-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VK4DukZsKVahBgcpJeCgkWGGZ1TODc+uIwiPOtapBWRAfgLgEq1a5rPhLkYY+MK4 C6FH+/9ITRqhBylryYUMrg== /in/edgar/work/20000808/0000910680-00-000526/0000910680-00-000526.txt : 20000921 0000910680-00-000526.hdr.sgml : 20000921 ACCESSION NUMBER: 0000910680-00-000526 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20000808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTSERV ONLINE INC CENTRAL INDEX KEY: 0001005698 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 133750708 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-43258 FILM NUMBER: 688325 BUSINESS ADDRESS: STREET 1: METRO CENTER STREET 2: ONE STATION PLACE CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535950 MAIL ADDRESS: STREET 1: ONE STATION PLACE CITY: STAMFORD STATE: CT ZIP: 06902 SB-2 1 0001.txt FORM SB-2 FOR SMARTSERV ONLINE, INC. +As filed with the Securities and Exchange Commission on August 8, 2000. REGISTRATION NO. 333-________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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. 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. PARKER CHAPIN LLP THE CHRYSLER BUILDING 405 LEXINGTON AVENUE NEW YORK, NEW YORK 10174 TELEPHONE NO.: (212) 704-6000 FACSIMILE NO.: (212) 704-6288 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE ========================================== ========================== ============================== ============================ TITLE OF EACH CLASS OF AMOUNT TO BE REGISTERED PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE ========================================== ========================== ============================== ============================ Common Stock, par value $.01 per share 668,715 (1) $23,300,705(2) $6,151 ========================================== ========================== ============================== ============================
(1) Pursuant to Rule 416(b), there shall be deemed covered hereby all additional securities resulting from antidilution adjustments. (2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee. The fee for the common stock was based on the average of the closing bid and asked price of the common stock reported on the Nasdaq National Market on August 2, 2000. (3) Does not include the following securities for which SmartServ paid a fee in connection with the filing of a Registration Statement on Form SB-2 (File No. 333-114) and for which this Registration Statement serves as Post-Effective Amendment No. 1: (i) 155,211 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 May 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) 155,211 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 May 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. 668,715 SHARES OF COMMON STOCK o The selling stockholders are offering to sell 668,715 shares of common stock of which 292,954 shares are issuable upon exercise of warrants. This prospectus also covers (i) 155,211 shares of our 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 our common stock issuable upon the exercise of warrants at $7.731 per share issued in our May 1996 initial public offering. o We will not receive any proceeds from the offering of common stock. We will receive approximately $12,085,000 if all of the warrants are exercised. These proceeds will be used for our general corporate purposes. o Our common stock is traded and quoted on the Nasdaq National Market (NMS) under the symbol "SSOL". On August 2, 2000, the last reported bid price of our common stock was $34.8125 and the last reported asked price was $34.8750. 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 August __, 2000 -1- TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................3 ABOUT OUR COMPANY.................................................................................................3 SUMMARY FINANCIAL DATA............................................................................................3 RISK FACTORS......................................................................................................4 SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS..........................................................8 USE OF PROCEEDS...................................................................................................8 MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS..............................................................8 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........................................................9 BUSINESS.........................................................................................................15 MANAGEMENT.......................................................................................................19 PRINCIPAL STOCKHOLDERS...........................................................................................27 SELLING STOCKHOLDERS.............................................................................................29 PLAN OF DISTRIBUTION.............................................................................................30 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................31 DESCRIPTION OF CAPITAL STOCK.....................................................................................32 DELAWARE BUSINESS COMBINATION PROVISIONS.........................................................................34 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................................34 WHERE YOU CAN FIND MORE INFORMATION..............................................................................35 TRANSFER AGENT...................................................................................................36 LEGAL MATTERS....................................................................................................36 EXPERTS..........................................................................................................36 INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
-2- PROSPECTUS SUMMARY This summary highlights information included elsewhere in this document. You should carefully review the more detailed information and financial statements included in this document. The summary is not complete and may not contain all of the information you may need to consider before investing in our common stock. We urge you to carefully read this document, including the "Risk Factors" section beginning on page 4 and the Financial Statements and notes to those statements beginning on page F-1 of this document. ABOUT OUR COMPANY Please note that throughout this prospectus, the words "we", "our" or "us" refer to SmartServ Online, Inc. and not to the selling stockholders. SmartServ Online, Inc. was organized in 1993. We are a business-to-business Web and wireless application services provider specializing in building and hosting content-rich and transaction-intensive applications for both mobile wireless and fixed wireline users. We deliver Internet-based content and trade order routing solutions, as well as "Web-to-Wireless" applications designed to facilitate e-commerce. We have developed online financial, transactional and media applications using a unique "device-independent" delivery solution and have designed applications that enable the receipt of information and the execution of transactions on wireless telephones and personal digital assistants. Our executive offices are located at One Station Place, Stamford, Connecticut 06902 and our telephone number is (203) 353-5950. SUMMARY FINANCIAL DATA This summary financial data is derived from our financial statements for the fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997, and for the fiscal periods ended March 31, 2000 and March 31, 1999, certain of which are included elsewhere herein. You should read the following summary financial data in conjunction with the financial statements and notes to those statements.
Nine Months Ended March 31 Years Ended June 30 ----------------------------------------- ------------------------------------------------ STATEMENT OF OPERATIONS 2000 1999 1999 1998 1997 Revenues $ 2,710,856 $ 1,028,353 $ 1,443,781 $ 873,476 $ 688,610 Loss from Operations (35,819,259) * (2,538,791) (3,750,471) (4,488,307) (4,457,343) Net Loss (35,083,239) * (4,766,362) (7,124,126) (5,040,009) (4,434,482) Basic and Diluted Loss per (17.55) (4.45) (6.44) (7.65) (7.20) Share
BALANCE SHEET At March 31 At June 30 ----------------------------------------- ------------------------------------------------ 2000 1999 1998 1997 ------------------- ------------------------------------------------ Cash and Cash Equivalents $ 5,175,577 $ 2,165,551 $ 354,225 $ 93,345 Working Capital (Deficiency) 4,368,144 (1,822,340) (1,850,287) (901,026) Total Assets 7,570,111 3,820,598 1,276,853 1,246,689 Total Liabilities and Deferred Revenues 5,832,698 8,527,898 2,523,714 1,945,017 Shareholders' Equity 1,737,413 (4,707,300) (1,246,861) (698,328) (Deficiency) * Included in such amount are noncash charges for stock-based compensation costs of $35,636,026. -3- RISK FACTORS An investment in our common stock is highly speculative and involves a high degree of risk. Therefore, you should consider all of the risk factors discussed below, as well as the other information contained in this document. You should not invest in our common stock unless you can afford to lose your entire investment and you are not dependent on the funds you are investing. WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS We have incurred net losses of $7,124,126 for the year ended June 30, 1999, $5,040,009 for the year ended June 30, 1998, $4,434,482 for the year ended June 30, 1997 and $2,966,287 for the year ended June 30, 1996. Additionally, we have incurred a net loss of $35,083,239 for the nine month period ended March 31, 2000. However, included in the March 31, 2000 operating results were noncash charges for stock-based compensation of $35,636,026. At March 31, 2000, we had an accumulated deficit of $57,029,244 and stockholders equity of $1,737,413. Losses have resulted principally from costs incurred in connection with activities aimed at developing our software, information and transactional services and from costs associated with our marketing and administrative activities. We have incurred substantial expenses and commitments and continue to operate at a deficit on a monthly basis. No assurance can be provided that we will be able to develop revenues sufficient to support our operations. On May 15, 2000, SmartServ sold common stock to investors in a private placement. Proceeds from that offering were $17,500,000. Giving effect to this offering, we had stockholders' equity of approximately $18,437,000 at March 31, 2000 on a proforma basis. WE DEPEND ON ONE CUSTOMER, AND THE LOSS OF THIS CUSTOMER COULD ADVERSELY AFFECT OUR OPERATING RESULTS Currently, substantially all of our revenues are generated through our licensing arrangement with Data Transmission Network Corporation, or DTN. Our results of operations will depend upon numerous factors including sustained revenues from our arrangement with DTN, the regulatory environment, introduction and market acceptance of new services, establishing alliances with strategic marketing partners and competition. If we default under the license agreement, DTN may at its sole cost elect to provide its own maintenance to both the system software and related hardware. Under these circumstances, DTN will have the right to own the system software, including the source codes, and related hardware, and DTN will have no further obligation to pay us licensing fees which we currently rely on for a significant part of our revenues. We anticipate that our results of operations for the immediate future will continue to depend to a significant extent upon revenues from DTN and a small number of customers. In order to increase our revenues, we will need to attract and retain additional customers. Our failure to obtain a sufficient number of additional customers could adversely affect our results of operations. OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT WHICH MAY HURT OUR ABILITY TO RAISE ADDITIONAL FINANCING AND THE PRICE OF OUR COMMON STOCK The report of our independent auditors on our financial statements for the years ended June 30, 1999 and 1998 contains an explanatory paragraph which indicates that we have had recurring operating losses and a working capital deficiency which raise substantial doubt about our ability to continue as a going concern. This report may make it more difficult for us to raise additional debt or equity financing needed to run our business and is not viewed favorably by analysts of, or investors in, our common stock. We urge potential investors to review this report before making a decision to invest in our company. -4- 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-commence services to their clients. Our success will depend on: o our ability to enter into agreements with strategic marketing partners; o the ultimate success of these strategic marketing partners; and o the ability of the strategic marketing partners to successfully market our services. Our failure to complete our strategic alliance strategy or the failure of the strategic marketing partners to develop and sustain a market for our services would have a material adverse affect on our overall performance. Although we view strategic marketing alliances as a major factor in the successful commercialization of our services, there can be no assurance that the strategic marketing partners would view an alliance with us as significant to their businesses and any potential benefits from these arrangements may not materialize. THE MARKET FOR OUR BUSINESS IS DEVELOPING AND MAY NOT ACHIEVE THE GROWTH WE EXPECT Online information and transactional services, as well as the convergence of wireless and Internet technologies, are developing markets. Our future growth and profitability will depend, in part, upon consumer acceptance of online information and transactional services in general and a significant expansion in the consumer market for the delivery of such services via wireless telephones and personal digital assistants, and personal computers. Even if these markets experience substantial growth, there can be no assurance that our services will be commercially successful or will benefit from such growth. Further, even if initially successful, any continued development and expansion of a market for our services will depend in part upon our ability to create and develop additional services and adjust existing services in accordance with changing consumer preferences, all at competitive prices. Our failure to develop new services and generate revenues could have a material adverse effect on our financial condition and operating results. WE COMPETE AGAINST LARGER, WELL KNOWN COMPANIES WITH GREATER RESOURCES THAN WE HAVE The market for Web 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 increasing competition -5- from other emerging services delivered through personal computers and wireless devices such as developing transactional services offered by Data Broadcasting Corporation, Electronic Data Systems Corp. and other Web-based software and online companies. Established online information services including those offered by America Online, Inc., offer competing services delivered through personal computers. Although in its infancy, the wireless arena too has its competitors, such as Datalink Systems Corporation, I 3 Mobile, Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Tantau Software, Inc., 724 Solutions, Inc. and W-Trade Technologies, Inc. We expect competition to increase from existing competitors and from new competitors, including telecommunications companies. The information content provided through our software and communication architecture is generally purchased through non-exclusive distribution agreements. While we are not dependent on any single content provider, existing and potential competitors may enter into agreements with these and other such providers and thereby acquire the ability to deliver online information and transactional services substantially similar to those provided by us. WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS AND SEVERAL TECHNICAL EMPLOYEES, THE LOSS OF ANY OF WHOM COULD HAVE AN ADVERSE IMPACT ON OUR FUTURE OPERATIONS We believe that due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are more important in establishing and maintaining a leadership position within the industry than legal protections of our technology. We are dependent on our ability to recruit, retain and motivate high quality personnel. However, competition for such personnel is intense and the inability to attract and retain additional qualified employees or the loss of current key employees could materially and adversely affect our business, operating results and financial condition. We maintain and are the sole beneficiary of a key-person life insurance policy on the life of (1) Mr. Sebastian E. Cassetta, our Chief Executive Officer, in the amount of $1,000,000 and (2) Mr. Mario F. Rossi, our Senior Vice President of Technology, in the amount of $500,000. The loss of the services of either Mr. Cassetta or Mr. Rossi would have a material adverse effect upon our business, financial condition and results of operations. PROVISIONS IN OUR CHARTER MAY MAKE IT MORE DIFFICULT FOR A PERSON TO ACQUIRE US AT A PREMIUM TO OUR CURRENT MARKET VALUE Our charter restricts the ability of our stockholders to call a stockholders meeting and provides that our stockholders may not act by written consent or change the number of directors and classes of our board of directors. These provisions may have the effect of deterring or delaying certain transactions involving an actual or potential change in control of SmartServ, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our stockholders to approve transactions that they may deem to be in their best interests. YOUR OWNERSHIP INTEREST, VOTING POWER AND THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A SUBSTANTIAL NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON STOCK We have issued common stock, options and warrants to purchase our common stock, and in the future we may issue additional shares of common stock, options, warrants, preferred stock or other securities exercisable for or convertible into our common stock. At July 27, 2000, there were $612,000 of our prepaid warrants outstanding that were then convertible into 437,142 shares of our common stock. Additionally, we have issued warrants to investors and consultants and granted options to employees for the purchase of 3,930,600 shares of our common stock. Except for 1,047,000 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. -6- Sales of these shares or the market's perception that these sales could occur may cause the market price of our common stock to fall and may make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate or to use equity securities as consideration for future acquisitions. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS We have designed and developed our own information platform, "SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s version 7.X relational database manager, to support a variety of end user devices. Although we intend to protect our rights vigorously, there can be no assurance that any of the measures to protect our proprietary rights explained below will be successful. In an effort to protect our proprietary rights, we rely upon a combination of contract provisions and copyrights, trade secret laws and a service mark. We license the use of our services to our strategic marketing partners under agreements that contain terms and conditions prohibiting the unauthorized reproduction of our software and services. We seek to protect the source code of our application software and communications architecture as a trade secret and as an unpublished copyrighted work. We believe that our service mark "SmartServ Online" has significant value and is important to the marketing of our services. There can be no absolute assurance, however, that our mark does not or will not violate the proprietary rights of others, that our mark would be upheld if challenged or that we would not be prevented from using our mark, any of which could have an adverse effect on us. In addition, there can be no assurance that we will have the financial resources necessary to enforce or defend our mark. We believe that our software, services, service mark and other proprietary rights do not infringe on the proprietary rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against us with respect to current features, content or services or that any such assertion may not require us to enter into royalty arrangements or result in litigation. OUR LICENSE ARRANGEMENT WITH DTN CONTAINS PROVISIONS WHICH ALLOW DTN TO TERMINATE OUR RELATIONSHIP AND TAKE OWNERSHIP OF CERTAIN OF OUR PROPRIETARY TECHNOLOGY UNDER CERTAIN CIRCUMSTANCES We granted DTN an exclusive perpetual worldwide license to our Internet-based (1) real-time stock quote product, (2) online trading vehicle for customers of small and medium sized brokerage companies, (3) administrative reporting package for brokers of small and medium sized brokerage companies and (4) order entry/routing system. Under the license agreement, we are required to maintain certain systems' performance standards and to satisfy other general business requirements. Our inability to maintain compliance with the license agreement could result in a default thereunder. In addition, a change of control of SmartServ is an event of default under the license agreement. A change of control includes a change in the majority of the members on our board of directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital may elect a majority of the board under certain circumstances, including the failure of our common stock to be listed on Nasdaq. If an event of default occurs under the license agreement, DTN may at its sole cost elect to provide its own maintenance to both the system software and related hardware. Under these circumstances, DTN will have the right to own the system software, including the source codes, and related hardware, and DTN will have no further obligation to pay us licensing fees which we currently rely on for a significant part of our revenues. -7- WE ARE INVOLVED IN SEVERAL PENDING LEGAL PROCEEDINGS WHICH, IF RESOLVED AGAINST US, COULD CAUSE DILUTION TO OUR STOCKHOLDERS AND HAVE A MATERIAL NEGATIVE IMPACT ON OUR OPERATIONS From time to time we have been, and expect to continue to be, a party to legal proceedings and claims in the ordinary course of our business. Our ongoing legal proceedings with Michael Fishman and Commonwealth Associates, L.P. have been set forth in the Business section of this document under the heading "Legal Proceedings". Commonwealth seeks 13,333 shares of our common stock or damages of at least $1,770,000. While we expect to contest these matters vigorously, litigation is inherently uncertain and an adverse judgment on any of these claims could cause dilution to our stockholders as well as harm our business. Even if not meritorious, any of these current and future matters could require the expenditure of significant financial and managerial resources. SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS Some of the statements in this prospectus or in the documents we incorporate by reference are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among others, the factors set forth above under "Risk Factors." The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this document to reflect future events or developments. USE OF PROCEEDS We will receive approximately $12,085,000 if all of the warrants for the underlying shares of common stock being registered are exercised. We expect to use these proceeds, if any, for general corporate purposes. MARKET PRICE OF OUR COMMON STOCK AND PUBLIC WARRANTS On May 16, 2000, SmartServ's $.01 par value common stock commenced trading on the Nasdaq National Market as SSOL. On this date, our Redeemable Common Stock Purchase Warrants, or public warrants, also commenced trading on the Nasdaq National Market as SSOLW. SmartServ's securities traded on the OTC Bulletin Board until May 15, 2000. On October 15, 1998, our stockholders approved a one-for-six reverse stock split which became effective on October 26, 1998. 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. -8- COMMON STOCK WARRANTS ------------ -------- HIGH LOW HIGH LOW ---- --- ---- --- Year Ending June 30, 2001 - ------------------------- First Quarter $ 70.250 $ 33.188 $ 27.000 $ 11.000 (through August 2, 2000) Year Ended June 30, 2000 - ------------------------ First Quarter $ 1.531 $ .719 $ .156 $ .063 Second Quarter 24.625 .719 6.500 .070 Third Quarter 186.000 17.625 64.000 5.000 Fourth Quarter 129.000 25.000 47.031 10.500 Year Ended June 30, 1999 - ------------------------ First Quarter $ 4.313 $ 1.875 $ 2.250 $ .375 Second Quarter 4.125 1.031 .531 .063 Third Quarter 4.875 1.500 .625 .063 Fourth Quarter 2.500 1.500 .250 .100
As of August 2, 2000, we had 5,776,870 shares of common stock outstanding held by 113 shareholders of record. We estimate that our common stock is held by approximately 2,000 beneficial holders. As of such date, we had 1,725,000 public warrants outstanding held by 17 warrant holders of record. DIVIDENDS We have never paid a cash dividend on our common stock. It is our present policy to retain earnings, if any, to finance the development and growth of our business. Accordingly, we do not anticipate that cash dividends will be paid until our earnings and financial condition justify such dividends, and there can be no assurance that we can achieve such earnings. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION PLAN OF OPERATION SmartServ delivers Internet-based and wireless content and trade order routing solutions that enable the processing of transactions for its strategic alliances, or Strategic Marketing Partners, and their customers. SmartServ has developed online and wireless financial, transactional and media applications using a unique "device-independent" delivery solution. SmartServ's plan of operation includes programs for the sale of its information and transactional application services through Strategic Marketing Partners utilizing a "business-to-business" strategy. Such a strategy provides access to a large number of potential subscribers and allows SmartServ to maximize its market reach at minimal operating costs. The flexibility of SmartServ's application software and -9- communications architecture enables the customization of each information package offered to each Strategic Marketing Partner, and in turn to their end users. As an early entrant in the dynamic market for the distribution of financial information and transaction services via wireless telephones and personal digital assistants, or PDAs, SmartServ is developing strategic marketing relationships with wireless equipment manufacturers, carriers and other value-added service providers and potential corporate partners. SmartServ continuously seeks to increase product performance and widen its distribution by building and maintaining this network of Strategic Marketing Partners. Combining SmartServ's application development and data platform with the core competencies of its Strategic Marketing Partners, SmartServ is offering a packaged turnkey solution for extending content and transactions to the wireless environment. Management believes the wireless area has tremendous potential for distribution of SmartServ's information products and as a source of revenues from "fee based" transactions such as routing stock order entries; however, we have yet to derive any revenues from such efforts. Management believes that most of SmartServ's revenues will continue to be derived from consumers who purchase its services through Strategic Marketing Partners. SmartServ anticipates that Strategic Marketing Partners will brand its information and transaction services with their own private label and promote and distribute SmartServ's packaged offering to their clients. SmartServ has the ability to customize the information package to be offered to each Strategic Marketing Partner, by device. With the licensing of four of its Internet products by DTN in 1998, SmartServ has discontinued efforts to develop a direct subscriber base. Management anticipates that staffing requirements associated with the implementation of its plan of operation will result in the addition of a minimum of fifteen people during the period ending December 31, 2000. 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 NINE MONTHS ENDED MARCH 31, 2000 VS. NINE MONTHS ENDED MARCH 31, 1999 During the nine months ended March 31, 2000 and 1999, SmartServ recorded revenues of $2,710,856 and $1,028,353, respectively. Substantially all of such revenues were earned through SmartServ's licensing of its products to DTN. Of such amounts, SmartServ recognized $1,242,472 and $146,602, respectively, as amortization of deferred revenues emanating from its licensing agreement with DTN. During the nine months ended March 31, 2000, SmartServ incurred costs of revenues of $603,355. These costs consisted primarily of information and communication costs ($98,600), personnel costs ($152,700), computer hardware leases, depreciation and maintenance costs ($242,400) and consulting fees ($43,600). During the nine months ended March 31, 1999, SmartServ incurred costs of revenues of $593,798. Such costs consisted primarily of information and communication costs ($209,200), personnel costs ($108,500), and computer hardware leases, depreciation and maintenance costs ($255,400). Product development costs were $240,500 and $132,600 for the nine months ended March 31, 2000 and 1999, respectively. Such costs consisted primarily of personnel costs of $31,400 and $8,900 in 2000 and 1999, respectively, and amortization expenses relating to capitalized software development costs of $209,100 and $94,200 in 2000 and 1999, respectively. During the nine months ended March 31, 2000 and 1999, SmartServ capitalized $846,814 and $672,875, respectively, of development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", or Statement 86. -10- During the nine months ended March 31, 2000, SmartServ incurred selling, general and administrative expenses of $2,050,202. Such costs were incurred primarily for personnel costs ($888,700), facilities ($145,800), marketing and advertising costs ($294,000) and professional fees ($555,200). During the nine months ended March 31, 1999, SmartServ incurred selling, general and administrative expenses of $1,799,139. Such costs were incurred primarily for personnel costs ($599,200), marketing and advertising costs ($210,300), professional fees ($616,000), facilities ($166,600) and telecommunications costs ($51,700). During the nine months ended March 31, 2000, noncash charges for stock-based compensation amounted to $35,636,026 compared to $1,041,602 during the nine months ended March 31, 1999. Such noncash charges in 2000 were primarily related to personnel costs ($34,677,300) resulting from the valuation of stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", or APB No. 25. Noncash charges pertaining to professional fees amounted to $958,700 and $1,002,800 for the nine months ended March 31, 2000 and 1999, respectively. These noncash professional fees resulted from the issuance of common stock purchase warrants to various financial, marketing and technical consultants. The value of such common stock purchase warrants was recorded in accordance with the Black-Scholes pricing methodology. Interest income for the nine months ended March 31, 2000 and 1999 amounted to $58,570 and $3,772, respectively. During the nine months ended March 31, 2000, such amounts were earned from SmartServ's investments in highly rated commercial paper. During the nine months ended March 31, 1999, such amounts were earned primarily from the SmartServ's cash balances. During the nine months ended March 31, 2000 and 1999, interest and financing costs were $40,250 and $2,231,343, respectively. During the nine months ended March 31, 2000 such costs were related to a partial redemption of SmartServ's Prepaid Warrants. During the nine months ended March 31, 1999, such costs consisted primarily of interest and the amortization of deferred financing costs ($454,700) associated with the issuance of $550,000 of convertible notes in December 1998 and January 1999, and costs ($958,900) associated with the settlement of obligations to holders of SmartServ's Prepaid Warrants. SmartServ has received a waiver of certain events of default pursuant to its Prepaid Warrants, and accordingly in December 1999, reversed previously recorded charges of $717,700. The common stock purchase warrants have been recorded in the financial statements in accordance with the Black-Scholes pricing methodology. FISCAL YEAR ENDED JUNE 30, 1999 VERSUS FISCAL YEAR ENDED JUNE 30, 1998 During the year ended June 30, 1999, SmartServ recorded revenues of $1,443,781. Substantially all of such revenues were earned through its licensing agreement with DTN. During the year ended June 30, 1998, SmartServ earned revenues of $873,476. Of such amount, $210,000 was earned through the relationship with DTN, while $454,000 was earned from the sale of the SmartServ Pro stock quote services. During the year ended June 30, 1999, SmartServ incurred costs of services of $994,465. Such costs consisted primarily of information and communication costs ($267,600), personnel costs ($290,100), computer hardware leases and maintenance ($339,400) and systems consultants ($97,300). During the year ended June 30, 1998, SmartServ incurred costs of revenues of $1,216,761. Such costs consisted primarily of information and communication costs ($551,700), personnel costs ($310,600), and computer hardware leases and maintenance ($339,300). Information and communication costs decreased in 1999 compared to 1998 as a result of the licensing agreement entered into between SmartServ and DTN. Personnel costs decreased in 1999 compared to 1998 as a result of the migration of personnel resources into product development areas in 1999. Product development costs were $193,188 vs. $923,082 for the year ended June 30, 1998. The decrease in the product development costs resulted from the capitalization of software development costs related to certain product enhancements in accordance with Statement 86. During the year ended June 30, 1999, SmartServ capitalized $765,000 of development costs in accordance with Statement 86. No such costs -11- were capitalized during the year ended June 30, 1998. During the year ended June 30, 1999, product development costs consisted primarily of the amortization of capitalized software development costs. During the year ended June 30, 1998, product development costs consisted primarily of personnel costs ($541,400) and computer system consultants ($335,000). During the year ended June 30, 1999, SmartServ incurred selling, general and administrative expenses of $4,006,599 vs. $3,221,940 for the year ended June 30, 1998. During the year ended June 30, 1999, such costs were incurred primarily for personnel costs ($1,148,400), facilities ($240,500), marketing and advertising costs ($263,100), professional fees ($2,150,000), and telecommunications costs ($69,500). During the year ended June 30, 1998, such costs were incurred primarily for personnel costs ($1,349,000), facilities ($216,000), marketing and advertising costs ($240,400), professional fees ($1,051,400) and telecommunications costs ($73,100). Included in professional fees are noncash charges of $1,349,020 in 1999 and $660,576 in 1998 representing the amortization of deferred costs in connection with the issuance of warrants to financial consultants. Interest income for the year ended June 30, 1999 amounted to $4,767 vs. $40,788 for the year ended June 30, 1998. Such amounts were earned primarily from SmartServ's investments in highly liquid commercial paper. Interest and financing costs for the year ended June 30, 1999 were $3,378,422. Such costs were incurred primarily in connection with the issuance of the 8% convertible notes ($2,254,700) and SmartServ's default pursuant to the prepaid warrants ($1,095,700). Of such amounts, $2,593,800 were noncash charges for the issuance of common stock or warrants to purchase common stock as settlement of such obligations. Interest and financing costs for the year ended June 30, 1998 were $592,490. These costs were incurred in connection with the origination of SmartServ's May 1997 line of credit. Of such amount, $463,600 represents the noncash charges associated with the issuance of certain common stock purchase warrants. Loss per share was $6.44 per share for the year ended June 30, 1999 vs. $7.65 per share for the year ended June 30, 1998. While the net loss increased by $2,084,117, SmartServ's weighted average shares of common stock outstanding in 1999 increased by 446,569 shares, thereby affecting the per share loss. FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997 During the year ended June 30, 1998, SmartServ recorded revenues of $873,476 from the sale of its information services vs. $688,610 during the year ended June 30, 1997. Included in revenues for the year ended June 30, 1998 was $210,000 resulting from SmartServ's licensing agreement with DTN and $454,000 from the sale of the SmartServ Pro stock quote services. During the year ended June 30, 1997, SmartServ earned revenues from the enhancement, implementation and marketing of services to Schroder & Co. Inc. of $342,200. During the year ended June 30, 1998, SmartServ incurred costs of services of $1,216,761. Such costs consisted primarily of information and communication costs ($551,700), personnel costs ($310,600) and computer hardware leases and maintenance ($339,300). During the year ended June 30, 1997, with SmartServ's departure from the development stage, it incurred costs of revenues of $1,133,884. Such costs consisted primarily of information and communication costs ($390,000), personnel costs ($417,500), computer hardware leases and maintenance ($201,800) and screenphone purchases ($95,300). Product development costs were $923,082 vs. $1,150,224 for the year ended June 30, 1997. During the year ended June 30, 1998, such costs consisted primarily of personnel costs ($541,400) and computer system consultants ($335,000). During the year ended June 30, 1997 such costs consisted primarily of personnel costs ($686,100) and computer system consultants ($454,000). Included in personnel costs in 1997 is a noncash charge of approximately $73,000 for the change in market value of employee stock options. -12- During the year ended June 30, 1998, SmartServ incurred selling, general and administrative expenses of $3,221,940 vs. $2,861,845 for the year ended June 30, 1997. During the year ended June 30, 1998, such costs were incurred primarily for personnel costs ($1,349,000), facilities ($216,000), advertising and marketing costs ($240,400), professional fees ($1,051,400) and telecommunications costs ($73,100). During the year ended June 30, 1998, selling, general and administrative costs increased $360,095 from the prior year as a result of increases in professional fees ($593,000), personnel costs ($403,500) and facilities costs ($55,700). Such increases were offset by a decrease in advertising and marketing expenses of $600,900. Professional fees includes a noncash charge of $527,576, representing amortization of deferred compensation in connection with the issuance of 592,592 common stock purchase warrants to a financial consultant. Interest income for the year ended June 30, 1998 amounted to $40,788 vs. $74,507 for the year ended June 30, 1997. Such amounts were earned primarily from SmartServ's investments in highly liquid commercial paper. Interest and financing costs for the year ended June 30, 1998 were $592,490. These costs were incurred in connection with the origination of SmartServ's May 1997 line of credit. Of such amount, $463,600 represents the noncash charges associated with the revaluation of certain common stock purchase warrants granted to Zanett Securities Corporation. Interest and financing costs for the year ended June 30, 1997 were $54,646. Such amounts were incurred in connection with SmartServ's May 1997 line of credit. Loss per share was $7.65 per share for the year ended June 30, 1998 vs. $7.20 per share for the year ended June 30, 1997. While the net loss increased by $605,527, SmartServ's weighted average shares of common stock outstanding increased by 43,201 shares, thereby affecting the per share loss. CAPITAL RESOURCES AND LIQUIDITY On June 24, 1999, SmartServ and DTN entered into a License Agreement that amended their previous agreement. In consideration of the receipt of $5.175 million, SmartServ granted DTN an exclusive perpetual worldwide license to its Internet-based (1) real-time stock quote product, (2) online trading vehicle for customers of small and medium sized brokerage companies, (3) administrative reporting package for brokers of small and medium sized brokerage companies and (4) order entry/routing system. Additionally, SmartServ received $324,000 in exchange for an agreement to issue warrants to purchase 300,000 shares of its common stock at an exercise price of $8.60 per share. SmartServ has agreed to continue to operate these products and provide maintenance and enhancement services in exchange for a percentage of the revenues earned by DTN therefrom. The cost of the SmartServ's commitment to provide such maintenance and enhancement services is limited to a maximum of 20% of the revenues earned by SmartServ. If SmartServ defaults under the license agreement, DTN may at its sole cost elect to provide its own maintenance to both the system software and related hardware. Under these circumstances, DTN will have the right to own the system software, including the source codes, and related hardware, and DTN will have no further obligation to pay SmartServ licensing fees which SmartServ currently relies on for a significant part of its revenues. None of SmartServ's wireless products were included in this transaction. Although SmartServ believes that DTN has the experience and the financial ability to distribute its services to thousands of potential customers, there can be no assurance that the products and services will be accepted by the ultimate consumer on a widespread basis. In November 1998, SmartServ completed a financing of $550,000 of its securities. SmartServ sold five and one-half (5.5) units, each consisting of a secured convertible 8% note in the principal amount of $100,000 and warrants to purchase common stock. The notes and the warrants were initially convertible and exercisable, respectively, at $.60 per share of common stock. Such notes were repaid in June 1999. On July 1, 1999, SmartServ entered into an agreement with Arnhold & S. Bleichroeder, Inc. to settle its obligation to Arnhold & S. Bleichroeder under the default provisions of its prepaid warrants. In -13- accordance with that agreement, SmartServ paid Arnhold & S. Bleichroeder $325,000 to redeem the prepaid warrants and issued 180,000 shares of common stock in full settlement of all obligations. In January 2000, SmartServ issued 306,667 shares of common stock to certain investors in the November 1998 interim financing upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $184,000. On January 18, 2000, America First Associates Corp., acting as placement agent for SmartServ, completed a private placement of 233,000 shares of common stock at $15.00 a share. The net proceeds of the placement of $3,215,400 were used for general working capital requirements. In addition, on January 18, 2000, SmartServ completed a private placement of an additional 100,000 shares of common stock at $15.00 a share. There was no placement agent for these shares. The net proceeds of the placement of $1,500,000 were used for general working capital requirements. During the quarter ended March 31, 2000, the Company issued 474,022 shares of common stock to investors upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $696,944. On May 15, 2000, Chase Securities Inc., acting as placement agent for SmartServ, completed a private placement of 353,535 shares of common stock at $49.50 a share. The net proceeds of the placement of $16,750,000 were used for general working capital requirements. SmartServ's financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. SmartServ incurred net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June 30, 1999, 1998 and 1997, respectively. Additionally, SmartServ has incurred a net loss of $35,083,239 for the nine month period ended March 31, 2000. Included in such amount were noncash charges for stock-based compensation costs of $35,636,026. At March 31, 2000, SmartServ had an accumulated deficit of $57,029,244 and stockholders' equity of $1,737,413; however, after giving effect to the May 2000 private placement, SmartServ had stockholders' equity of approximately $18,437,000 on a proforma basis. SmartServ is also a defendant in several legal proceedings that could have a material adverse effect on its financial position, cash flows and results of operations. Losses have resulted principally from costs incurred in connection with activities aimed at developing our software, information and transactional services and from costs associated with our marketing and administrative activities. We have incurred substantial expenses and commitments and continue to operate at a deficit on a monthly basis. No assurance can be provided that we will be able to develop revenues sufficient to support our operations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Management believes that upon the successful implementation of its marketing plan, sufficient revenues will be generated to meet operating requirements. Management also believes that the successful execution of its proposed plan of operations will generate sufficient cash flow from operations to enable SmartServ to offer its services on an economically sound basis. No assurance can be given that such goals will be obtained or that any expected revenues or cash flows will be achieved. -14- BUSINESS THE COMPANY SmartServ Online is a business-to-business Web and wireless application services provider (ASP) specializing in building and hosting content-rich and transaction-intensive applications for both mobile wireless and fixed wireline users. We deliver Internet-based content and trade order routing solutions, as well as "Web-to-Wireless" applications designed to facilitate e-commerce. We have developed online financial, transactional and media applications using a unique "device-independent" delivery solution and have designed applications that enable the receipt of information and the execution of transactions on wireless telephones and personal digital assistants. SERVICES SmartServ's services and platform solve the problem of ubiquitous Web access by offering enterprises application development and customization services, secure and reliable hosting environments, industrial strength transaction-routing systems and anytime, anywhere access. Recognizing the call for mobility, we developed an infrastructure to integrate and deliver our Internet-based information and to effectuate e-commerce transactions on wireless networks and devices. We offer complete systems to help traditional companies reach the Web and new-economy companies extend from the Web to the emerging mobile market. All SmartServ developed and hosted applications are accessible from the vast array of Web and wireless interactive appliances. We are well positioned to provide Web-based information and transaction applications and solutions for Strategic Marketing Partners such as financial institutions, wireless carriers, device manufacturers and value-added service providers and retailers. Our core competency focuses on providing financial news and reports - -- including real-time stock quotes -- with the goal of facilitating online and wireless stock trading and other transactions. To complement our financial offerings, we also provide a host of personalized information services from local news, sports and weather to traffic and entertainment services that can be accessed on demand or as an alert. We have invested in the development of a transaction engine and an application software and communications architecture in an attempt to make our services easy to use and visually appealing, as well as to take advantage of the different virtues and capabilities of established and emerging devices capable of interacting with Web-based and Web-to-Wireless applications. We believe that our application software and communications architecture, which recognize multiple devices, format the information for the particular device and present the information in a user-friendly manner, will be attractive in the marketplace. Product development efforts are focused on providing enhancements to the current information and transaction services, format modifications for emerging devices, content and features improvements and customizations based on market requirements. We intend to continue to invest in this area and believe our transaction engine, application software and communications architecture represent an important competitive advantage. MARKETING STRATEGY We believe our primary source of revenues will ultimately be derived from the sale of our information and transactional application services through Strategic Marketing Partners utilizing a "business-to-business" strategy. We expect that Strategic Marketing Partners will brand our information and transaction services with their own private label, promote the packaged offering, and then distribute these information and e-commerce services to their clients. Additionally, our e-commerce platform will enable our Strategic Marketing Partners to offer transaction services via the Internet and wireless networks. Our strategy of forming alliances with Strategic Marketing Partners enables us to maximize our market reach at minimal operating costs, improve product and services performance and grow distribution channels to end-users. -15- In May 1998, we licensed to DTN the rights to market and service three of our Internet products. DTN, which has over 150,000 subscribers for its satellite-based information services, lacked an Internet-based product and delivery system. We filled that need. In June 1999, we entered into an agreement with DTN that expanded our relationship. In consideration of the receipt of $5.175 million, we granted DTN an exclusive perpetual worldwide license to our Internet-based (1) real-time stock quote product, (2) online trading vehicle for customers of small and medium sized brokerage companies, (3) administrative reporting package for brokers of small and medium sized brokerage companies and (4) order entry/routing system. We will continue to operate and support these products in exchange for a percentage of the revenues earned by DTN therefrom. None of our wireless products were included in these transactions. During the year ended June 30, 1998, we discontinued our efforts to sell products directly to the retail market via our own marketing programs. As an early entrant in the dynamic market of distribution of financial information and transaction services via wireless telephones and personal digital assistants, we are developing strategic marketing relationships with the wireless equipment manufacturers, carriers, other value-added service providers and potential corporate partners. We continuously seek to increase product performance and widen our distribution by building and maintaining this network of Strategic Marketing Partners. Combining our application development and data platform with the core competencies of our Strategic Marketing Partners we are offering a packaged turnkey solution for extending content and transactions to the wireless environment. Management believes the wireless area has tremendous potential for distribution of our information products and as a source of revenues from "fee based" transactions such as routing stock order entries and other e-commerce offerings. The market for wireless services is exploding alongside the market for Internet access, and Management believes that these markets are about to converge. The majority of wireless data penetration will result from the distribution of telephones and other PCS devices equipped with wireless modems and Web browsers for accessing the Internet. Our data and communication architecture adds user functionality and utility to both wired and wireless technology. With our Web-server platform, application development and strategic alliances, we have the competitive advantage of providing complete end-to-end solutions. While we continue to have discussions about potential marketing opportunities with major equipment manufacturers, telecommunications and stock brokerage companies, there can be no assurance that we will enter into agreements with any such companies. COMPETITION The market for Web-based information and transactional services is highly competitive and subject to rapid innovation and technological change, shifting consumer preferences and frequent new service introductions. While our application software and communications architecture makes the services "device independent", we face increasing competition from other emerging services delivered through personal computers, such as developing transactional services offered by Data Broadcasting Corporation, Electronic Data Systems Corp. and other Web-based software companies. Established online information services including those offered by America Online, Inc., offer competing services delivered through personal computers. Although in its infancy, the wireless arena too has its competitors, such as DataLink Systems Corporation, I 3 Mobile, Inc., Aether Systems, Inc. (a/k/a Aether Technologies), Tantau Software, Inc., 724 Solutions, Inc. and W-Trade Technologies, Inc. We expect competition to increase from existing competitors and from new competitors, possibly including telecommunications companies. Most of our competitors and potential competitors have substantially greater financial, marketing and technical resources than we have. We believe that potential new competitors, including large multimedia and information system companies, are increasing their focus on transaction processing. Increased competition in the market -16- for our services could limit our ability to expand and materially and adversely affect our results of operations. The information content provided through our application software and communication architecture is generally purchased through non-exclusive distribution agreements. While we are not dependent on any one content provider, existing and potential competitors may enter into agreements with these and other such providers and thereby acquire the ability to deliver online information and transactional services substantially similar to those provided us. The principal competitive factors in both the online and wireless industries include content, product features and quality, ease of use, access to distribution channels, brand recognition, reliability and price. Our strategy of establishing alliances with potential Strategic Marketing Partners and our ability to provide what we believe to be unique software applications and communications architecture should enable us to compete effectively. SOFTWARE We have developed an application software and communications architecture that we believe makes our services easy to use and visually appealing, and which maximize the capabilities of various devices. Our user-friendly front-end application software provides instant access to information and flexibility to the varying needs of multiple users. Subscribers are empowered to create their own groupings of information they routinely request and are able to navigate directly to the information they seek with the software's easy to read menu systems and search capabilities. Our transaction engine has been designed to facilitate various forms of e-commerce. Our application software employs common user interface techniques, such as icons, pull-down menus, spreadsheet formats, tree structures and the use of "key" words, to make our product intuitive to our users. Our software employs a unique, object-oriented architecture that intelligently identifies a wide range of wireless and wired devices and formats the information to device-specific attributes.. During the fiscal years ended June 30, 1999, 1998 and 1997, we incurred costs of $193,188, $923,082 and $1,150,224, respectively, for research and project development activities. Additionally, during the fiscal year ended June 30, 1999, we capitalized software development costs amounting to $765,000; no such costs were capitalized in either of the years ended June 30, 1998 or 1997. During the nine months ended March 31, 2000, we incurred $240,500 for research and project development activities and capitalized software development costs of approximately $846,800. PROPRIETARY RIGHTS We have designed and developed our own "device independent" information and transaction platform, "SmartServ", based on Sun Microsystems, Inc. computers and Oracle Corp.'s version 7.X relational database manager, to support a wide array of wireless browsers and operating systems. The platform seamlessly integrates real-time data and transaction capabilities, such as stock trade order routing and e-commerce services, into a user-friendly services' interface. We rely upon a combination of contract provisions, trade secret laws and a service mark to attempt to protect our proprietary rights. We license the use of our services to Strategic Marketing Partners under agreements that contain terms and conditions prohibiting the unauthorized reproduction of our software and services. Although we intend to protect our rights vigorously, there can be no assurance that any of the foregoing measures will be successful. We granted DTN an exclusive perpetual worldwide license to our Internet-based (1) real-time stock quote product, (2) online trading vehicle for customers of small and medium sized brokerage companies, (3) -17- administrative reporting package for brokers of small and medium sized brokerage companies and (4) order entry/routing system. Under the license agreement, we are required to maintain certain systems' performance standards and to satisfy other general business requirements. Our inability to maintain compliance with the license agreement could result in a default thereunder. In addition, a change of control of SmartServ is an event of default under the license agreement. A change of control includes a change in the majority of the members on our board of directors. Under a letter agreement with Zanett Capital, Inc., Zanett Capital may elect a majority of the board under certain circumstances, including the failure of our common stock to be listed on Nasdaq. If we default under the license agreement, DTN may at its sole cost elect to provide its own maintenance to both the system software and related hardware. Under these circumstances, DTN will have the right to own the system software, including the source codes, and related hardware, and DTN will have no further obligation to pay us licensing fees which we currently rely on for a significant part of our revenues. We believe that our software, services, trademark, service mark and other proprietary rights do not infringe on the proprietary rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against us with respect to current features, content or services or that any such assertion may not require us to enter into royalty arrangements or result in litigation. GOVERNMENT REGULATION We are not currently subject to direct regulation other than federal and state regulation generally applicable to businesses. However, changes in the regulatory environment relating to the telecommunications and media industry could have an effect on our business, including regulatory changes which directly or indirectly affect telecommunication costs or increase the likelihood or scope of competition from regional telephone companies. Additionally, legislative proposals from international, federal and state governmental bodies in the areas of content regulation, intellectual property and privacy rights, as well as federal and state tax issues could impose additional regulations and obligations upon all online service providers. We cannot predict the likelihood that any such legislation will pass, or the financial impact, if any, the resulting regulation or taxation may have. Moreover, the applicability to application service providers of existing laws governing issues such as intellectual property ownership, libel and personal privacy is uncertain. The use of the Internet for illegal activities and the dissemination of pornography have increased public focus and could lead to increased pressure on legislatures to impose regulations on application service providers such as ourselves. The law relating to the liability of online service companies for information carried on or disseminated through their systems is currently unsettled. If an action were to be initiated against us, the costs incurred as a result of such action could have a material adverse effect on our business. EMPLOYEES We employ thirty-eight people, thirty-seven of whom are full-time employees. We anticipate that staffing requirements associated with the implementation of our plan of operation will result in the addition of a minimum of fifteen people during the period ending December 31, 2000. Such personnel will be added to assist primarily with the programming requirements of Strategic Marketing Partners' product offerings, for customer support and sales and marketing. None of our employees are covered by a collective bargaining agreement, and we believe that our relationship with our employees is satisfactory. -18- DESCRIPTION OF PROPERTY We occupy approximately 6,300 square feet in a leased facility located in Stamford, Connecticut. The lease expires in October 2002. LEGAL PROCEEDINGS On or about June 4, 1999, Michael Fishman, our former Vice President of Sales, commenced an action against us, Sebastian E. Cassetta, Steven Francesco, (our former President) and four others in the Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good faith and fair dealing, fraudulent misrepresentation, negligent misrepresentation, intentional misrepresentation and failure to pay wages. The defendants have answered the complaint and filed counterclaims for fraudulent inducement and breach of contract. Plaintiff has responded to the counter-claim, and discovery is proceeding. Although we are vigorously defending this action, there can be no assurance that we will be successful. On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint against us in the Supreme Court of the State of New York, County of New York. The complaint alleges that on or about August 19, 1999 Commonwealth and SmartServ entered into an engagement letter pursuant to which Commonwealth was to provide financial advisory and investment banking services to SmartServ in connection with a possible combination between SmartServ and Data Link Systems Corporation. The engagement letter provided for a nonrefundable fee of $15,000 payable in cash or common stock at SmartServ's option. The complaint alleges that SmartServ elected to pay the fee in stock and seeks 13,333 shares of common stock or at least $1,770,000 together with interest and costs. In our answer to the complaint, we denied the material allegations of the complaint, including the allegation that we elected to pay in stock. Discovery has commenced. Although we are vigorously defending this action, there can be no assurance that we will be successful. While we intend to vigorously defend these actions, the unfavorable outcome of either such action could have a material adverse effect on our financial condition, results of operations and cash flows. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information with respect to the executive officers and directors of SmartServ Online, Inc.
NAME AGE POSITION - ---- --- -------- Sebastian E. Cassetta 51 Chief Executive Officer, Secretary, Chairman of the Board and Class III Director Alan G. Bozian 46 Senior Vice President and Chief Financial Officer Mario F. Rossi (4) 61 Senior Vice President of Operations and Class II Director Thomas W. Haller, CPA 46 Vice President, Treasurer and Chief Accounting Officer Richard D. Kerschner 33 Vice President and General Counsel John Montgomery 38 Vice President of Financial Services Robert Pearl 32 Vice President of Strategy and Alliances
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Evan Sohn 32 Vice President of Business Development Claudio Guazzoni (3) 36 Class I Director Charles R. Klotz 58 Class II Director Stephen Lawler (4) 36 Class III Director L. Scott Perry (2) 51 Class I Director Robert Steele (1) (2) (3) 60 Class II Director Catherine Cassel Talmadge (2) (3) 47 Class I Director Charles R. Wood (1) 58 Class III Director - ---------------------------------
(1) Member of the Compensation Committee (2) Member of the Audit Committee (3) Member of the Finance Committee (4) Member of the Technology Advisory Committee SEBASTIAN E. CASSETTA has been Chief Executive Officer, Secretary, Chairman of the Board and a director of SmartServ since its inception. Mr. Cassetta was also SmartServ's Treasurer from its inception until March 1996. From June 1987 to August 1992, Mr. Cassetta was the President of Burns and Roe Securacom Inc., an engineering and large-scale systems integration firm. He is also a former Director, Managing Director and Vice President of Brinks Inc. At Brinks, he expanded international operations in over 15 countries and became the youngest person to be appointed Vice President in Brinks' 140 year history. Appointed by President Reagan and Department of Commerce Secretary Malcolm Baldridge, he served on both the U.S. Export Council and The Industry Sector Advisory Committee (ISAC) regarding GATT negotiations. He is a former member of the Board of Directors of The Young Presidents' Organization and the former Chairman of the New York Chapter. ALAN G. BOZIAN joined SmartServ as Senior Vice President & Chief Financial Officer in May 2000. Prior to joining SmartServ, he spent 24 years at UBS AG and its predecessor, Union Bank of Switzerland, a global integrated investment services firm. At UBS, Mr. Bozian rose through a series of senior trading management and treasury management positions including responsibility for its worldwide treasury activities as Global Treasurer. MARIO F. ROSSI was Vice President of Operations of SmartServ from December 1994 to February 1998 when he was promoted to Senior Vice President, Operations and Chief Technology Officer and was appointed a director of SmartServ. Mr. Rossi has business and operational management experience in the computer, telecommunications and security fields. He has an extensive background in product development, operations and technical marketing. From 1989 to 1994, Mr. Rossi was Vice President of Operations for MVS Inc., a fiber optic company specializing in wireless technology, and a General Manager at Pirelli from 1986 to 1988. From 1971 to 1986, he was Director of Development of Philips Medical Systems, in the U.S. as well as the Netherlands. THOMAS W. HALLER, CPA joined SmartServ as Vice President, Treasurer and Chief Financial Officer in March 1996. He served as SmartServ's Chief Financial Officer until June 2000, when he became SmartServ's Chief Accounting Officer. 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. Prior thereto Mr. Kerschner was Managing Counsel at Omnipoint Communications, a leading wireless -20- 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 the 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. JOHN MONTGOMERY joined SmartServ in April 2000 with over 15 years of global and domestic securities experience. From January 1999 to January 2000 Mr. Montgomery was a Director of and from April 1997 to January 1999 was a Vice President of SG Gowen Securities. Managing over 22 sales professionals, he provided account coverage to broker-dealers, money managers, mutual funds, insurance companies and commercial banks. Mr. Montgomery holds several NASD registrations, including General Securities Sales Supervisor. He has experience with equities, fixed-income, options and interest rate derivatives. Mr. Montgomery spent 5 years in institutional sales at UBS Securities, over 3 years in portfolio strategies for PaineWebber and 3 years with Merrill Lynch Capital Markets. ROBERT PEARL joined SmartServ in September 1998 with over 7 years of wireless industry experience. He is responsible for developing SmartServ's wireless strategy and consummating relationships with key business and technology strategic alliances. Mr. Pearl is a co-founder and former co-chairman of the WAP Forum's Developer Expert Group. Prior to joining SmartServ, Mr. Pearl was Project Manager for Wireless Information Services at Omnipoint from 1996 to 1998 and Marketing Liaison at AT&T Wireless (formerly McCaw Cellular Communications) from 1993 to 1996. EVAN SOHN joined SmartServ Online in March 2000 as the Vice President of Business Development. Prior thereto, Mr. Sohn was the Vice President of Business Development of the Strategic Technologies division of IMS Health from December 1998 to March 2000. He joined Strategic Technologies upon its acquisition of Logix, Inc., a company he founded in 1989 and of which he served as President. Logix was a leading provider of mobile and handheld applications in areas of sales force automation, financial services, wireless communication and medical information. CLAUDIO GUAZZONI became a director of SmartServ on January 11, 1998. Since 1993, Mr. Guazzoni has been President of The Zanett Securities Corporation (now known as the Planet Zanett Internet Incubator) and Zanett Capital, Inc. providing financial and strategic consulting services to growth companies. Prior to joining the Zanett organization, Mr. Guazzoni was a Money Manager with Delphi Capital Management, Inc. (1992) and an associate with Salomon Brothers, Inc. from 1985 to 1991. CHARLES R. KLOTZ became a director of SmartServ on May 15, 2000. Since 1985, Mr. Klotz has been a director of a number of private and public companies associated with David R. Barclay and Frederick H. Barclay. He was President and Chief Executive Officer of Gulf Resources & Chemical Corporation from 1985-1998 and he was Chairman and Chief Executive Officer of Gotaas Larsen Shipping Corporation from 1988-1997. Prior thereto, he was with Bank of Boston where he held a number of positions including Head of Corporate Banking in London and Deputy Head of Specialized Corporate Finance which covered acquisition finance and venture capital. STEPHEN LAWLER was elected a director of SmartServ on December 28, 1999. He has been the Group Product Manager for the Mobile Internet Business Unit at Microsoft Corporation since April 1999. Mr. Lawler's experience includes all aspects of engineering including software development, program management, quality assurance and documentation. Additionally, he has directed product marketing teams, program management teams and engineering teams. From 1992 to April 1999, he worked for MapInfo Corporation where he was a member of the Executive Team, the Managing Director of Product Marketing and Product Management and the Managing Director of Software Development and Product Development. -21- L. SCOTT PERRY has been a director of SmartServ since November 1996. Since June 1998, Mr. Perry has been Vice President, Strategy & Alliances - AT&T Solutions. From December 1995 to June 1998, Mr. Perry had been Vice President, Advanced Platform Services of AT&T Corp. From January 1989 to December 1995, Mr. Perry held various positions with AT&T including Vice President -- Business Multimedia Services, Vice President (East) -- Business Communications Services and Vice President -- Marketing, Strategy and Technical Support for AT&T Data Systems Group. Mr. Perry serves on the Board of Directors of Junior Achievement of New York, is a member of the Cornell University Engineering College Advisory Council and serves on the Board of INEA, a private financial planning software company based in Toronto, Canada. ROBERT STEELE was appointed a director of SmartServ on February 23, 1998. Since February 1998, Mr. Steele has been Vice Chairman of the John Ryan Company, an international bank support and marketing company. From 1992 to February 1998, Mr. Steele was a Senior Vice President of the John Ryan Company. Mr. Steele is the former President of Dollar Dry Dock Bank and a member of the Board of Directors of Moore Medical Corp., Scan Optics, Inc. Accent Color Sciences, Inc., NLC Insurance Companies, Inc. and the New York Mercantile Exchange. CATHERINE CASSEL TALMADGE has been a director of SmartServ since March 1996. Since May 1999, Ms. Talmadge has been Senior Vice President of Business Development for High Speed Access Corporation. From September 1984 to May 1999, she held various positions with Time Warner Cable, a division of Time Warner Entertainment Company, L.P., including Vice President, Cable Programming; Director, Programming Development; Director, Operations; Director, Financial Analyses; and Manager, Budget Department. CHARLES R. WOOD was appointed a director of SmartServ in September 1998. Mr. Wood was Senior Vice President of DTN and President of its Financial Services Division, from 1989 and 1986, respectively, until February 28, 2000. BOARD OF DIRECTORS The Board of Directors consists of nine directors divided into three classes: Class I Directors, Class II Directors and Class III Directors. The Class I and Class III Directors will serve until the 1999 annual meeting and the Class II Directors will serve until the 2000 annual meeting or, in each case, until their respective successors are duly elected and qualified or until their earlier resignation or removal. Upon such annual meetings of stockholders, the Class III Directors will serve until the annual meeting of SmartServ's stockholders to be held in 2001, the Class I Directors will serve until the annual meeting of SmartServ's stockholders to be held in 2002 and the Class II Directors will serve until the annual meeting of SmartServ's stockholders to be held in 2003. Directors of each Class are elected for a full term of three years (or any lesser period representing the balance of the previous term of such Class) and until their respective successors are duly elected and qualified or until their earlier resignation or removal. Officers are appointed annually and serve at the discretion of the Board for one year. 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 18.83% of the outstanding stock of SmartServ, to elect the director designated by TecCapital. 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, Messrs. Cassetta and Francesco have agreed to vote their shares of common stock, representing approximately 15.27% 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. -22- 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. Between December 29, 1998 and December 31, 1999, each non-employee director received a $1,000 fee for each meeting he or she attended. Commencing January 1, 2000, 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. Between November 4, 1996 and April 24, 1998, each person who was not a salaried employee of SmartServ was granted, on the date he or she became a director, an option to purchase 5,000 shares of common stock and immediately following each annual meeting of stockholders at which directors were elected, each such person elected to serve as a director at that annual meeting or who remained a director following that annual meeting was granted an option to purchase 5,000 shares of common stock. Subsequent to April 24, 1998, the Compensation Committee has had the discretionary authority to grant options to non-employee directors. Pursuant to such authority, on December 28, 1998 and October 13, 1999 it granted options to purchase 10,000 shares of common stock at a price of $2.35 and $.9375, respectively, to each non-employee director. The exercise price of each share of common stock under any option granted to a director was equal to the fair market value of a share of common stock on the date the option was granted. EXECUTIVE COMPENSATION The following table sets forth information concerning annual and long-term compensation, paid or accrued, for the Chief Executive Officer and for each other executive officer (the "Named Executive Officers") of SmartServ whose compensation exceeded $100,000 in fiscal 1999 for services in all capacities to SmartServ during the last three fiscal years. SUMMARY COMPENSATION TABLE --------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------------------------------------------- RESTRICTED SECURITIES NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION (1) (2) OPTIONS COMPENSATION - -------------------------- -------- ------------- ---------- ------------------ --------------- -------------- -------------- Sebastian E. Cassetta 1999 $ 155,000 $ 5,414 $ 9,750 $ 185,471(3) 92,000 (5) $24,416(8) Chief Executive 1998 125,000 -- 9,750 -- 37,500 (6) -- (9) Officer 1997 125,000 -- 9,750 -- 16,666 (6) -- (9) Mario F. Rossi 1999 122,500 3,249 6,000 61,824(4) 67,500 (7) -- (9)
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Vice President 1998 92,400 -- 6,000 -- 20,834 (6) -- (9) of Operations 1997 75,000 -- 6,000 -- 4,416 (6) -- (9)
(1) Amounts shown consist of a non-accountable expense allowance. (2) The Named Executive Officers did not receive any LTIP Payouts in 1999, 1998 or 1997. (3) On December 29, 1998, the Board of Directors approved the sale to Mr. Cassetta of 618,239 shares of restricted stock representing 9% of the fully diluted shares of common stock of SmartServ. Compensation has been determined as the number of shares awarded to Mr. Cassetta times the closing price of SmartServ's common stock on December 29, 1998 ($2.50) less the consideration to be paid by Mr. Cassetta. At June 30, 1999, based upon the closing bid price ($1.50) of SmartServ's common stock, the value of Mr. Cassetta's shares was $0. On October 13, 1999, the Board of Directors agreed to reprice the shares granted to Mr. Cassetta to $.75 per share, the fair value of the shares at that date. Through December 31, 1999, the purchase of this restricted stock was recorded as a variable award pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In accordance therewith, SmartServ's results of operations for the six months ended December 31, 1999 includes a noncash compensation charge of $11,727,000 for the change in the fair value of its common stock at December 31, 1999. (4) On December 29, 1998, the Board of Directors approved the sale to Mr. Rossi of 206,080 shares of restricted stock representing 3% of the fully diluted shares of common stock of SmartServ. Compensation has been determined as the number of shares awarded to Mr. Rossi times the closing price of SmartServ's common stock on December 29, 1998 ($2.50) less the consideration to be paid by Mr. Rossi. At June 30, 1999, based upon the closing bid price ($1.50) of SmartServ's common stock, the value of Mr. Rossi's shares was $0. On October 13, 1999, the Board of Directors agreed to reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the shares at that date. Through December 31, 1999, the purchase of this restricted stock was recorded as a variable award pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In accordance therewith, SmartServ's results of operations for the six months ended December 31, 1999 includes a noncash compensation charge of $3,909,000 for the change in the fair value of its common stock at December 31, 1999. (5) Includes options for the purchase of 37,500 shares which were cancelled when repriced options to purchase a like number of shares were granted in lieu thereof. (6) Such options were cancelled when repriced options were granted in lieu thereof in fiscal 1999. (7) Includes options for the purchase of 25,250 shares which were cancelled when repriced options to purchase a like number of shares were granted in lieu thereof. (8) Amounts represent premiums paid by SmartServ for life and disability insurance for the benefit of Mr. Cassetta. (9) The aggregate amount of personal benefits not included in the Summary Compensation Table does not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus paid to the Named Executive Officers. -24- STOCK OPTIONS The following table sets forth information with respect to stock options granted to the Named Executive Officers during fiscal year 1999:
OPTION GRANTS IN FISCAL 1999 (INDIVIDUAL GRANTS) (1) ----------------------- NUMBER OF % OF TOTAL OPTIONS SECURITIES UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION NAME OPTIONS GRANTED FISCAL 1999 PRICE DATE - -------------------------- ----------------------- ------------------------- ------------------- --------------------- Sebastian E. Cassetta 17,000 3.66% $ 1.625 11/19/08 37,500 8.08 1.290 10/07/08 37,500 (2) 8.08 2.530 8/06/08 Mario F. Rossi 17,000 3.66 1.625 11/19/08 25,250 5.44 1.290 10/07/08 25,250 (2) 5.44 2.530 8/06/08
(1) No stock appreciation rights ("SARs") were granted to the Named Executive Officers during fiscal 1999. (2) Cancelled on October 8, 1998. The following table sets forth information as to the number of unexercised shares of common stock underlying stock options and the value of unexercised in-the-money stock options at fiscal year end:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE (1)(2) ----------------------------------- VALUE OF NUMBER OF UNEXERCISED IN- UNEXERCISED THE-MONEY SECURITIES UNDERLYING OPTIONS AT UNDERLYING OPTIONS FISCAL YEAR AT FISCAL YEAR END END SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE - ------------------------------ -------------------- ----------------- -------------------------- --------------------- Sebastian E. Cassetta -- -- 0/54,499 $0/$7,874 Mario F. Rossi -- -- 0/42,249 $0/$5,302
(1) No SARs were granted to, or exercised by, the Named Executive Officers during fiscal 1999. (2) Value is based on the closing bid price of SmartServ's common stock as reported by the OTC Bulletin Board on June 30, 1999 ($1.50) less the exercise price of the option. EMPLOYMENT AGREEMENTS SmartServ and Mr. Cassetta have entered into an employment agreement ("Cassetta Agreement"), effective January 1, 1999 and expiring on December 31, 2001, providing for (1) base compensation of $185,000 per annum, (2) additional compensation of up to 100% of base compensation and (3) the sale to -25- him of 618,239 shares of restricted stock representing 9% of the fully diluted shares of common stock of SmartServ. Mr. Cassetta's additional compensation will be equal to 10% of his base compensation for each 10% increase in sales during the first year of the Cassetta Agreement, subject to a maximum of 100% of base compensation. In each subsequent year of the Cassetta Agreement, Mr. Cassetta will receive additional compensation equal to 5% of his base compensation for each 5% increase in sales, subject again to a maximum of 100% of base compensation. The purchase price ($2.20 per share) of the restricted stock was equal to 110% of the fair market value of SmartServ's common stock for the 30 days preceding the date of the stock purchase agreement ("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement. On October 13, 1999, the Board of Directors agreed to reprice the shares granted to Mr. Cassetta to $.75 per share, the fair market value of the shares at that date. $6,182.39 of the purchase price has been paid in cash and the balance by a 5 year, non-recourse promissory note, secured by the stock, at an interest rate of 6.75%, which is 1% below the prime rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock Purchase Agreement provides SmartServ with certain repurchase options and provides Mr. Cassetta with a put option in the event of the termination of his employment. In the event that Mr. Cassetta's employment is terminated without cause, Mr. Cassetta will receive a lump sum severance payment equal to his full base salary for the remaining term of the Cassetta Agreement, discounted to the present value using an 8% discount rate and continuing benefit coverage for the lesser of 12 months or the remaining term of the Cassetta Agreement. On December 28, 1999, the Board of Directors of the Company approved the payment to Mr. Cassetta in stock of the bonus payable to him for 1999 under his employment agreement. Pursuant thereto, in March 2000 the Company issued 148,000 shares of common stock to Mr. Cassetta. SmartServ and Mr. Rossi have entered into an employment agreement ("Rossi Agreement"), effective January 1, 1999 and expiring on December 31, 2001, providing for (1) base compensation of $135,000 per annum, (2) additional compensation of up to 50% of base compensation and (3) the sale to him of 206,080 shares of restricted stock representing 3% of the fully diluted shares of common stock of SmartServ. Mr. Rossi's additional compensation will be equal to 5% of his base compensation for each 10% increase in sales during the first year of the Rossi Agreement, subject to a maximum of 50% of base compensation. In each subsequent year of the Rossi Agreement, Mr. Rossi will receive additional compensation equal to 2.5% of base compensation for each 5% increase in sales, subject again to a maximum of 50% of base compensation. The purchase price ($2.20 per share) of the restricted stock was equal to 110% of the fair market value for the 30 days preceding the date of the stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the Rossi Agreement. On October 13, 1999, the Board of Directors agreed to reprice the shares granted to Mr. Rossi to $.75 per share, the fair market value of the shares at that date. $2,060.80 of the purchase price has been paid in cash and the balance by a 5 year, non-recourse promissory note, secured by the stock, at an interest rate of 6.75%, which is 1% below the prime rate on the date of the Rossi Stock Purchase Agreement. The Rossi Stock Purchase Agreement provides SmartServ with certain repurchase options and provides Mr. Rossi with a put option in the event of the termination of his employment. In the event that Mr. Rossi's employment is terminated without cause, Mr. Rossi will receive a lump sum severance payment equal to his full base salary for the remaining term of the Rossi Agreement, discounted to the present value using an 8% discount rate and continuing benefit coverage for the lesser of 12 months or the remaining term of the Rossi Agreement. On December 28, 1999, the Board of Directors of the Company approved the payment to Mr. Rossi in stock of the bonus payable to him for 1999 under his employment agreement. Pursuant thereto, in March 2000 the Company issued 54,000 shares of common stock to Mr. Rossi. SmartServ and Mr. Bozian have entered into an employment agreement ("Bozian Agreement"), effective May 29, 2000 and expiring on May 29, 2003, providing for (1) base compensation of $250,000 per annum, (2) a merit bonus of up to 50% of base compensation, (3) the grant to him of options to purchase an aggregate of 175,000 shares of stock at an exercise price of $49.50 per share and (4) reimbursement of certain moving and other expenses. In the event that Mr. Bozian's employment is terminated without cause, -26- he will receive a lump sum severance payment equal to his full base salary for the remaining term of the Bozian 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 Bozian Agreement. PRINCIPAL STOCKHOLDERS The following table sets forth, as of July 10, 2000, certain information with respect to the beneficial ownership of the common stock by (1) each person known by SmartServ to beneficially own more than 5% of the outstanding shares, (2) each director of SmartServ, (3) each Named Executive Officer and (4) all executive officers and directors of SmartServ as a group. Except as otherwise indicated, each person listed below has sole voting and investment power with respect to the shares of common stock set forth opposite such person's name.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES (3) -------------------- ------------------------ ---------------------- Sebastian E. Cassetta 856,241 (4) 15.27% c/o SmartServ Online, Inc. Metro Center, One Station Place Stamford, CT 06902 Steven Rosner 411,300 (5) 7.11% 1220 Mirabeau Lane Gladwyn, Pennsylvania 19035 TecCapital Ltd. 303,030 5.43% c/o Berwick Management, Inc. 150 Federal Street, 19th Floor Boston, MA 02110 Data Transmission Network Corporation 285,000 (6) 5.02% 9110 West Dodge Road Omaha, Nebraska 68114 Mario F. Rossi 281,954 (7) 5.04% c/o SmartServ Online, Inc. Metro Center, One Station Place Stamford, CT 06902 Claudio Guazzoni 93,699 (8) 1.65% L. Scott Perry 25,833 (9) * Catherine Cassel Talmadge 25,816 (9) * Stephen Lawler 20,000 (10) * Robert H. Steele 14,166 (11) * Charles R. Wood 14,000 *
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Charles R. Klotz 0 (12) * All executive officers and directors as a group (15 persons) 1,455,973 (13) 24.90%
* Less than 1% of the outstanding common stock (1) Under the rules of the Securities and Exchange Commission (SEC), addresses are only given for holders of 5% or more of the outstanding common stock of SmartServ. (2) Under the rules of the SEC, a person is deemed to be the beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities if that person has the right to acquire beneficial ownership within 60 days of the date hereof. Unless otherwise indicated by footnote, the named entities or individuals have sole voting and investment power with respect to the shares of common stock beneficially owned. (3) Represents the number of shares of common stock beneficially owned as of July 10, 2000 by each named person or group, expressed as a percentage of the sum of all of the shares of such class outstanding as of such date and the number of shares not outstanding, but beneficially owned by such named person or group. (4) Includes 27,249 shares of common stock subject to currently exercisable options. Also includes 2,051 shares held in trust for the benefit of Mr. Cassetta's wife. (5) Includes 208,000 shares of common stock subject to currently exercisable warrants. (6) Includes 100,000 shares of common stock subject to currently exercisable warrants. (7) Includes 21,124 shares of common stock subject to currently exercisable options. (8) Includes 24,166 shares of common stock subject to currently exercisable options. Also includes 69,533 shares of common stock subject to currently exercisable warrants. (9) Includes 25,000 shares of common stock subject to currently exercisable options. (10) Represents 20,000 shares of common stock subject to currently exercisable options. (11) Includes 10,000 shares of common stock subject to currently exercisable options. (12) Does not include 303,031 shares beneficially owned by TecCapital Ltd. of which Mr. Klotz is a director. Mr. Klotz disclaims beneficial ownership of these shares. (13) Includes 2,051 shares held in trust for the benefit of Mr. Cassetta's wife, 268,236 shares of common stock subject to currently exercisable options and warrants issued to all executive officers and directors. CHANGES IN CONTROL SmartServ and each of Messrs. Cassetta and Francesco have entered into an agreement with Zanett Capital, Inc. dated September 29, 1997, as subsequently amended, which provides, among other things, that -28- for a period of 5 years, upon an event of default under the prepaid warrants, SmartServ will, at the request of Zanett Capital, Inc., appoint such number of designees of Zanett Capital, Inc. to its Board of Directors so that the designees of Zanett Capital, Inc., will constitute a majority of the members of the Board of Directors of SmartServ. Further, Messrs. Cassetta and Francesco have agreed to vote their shares of common stock, representing approximately 15.27% 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, the shares of common stock held by certain financial consultants and 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, InterBank Funding Corp., Ehrenkrantz King Nussbaum, Inc., Michael Kramer, Lindquist Global Advisors, LLC, Steven Rosner and Brauning Associates (of which Michael P. Silva and Todd M. Peterson are principals and transferees), investment advisory relationships with The Zanett Securities Corporation, (of which Claudio Guazzoni, a director of SmartServ, is a principal) and that Charles R. Klotz is a director of SmartServ and designee of TecCapital, Ltd., none of the selling stockholders has, and, within the past three years, none has had, any position, office or other material relationship with us or any of our predecessors or affiliates. The following table sets forth the name of the selling stockholders, the number of shares of common stock beneficially owned by the selling stockholders as of July 10, 2000 and the number of shares of common stock being offered by the selling stockholders. The shares being offered hereby are being registered to permit public secondary trading, and the selling stockholders may offer all or part of the shares for resale from time to time. However, the selling stockholders are under no obligation to sell all or any portion of such shares nor are the selling stockholders obligated to sell any shares immediately under this prospectus. All information with respect to share ownership has been furnished by the selling stockholders. Because the selling stockholders may sell all or part of their shares, no estimates can be given as to the number of shares of common stock that will be held by the selling stockholders upon termination of any offering made hereby.
Shares of Common Stock Shares of Common Beneficial Ownership Beneficially Stock After Offering If All Selling Stockholders Owned to be Sold Shares Are Sold -------------------- ----- ---------- --------------- TecCapital, Ltd. 303,030 303,030 -- The Abernathy Group 20,202 20,202 -- Hare & Co. 30,303 30,303 -- John E. Herzog 4,167 4,167 -- Andrew DaPonte 3,750 3,750 -- Emanuel E. Geduld 2,083 2,083 -- Anchung Sammy Chung and Fong-Chi Alison Taso 1,250 1,250 -- Alexandra Building Corp. 833 833 -- Andrew Seybold Group, LLC 10,000 10,000 -- InterBank Funding Corp. 4,309 4,309 --
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Ehrenkrantz King Nussbaum, Inc. 16,667 16,667 -- Michael Kramer 16,000 16,000 -- Lindquist Global Advisors, LLC 0 50,000 (1) -- Steven Rosner 411,300 8,000 403,300 Bruno Guazzoni 116,866 116,866 -- Zanett Lombardier, Ltd. 9,227 9,227 -- Samuel L. Milbank 4,406 4,406 -- David M. McCarthy 8,811 8,811 -- Claudio Guazzoni 8,811 8,811 -- Michael P. Silva 40,000 40,000 -- Todd M. Peterson 10,000 10,000 -- ------ ------- ---- Total 1,022,015 668,715 403,300 ======= ======= =======
- ----------------------------- (1) Represents 50,000 shares underlying warrants to purchase such shares that are not included in shares of common stock beneficially owned because the warrants are not currently exercisable nor will be within the next 60 days. We agreed with Zanett Lombardier, Ltd. and Bruno Guazzoni to register the underlying shares of common stock pursuant to the antidilution provisions of warrants issued to them. They agreed that they will not exercise their warrants to the extent that they would beneficially own more than 4.99% of our common stock. They can waive this restriction on 61 days notice. PLAN OF DISTRIBUTION The shares may be sold or distributed from time to time by the selling stockholders or by pledgees, donees or transferees of, or successors in interest to, the selling stockholders, directly to one or more purchasers (including pledgees) or through brokers, dealers or underwriters who may act solely as agents or may acquire shares as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices, which may be changed. The distribution of the shares may be effected in one or more of the following methods: o ordinary brokers transactions, which may include long or short sales, o transactions involving cross or block trades or otherwise on the OTC Bulletin Board, -30- 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. Brokers, dealers, underwriters or agents participating in the distribution of the shares may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agent or to whom they may sell as principal, or both (which compensation as to a particular broker-dealer may be in excess of customary commissions). The selling stockholders and any broker-dealers acting in connection with the sale of the shares hereunder may be deemed to be underwriters within the meaning of Section 2(11) of the Securities Act of 1933, and any commissions received by them and any profit realized by them on the resale of shares as principals may be deemed underwriting compensation under the Securities Act of 1933. Neither SmartServ nor the selling stockholders can presently estimate the amount of such compensation. SmartServ knows of no existing arrangements between the selling stockholders and any other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares. SmartServ will not receive any proceeds from the sale of the shares pursuant to this prospectus. SmartServ has agreed to bear the expenses of the registration of the shares, including legal and accounting fees, and such expenses are estimated to be approximately $42,000. SmartServ has informed the selling stockholders that while they are engaged in a distribution of the shares included in this prospectus they are required to comply with certain anti-manipulative rules contained in Regulation M under the Securities Exchange Act of 1934. With certain exceptions, Regulation M precludes the selling stockholders, any affiliated purchasers, and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the shares offered by this prospectus. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On June 24, 1999, SmartServ and DTN entered into an agreement that amended the Software License and Service Agreement dated April 23, 1998. In consideration of the receipt of $5.175 million, SmartServ granted DTN an exclusive perpetual worldwide license to SmartServ's Internet-based (1) real-time stock quote product, (2) online trading vehicle for customers of small and medium sized brokerage companies, (3) administrative reporting package for brokers of small and medium sized brokerage companies -31- and (4) order entry/routing system. Additionally, SmartServ received $324,000 in exchange for an agreement to issue warrants to purchase 300,000 shares of SmartServ's common stock at an exercise price of $8.60 per share. SmartServ has agreed to continue to operate these products and provide maintenance and enhancement services in exchange for a percentage of the revenues earned by DTN therefrom. The cost of SmartServ's commitment to provide such maintenance and enhancement services is limited to a maximum of 20% of the revenues earned by SmartServ. Charles R. Wood, a director of SmartServ, was until February 28, 2000, Senior Vice President of DTN and President of its Financial Services Division. SmartServ believes that the terms of the transactions described above were no less favorable to SmartServ than would have been obtained from a non-affiliated third party for similar transactions at the 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 August 2, 2000, we had 5,776,870 shares of common stock issued and outstanding. No shares of preferred stock are issued and outstanding. We have reserved 4,513,930 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 -32- 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 155,211 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, 2001. 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, 2001. The warrants are subject to redemption by the Company 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, subject to certain exceptions, by us and the warrant agent with the written consent of the holders of at least a majority of the warrants. Prior to our initial public offering, we issued to Alexandra Building Corp., John E. Herzog, Andrew DaPonte, Emanuel E. Geduld, Anchung Sammy Chung and Fong-Chi Alison Tsao, for nominal consideration, warrants to purchase an aggregate of 12,083 shares of common stock at an exercise price of $24.00 per share during the period ending March 21, 2001. On January 1, 1999, we issued to Andrew Seybold Group, LLC a warrant to purchase 10,000 shares of common stock at an exercise price of $2.50 per share. These warrants were issued as partial consideration for marketing consulting services provided to the Company 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 the Company 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 the Company 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 the Company and expires on July 2, 2003. On January 7, 2000, we issued 16,667 shares of common stock to Ehrenkrantz King Nussbaum, Inc. upon exercise of warrants. -33- On March 15, 2000, we issued 4,309 shares of common stock to InterBank Funding Corp. upon exercise of warrants. On April 5, 2000, we issued 1,250 shares of common stock to Anchung Sammy Chung and Fong-Chi Alison Tsao upon exercise of warrants. On May 1, 2000, we issued to Lindquist Global Advisors, LLC, a warrant to purchase 50,000 shares of common stock at an exercise price of $49.50. This warrant was issued as partial consideration for financial consulting services to be provided to the Company and will expire on April 30, 2003. The warrants may be exercised in whole or in part, subject to the limitations provided in the warrants. Any warrant holders who do not exercise their warrants prior to the conclusion of the exercise period will forfeit the right to purchase the shares of common stock underlying the warrants and any outstanding warrants will become void and be of no further force or effect. Holders of the warrants have no voting, preemptive, liquidation or other rights of a stockholder, and no dividends will be declared on the warrants. We have agreed to pay all registration expenses incurred in connection with the registration of the common stock issuable upon exercise of the warrants. DELAWARE BUSINESS COMBINATION PROVISIONS We are governed by the provisions of Section 203 of the Delaware General Corporation Law ("DGCL"). In general, this statute prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless: o prior to the date at which the stockholder became an interested stockholder, the Board of Directors approved either the business combination or the transaction in which the person became an interested stockholder; o the stockholder acquired more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers and shares held in certain employee stock plans) upon consummation of the transaction in which the stockholder became an interested stockholder; or o the business combination is approved by the Board of Directors and by at least 66-2/3% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent) held on or after the date such stockholder became an interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's voting stock. Section 203 defines a "business combination" to include, without limitation, mergers, consolidations, stock sales and asset-based transactions and other transactions resulting in a financial benefit to the interested stockholder. 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: -34- o for any breach of a director's duty of loyalty to the corporation or its stockholders, o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, o pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or o for any transaction from which a director derived an improper personal benefit. The Amended and Restated Certificate of Incorporation of SmartServ provides in effect for the elimination of the liability of directors to the extent permitted by the DGCL. Section 145 of the DGCL provides, in summary, that directors and officers of Delaware corporations are entitled, under certain circumstances, to be indemnified against all expenses and liabilities (including attorney's fees) incurred by them as a result of suits brought against them in their capacity as a director or officer, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful; provided, that no indemnification may be made against expenses in respect of any claim, issue or matter as to which they shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, they are fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Any such indemnification may be made by the corporation only as authorized in each specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable standard of conduct. SmartServ's By-Laws entitle officers and directors of SmartServ to indemnification to the fullest extent permitted by the DGCL. SmartServ has agreed to indemnify each of its directors and certain officers against certain liabilities, including liabilities under the Securities Act of 1933. In addition, SmartServ maintains an insurance policy with respect to potential liabilities of its directors and officers, including potential liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of SmartServ pursuant to the provisions described above, or otherwise, SmartServ has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by SmartServ of expenses incurred or paid by a director, officer or controlling person of SmartServ in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, SmartServ will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 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 -35- Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, we file electronic versions of these documents on the Commission's Electronic Data Gathering Analysis and Retrieval, or EDGAR, System. The Commission maintains a website at http.//www.sec.gov that contains reports, proxy statements and other information filed with the Commission. We have filed a registration statement on Form SB-2 with the Commission to register the shares of our common stock to be sold by the selling stockholders. This prospectus is part of that registration statement and, as permitted by the Commission's rules, does not contain all of the information set forth in the registration statement. For further information with respect to us or our common stock, you may refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. You can review a copy of the registration statement and its exhibits and schedules at the public reference room maintained by the Commission, and on the Commission's web site, as described above. You should note that statements contained in this prospectus that refer to the contents of any contract or other document are not necessarily complete. Such statements are qualified by reference to the copy of such contract or other document filed as an exhibit to the registration statement. TRANSFER AGENT The Transfer Agent and Registrar for the common stock is Continental Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Its telephone number is (212) 509-4000. LEGAL MATTERS The validity of the shares of common stock offered in this prospectus has been passed upon for us by Parker Chapin LLP, The Chrysler Building, 405 Lexington Avenue, New York, New York 10174. Its telephone number is (212) 704-6000. EXPERTS The financial statements of SmartServ Online, Inc. at June 30, 1999 and 1998, and for each of the three years in the period ended June 30, 1999, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 1 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. -36- - -------------------------------------------------------------------------------- [LOGO] SMARTSERV ONLINE, INC. 668,715 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. August __, 2000 - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Section 145 of the General Corporation Law of Delaware ("DGCL") provides that directors, officers, employees or agents of Delaware corporations are entitled, under certain circumstances, to be indemnified against expenses (including attorneys' fees) and other liabilities actually and reasonably incurred by them in connection with any suit brought against them in their capacity as a director, officer, employee or agent, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. Section 145 also provides that directors, officers, employees and agents may also be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by them in connection with a derivative suit bought against them in their capacity as a director, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made without court approval if such person was adjudged liable to the corporation. Article Tenth of the registrant's Certificate of Incorporation provides that the registrant shall indemnify any and all persons whom it shall have power to indemnify to the fullest extent permitted by the DGCL. Article VI of the registrant's by-laws provides that the registrant shall indemnify authorized representatives of the registrant to the fullest extent permitted by the DGCL. The registrant's by-laws also permit the registrant to purchase insurance on behalf of any such person against any liability asserted against such person and incurred by such person in any capacity, or out of such person's status as such, whether or not the registrant would have the power to indemnify such person against such liability under the foregoing provision of the by-laws. The registrant maintains a directors and officers liability insurance policy with National Union Fire Insurance Company of Pittsburgh, PA. The policy insures the directors and officers of the registrant against loss arising from certain claims made against such directors or officers by reason of certain wrongful acts. Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated expenses in connection with the issuance and distribution of the securities being registered hereby. All such expenses will be borne by the registrant; none shall be borne by any selling stockholders. Securities and Exchange Commission registration fee $ 6,151 Legal fees and expenses $ 20,000 Accounting fees and expenses $ 15,000 Miscellaneous $ 849 Total $ 42,000 - ------------------------------- II-1 Item 26. RECENT SALES OF UNREGISTERED SECURITIES. On May 29, 1997, the Company issued a $550,000 promissory note and warrants to purchase 45,302 shares of common stock to Zanett Lombardier, Ltd. ("ZLL") for $550,000. On each of July 21, 1997 and September 16, 1997, the Company issued an additional $111,111 promissory note and warrants to purchase an additional 10,478 shares of common stock to ZLL for $111,111. The warrants are subject to antidilution provisions and have exercise prices of $4.34 and $5.30 per share. Zanett Securities Corporation ("Zanett") received fees of $78,576 for its services in connection with such transactions. Additionally, Zanett received warrants to purchase 18,206 shares of common stock. Such warrants are subject to antidilution provisions and have exercise prices of $4.34 and $5.30. The promissory notes and warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On September 16, 1997, the Company issued warrants to purchase 50,083 shares of common stock to ZLL as a default penalty under the ZLL notes. The warrants have an exercise price of 50% of the closing price of the Company's common stock on the exercise date. On November 16, 1999, ZLL exercised on a cashless basis all of such warrants in exchange for 25,042 shares of common stock. No sales commissions were paid in connection with such transactions. The warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. The shares were issued in reliance upon the exemption from registration provided by Section 3 (a) (9) of the Securities Act. On September 29, 1997, the Company issued 4,000 prepaid common stock purchase warrants ("Prepaid Warrants") to 12 investors for $4,000,000. Included in such amount was $772,222 of the promissory notes issued to ZLL and $63,837 of accrued interest thereon which were cancelled in connection with this transaction. The Prepaid Warrants are convertible into a number of shares of common stock of the Company that is equal to $1,000 divided by the applicable exercise price. The exercise price is 70% of the average closing bid price of the common stock for the 10 trading days ending on the day prior to exercise of such warrants, reduced by 1% for each 60 day period the Prepaid Warrants remain unexercised, but in no event above $8.40 per share. Zanett received a commission of $400,000, an unaccountable expense allowance of $120,000, and warrants to purchase 155,627 shares, subject to antidilution provisions, of common stock at $4.34 per share in connection with such transaction. The Prepaid Warrants, and the warrants issued to Zanett, were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On September 29, 1997, the Company issued 130,035 warrants to Bruno Guazzoni and, subject to stockholder approval, agreed to issue to him warrants to purchase an additional 792,201 shares of common stock. These additional warrants were approved by the stockholders and issued in April 1998. The warrants are subject to antidilution provisions and have an exercise price of $4.34 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. Between January 13, 1998 and March 21, 2000 an aggregate of 3,388 Prepaid Warrants were converted into an aggregate of 1,209,738 shares of common stock of the Company. No sales commissions were paid in connection with such conversions. The shares were issued in reliance upon the exemption from registration provided by Section 3 (a) (9) of the Securities Act. On January 2, 1998 and March 3, 1998, the Company issued warrants to purchase 16,666 and 20,833 shares of common stock, respectively, in connection with consulting contracts. The warrants have exercise prices of $3.75 and $15.75 to $19.50, respectively. No sales commissions were paid in II-2 connection with such transactions. The warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On August 31, 1998, the Company issued 32,953 shares of common stock to ZLL and 17,047 shares of common stock to Bruno Guazzoni in consideration for their agreeing to certain restrictions on the exercise of the Prepaid Warrants and the resale of the shares of common stock issuable on exercise thereof. No sales commissions were paid in connection with such transaction. The shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On September 8, 1998, the Company issued warrants to purchase 3,000 shares of common stock to Data Transmission Network Corporation ("DTN") for prepayment of certain guaranteed payments in accordance with the Software License and Service Agreement between the parties dated April 23, 1998. Such warrants are exercisable at $3.00 per share of common stock. These warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. No sales commissions were paid in connection with such transaction. On November 17, 1998, the Company issued 125,000 shares of common stock and warrants to purchase 16,667 shares of common stock, exercisable at $5.00 per share until November 11, 2001, to Steven Francesco, a former officer of the Company, as partial consideration for the settlement of his claims against the Company and certain of its officers and directors. The shares and warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. No sales commissions were paid in connection with such transaction. Between November 20, 1998 and December 3, 1998, the Company issued convertible promissory notes in the amount of $500,000 and warrants to purchase 833,333 shares of common stock to 6 investors for $500,000. Such warrants are exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent, received a commission of $50,000 and an unaccountable expense allowance of $15,000 in connection with such transaction. Additionally, the Company issued warrants to purchase 166,667 shares of common stock to Spencer Trask exercisable at $.72 per share through November 29, 2003. These promissory notes and warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On January 14, 1999, the Company issued 10,000 shares of common stock to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants, in consideration of an agreement to waive certain events of default under such Prepaid Warrants. No sales commissions were paid in connection with such transaction. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833 shares of common stock exercisable at $15.75 and $19.50 per share to Mr. Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to purchase 40,833 shares of common stock at $.60 per share for his efforts in arranging the Company's relationship with Spencer Trask. These warrants expire on March 4, 2003 and January 19, 2004 and were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On January 28, 1999, the Company issued a convertible promissory note in the amount of $50,000 and warrants to purchase 83,333 shares of common stock to Mr. Bruno Guazzoni, an investor in the Company's Prepaid Warrants, for $50,000. Such warrants are exercisable at $.60 per share and expire on November 19, 2003. Spencer Trask, the placement agent, received a commission of $5,000, an unaccountable expense allowance of $1,500 and warrants to purchase 16,667 shares of common stock at $.72 per share through January 26, 2004 in connection with this transaction. The promissory note and the II-3 warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On July 6, 1999, the Company issued 180,000 shares of common stock to ASB to settle the Company's obligation to ASB pursuant to the default provisions of the Prepaid Warrants. No sales commissions were paid in connection with such transaction. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On November 19, 1999, the Company 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 the Company 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. On December 28, 1999, the Board of Directors of the Company approved the payment to Sebastian E. Cassetta and Mario F. Rossi in stock of the bonus payable to them for 1999 under their employment agreements. Pursuant thereto, in March 2000 the Company issued 148,000 shares of common stock to Mr. Cassetta and 54,000 shares to Mr. Rossi. No sales commissions were paid in connection with such transaction. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On December 31, 1999, the Company 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 the Company 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. On January 4, 2000, the Company issued 618,239 and 206,080 shares of common stock to Sebastian E. Cassetta and Mario F. Rossi, respectively, pursuant to Stock Purchase Agreements dated December 29, 1998 between the Company and each of them. No sales commissions were paid in connection with such transactions. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On January 4, 2000, the Company issued to Steven Rosner, a warrant to purchase 8,000 shares of common stock at an exercise price of $18.375 per share. This warrant was issued as partial consideration for financial consulting services to be provided to the Company and expires on July 2, 2003. No sales commissions were paid in connection with such transaction. The warrant was issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. On January 18, 2000, the Company issued 233,000 shares of common stock to 24 investors. America First Associates Corp., the placement agent, received a commission of 8% of the aggregate purchase price of the shares purchased in the offering, an unaccountable expense allowance of $25,000 in connection with such transaction and warrants to purchase 18,640 shares. These shares and warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. II-4 On January 18, 2000, the Company issued 100,000 shares of common stock to 14 additional investors. No sales commissions were paid in connection with such transaction. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On January 20, 2000, the Company issued to DTN a warrant to purchase 300,000 shares of the Company's common stock at $8.60 per share in exchange for $324,000. The warrant will expire on November 17, 2000. No sales commissions were paid in connection with such transaction. The warrant was issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. On May 1, 2000, the Company 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 the Company and expires on April 30, 2003. No sales commissions were paid in connection with such transaction. This warrant is to be issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act. On May 15, 2000, the Company issued 353,535 shares of common stock to 3 investors. Chase Securities Inc., the placement agent, received a commission of 4% of the aggregate purchase price of the shares purchased in the offering and an unaccountable expense allowance of $50,000 in connection with such transaction. These shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. ------------------------------------------- (a) Exhibits: The following exhibits are filed as part of this registration statement: EXHIBIT DESCRIPTION - ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company** 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on June 1, 1998 * 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on October 16, 1998* 3.4 By-laws of the Company, as amended** 4.1 Specimen Certificate of the Company's Common Stock** 4.2 Form of Warrant Agent Agreement** 4.3 Form of Redeemable Warrant** 4.4 Form of Warrant Agreement used by the Company 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 the Company 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 the Company and TecCapital, Ltd., The Abernathy Group and Conseco Equity Fund+ 5.1 Opinion of Parker Chapin LLP+ 10.1 Information Distribution License Agreement dated as of July 18, 1994 between the II-5 Company and S&P ComStock, Inc.** 10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of Market Data dated as of August 11, 1994 between the Company and the New York Stock Exchange, Inc.** 10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1 Service and Last Sale Service dated as of September 12, 1994 between the Company and The Nasdaq Stock Exchange, Inc. ("Nasdaq")** 10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale Service dated as of October 11, 1994 between the Company and Nasdaq** 10.5 Lease Agreement dated as of March 4, 1994, between the Company and One Station Place, L.P. regarding the Company's Stamford, Connecticut offices** 10.6 Lease Modification and Extension Agreement, dated February 6, 1996, between the Company and One Station Place, L.P. regarding the Company's Stamford, Connecticut offices*** 10.7 1996 Stock Option Plan**** 10.8 1999 Stock Option Plan+ 10.9 Asset Purchase and Software License and Service Agreements between SmartServ Online, Inc. and Data Transmission Network Corporation, dated April 23, 1998***** 10.10 Amendment to the Software and License Agreement between SmartServ Online, Inc. and Data Transmission Network Corporation, dated June 24, 1999. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to an order by the Securities and Exchange Commission dated December 2, 1999, granting confidential treatment under the Securities Exchange Act of 1934 and the omitted portions have been filed separately with the Securities and Exchange Commission * 10.11 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 * 10.12 Amended and Restated Employment Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999* 10.13 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated December 29, 1998* 10.14 Employment Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated January 1, 1999* 10.15 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated December 29, 1998* 10.16 Amended Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated December 31, 1999+ 10.17 Amended Promissory Note between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 4, 2000+ 10.18 Amended Security Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 4, 2000+ 10.19 Amended Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated December 31, 1999+ 10.20 Amended Promissory Note between SmartServ Online, Inc. and Mario F. Rossi, dated January 4, 2000+ 10.21 Amended Security Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated January 4, 2000+ 10.22 Employment Agreement between SmartServ Online, Inc. and Alan G. Bozian, dated II-6 May 29, 2000+ 23.1 Consent of Ernst & Young LLP+ 23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1) 24.1 Power of Attorney of certain directors and officers of SmartServ (Included as part of the signature page beginning on page II-8 of this filing) - ------------ + Filed herewith * Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 ** Filed as an exhibit to the Company's registration statement on Form SB-2 (Registration No. 333-114) *** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996 **** Filed as an exhibit to the Company's Proxy Statement dated October 10, 1996 ***** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1998 Item 28. UNDERTAKINGS. ------------- (A) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the registration statement; and (iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (B) Undertaking Required by Regulation S-B, Item 512(e). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such II-7 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 registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on the 8th day of August, 2000. SmartServ Online, Inc. By:/s/ Sebastian E. Cassetta ------------------------------ Sebastian E. Cassetta Chairman of the Board, Chief Executive Officer and Secretary POWER OF ATTORNEY The undersigned directors and officers of SmartServ Online, Inc. hereby constitute and appoint Sebastian E. Cassetta, Mario F. Rossi and Thomas W. Haller and each of them, with full power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below any and all amendments (including post-effective amendments and amendments thereto) to this registration statement under the Securities Act of 1933 and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and hereby ratify and confirm each and every act and thing that such attorneys-in-fact, or any of them, or their substitutes, shall lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this 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, August 8, 2000 - --------------------------------------- Chief Executive Officer, Secretary Sebastian E. Cassetta and Director /s/ Alan G. Bozian Senior Vice President and August 8, 2000 - --------------------------------------- Chief Financial Officer Alan G. Bozian /s/ Thomas W. Haller Vice President and Treasurer August 8, 2000 - --------------------------------------- (Chief Accounting Officer) Thomas W. Haller /s/ Mario F. Rossi Director August 8, 2000 - --------------------------------------- Mario F. Rossi Director August __, 2000 - --------------------------------------- Claudio Guazzoni
II-9
/s/ Charles R. Klotz Director August 8, 2000 - --------------------------------------- Charles R. Klotz Director August __, 2000 - --------------------------------------- Stephen Lawler /s/ L. Scott Perry Director August 8, 2000 - --------------------------------------- L. Scott Perry /s/ Robert H. Steele Director August 8, 2000 - --------------------------------------- Robert H. Steele /s/ Catherine Cassel Talmadge Director August 8, 2000 - --------------------------------------- Catherine Cassel Talmadge /s/ Charles R. Wood Director August 8, 2000 - --------------------------------------- Charles R. Wood
II-10 INDEX TO FINANCIAL STATEMENTS
PAGE UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2000 Balance Sheets as of June 30, 1999 and March 31, 2000 (unaudited) F-2 Statements of Operations for the three month and the nine month periods ended March 31, 2000 and 1999 (unaudited) F-4 Statement of Changes in Stockholders' Deficiency for the nine months ended March 31, 2000 (unaudited) F-5 Statements of Cash Flows for the three month and the nine month periods ended March 31, 2000 and 1999 (unaudited) F-6 Notes to Unaudited Financial Statements F-7 FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDING JUNE 30, 1999 AND JUNE 30, 1998 AND JUNE 30, 1997 Report of Independent Auditors F-13 Balance Sheets as of June 30, 1999 and 1998 F-14 Statements of Operations for the years ended June 30, 1999, 1998 and 1997 F-16 Statement of Stockholders' Equity (Deficiency) for the years ended June 30, 1997, 1998 and 1999 F-17 Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 F-21 Notes to Financial Statements F-22
F-1 SMARTSERV ONLINE, INC. BALANCE SHEETS
MARCH 31, JUNE 30, 2000 1999 -------------------- ------------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 5,175,577 $ 2,165,551 Accounts receivable 265,465 348,278 Prepaid expenses 204,061 50,150 -------------------- ------------------ Total current assets 5,645,103 2,563,979 -------------------- ------------------ Property and equipment - net 530,594 498,448 Other assets Capitalized software development costs - net of accumulated amortization of $291,219 at March 31, 2000 and $82,108 at June 30, 1999 1,321,040 683,337 Security deposits 73,374 74,834 -------------------- ------------------ 1,394,414 758,171 -------------------- ------------------ Total Assets $ 7,570,111 $ 3,820,598 ==================== ==================
See accompanying notes. F-2 SMARTSERV ONLINE, INC. BALANCE SHEETS
MARCH 31, JUNE 30, 2000 1999 -------------------- ------------------ (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities Accounts payable $ 919,580 $ 780,543 Accrued liabilities 249,181 474,189 Accrued liabilities to warrant holders -- 1,311,365 Salaries payable 108,198 93,443 Capital lease obligation -- 70,147 -------------------- ------------------ Total current liabilities 1,276,959 2,729,687 -------------------- ------------------ Deferred revenues 4,555,739 5,798,211 STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred Stock - $.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 - 4,098,388 shares at March 31, 2000 and 1,199,787 shares at June 30, 1999 40,983 11,998 Common stock subscribed 57,614 1,812,554 Additional paid-in capital 61,956,440 20,679,611 Unearned compensation (2,621,539) (3,452,904) Notes receivable from officers (666,841) (1,812,554) Accumulated deficit (57,029,244) (21,946,005) -------------------- ------------------ Total stockholders' equity (deficiency) 1,737,413 (4,707,300) -------------------- ------------------ Total Liabilities and Stockholders' Equity (Deficiency) $ 7,570,111 $ 3,820,598 ==================== ==================
See accompanying notes. F-3 SMARTSERV ONLINE, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED MARCH 31 ENDED MARCH 31 --------------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------------ ----------------- ----------------- ---------------- Revenues $989,943 $334,624 $2,710,856 $1,028,353 ------------------ ----------------- ----------------- ---------------- Costs and expenses: Costs of revenues 157,942 204,277 603,355 593,798 Product development expenses 106,312 81,389 240,532 132,605 Selling, general and administrative expenses 747,227 609,094 2,050,202 1,799,139 Stock-based compensation 14,001,007 399,092 35,636,026 1,041,602 ------------------ ----------------- ----------------- ---------------- Total costs and expenses 15,012,488 1,293,852 38,530,115 3,567,144 ------------------ ----------------- ----------------- ---------------- Loss from operations (14,022,545) (959,228) (35,819,259) (2,538,791) ------------------ ----------------- ----------------- ---------------- Other income (expense): Interest income 45,537 864 58,570 3,772 Interest expense and other financing costs (10,000) (1,420,546) (40,250) (2,231,343) Prepaid warrant costs -- -- 717,700 -- ------------------ ----------------- ----------------- ---------------- 35,537 (1,419,682) 736,020 (2,227,571) ------------------ ----------------- ----------------- ---------------- Net loss $ (13,987,008) $ (2,378,910) $ (35,083,239) $ (4,766,362) ================== ================= ================= ================ Basic and diluted earnings per common share $ (4.33) $ (1.98) $ (17.55) $ (4.45) ================== ================= ================= ================ Weighted average shares outstanding 3,232,687 1,198,563 1,998,790 1,072,264 ================== ================= ================= ================
See accompanying notes. F-4 SMARTSERV ONLINE, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) NINE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
COMMON STOCK COMMON NOTES ADDITIONAL PAR 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 connection with the settlement of obligations to a Prepaid Warrant holder 180,000 1,800 -- -- 266,895 -- -- Issuance of Common Stock upon exercise of employee stock options 47,808 478 -- -- 80,290 -- -- Issuance of warrants to purchase 284,000 shares of Common Stock for various consulting services -- -- -- -- 137,300 (77,400) -- Conversion of 1,357 Prepaid Common Stock Purchase Warrants into Common Stock 810,785 8,107 -- -- (8,107) -- -- Issuance of 1,103,157 shares of Common Stock in connection with Officer's Restricted Stock Purchase and Employment Agreements 1,026,319 10,263 (1,754,940) 1,145,713 3,940,976 -- -- Issuance of Common Stock upon exercise of warrants to purchase Common Stock 500,689 5,007 -- -- 707,938 -- -- Amortization of unearned compensation over the terms of consulting agreements -- -- -- -- -- 908,765 -- Issuance of 333,000 shares of Common Stock and warrants to purchase 18,640 shares of Common Stock in connection with private placement, net of direct costs of $326,200 333,000 3,330 -- -- 4,665,675 -- -- Change in market value of employee stock options and stock subscriptions -- -- -- -- 31,485,862 -- -- Net loss for the period -- -- -- -- -- -- (35,083,239) ---------- ---------- ------------ ------------- -------------- -------------- ------------- Balance at March 31, 2000 $4,098,388 $40,983 $ 57,614 $ (666,841) $61,956,440 $(2,621,539) $(57,029,244) ========== ========== ============ ============= ============== ============== =============
See accompanying notes. F-5 SMARTSERV ONLINE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED MARCH 31 ENDED MARCH 31 ------------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------------ ---------------- ------------------ ----------------- OPERATING ACTIVITIES Net loss $ (13,987,008) $ (2,378,910) $(35,083,239) $ (4,766,362) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 146,891 97,739 368,237 237,555 Noncash interest expense and other financing costs -- 665,360 -- 1,459,605 Noncash compensation costs 13,624,852 38,837 34,667,361 38,837 Noncash consulting costs 376,155 360,255 968,665 1,002,765 Amortization of unearned revenues (414,160) (115,534) (1,242,472) (146,602) Changes in operating assets and liabilities Accounts receivable 120,542 16,770 82,813 51,581 Prepaid expenses (152,284) 36,580 (153,911) (36,047) Accounts payable and accrued liabilities 75,705 305,480 (977,142) 844,530 Accrued interest payable -- 13,807 -- 17,583 Salaries payable 60,005 29,864 14,755 (5,046) Unearned revenues -- 13,152 -- 226,203 Security deposit -- -- 1,460 -- ------------------ ---------------- ------------------ ----------------- Net cash used for operating activities (149,302) (916,600) (1,353,473) (1,075,398) ------------------ ---------------- ------------------ ----------------- INVESTING ACTIVITIES Purchase of equipment (127,901) (146,104) (191,271) (168,799) Capitalization of software development costs (293,519) (176,970) (846,814) (672,785) ------------------ ---------------- ------------------ ----------------- Net cash used for investing activities (421,420) (323,074) (1,038,085) (841,584) ------------------ ---------------- ------------------ ----------------- FINANCING ACTIVITIES Repayment of capital lease obligation (23,942) (21,222) (70,147) (61,575) Proceeds from the issuance of notes -- 43,500 -- 478,500 Repayment of notes -- (75,000) -- (75,000) Proceeds from the issuance of common stock, net of direct costs of $326,200 5,398,660 -- 5,471,731 -- Deferred financing costs -- -- -- (35,000) Proceeds of advances from DTN Corporation -- 1,408,287 -- 1,408,287 ------------------ ---------------- ------------------ ----------------- Net cash provided by financing activities 5,374,718 1,355,565 5,401,584 1,715,212 ------------------ ---------------- ------------------ ----------------- Increase (decrease) in cash and cash equivalents 4,803,996 115,891 3,010,026 (201,770) Cash and cash equivalents - beginning of period 371,581 36,564 2,165,551 354,225 ------------------ ---------------- ------------------ ----------------- Cash and cash equivalents - end of period $ 5,175,577 $ 152,455 $ 5,175,577 $ 152,455 ================== ================ ================== =================
See accompanying notes. F-6 SMARTSERV ONLINE, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS MARCH 31, 2000 1. ORGANIZATION SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993. The Company delivers Internet-based and wireless content, as well as "Web-to-Wireless" applications, such as securities trade order routing, that enable e-commerce by providing transactional and information services to its alliance partners. The Company has developed online financial, transactional and media applications using a unique "device independent" delivery solution and makes these services available to wireless telephones and personal digital assistants, personal computers and the Internet through its application software and communications architecture. The Company's services facilitate stock trading and disseminate real-time stock quotes, business and financial news, sports information, private-labeled electronic mail, national weather reports and other business and entertainment information in a user-friendly manner. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - --------------------- The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions of Form 10-QSB and Rule 310 of Regulation S-B and, therefore, do not include all information and notes necessary for a presentation of results of operations, financial position and cash flows in conformity with generally accepted accounting principles. The balance sheet at June 30, 1999 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended June 30, 1999. 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 nine months ended March 31, 2000 are not necessarily indicative of those expected for the year ending June 30, 2000. 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 the Company's agreements with Data Transmission Network Corporation ("DTN") are being amortized over the term of the anticipated future revenue stream, a period of 42 months, commencing on June 1, 1999. BASIC AND DILUTED EARNINGS PER SHARE - ------------------------------------ The weighted average shares outstanding are determined as the mean average of the shares outstanding and assumed to be outstanding during the period. F-7 CAPITALIZED SOFTWARE DEVELOPMENT COSTS - -------------------------------------- In connection with certain contracts entered into between the Company and its Strategic Marketing Partners, the Company has capitalized software development costs related to certain product enhancements in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998. STOCK BASED COMPENSATION - ------------------------ The Company maintains stock option plans for employees and non-employee directors that provide for the granting of stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for these stock compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Certain options, which have been repriced, are subject to the variable plan requirements of APB No. 25, that requires the Company to record compensation expense for changes in the fair value of the Company's Common Stock. 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. SAB 101 must be applied to the financial statements no later than the quarter ending September 30, 2000. The Company does not believe that the adoption of SAB 101 will have a material affect on the Company's financial results. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MARCH 31, JUNE 30, 2000 1999 ------------------- ----------------- Data processing equipment $ 891,481 $ 700,210 Data processing equipment under a capital lease 246,211 246,211 Office furniture and equipment 71,423 71,423 Display equipment 9,635 9,635 Leasehold improvements 36,678 36,678 ------------------- ----------------- 1,255,428 1,064,157 Accumulated depreciation, including $143,623 and $106,691 at March 31, 2000 and June 30, 1999, respectively, for equipment under a capital lease (724,834) (565,709) ------------------- ----------------- $ 530,594 $ 498,448 =================== =================
4. EQUITY TRANSACTIONS On July 1, 1999, the Company entered into an agreement with a holder of $325,000 of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"), to settle the Company's obligation to such holder pursuant to the default provisions of the Prepaid Warrants. Accordingly, the Company paid $325,000 to redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full settlement of all obligations to the holder. Settlement costs of $268,695 were recorded during the year ended June 30, 1999. During the period, holders of $1,357,000 of the Company's Prepaid Warrants converted such warrants into 810,785 shares of Common Stock at exercise prices ranging from $1.40 to $8.40 per share. F-8 In October 1999, the Board of Directors authorized the repricing of the restricted shares granted to Messrs. Cassetta and Rossi to $.75 per share, the fair value of the shares at that date. Through December 31, 1999, the restricted stock awards were variable plan awards pursuant to APB No. 25 and accordingly, the Company was required to recognize compensation expense for the changes in the market value of its Common Stock. In conjunction therewith, the Company has recorded a charge to compensation expense of $15,636,300 for the nine-month period ended March 31, 2000, as well as a corresponding increase to additional paid-in capital. In October 1999, the Board of Directors authorized the Company to enter into a restricted stock agreement with Robert Pearl, Vice President Strategy and Alliances, pursuant to which Mr. Pearl was awarded 76,818 shares of Common Stock at the purchase price of $.75 per share. In October 1999, the Company entered into a consulting agreement with a financial advisor to the Company. As consideration for such services, the Company granted such advisor warrants to purchase 100,000 shares of Common Stock at an exercise price of $2.625 per share and warrants to purchase 100,000 shares of Common Stock at $3.65 per share. In consideration of $125,000 and the issuance of warrants to purchase 8,000 shares of Common Stock at $18.375 per share, the Company extended this agreement for the two-year period commencing October 24, 2000. The warrants expire on October 24, 2004. The Company recorded a noncash charge of $62,400 to unearned compensation for the value of the warrants that is being amortized to income over the term of the agreement. In November 1999, the Company issued 25,042 shares of Common Stock to Zanett Lombardier, Ltd. pursuant to the cashless exercise provisions of warrants to purchase 50,084 shares of Common Stock. During the period, the Board of Directors authorized the issuance of an aggregate of 202,000 shares of Common Stock to Messrs. Cassetta and Rossi in satisfaction of its bonus obligations to Messrs. Cassetta and Rossi, pursuant to their employment contracts. The Company has recorded a charge to compensation expense of $3,181,500 for the change in fair value of the Company's Common Stock between the due date of the obligation and the grant date of the Common Stock. The Company also issued 824,319 shares of Common Stock to Messrs. Cassetta and Rossi in connection with restricted stock purchase agreements between the Company and Messrs. Cassetta and Rossi. The Company received cash in the amount of $8,243 and notes in the amount of $609,996. The notes bear interest at 6.75 % and are secured by the Common Stock. During the period, the Company granted warrants to purchase 16,000 shares of Common Stock at an exercise price of $17.75 to a computer software consultant. The Company recorded a noncash charge of $15,000 to unearned compensation which is being amortized to income over the term of the agreement. During the period, the Company issued 333,334 shares of Common Stock to certain participants of the Company's November 1998 financing upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $200,000. During the period, the Company issued warrants to purchase 10,000 shares of Common Stock at an exercise price of $2.50 per share to a marketing consultant in connection with services rendered to the Company. Such warrants were recorded in accordance with the Black Scholes pricing methodology. The Company recorded a charge to earnings of $19,900 in connection with such issuance. In January 2000, the Company completed an offering ("Offering") of 333,000 shares of its 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, the Company issued warrants to purchase 18,640 shares of Common Stock at $15.00 per share through January 18, 2005 to America First Associates Corp. in connection with services as placement agent for the Offering. F-9 During the period, the Company issued warrants to purchase 50,000 shares of Common Stock at an exercise price of $3.00 per share to a marketing consultant in connection with the completion of services rendered to the Company. The Company recorded a charge to earnings of $40,000 in connection with such issuance. During the period, the Company issued 142,308 shares of Common Stock to certain investors at prices ranging from $0.60 to $9.28 per share upon exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $512,900. 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31 NINE MONTHS ENDED MARCH 31 --------------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------------ ----------------- ------------------ ------------------ Numerator: Net loss $ (13,987,008) $ (2,378,910) $ (35,083,239) $ (4,766,362) ================== ================= ================== ================== Denominator: Weighted average shares 3,232,687 1,198,563 1,998,790 1,072,264 ================== ================= ================== ================== Basic and diluted earnings per common share $ (4.33) $ (1.98) $ (17.55) $ (4.45) ================== ================= ================== ==================
At March 31, 2000, $612,000 of the Company's prepaid common stock purchase warrants ("Prepaid Warrants") were outstanding. At that date, the Prepaid Warrants were convertible into 437,000 shares of Common Stock. Additionally there were 3,597,200 common stock purchase warrants outstanding. Such warrants have exercise prices ranging from $0.60 to $72.00 per share and expire from March 2001 through October 2004. Additionally, the Company has established employee stock option plans and authorized restricted stock awards to employees, directors, and consultants to the Company. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code, as amended, or as nonqualified stock options. The options are partially exercisable after one year from date of grant and no options may be granted after April 15, 2006. At March 31, 2000, options and restricted stock awards have been authorized for the purchase of 733,000 shares of the Company's Common Stock. None of the warrants or options have been included in the computation of diluted loss per share because their inclusion would be antidilutive. 6. STOCK-BASED COMPENSATION In connection with the grant of certain stock options, warrants and other compensation arrangements, the Company has recorded charges to earnings that are noncash in nature. These grants are subject to the variable plan requirements of APB No. 25 that require the Company to record compensation expense for changes in the fair value of the Company's Common Stock. The following table shows the amount of stock-based compensation that would have been recorded in the categories of the statement of operations had stock-based compensation not been separately stated therein: F-10
THREE MONTHS NINE MONTHS ENDED MARCH 31 ENDED MARCH 31 --------------------------------------- -------------------------------------- 2000 1999 2000 1999 ------------------ ----------------- ------------------ ------------------ Costs of revenues $ 3,039,090 $ 8,720 $ 3,636,791 $ 8,720 Selling, general and administrative expenses 10,961,917 390,372 31,999,235 1,032,882 ------------------ ----------------- ------------------ ------------------ $ 14,001,007 $ 399,092 $ 35,636,026 $ 1,041,602 ================== ================= ================== ==================
7. COMMITMENTS AND CONTINGENCIES By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman filed a complaint against the Company, Sebastian E. Cassetta and four other defendants in the United States District Court for the District of Connecticut. The complaint asserted claims under Sections 10(b) and 18 of the Securities Exchange Act of 1934, as well as several state law claims, including breach of contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1) failed to pay him the benefits and compensation to which he was entitled and (2) made material misrepresentations in its filings with the Securities and Exchange Commission. On December 11, 1998, the Court granted the Company's motion to dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to file an amended complaint within 30 days. On May 12, 1999, the Court denied the plaintiff's subsequent motion for leave to file a substituted complaint on the basis that the federal securities law claim, the only federal claim alleged by the plaintiff, was still deficient. Accordingly, the federal securities claim was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an action against the same defendants and added as a seventh defendant, the Company's former President, Steven Francesco, in the Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good faith and fair dealing, fraudulent misrepresentation, negligent misrepresentation, intentional misrepresentation and failure to pay wages. The defendants have answered the complaint and filed counterclaims for fraudulent inducement and breach of contract. Plaintiff has responded to the counter-claim, and discovery is proceeding. By pleading dated February 29, 2000, Mr. Fishman filed an application with the Court seeking entry of a prejudgment remedy in the amount of $19,250,000. To date, Mr. Fishman's application has not been acted on by the Court and no hearing date has been set. Although the Company is vigorously defending this action, there can be no assurance that it will be successful. On or about May 11, 1998, Ronald G. Weiner filed a complaint against Mr. Francesco and the Company in the Supreme Court of the State of New York, County of New York. The complaint alleges, among other things, that in May 1993, by letter from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly was the President and sole shareholder, in exchange for his active involvement in, among other things, raising capital and managing the financial aspects of SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter to Mr. Weiner in which he (1) represented that SPS had failed to attract a single investor and (2) withdrew his offer to Mr. Weiner of a 10% equity position in SPS. The complaint further alleges that, in conversations with Mr. Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing all efforts to capitalize SPS. The complaint alleges, among other things, that Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing their offer to him of a 10% equity stake in SPS, and that, at the time Mr. Francesco represented that he was ceasing efforts to capitalize SPS, he had actually formed SmartServ and was actively seeking investors for it. The complaint further alleges that the Company is a successor entity to SPS and that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged conduct in derogation of their alleged agreement with Mr. Weiner. The complaint seeks, among other things, (1) a declaratory judgment declaring Mr. Weiner a 10% equity shareholder of the Company, (2) a constructive trust in Mr. Weiner's favor for 10% of the Company `s equity shares and (3) restitution against Mr. Francesco and the Company for unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In the F-11 Company's answer to the complaint, the Company denied the material allegations of the complaint and asserted affirmative defenses. No discovery in this action has yet been taken. Although the Company is vigorously defending this action there can be no assurance that it will be successful. On or about February 29, 2000, Commonwealth Associates, L.P. filed a complaint against the Company 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 the Company entered into an engagement letter pursuant to which Commonwealth was to provide financial advisory and investment banking services to the Company in connection with a possible combination between the Company and Data Link Systems Corporation. The engagement letter provided for a nonrefundable fee of $15,000 payable in cash or common stock at the Company's option. The complaint alleges that notwithstanding the terms of the engagement letter the fee was to be paid in stock and seeks 13,333 shares of common stock or at least $1,770,000 together with interest and costs. In the Company's answer to the complaint, the Company denied the material allegations of the complaint. Discovery in this action has recently commenced and is proceeding. Although the Company is vigorously defending this action there can be no assurance that it will be successful. While the Company intends to vigorously defend these actions, the unfavorable outcome of any such action could have a material adverse effect on the Company's financial condition, results of operations, and cash flows. 8. SUBSEQUENT EVENTS On May 15, 2000, the Company completed an offering of 353,535 shares of its Common Stock to accredited investors. Proceeds from this transaction amounted to $16,715,000, net of commissions and expenses of $785,000. F-12 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors SmartServ Online, Inc. We have audited the accompanying balance sheets of SmartServ Online, Inc. as of June 30, 1999 and 1998, and the related statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SmartServ Online, Inc. at June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that SmartServ Online, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and has a working capital deficiency. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /S/ ERNST & YOUNG LLP Stamford, Connecticut October 13, 1999 F-13 SMARTSERV ONLINE, INC. BALANCE SHEETS
JUNE 30 ----------------------------------------- 1999 1998 --------------------- ------------------- ASSETS Current assets Cash and cash equivalents $ 2,165,551 $ 354,225 Accounts receivable 348,278 111,051 Prepaid expenses 50,150 130,603 --------------------- ------------------- Total current assets 2,563,979 595,879 --------------------- ------------------- Property and equipment, net 498,448 610,537 Other assets Capitalized software development costs, net of accumulated amortization of $82,108 683,337 -- Security deposit 74,834 70,437 --------------------- ------------------- 758,171 70,437 --------------------- ------------------- Total Assets $ 3,820,598 $ 1,276,853 ===================== ===================
F-14 SMARTSERV ONLINE, INC. BALANCE SHEETS
JUNE 30 ----------------------------------------- 1999 1998 -------------------- -------------------- LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable $ 780,543 $ 800,545 Accrued liabilities 474,189 736,137 Accrued liabilities to warrant holders 1,311,365 -- Salaries payable 93,443 57,308 Capital lease obligation - current portion 70,147 76,127 Deferred revenues - current portion 1,656,632 776,049 -------------------- -------------------- Total current liabilities 4,386,319 2,446,166 -------------------- -------------------- Capital lease obligation - long-term portion -- 77,548 Deferred revenues - long-term portion 4,141,579 -- COMMITMENTS AND CONTINGENCIES - NOTE 9 STOCKHOLDERS' DEFICIENCY Preferred stock - $0.01 par value Authorized - 1,000,000 shares Issued and outstanding - None Common Stock - $0.01 par value Authorized - 40,000,000 shares Issued and outstanding - 1,199,787 shares at June 30, 1999 and 836,227 shares at June 30, 1998 11,998 8,362 Common stock subscribed 1,812,554 -- Notes receivable from officers (1,812,554) -- Additional paid-in capital 20,679,611 18,184,580 Unearned compensation (3,452,904) (4,617,924) Accumulated deficit (21,946,005) (14,821,879) -------------------- -------------------- Total stockholders' deficiency (4,707,300) (1,246,861) -------------------- -------------------- Total Liabilities and Stockholders' Deficiency $ 3,820,598 $ 1,276,853 ==================== ====================
See accompanying notes. F-15 SMARTSERV ONLINE, INC. STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30 ----------------------------------------------------------- 1999 1998 1997 ----------------------------------------------------------- Revenues $ 1,443,781 $ 873,476 $ 688,610 ----------------------------------------------------------- Costs and expenses Cost of services (994,465) (1,216,761) (1,133,884) Product development expenses (193,188) (923,082) (1,150,224) Selling, general and administrative expenses (4,006,599) (3,221,940) (2,861,845) ----------------------------------------------------------- Total costs and expenses (5,194,252) (5,361,783) (5,145,953) ----------------------------------------------------------- Loss from operations (3,750,471) (4,488,307) (4,457,343) ----------------------------------------------------------- Other income (expense): Interest income 4,767 40,788 74,507 Interest expense (167,839) (57,485) (20,194) Debt origination and other financing costs (3,210,583) (535,005) (31,452) ----------------------------------------------------------- (3,373,655) (551,702) 22,861 ----------------------------------------------------------- Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482) =========================================================== Basic and diluted loss per share $ (6.44) $ (7.65) $ (7.20) =========================================================== Weighted average shares outstanding 1,105,603 659,034 615,833 ===========================================================
See accompanying notes. F-16 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, 1996 615,832 $ 6,158 $ -- $ -- $8,789,091 $ -- $(5,347,388) Change in market value of employee stock options -- -- -- -- 188,293 -- -- Issuance of Common Stock Purchase Warrants in connection with investment advisory services -- -- -- -- 75,000 -- -- Issuance of Common Stock Purchase Warrants in connection with short-term line of credit -- -- -- -- 25,000 -- -- Net loss for the year -- -- -- -- -- -- (4,434,482) ---------------------------------------------------------------------------------------------- Balances at June 30, 1997 615,832 $ 6,158 $ -- $ -- $9,077,384 $ -- $ (9,781,870) ----------------------------------------------------------------------------------------------
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 ---------------------------------------------------------------------------------------------- Balances at June 30, 1997 $615,832 $ 6,158 $ -- $ -- $ 9,077,384 $ -- $ (9,781,870) Issuance of 4,000 Prepaid Common Stock Purchase Warrants; net of direct costs of $545,000 -- -- -- -- 3,455,000 -- -- Conversion of 1,429.33 Prepaid Common Stock Purchase Warrants into Common Stock 220,395 2,204 -- -- (2,204) -- -- Issuance of Common Stock Purchase Warrants to a financial consultant in connection with the issuance of 4,000 Prepaid Common Stock Purchase Warrants -- -- -- -- 5,145,500 (5,145,500) -- Issuance of Common Stock Purchase Warrants in connection with the -- issuance of notes -- -- -- -- 388,900 -- Issuance of Common Stock Purchase Warrants in connection with investment advisory contracts -- -- -- -- 120,000 -- -- Amortization of unearned compensation -- -- -- -- -- 527,576 -- Net loss for the year -- -- -- -- -- -- (5,040,009) ---------------------------------------------------------------------------------------------- Balances at June 30, 1998 $836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879) ----------------------------------------------------------------------------------------------
See accompanying notes. F-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 ---------------------------------------------------------------------------------------------- Balances at June 30, 1998 $836,227 $ 8,362 $ -- $ -- $ 18,184,580 $ (4,617,924) $ (14,821,879) Conversion of 276.67 Prepaid Common Stock Purchase Warrants into Common Stock 178,560 1,786 -- -- (1,786) -- -- Issuance of Common Stock to Prepaid Warrant holders as consideration for amending certain terms and conditions of the Prepaid Warrants 60,000 600 -- -- 146,713 -- -- Issuance of Common Stock Purchase Warrants in connection with prepayments made by a marketing partner -- -- -- -- 6,300 -- -- Issuance of Common Stock Purchase Warrants in connection with the issuance of 8% convertible notes -- -- -- -- 1,573,000 -- -- Beneficial conversion feature of 8% convertible notes -- -- -- -- 550,000 -- -- Issuance of Common Stock and warrants to purchase Common Stock in partial settlement of litigation 125,000 1,250 -- -- 144,500 -- -- Amortization of unearned compensation over the term of the consulting agreement -- -- -- -- -- 1,165,020 -- Common Stock subscriptions and notes receivable in connection with officers' employment agreements -- -- 1,812,554 (1,812,554) -- -- -- Issuance of Common Stock Purchase Warrants to a financial consultant as compensation for services -- -- -- -- 59,000 -- -- Redemption of Prepaid Common Stock Purchase Warrants -- -- -- -- (325,000) -- --
See accompanying notes. F-19 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 ---------------------------------------------------------------------------------------------- Authorization of the issuance of Common Stock Purchase Warrants in connection with a licensing agreement -- -- -- -- 324,000 -- -- Change in market value of employee stock options -- -- -- -- 18,304 -- -- Net loss for the year -- -- -- -- -- -- (7,124,126) ----------- ----------- ------------- ------------- ------------- -------------- -------------- Balance at June 30, 1999 $1,199,787 $11,998 $1,812,554 $(1,812,554) $20,679,611 $(3,452,904) $(21,946,005) =========== =========== ============= ============= ============= ============== ==============
See accompanying notes. F-20 SMARTSERV ONLINE, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30 ----------------------------------------------------- 1999 1998 1997 ----------------------------------------------------- OPERATING ACTIVITIES Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 278,646 193,601 149,182 Provision for losses on and write-off of receivables -- (1,300) 29,248 Noncash interest costs 12,524 52,837 -- Noncash debt origination and other financing costs 2,593,808 475,527 30,449 Noncash compensation costs 18,304 -- 188,293 Noncash consulting services 1,349,020 660,576 75,000 Amortization of unearned revenues (1,112,138) (251,058) -- Settlement of litigation -- 145,750 -- Changes in operating assets and liabilities Accounts receivable (237,227) 40,031 (121,040) Prepaid expenses (44,547) (25,878) (22,415) Accounts payable and accrued liabilities 781,264 349,764 558,317 Accrued interest -- (5,323) 16,323 Payroll taxes payable 1,696 (16,089) 5,482 Salaries payable 34,439 6,996 1,364 Unearned revenues 6,121,776 1,002,193 24,914 Security deposit (4,397) 10,781 -- ----------------------------------------------------- Net cash provided by (used for) operating activities 2,669,042 (2,401,601) (3,499,365) ----------------------------------------------------- INVESTING ACTIVITIES Capitalization of software development costs (765,445) -- -- Purchase of equipment (84,449) (60,424) (351,786) ----------------------------------------------------- Net cash used for investing activities (849,894) (60,424) (351,786) ----------------------------------------------------- FINANCING ACTIVITIES Proceeds from the issuance of warrants 324,000 2,643,941 -- Proceeds from the issuance of short-term notes 478,500 196,500 493,646 Repayment of short-term notes (691,794) -- -- Repayment of capital lease obligation (83,528) (92,536) -- Proceeds of advances from DTN 2,058,300 -- -- Repayment of advances from DTN (2,058,300) -- -- Costs of issuing securities (35,000) (25,000) (10,000) ----------------------------------------------------- Net cash provided by (used for) financing activities (7,822) 2,722,905 483,646 ----------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,811,326 260,880 (3,367,505) Cash and cash equivalents - beginning of year 354,225 93,345 3,460,850 ----------------------------------------------------- Cash and cash equivalents - end of year $ 2,165,551 $ 354,225 $ 93,345 =====================================================
See accompanying notes. F-21 SMARTSERV ONLINE, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND LIQUIDITY SmartServ Online, Inc. (the "Company") commenced operations on August 20, 1993. The Company offers a range of services designed to facilitate e-commerce by providing transactional and information services to its alliance partners ("Strategic Marketing Partners"). The Company has developed online financial, transactional and media applications using a unique "device independent" delivery solution and makes these services available through its application software and communication architecture to wireless telephones and personal digital assistants, personal computers and the Internet. The Company's services include stock trading, real-time stock quotes, business and financial news, sports information, private-labeled electronic mail, national weather reports and other business and entertainment information. The Company's financial statements for the year ended June 30, 1999 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $7,124,126, $5,040,009, and $4,434,482 for the years ended June 30, 1999, 1998, and 1997, respectively, and as of June 30, 1999 had an accumulated deficit of $21,946,005 and a deficiency of net assets of $4,707,300. The Company is also a defendant in several legal proceedings (see Note 9) which could have a material adverse effect on the Company's financial position, cash flow, and results of operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. The Company's business plan focuses on the strategy of marketing its services in partnership with those companies that have an economic incentive to provide the Company's information and transaction services to their customers. Management believes that the Company's primary source of revenues will be derived from consumers who purchase the services through its Strategic Marketing Partners. Through the use of this strategy, the consumer is a customer of both SmartServ and its Strategic Marketing Partner. The Company also believes that the sale of its information and transaction services through the cooperative efforts of partners with more recognizable brand names than its own is important to its success. On September 30, 1997, the Company completed a private placement ("Placement") of $4 million of Prepaid Common Stock Purchase Warrants ("Prepaid Warrants") as more fully disclosed in Note 5. An integral part of this Placement was the conversion of notes payable and accrued interest thereon, aggregating $836,059, into Prepaid Warrants. The net proceeds of $2,643,941 provided the Company with working capital to continue its marketing efforts. Effective May 1, 1998, the Company entered into an agreement with Data Transmission Network Corporation ("DTN") whereby DTN purchased the exclusive right to market three of the Company's Internet products: SmartServ Pro, a real time stock quote product; TradeNet, an online trading vehicle for the customers of small and medium sized brokerage companies, and BrokerNet, an administrative reporting package for brokers of small and medium sized brokerage companies. The consummation of this agreement has removed the Company from the retail market and allows the Company to focus on business-to-business marketing. The Company received $850,000 upon execution of the agreement and F-22 received minimum monthly payments of $100,000 through April 1999. On June 24, 1999, the Company and DTN entered into an agreement that amended the Software License and Service Agreement dated April 23, 1998. In consideration of the receipt of $5.175 million, the Company granted DTN an exclusive perpetual worldwide license to the Company's Internet-based (i) SmartServ Pro, (ii) TradeNet, (iii) BrokerNet, and (iv) order entry/routing system. Additionally, the Company received $324,000 in exchange for an agreement to issue warrants to purchase 300,000 shares of the Company's Common Stock at an exercise price of $8.60 per share. The Company has agreed to continue to operate these products and provide maintenance and enhancement services in exchange for a percentage of the revenues earned by DTN therefrom. The cost of the Company's commitment to provide such maintenance and enhancement services is limited to a maximum of 20% of the revenues earned by the Company. None of the Company's wireless products were included in this transaction. The market for online information and transactional services is highly competitive and subject to rapid innovation and technological change, shifting consumer preferences and frequent new service introductions. The Company believes that potential new competitors, including large multimedia and information systems companies, are increasing their focus on transaction processing. Increased competition in the market for the Company's services could materially and adversely affect the Company's results of operations through price reductions and loss of potential market share. The Company's ability to compete in the future depends on its ability to maintain the technological and performance advantages of its current distribution platform and to introduce new applications that achieve market acceptance. Notwithstanding the execution of the DTN agreements and the continual discussions with potential Strategic Marketing Partners about future relationships, the Company's ability to generate fee revenue and working capital may not be sufficient to meet management's objectives as presently structured. Management recognizes that the Company must generate additional revenues or consider additional modifications to its sales and marketing program or institute cost reductions to allow it to continue to operate with available cash resources. There is no assurance that the Company will generate future revenues or cash flow from operations or that the Company's products and services will continue to be accepted in the marketplace by the ultimate consumers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - --------------------- The financial statements are prepared in conformity with generally accepted accounting principles. The Company's stockholders approved a one-for-six reverse stock split at a Special Meeting on October 15, 1998. Such reverse stock split became effective on October 26, 1998. All applicable financial statement amounts and related disclosures have been restated to give effect to this transaction. USE OF ESTIMATES - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION - ------------------- Revenues are recognized as services are provided. Deferred revenues, resulting from customer prepayments, are recognized as services are provided throughout the term of the agreement. Deferred revenues resulting from the Company's agreements with DTN are being amortized over the anticipated future revenue stream, a period of 42 months. F-23 BASIC AND DILUTED EARNINGS PER SHARE - ------------------------------------ In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement 128 requirements. The weighted average shares outstanding are determined as the mean average of the shares outstanding and assumed to be outstanding during the period. CAPITALIZED SOFTWARE DEVELOPMENT COSTS - -------------------------------------- In connection with certain contracts entered into between the Company and its Strategic Marketing Partners, the Company has capitalized software development costs related to certain product enhancements in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", effective July 1, 1998. FAIR VALUE OF FINANCIAL INSTRUMENTS - ----------------------------------- The carrying amounts of the Company's financial instruments approximate fair value. SUPPLEMENTAL CASH FLOW DATA - --------------------------- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Interest, debt origination and other financing costs paid during the years ended June 30, 1999, 1998, and 1997 were $101,974, $32,536, and $9,194, respectively. CONCENTRATION OF CREDIT RISK - ---------------------------- Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. There is no single geographic concentration of sales or related accounts receivable in the United States. At June 30, 1999, accounts receivable consist principally of amounts due from DTN ($268,000), and a telecommunications company ($78,100). The Company performs periodic credit evaluations of its customers and, if applicable, provides for credit losses in the financial statements. PROPERTY AND EQUIPMENT - ---------------------- Property and equipment are stated at cost. Equipment purchased under a capital lease has been recorded at the present value of the future minimum lease payments at the date of acquisition. Depreciation is computed using the straight-line method over estimated useful lives of three to ten years. ADVERTISING COSTS - ----------------- Advertising costs are expensed as incurred and were approximately $20,500, $97,100, and $540,000 in 1999, 1998 and 1997, respectively. STOCK BASED COMPENSATION - ------------------------ The Company maintains a stock option plan for employees and non-employee directors that provides for the granting of stock options for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for this stock compensation plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. In 1997, the Company adopted the F-24 disclosure provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation". RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, as amended by SOP 98-4, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The adoption of SOP 98-1 is not expected to have a material effect on the Company's operations. SOP 98-1 is required to be adopted by the Company no later than July 1, 1999. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JUNE 30 ------------------------------------------ 1999 1998 ------------------- ----------------- Data processing equipment $ 700,210 $ 616,587 Data processing equipment purchased under a capital lease 246,211 246,211 Office furniture and equipment 71,423 70,597 Display equipment 9,635 9,635 Leasehold improvements 36,678 36,678 ------------------- ----------------- 1,064,157 979,708 Accumulated depreciation, including $106,691 and $57,449 for equipment purchased under a capital lease (565,709) (369,171) ------------------- ----------------- $ 498,448 $ 610,537 =================== =================
During the year ended June 30, 1997, the Company leased computer equipment with a capitalized cost of $246,211. The recording of such costs and the related capitalized lease obligation are non-cash transactions for the purposes of the Statement of Cash Flows. 4. NOTES PAYABLE On May 29, 1997, the Company entered into a line of credit facility with a financial institution for a maximum borrowing thereunder of $550,000. Borrowings under this facility were to be repaid on August 27, 1997 along with interest at the rate of 24% per annum. On July 21, 1997 and September 16, 1997, the facility was amended to provide for additional borrowings of up to $222,222. On September 30, 1997, notes payable of $772,222 and accrued interest thereon of $63,837 were converted into the Company's Prepaid Warrants as more fully described in Note 5. In conjunction with the origination of the line of credit facility, the Company issued 56,627 common stock purchase warrants to the financial institution. Similarly, the Company issued 11,438 warrants for each of the July and September amendments. As a result of the Company's default on the note in August, the Company was required to issue 50,083 "default" warrants to such institution. At June 30, 1999, these warrants were exercisable at prices ranging from $.75 to $6.07. These warrants are subject to certain antidilution provisions and expire in September 2002. Pursuant to Statement of Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation", the Company valued these warrants in accordance with the Black-Scholes pricing methodology at the time of issuance and recorded such valuation in the statement of operations as debt origination and other financing costs. The Company recorded debt origination and other financing costs associated with these warrants of $463,567 for the year ended June 30, 1998. F-25 Commencing November 20, 1998, the Company sold five and one-half (5.5) units, each consisting of a secured 8% convertible note in the principal amount of $100,000 and warrants to purchase Common Stock of the Company. The warrants are exercisable at $.60 per share of Common Stock. The convertible notes were repaid in June 1999. The Company has agreed to register the shares of Common Stock issuable upon exercise of the warrants. In addition to customary fees and expenses, Spencer Trask Securities, Inc. ("Spencer Trask"), the placement agent, received for nominal consideration, warrants to purchase ten percent (10%) of the shares of Common Stock of the Company issuable on conversion of the notes and exercise of the warrants at $.72 per share. The issuance to the noteholders of warrants to purchase 916,667 shares of Common Stock, as well as those issued to Spencer Trask for the purchase of 183,333 shares of Common Stock have been valued in accordance with the Black-Scholes pricing methodology and recorded as debt origination and other financing costs. Also in connection with the 8% convertible notes, the Company has recorded a non-cash charge to debt origination and other financing costs of $550,000 representing the perceived cost of the beneficial conversion feature of the notes. Emerging Issues Task Force Issue 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue 98-5") defines the beneficial conversion feature as the non-detachable conversion feature that is "in-the-money" at the date of issuance. Issue 98-5 requires the recognition of the intrinsic value of the conversion feature as the difference between the conversion price and the fair value of the common stock into which the notes are convertible. Such amount is limited to the proceeds of the financing ($550,000) and has been recorded in debt origination and other financing costs as of the date of issuance. On December 30, 1998, the Company executed an agreement with a service provider whereby certain obligations of the Company, amounting to $141,794, were converted into a 12% note payable. On June 28, 1999, the outstanding balance of $66,794 was repaid. 5. EQUITY TRANSACTIONS During the year ended June 30, 1997, the Company authorized the issuance of warrants for the purchase of 33,333 shares of Common Stock in connection with certain investment advisory agreements. Such warrants are exercisable at prices ranging from $12.00 to $24.00 per share through May 2002. On September 30, 1997, The Zanett Securities Corporation ("Zanett"), acting as placement agent for the Company, completed the private placement ("Placement") of $4 million of the Company's Prepaid Common Stock Purchase Warrants ("Prepaid Warrants"). The sale of the Prepaid Warrants was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. Each Prepaid Warrant entitles the holder to purchase that number of shares of Common Stock that is equal to $1,000 divided by the applicable exercise price. Such exercise price is determined initially as 70% of the average closing bid price of the Common Stock for the 10 trading days ending on the day prior to exercise of the Prepaid Warrants. Additionally, the exercise discount shall be increased by 1% for each subsequent 60 day period that the Prepaid Warrants remain unexercised. The exercise price, however, shall never exceed $8.40. The Prepaid Warrants became exercisable on December 29, 1997 and expire on September 30, 2000. As compensation for its services, Zanett received a placement fee and an unaccountable expense allowance of 10% ($400,000) and 3% ($120,000), respectively, of the gross proceeds of the Placement. Additionally, the Company issued 135,906 Common Stock Purchase Warrants to Zanett that are subject to antidilution provisions and are exercisable at $4.97 per share of Common Stock. These warrants expire on September 30, 2002. Also in conjunction with the Placement, the Company entered into an agreement with Bruno Guazzoni, a financial consultant who is an affiliate of Zanett Lombardier, Ltd., an investor in the Prepaid Warrants. F-26 During the five-year term of the agreement such consultant will provide the Company with advisory services relating to financial and strategic ventures and alliances, investment banking and general financial advisory services, and advice and assistance with the Company's market development activities. As compensation for these services, the Company authorized the issuance of 805,370 Common Stock Purchase Warrants ("Consulting Warrants") to this consultant that are subject to antidilution provisions and are exercisable at $4.97 per share of Common Stock. The Company has valued these Consulting Warrants in accordance with Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation", and the Black-Scholes pricing methodology at $5,145,500 and recorded this amount in stockholders' equity as unearned compensation. Unearned compensation is being amortized to income over the five-year term of the agreement. These warrants expire on September 30, 2002. The Company has recorded consulting expense of $1,165,020 and $527,576 for the years ended June 30, 1999 and 1998, respectively. During the year ended June 30, 1999, holders of 276.67 of the Company's Prepaid Warrants converted such warrants into 178,560 shares of Common Stock at exercise prices ranging from $.75 to $2.38 per share. On August 31, 1998, the Company issued 32,953 shares of Common Stock to Zanett Lombardier, Ltd. and 17,047 shares of Common Stock to Bruno Guazzoni in consideration of their agreement to certain restrictions on the exercise of Prepaid Warrants and the resale of the shares of Common Stock issuable on exercise thereof. Such shares have been recorded at the fair value of the Company's Common Stock at that date as other financing costs. On September 8, 1998, the Company issued warrants to purchase 3,000 shares of Common Stock to DTN for prepayment of certain guaranteed payments in accordance with the Software License and Service Agreement between the parties dated April 23, 1998. Such warrants are exercisable at $3.00 per share of Common Stock and have been recorded in accordance with the Black-Scholes pricing methodology as other financing costs. On November 17, 1998, the Company issued 125,000 shares of Common Stock and warrants to purchase 16,667 shares of Common Stock, exercisable at $5.00 per share until November 11, 2001, to Steven Francesco, a former officer of the Company, as partial consideration for the settlement of his claims against the Company and certain of its officers and directors. The value of these shares has been recorded in selling, general and administrative expenses based upon the fair value of the Company's Common Stock at that date while the warrants have been recorded in accordance with the Black-Scholes pricing methodology. On December 29, 1998, the Board of Directors approved the terms of employment contracts for Sebastian E. Cassetta, Chairman and Chief Executive Officer, and Mario F. Rossi, Vice President of Technology. The employment agreement with Mr. Cassetta ("Cassetta Agreement"), is effective January 1, 1999, expires on December 31, 2001, and provides for, among other things, the sale to him of 618,239 shares of restricted stock representing 9% of the fully diluted shares of Common Stock of the Company. The purchase price ($2.20 per share) of the restricted stock is equal to 110% of fair market value of the Company's Common Stock for the 30 days preceding the date of the stock purchase agreement ("Cassetta Stock Purchase Agreement") contemplated by the Cassetta Agreement. The purchase price has been paid with a 5 year, non-recourse promissory note, secured by the stock, at an interest rate of 6.75%, which is 1% below the prime rate on the date of the Cassetta Stock Purchase Agreement. The Cassetta Stock Purchase Agreement provides the Company with certain repurchase options and provides Mr. Cassetta with a put option in the event of the termination of his employment. In accordance with APB No. 25, the Company will record the changes in the fair value of such shares in recognition of the compensatory nature of their issuance. On October 13, 1999, the Board of Directors agreed to reprice the shares granted F-27 to Mr. Cassetta to $.75 per share, the fair value of the shares at that date. The Company and Mr. Rossi have also entered into an employment agreement ("Rossi Agreement"), effective January 1, 1999 and expiring on December 31, 2001, providing for, among other things, the sale to him of 206,080 shares of restricted stock representing 3% of the fully diluted shares of Common Stock of the Company. The purchase price ($2.20 per share) of the restricted stock is equal to 110% of fair market value for the 30 days preceding the date of the stock purchase agreement ("Rossi Stock Purchase Agreement") contemplated by the Rossi Agreement. The purchase price has been paid with a 5 year, non-recourse promissory note, secured by the stock, at an interest rate of 6.75%, which is 1% below the prime rate on the date of the Rossi Stock Purchase Agreement. The Rossi Stock Purchase Agreement provides the Company with certain repurchase options and provides Mr. Rossi with a put option in the event of the termination of his employment. In accordance with APB No. 25, the Company will record the changes in the fair value of such shares in recognition of the compensatory nature of their issuance. On October 13, 1999, the Board of Directors agreed to reprice the shares granted to Mr. Rossi to $.75 per share, the fair value of the shares at that date. On January 14, 1999, the Company issued 10,000 shares of Common Stock to Arnhold & S. Bleichroeder, Inc. ("ASB"), an investor in the Company's Prepaid Warrants, in consideration of an agreement to waive certain events of default under such Prepaid Warrants. These shares have been recorded at the fair value of the Company's Common Stock at that date as other financing costs. On January 20, 1999, the Company agreed to cancel warrants to purchase 20,833 shares of Common Stock exercisable at $15.75 and $19.50 per share to Steven Rosner, a financial advisor to the Company, and to grant Mr. Rosner warrants to purchase 40,833 shares of Common Stock at $.60 per share for his efforts at arranging the Company's relationship with Spencer Trask. Such warrants will expire on January 20, 2004. These warrants have been recorded in accordance with the Black-Scholes pricing methodology as selling, general and administrative expenses. On June 24, 1999, in consideration of the receipt of $324,000, the Company agreed to issue DTN warrants for the purchase of 300,000 shares of the Company's Common Stock at $8.60 per share. The warrants will expire on the earlier of April 30, 2003, or the date one year after the market price of a share of Common Stock reaches $8.60. These warrants have been recorded in accordance with the Black-Scholes pricing methodology. The delisting of the Company's Common Stock from the Nasdaq Small Cap Market caused the Company to default on certain terms and conditions of the Prepaid Warrants. Such default obligates the Company to pay financial penalties, as well as to redeem the outstanding Prepaid Warrants at a 43% premium. The Company has been unable to obtain appropriate waivers from holders of $1,994,000 of such Prepaid Warrants. Accordingly, the Company has recorded a charge to debt origination and other financing costs in the amount of $986,365, representing the potential penalties due such holders. F-28 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted loss per share:
YEAR ENDED JUNE 30 ---------------------------------------------------------------- 1999 1998 1997 ------------------ -------------------- -------------------- Numerator: Net loss $ (7,124,126) $ (5,040,009) $ (4,434,482) ================== ==================== ==================== Denominator: Weighted average shares 1,105,603 659,034 615,833 ================== ==================== ==================== Basic and diluted loss per common share $ (6.44) $ (7.65) $ (7.20) ================== ==================== ====================
At June 30, 1999 there were, exclusive of the Prepaid Warrants (Note 5), 3,195,000 Common Stock Purchase Warrants outstanding. Such warrants have exercise prices ranging from $.60 to $72.00 per share and expire from March 2001 through January 2004. Based on the closing bid price ($1.50) of the Company's Common Stock at June 30, 1999, there were, exclusive of the Prepaid Warrants, currently exercisable in-the-money warrants outstanding for the purchase of 507,700 shares of Common Stock. Additionally, the Company has established an employee stock option plan for the benefit of directors, employees, and consultants to the Company. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code, as amended, or as nonqualified stock options. The options are partially exercisable after one year from date of grant and no options may be granted after April 15, 2006. At June 30, 1999, there are options outstanding for the purchase of 285,901 shares of the Company's Common Stock. None of the warrants or options have been included in the computation of diluted loss per share because their inclusion would be antidilutive. (See Note 11 for a discussion of the Company's stock option plans.) 7. INCOME TAXES At June 30, 1999 and 1998, the Company has deferred tax assets as follows:
1999 1998 ---- ---- Capitalized Start-up Costs $ 741,600 $ 1,112,500 Net Operating Loss Carryforwards 6,578,000 4,126,000 ------------- ------------ $ 7,319,600 $ 5,238,500 ============= ============
In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," the Company has established a valuation allowance to fully reserve the future income tax benefit of these deferred tax assets due to uncertainty about their future realization. The valuation allowance increased to $7,319,600 at June 30, 1999 from $5,238,500 at June 30, 1998 and $3,540,000 at June 30, 1997. At June 30, 1999, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $8,930,000 which expire in the years 2009 through 2013. As a result of the public issuance of stock by the Company on March 21, 1996, and the resultant change in ownership pursuant to F-29 Internal Revenue Code Section 382, the utilization of net operating losses incurred prior to this date may be limited. 8. LEASES The Company leases office space for its Stamford, Connecticut headquarters under a noncancelable lease. The lease includes escalation clauses for items such as real estate taxes, building operation and maintenance expenses, and electricity usage. On May 1, 1997, the Company entered into a 3 year noncancelable capital lease for certain computer equipment used to provide information services. The Company also leases certain other computer equipment under operating leases which expire through July 2000. Rent expense amounted to approximately $290,600, $278,000, and $207,000 for the years ended June 30, 1999, 1998, and 1997, respectively. Minimum future rental payments at June 30, 1999 are as follows:
OPERATING LEASES ------------------------------------ CAPITAL YEAR ENDING JUNE 30 PREMISES EQUIPMENT LEASE ----------------- --------------- ------------------ 2000 $ 179,700 $ 41,000 $ 75,341 2001 186,000 1,600 -- 2002 192,300 -- -- 2003 67,000 -- -- ----------------- --------------- ------------------ $ 625,000 $ 42,600 75,341 ================= =============== Less amounts representing interest and executory costs 5,194 ------------------ $ 70,147 ==================
9. COMMITMENTS AND CONTINGENCIES By letter dated April 10, 1998, Michael Fishman, then Vice President of Sales for the Company, resigned his position. On or about April 24, 1998, Mr. Fishman filed a complaint against the Company, Sebastian E. Cassetta and four other defendants in the United States District Court for the District of Connecticut. The complaint asserted claims under Sections 10(b) and 18 of the Securities Exchange Act of 1934, as well as several state law claims, including breach of contract, fraud and misrepresentation. Mr. Fishman alleged that the Company (1) failed to pay him the benefits and compensation to which he was entitled and (2) made material misrepresentations in its filings with the Securities and Exchange Commission. On December 11, 1998, the Court granted the Company's motion to dismiss Mr. Fishman's action without prejudice to the plaintiff to seek leave to file an amended complaint within 30 days. On May 12, 1999, the Court denied the plaintiff's subsequent motion for leave to file a substituted complaint on the basis that the federal securities law claim, the only federal claim alleged by the plaintiff, was still deficient. Accordingly, the federal securities claim was dismissed with prejudice. On or about June 4, 1999, Mr. Fishman commenced an action against the same defendants and added as a seventh defendant, the Company's former President, Mr. Steven Francesco, in the Connecticut Superior Court for the Judicial F-30 District of Stamford/Norwalk at Stamford alleging breach of contract, breach of duty of good faith and fair dealing, fraudulent misrepresentation, negligent misrepresentation, intentional misrepresentation and failure to pay wages. The defendants have answered the complaint and filed counterclaims for fraudulent inducement and breach of contract. Plaintiff's response to counterclaims was due October 14, 1999 and has yet to be received. Although the Company is vigorously defending this action, there can be no assurance that it will be successful. By memorandum dated April 10, 1998, Jonathan Paschkes, then Vice President of Marketing for the Company, resigned his position. On or about November 17, 1998, Mr. Paschkes filed a complaint against the Company and Sebastian E. Cassetta in the United States District Court, District of Connecticut. In the complaint, Mr. Paschkes alleges (i) fraudulent inducement to him to accept his position with the Company; (ii) breach of various terms of the Company's employment contract with him; and (iii) failure by the Company to pay him wages and bonuses and issue options to him pursuant to the terms of his employment contract. On or about February 18, 1999, Mr. Paschkes filed an amended complaint. The Company answered the amended complaint and asserted counterclaims against Mr. Paschkes for fraudulent inducement, breach of contract, conversion and statutory theft. On October 5, 1999, an agreement in principle was reached between the Company and Mr. Paschkes in full settlement of these claims. The Company anticipates executing a settlement agreement with Mr. Paschkes and filing a Stipulation of Dismissal with prejudice before October 31, 1999. The Company has recorded a charge for the settlement of such claims in the results of operations for the year ended June 30, 1999. On or about May 11, 1998, Ronald G. Weiner filed a complaint against the Company and Mr. Francesco in the Supreme Court of the State of New York, County of New York. The complaint alleges, among other things, that in May 1993, by letter from Mr. Francesco, Mr. Weiner was offered a 10% equity stake in Smart Phone Services, Inc. ("SPS"), a Subchapter S company of which Mr. Francesco allegedly was the President and sole shareholder, in exchange for his active involvement in, among other things, raising capital and managing the financial aspects of SPS. The complaint alleges that, in November 1993, Mr. Francesco sent a letter to Mr. Weiner in which he (i) represented that SPS had failed to attract a single investor and (ii) withdrew his offer to Mr. Weiner of a 10% equity position in SPS. The complaint further alleges that, in conversations with Mr. Weiner beginning in November 1993, Mr. Francesco represented that he was ceasing all efforts to capitalize SPS. The complaint alleges, among other things, that Mr. Francesco and SPS breached their agreement with Mr. Weiner by withdrawing their offer to him of a 10% equity stake in SPS, and that, at the time Mr. Francesco represented that he was ceasing efforts to capitalize SPS, he had actually formed the Company and was actively seeking investors for it. The complaint further alleges that the Company is a successor entity to SPS and that, therefore, the Company is liable for SPS' and Mr. Francesco's alleged conduct in derogation of their alleged agreement with Mr. Weiner. The complaint seeks, among other things, (i) a declaratory judgment declaring Mr. Weiner a 10% equity shareholder of the Company, (ii) a constructive trust in Mr. Weiner's favor for 10% for the Company's equity shares and (iii) restitution against Mr. Francesco and the Company for unjust enrichment. On his unjust enrichment claim, Mr. Weiner seeks unspecified damages that he alleges to be at least $250,000. In its answer to the complaint, the Company has denied the material allegations of the complaint, asserted affirmative defenses and also asserted cross-claims against Mr. Francesco seeking indemnification from, or contribution towards, any judgment that Mr. Weiner may obtain against the Company. In accordance with an agreement dated November 11, 1998, the Company has filed a motion to discontinue the cross-claims that it asserted against Mr. Francesco. No discovery in this action has yet been taken. Although the Company is vigorously defending this action there can be no assurance that it will be successful. 10. SIGNIFICANT RELATIONSHIPS During the year ended June 30, 1999, the Company's relationship with DTN accounted for 94.8% of its F-31 revenues. During the year ended June 30, 1998, three Strategic Marketing Partner relationships accounted for 10.2%, 10.0% and 24.1%, respectively, of the Company's revenues while during the year ended June 30, 1997, one Strategic Marketing Partner relationship accounted for approximately 46.4% of the Company's revenues. 11. EMPLOYEE STOCK OPTION PLAN In April 1996, the Board of Directors approved the establishment of an Employee Stock Option Plan authorizing stock option grants to directors, key employees, and consultants of the Company. The options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or as nonqualified stock options. The Plan provides for the issuance of up to 250,000 of such options at not less than the fair value of the stock on the date of grant. The options are partially exercisable after one year from date of grant and expire on the tenth anniversary of the date of grant. On September 24, 1997, the Compensation Committee granted new stock options to employees and non-employee directors conditional upon cancellation of all of their existing stock options. Such options were exercisable at $12.00. On October 8, 1998, the Board of Directors voted to cancel the outstanding employee and non-employee director options and reissue options covering a like number of shares to employees and non-employee directors at an exercise price not less than the fair value at that date. The exercise price of the options issued to employees and non-employee directors on October 8, 1998 was $1.29 per share. Such options expire on October 7, 2008. In accordance with APB No. 25, the Company has recorded the changes in the fair value of the shares underlying 177,201 of such options to reflect the compensatory nature of their issuance. On November 20, 1998, the Board of Directors granted employees options to purchase 58,700 shares of Common Stock at $1.625 per share. Such options expire on November 19, 2008. On December 29, 1998, the Board approved a plan to compensate non-employee directors for their service to the Company by granting to them options to purchase 10,000 shares of the Company's Common Stock at the commencement of each calendar year. Effective January 1, 1999, the Company issued options to such persons to purchase 50,000 shares of Common Stock exercisable at $2.35 per share through December 31, 2003. On October 13, 1999, the Board of Directors authorized the establishment of the Company's 1999 Employee Stock Option Plan ("1999 Plan"). The 1999 Plan provides for the issuance of options to employees and directors for the purchase of a maximum of 400,000 shares of Common Stock of the Company at not less than the fair value of the Common Stock on the date of grant. The Board authorized the issuance of 300,000 of such options to employees at the fair value of the Common Stock on that date. F-32 Information concerning stock options for the Company is as follows:
AVERAGE EXERCISE OPTIONS PRICE -------------------- ----------------------- Balance at July 1, 1996 51,925 $ 38.82 Granted 70,829 31.38 Exercised -- -- Cancelled 66,362 37.32 -------------------- ----------------------- Balance at June 30, 1997 56,392 31.26 Granted 206,391 12.00 Exercised -- -- Cancelled 85,216 25.50 -------------------- ----------------------- Balance at June 30, 1998 177,567 12.00 Granted 463,858 1.92 Exercised -- -- Cancelled 355,524 7.26 -------------------- ----------------------- Balance at June 30, 1999 285,901 $ 1.54 ==================== =======================
The following table summarizes information about the Company's stock options outstanding as of June 30, 1999.
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 - --------------------------- ----------------- --------------- --------------- ---------------- ------------------ $1.29 - $2.35 285,901 $ 1.54 8.25 81,164 $ 1.96 =========================== ================= =============== =============== ================ ==================
SUPPLEMENTAL AND PRO FORMA DISCLOSURE In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." This Statement requires companies to recognize compensation expense based on the respective fair values of the options at the date of grant. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules contained in APB No. 25, but are required to disclose the pro forma effects on net income and earnings per share, as if the fair value based method of accounting had been applied. The pro forma information regarding net loss and loss per share required by Statement 123 has been determined as if the Company had accounted for its employee stock option plan under the fair value methods described in that Statement. The fair value of options granted under the Company's employee stock option plan was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require F-33 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:
1999 1998 1997 ------------------- --------------- ------------------ Weighted average dividend yield for options granted 0.0% 0.0% 0.0% Weighted average expected life in years 5.0 5.0 5.0 Weighted average volatility 147.0% 143.9% 70.8% Risk-free interest rate 5.75% 6.0% 6.5% Weighted average grant date fair value of options $1.92 $10.92 $19.80
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. As such, the pro forma net loss and loss per share are not indicative of future years. The Company's pro forma information is as follows:
YEAR ENDED JUNE 30 ------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------ -- ----------------------------- -- ----------------------------- REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA --------------- -------------- -------------- -------------- -------------- -------------- Net Loss $7,124,126 $7,308,036 $5,040,009 $5,654,512 $4,434,482 $5,209,947 =============== ============== ============== ============== ============== ============== Loss per Share $6.44 $6.61 $7.65 $8.58 $7.20 $8.46 =============== ============== ============== ============== ============== ==============
12. SUBSEQUENT EVENTS On July 1, 1999, the Company entered into an agreement with ASB, a holder of $325,000 of the Company's Prepaid Warrants, to settle the Company's obligation to ASB pursuant to the default provisions of the Prepaid Warrants. Pursuant to such agreement, the Company paid ASB $325,000 to redeem the Prepaid Warrants and issued 180,000 shares of Common Stock in full settlement of all obligations to ASB. The Company has agreed to file a registration statement with the Securities and Exchange Commission covering such shares. Settlement costs of $268,695 have been recorded as debt origination and other financing costs during the year ended June 30, 1999. On October 13, 1999, the Board of Directors agreed to enter into a restricted stock purchase agreement with Mr. Robert Pearl, Director of Business Development. Accordingly, Mr. Pearl has been granted 1% of the fully diluted shares of Common Stock of the Company as of that date at the purchase price of $.75 per share. F-34 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- SMARTSERV ONLINE, INC.
EXHIBIT DESCRIPTION PAGE NO. ------- ----------- -------- 3.1 Amended and Restated Certificate of Incorporation of the Company 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on June 1, 1998 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation filed on October 16, 1998 3.4 By-laws of the Company, as amended 4.1 Specimen Certificate of the Company's Common Stock 4.2 Form of Warrant Agent Agreement 4.3 Form of Redeemable Warrant 4.4 Form of Warrant Agreement used by the Company 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 the Company 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 the Company and TecCapital, Ltd., The Abernathy Group and Conseco Equity Fund 5.1 Opinion of Parker Chapin LLP 10.1 Information Distribution License Agreement dated as of July 18, 1994 between the Company and S&P ComStock, Inc. 10.2 New York Stock Exchange, Inc. Agreement for Receipt and Use of Market Data dated as of August 11, 1994 between the Company and the New York Stock Exchange, Inc. 10.3 The Nasdaq Stock Market, Inc. Vendor Agreement for Level 1 Service and Last Sale Service dated as of September 12, 1994 between the Company and The Nasdaq Stock Exchange, Inc. ("Nasdaq") 10.4 Amendment to Vendor Agreement for Level 1 Service and Last Sale Service dated as of October 11, 1994 between the Company and Nasdaq 10.5 Lease Agreement dated as of March 4, 1994, between the Company and One Station Place, L.P. regarding the Company's Stamford, Connecticut offices 10.6 Lease Modification and Extension Agreement, dated February 6, 1996, between the Company and One Station Place, L.P. regarding the Company's Stamford, Connecticut offices
10.7 1996 Stock Option Plan 10.8 1999 Stock Option Plan 10.9 Asset Purchase and Software License and Service Agreements between SmartServ Online, Inc. and Data Transmission Network Corporation, dated April 23, 1998 10.10 Amendment to the Software and License Agreement between SmartServ Online, Inc. and Data Transmission Network Corporation, dated June 24, 1999. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to an order by the Securities and Exchange Commission dated December 2, 1999, granting confidential treatment under the Securities Exchange Act of 1934 and the omitted portions have been filed separately with the Securities and Exchange Commission. 10.11 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. 10.12 Amended and Restated Employment Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 1, 1999 10.13 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated December 29, 1998 10.14 Employment Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated January 1, 1999 10.15 Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated December 29, 1998 10.16 Amended Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated December 31, 1999 10.17 Amended Promissory Note between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 4, 2000 10.18 Amended Security Agreement between SmartServ Online, Inc. and Sebastian E. Cassetta, dated January 4, 2000 10.19 Amended Restricted Stock Purchase Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated December 31, 1999 10.20 Amended Promissory Note between SmartServ Online, Inc. and Mario F. Rossi, dated January 4, 2000 10.21 Amended Security Agreement between SmartServ Online, Inc. and Mario F. Rossi, dated January 4, 2000 10.22 Employment Agreement between SmartServ Online, Inc. and Alan G. Bozian, dated May 29, 2000 23.1 Consent of Ernst & Young LLP 23.2 Consent of Parker Chapin LLP (Included in Exhibit 5.1) 24.1 Power of Attorney of certain directors and officers of SmartServ (Included as part of the signature page beginning on page II-7 of the filing) EX-4.4 2 0002.txt FORM OF WARRANT AGREEMENT EXHIBIT 4.4 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT OR APPLICABLE BLUE SKY LAWS. THE REGISTERED HOLDER OF THIS WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED. No. COMMON STOCK PURCHASE WARRANT For the Purchase of _____ Shares of Common Stock of SMARTSERV ONLINE, INC. (a Delaware corporation) 1. Warrant. ------- THIS CERTIFIES THAT, in exchange for due consideration, the sufficiency of which is hereby acknowledged, paid by or on behalf of __________________ (the "Holder"), as registered owner of this Warrant, to SMARTSERV ONLINE, INC. (the "Company"), the Holder is entitled, at any time and from time to time during the five (5) year period commencing on ___________ and expiring on and after 5:00 p.m., New York time on ________ (the "Exercise Period"), to subscribe for, purchase and receive, in whole or in part, up to ____________ (_______) shares of Common Stock, $.01 par value (the "Common Stock"), of the Company. This Warrant is initially exercisable as to each share of Common Stock covered thereby at $_____ per share (the "Exercise Price"). The term "Exercise Price" shall mean the initial exercise price or such exercise price, as adjusted in the manner provided herein, depending on the context. 2. Exercise. -------- In order to exercise this Warrant, the exercise form attached hereto must be duly executed, completed and delivered to the Company, together with this Warrant and payment of the Exercise Price for the shares of the Common Stock being purchased. If the rights represented hereby shall not be exercised on or before the end of the Exercise Period, this Warrant shall become and be void and without further force or effect and all rights represented hereby shall cease and expire. 3. Restrictions on Transfer; Registration of Transfers. --------------------------------------------------- 3.1 Restrictions on Transfer. The registered Holder of this Warrant, by its acceptance hereof, agrees that prior to any proposed transfer of any Warrants or any securities purchased upon exercise of the Warrants, if such transfer is not made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), the Warrant holder will, if requested by the Company, deliver to the Company: (i) an opinion of counsel reasonably satisfactory in form and substance to the Company that the Warrants or the securities purchased upon exercise of the Warrants may be transferred without registration under the Act; (ii) an agreement by the proposed transferee to the impression of the restrictive investment legend set forth below on the Warrant or the securities to be received; (iii) an agreement by such transferee that the Company may place a notation in the stock books of the Company or a "stop transfer order" with any transfer agent or registrar with respect to the securities purchased upon exercise of the Warrants; and (iv) an agreement by such transferee to be bound by the provisions of this Section 3 relating to the transfer of such Warrant or the securities purchased upon exercise of such Warrant. Each Warrant holder agrees that each Warrant and each certificate representing securities purchased upon exercise of this Warrant shall bear a legend as follows unless such securities have been registered under the Act: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act or applicable blue sky laws." 3.2 Registration of Transfers. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with this Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer the number of Warrants specified in the assignment form on the books of the Company and shall execute and deliver a new warrant or warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the number of shares of Common Stock purchasable hereunder or such portion of such number as shall be contemplated by such assignment. -2- 4. New Warrants to be Issued. ------------------------- 4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any required transfer tax, the Company shall cause to be delivered to the Holder without charge a new warrant or new warrants of like tenor with this Warrant in the name of the Holder evidencing the right to purchase, in the aggregate, the remaining number of underlying shares of Common Stock purchasable hereunder after giving effect to any such partial exercise or assignment. 4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and of an indemnification in favor of the Company, reasonably satisfactory to it, the Company shall execute and deliver a new warrant of like tenor and date. Any such new warrants executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute an additional contractual obligation on the part of the Company. 5. Adjustments to Exercise Price and Number of Securities. ------------------------------------------------------ 5.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 5.2 Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 5, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full number obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 5.3 Recapitalization. For the purpose of this Warrant, the term "Common Stock" shall also mean any other class of stock resulting from successive changes or reclassifications of Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 5.4 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder(s) a supplemental warrant providing that the holder of each warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such warrant) to receive, upon exercise of such warrant, the kind and amount of shares of stock and other securities -3- and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such warrants might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrants shall provide for adjustments which shall be identical to the adjustments provided in Section 5. The above provision of this Section shall similarly apply to successive consolidations or mergers. 5.5 Redemption of Warrants This Warrant cannot be redeemed by the Company without the prior written consent of the Holder. 5.6 Dividends and Other Distributions. In the event that the Company shall at any time prior to the exercise in full of this Warrant declare a non-cash dividend (other than a dividend consisting solely of shares of Common Stock) or otherwise distribute to its stockholders any assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another, or any other thing of value other than cash, the Holder of this Warrant shall thereafter be entitled, in addition to the shares of Common Stock or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrant, the same property, assets, rights, evidences of indebtedness, securities or any other thing of value that it would have been entitled to receive at the time of such dividend or distribution as if the Warrant had been exercised immediately prior to such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section 5.6. 5.7 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. 6. Reservation. ----------- The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of the Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrant and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid and nonassessable. 7. Certain Notice Requirements. --------------------------- 7.1 Holder's Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holder the right to vote or consent or to receive notice as a stockholder for the -4- election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrant and its exercise, any of the events described in Section 7.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. 7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed. 7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (the "Price Notice"). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company's Chief Executive Officer and Treasurer. 7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Warrant shall be in writing and shall be deemed to have been duly given or made when hand delivered, or when delivered by responsible overnight courier: (i) If to the registered Holder of this Warrant, to: (ii) if to the Company, to: SmartServ Online, Inc. Metro Center One Station Place Stamford, CT 06902 Attention: Chief Executive Officer -5- Either of the Holder or the Company may change the foregoing address by notice given pursuant to this Section 7.4. 8. Miscellaneous. ------------- 8.1 Amendments. The Company and the Holder may from time to time supplement or amend this Warrant without the approval of any other Holder in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which the Company deems shall not adversely affect the interest of the Holder. All other modifications or amendments shall require the written consent of the party against whom enforcement of the modification or amendment is sought. 8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Warrant. 8.3 Entire Agreement. This Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Warrant) constitute the entire agreement of the parties hereto with respect to the subject matter hereof, and supersede all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 8.4 Binding Effect. This Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Warrant or any provisions herein contained. 8.5 Governing Law; Submission to Jurisdiction. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Connecticut, without giving effect to principles of conflicts of laws. Any action, proceeding or claim against the Company or the Holder arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of Connecticut or of the United States of America for the Federal District of Connecticut, and the Company and the Holder irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. The parties hereto waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. The prevailing party in any such action shall be entitled to recover from the other party all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefore. 8.6 Waiver, Etc. The failure of the Company or the Holder to at any time enforce -6- any of the provisions of this Warrant shall not be deemed or construed to be a waiver of any such provision, nor in any way to affect the validity of this Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Warrant. No waiver of any breach, noncompliance or nonfulfillment of any of the provisions of this Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, noncompliance or nonfulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, -7- noncompliance or nonfulfillment. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the __ day of _____, 199__. SMARTSERV ONLINE, INC. By:______________________________ Name: Title: -8- Form to be used to exercise Warrant: SMARTSERV ONLINE, INC. Metro Center One Station Place Stamford, CT 06902 Date: __________________ The Undersigned hereby elects irrevocably to exercise the within Warrant and to purchase __________ shares of Common Stock of SmartServ Online, Inc. and hereby makes payment of $_____________ (at the rate of $______________ per share) in payment of the Exercise Price pursuant thereto. Please issue the shares as to which this Warrant is exercised in accordance with the instructions given below. Signature Signature Guaranteed INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name --------------------------------------------------------------------------- (Print in Block Letters) Address ------------------------------------------------------------------------ NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. -9- Form to be used to assign Warrant: ASSIGNMENT (To be executed by the registered Holder to effect a transfer of the within Warrant): FOR VALUE RECEIVED, ________________________________ does hereby sell, assign and transfer unto __________________________ the right to purchase ____________ shares of Common Stock of SmartServ Online, Inc. (the "Company") evidenced by the within Warrant and does hereby authorize the Company to transfer such right on the books of the Company. Dated:___________________ -------------------------- Signature -------------------------- Signature Guaranteed NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. EX-4.5 3 0003.txt FORM OF WARRANT AGREEMENT EXHIBIT 4.5 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT OR APPLICABLE BLUE SKY LAWS. THE REGISTERED HOLDER OF THIS WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED. No. ____ COMMON STOCK PURCHASE WARRANT For the Purchase of ____ Shares of Common Stock of SMARTSERV ONLINE, INC. (a Delaware corporation) 1. Warrant. ------- THIS CERTIFIES THAT, in exchange for due consideration, the sufficiency of which is hereby acknowledged, paid by or on behalf of _________ (the "Holder"), as registered owner of this Warrant, to SMARTSERV ONLINE, INC. (the "Company"), the Holder is entitled, at any time and from time to time during the period commencing on ___ _, ___, and expiring on and after 5:00 p.m., New York time on ___ __, ____ (the "Exercise Period"), to subscribe for, purchase and receive, in whole or in part, up to ________ (______) shares of Common Stock, $.01 par value (the "Common Stock"), of the Company. This Warrant is initially exercisable as to each share of Common Stock covered thereby at ________ ($______) per share (the "Exercise Price"). The term "Exercise Price" shall mean the initial exercise price or such exercise price, as adjusted in the manner provided herein, depending on the context. 2. Exercise. -------- In order to exercise this Warrant, the exercise form attached hereto must be duly executed, completed and delivered to the Company, together with this Warrant and payment of the Exercise Price for the shares of the Common Stock being purchased. If the rights represented hereby shall not be exercised on or before the end of the Exercise Period, this Warrant shall become and be void and without further force or effect and all rights represented hereby shall cease and expire. 3. Restrictions on Transfer; Registration of Transfers. --------------------------------------------------- 3.1 Restrictions on Transfer. The registered Holder of this Warrant, by its acceptance hereof, agrees that prior to any proposed transfer of any Warrants or any securities purchased upon exercise of the Warrants, if such transfer is not made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), the Warrant holder will, if requested by the Company, deliver to the Company: (i) an opinion of counsel reasonably satisfactory in form and substance to the Company that the Warrants or the securities purchased upon exercise of the Warrants may be transferred without registration under the Act; (ii) an agreement by the proposed transferee to the impression of the restrictive investment legend set forth below on the Warrant or the securities to be received; (iii) an agreement by such transferee that the Company may place a notation in the stock books of the Company or a "stop transfer order" with any transfer agent or registrar with respect to the securities purchased upon exercise of the Warrants; and (iv) an agreement by such transferee to be bound by the provisions of this Section 3 relating to the transfer of such Warrant or the securities purchased upon exercise of such Warrant. Each Warrant holder agrees that each Warrant and each certificate representing securities purchased upon exercise of this Warrant shall bear a legend as follows unless such securities have been registered under the Act: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act or applicable blue sky laws." 3.2 Registration of Transfers. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with this Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer the number of Warrants specified in the assignment form on the books of the Company and shall execute and deliver a new warrant or warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the number of shares of Common Stock purchasable hereunder or such portion of such number as shall be contemplated by such assignment. -2- 4. New Warrants to be Issued. ------------------------- 4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any required transfer tax, the Company shall cause to be delivered to the Holder without charge a new warrant or new warrants of like tenor with this Warrant in the name of the Holder evidencing the right to purchase, in the aggregate, the remaining number of underlying shares of Common Stock purchasable hereunder after giving effect to any such partial exercise or assignment. 4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and of an indemnification in favor of the Company, reasonably satisfactory to it, the Company shall execute and deliver a new warrant of like tenor and date. Any such new warrants executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute an additional contractual obligation on the part of the Company. 5. Adjustments to Exercise Price and Number of Securities. ------------------------------------------------------ 5.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 5.2 Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 5, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be adjusted to the nearest full number obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 5.3 Recapitalization. For the purpose of this Warrant, the term "Common Stock" shall also mean any other class of stock resulting from successive changes or reclassifications of Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 5.4 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder(s) a supplemental warrant providing that the holder of each warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such warrant) to receive, upon exercise of such warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of -3- Common Stock of the Company for which such warrants might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrants shall provide for adjustments which shall be identical to the adjustments provided in Section 5. The above provision of this Section shall similarly apply to successive consolidations or mergers. 5.5 Redemption of Warrants. This Warrant cannot be redeemed by the Company without the prior written consent of the Holder. 5.6 Dividends and Other Distributions. In the event that the Company shall at any time prior to the exercise in full of this Warrant declare a non-cash dividend (other than a dividend consisting solely of shares of Common Stock) or otherwise distribute to its stockholders any assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another, or any other thing of value other than cash, the Holder of this Warrant shall thereafter be entitled, in addition to the shares of Common Stock or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrant, the same property, assets, rights, evidences of indebtedness, securities or any other thing of value that it would have been entitled to receive at the time of such dividend or distribution as if the Warrant had been exercised immediately prior to such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section 5.6. 5.7 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. 6. Reservation. ----------- The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of the Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrant and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid and nonassessable. 7. Certain Notice Requirements. --------------------------- 7.1 Holder's Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holder the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrant and its exercise, any of the events described in Section 7.2 shall occur, then, in one or more of said events, the Company shall -4- give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. 7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed. 7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (the "Price Notice"). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company's Chief Executive Officer and Treasurer. 7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Warrant shall be in writing and shall be deemed to have been duly given or made when hand delivered, or when delivered by responsible overnight courier: (i) If to the registered Holder of this Warrant, to: ------------- ------------- ------------- ------------- (ii) if to the Company, to: SmartServ Online, Inc. Metro Center One Station Place Stamford, CT 06902 Attention: Chief Executive Officer Either of the Holder or the Company may change the foregoing address by notice given pursuant to this Section 7.4. 8. Miscellaneous. ------------- -5- 8.1 Amendments. The Company and the Holder may from time to time supplement or amend this Warrant without the approval of any other Holder in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which the Company deems shall not adversely affect the interest of the Holder. All other modifications or amendments shall require the written consent of the party against whom enforcement of the modification or amendment is sought. 8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Warrant. 8.3 Entire Agreement. This Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 8.4 Binding Effect. This Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Warrant or any provisions herein contained. 8.5 Governing Law; Submission to Jurisdiction. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Connecticut, without giving effect to principles of conflicts of laws. Any action, proceeding or claim against the Company or the Holder arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of Connecticut or of the United States of America for the Federal District of Connecticut, and the Company and the Holder irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. The parties hereto waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. The prevailing party in any such action shall be entitled to recover from the other party all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefore. 8.6 Waiver, Etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Warrant shall not be deemed or construed to be a waiver of any such provision, nor in any way to affect the validity of this Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Warrant. No waiver of any breach, noncompliance or nonfulfillment of any of the provisions of this Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom -6- or which enforcement of such waiver is sought; and no waiver of any such breach, noncompliance or nonfulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, noncompliance or nonfulfillment. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the __ day of ___ , ___. SMARTSERV ONLINE, INC. By:______________________________ Name: Thomas W. Haller Title: Vice President -7- Form to be used to exercise Warrant: SMARTSERV ONLINE, INC. Metro Center One Station Place Stamford, CT 06902 Date: __________________ The Undersigned hereby elects irrevocably to exercise the within Warrant and to purchase __________ shares of Common Stock of SmartServ Online, Inc. and hereby makes payment of $_____________ (at the rate of $______________ per share) in payment of the Exercise Price pursuant thereto. Please issue the shares as to which this Warrant is exercised in accordance with the instructions given below. -------------------- Signature -------------------- Signature Guaranteed INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name ---------------------------------------------------------------------------- (Print in Block Letters) Address ------------------------------------------------------------------------- NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. -8- Form to be used to assign Warrant: ASSIGNMENT (To be executed by the registered Holder to effect a transfer of the within Warrant): FOR VALUE RECEIVED, ________________________________ does hereby sell, assign and transfer unto __________________________ the right to purchase ____________ shares of Common Stock of SmartServ Online, Inc. (the "Company") evidenced by the within Warrant and does hereby authorize the Company to transfer such right on the books of the Company. Dated:___________________ -------------------- Signature -------------------- Signature Guaranteed NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. -9- EX-4.6 4 0004.txt STOCK PURCHASE AGREEMENT EXHIBIT 4.6 EXECUTION COPY STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of May 12, 2000, among SMARTSERV ONLINE, INC., a Delaware corporation (the "Company") and the investors listed on Schedule A hereto (collectively, the "Investors", and each, individually, an "Investor"). The term "Investor" as used herein shall further include any Affiliate or member of an Affiliated Group of such Investor and any permitted transferee of any such Investor. RECITALS: --------- In consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES --------------------------- Section 1.1 Purchase and Sale. The Company hereby agrees to issue and sell to each Investor and, subject to all of the terms and conditions hereof and in reliance on the representations and warranties set forth or referred to herein, each Investor severally agrees to purchase such number of shares (collectively, the "Purchased Shares") of the Common Stock, par value $0.01 per share, of the Company ("Common Stock") as is equal to the result obtained when the aggregate purchase price (as to each Investor, the "Aggregate Purchase Price") being paid by each such Investor (as set forth opposite such Investor's name on Schedule A hereto) is divided by the "Per Share Purchase Price" (as such term is defined in Section 1.2, below) therefor. The term "Purchased Shares" as used in this Agreement also includes any securities issued or issuable with respect to the original Purchased Shares upon the occurrence of an Adjustment Event and any securities into which any of the original Purchased Shares are converted or convertible, directly or indirectly, or for which any of the original Purchased Shares are exchanged or exchangeable, directly or indirectly. Section 1.2 Purchase Price. The purchase price per share (the "Per Share Purchase Price") to be paid at Closing by the Investors for each of the Purchased Shares shall be equal to $49.50 per share of Common Stock (as adjusted from time to time on the occurrence of an Adjustment Event occurring after the execution hereof and at or before Closing). Section 1.3 Closing. The purchase and sale of the shares of Common Stock constituting the Investment will take place at a closing (the "Closing") at the offices of Bingham Dana LLP, counsel to TecCapital, at 399 Park Avenue, New York, New York 10022, at 10:00 A.M. on May 12, 2000. The date and time of Closing are referred to herein as the "Closing Date." ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company represents and warrants to the Investors as follows, which representations and warranties are true as of the date hereof and as of Closing: Section 2.1 Corporate Organization. The Company is a corporation duly incorporated, validly existing and subsisting under the laws of the State of Delaware. The Company has all requisite power and authority to own, operate and lease its properties and to conduct its business as currently conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such licensing or qualification, except to the extent that the failure to be so qualified or licensed would not have a Material Adverse Effect (as defined below). The Company has delivered to the Investors complete and correct copies of its Amended and Restated Certificate of Incorporation and By-laws, as in effect on the date hereof. As used in this Agreement, "Material Adverse Effect" means any event, circumstance, change, development or effect which individually or in the aggregate could have a material adverse effect on the business, properties, operations, condition (financial or otherwise), assets, liabilities, earnings or results of operations of the Company or on the transactions contemplated hereby. Section 2.2 Subsidiaries. The Company does not directly or indirectly own any equity or similar interest, or any interest convertible into or exchangeable or exercisable for any equity or similar interest, in any corporation, partnership, limited liability company, joint venture or other business association, entity or person. Section 2.3 Authorization. The Company has all requisite power and full legal right to execute and deliver this Agreement and the Ancillary Agreements, and to perform all of its obligations hereunder and thereunder in accordance with the respective terms hereof and thereof. This Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby have been duly approved and authorized by all requisite corporate and shareholder action on the part of the Company, and this Agreement has been duly executed and delivered by the Company and constitutes, and each of the Ancillary Agreements, when executed and delivered by the Company at the Closing, will constitute, a legal, valid, and binding obligation of the Company, enforceable against it in accordance with its respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditors' rights and remedies or by other equitable principles of general application. The execution, delivery, and performance by the Company of this Agreement and the Ancillary Agreements in accordance with their respective terms, and the consummation by the Company of the transactions contemplated hereby or thereby, will not result (with or without the giving of notice or the lapse of time or both) in any conflict, violation, breach, or default, or the creation of any Lien, or the termination, acceleration, vesting, or modification of any right or obligation, under or in respect of (x) the charter documents or by-laws of the Company, (y) any judgment, decree, order, statute, rule, or regulation binding on or applicable to the Company, or (z) any agreement or instrument to which the Company is a party or by which it or any of its assets is or are bound. Section 2.4 Capitalization. (a) Immediately prior to the Closing, not giving effect to the sale and purchase of the Purchased Shares or any of the other Acquired Securities provided for in this Agreement, the authorized and the outstanding capital stock of the Company (on a Fully Diluted Basis including all Derivative Securities) will be as set forth in Schedule 2.4(a), and all such outstanding shares of capital stock will be owned (of record) by the persons and in the amounts there indicated. All such outstanding shares of capital stock will be duly authorized, validly issued, fully paid, and nonassessable, and will have been issued free and clear of Liens. No adjustment has previously been made (or should have been made) nor will any adjustment be required to be made as a result of the Company's issuance of the Purchased Shares to the rate at which any shares of any class of the equity securities of the Company, subscriptions, options, warrants, calls, commitments or agreements or Derivative Securities of the Company are convertible into or exercisable for shares of Common Stock, Derivative Securities or shares of other equity securities of the Company (by reason of any "anti-dilution" provisions or agreements or otherwise). 2 (b) Except as set forth on Schedule 2.4(b), the Company does not have, is not bound by, and has no obligation to grant or enter into, any (i) outstanding subscriptions, options, warrants, calls, commitments, or agreements of any character calling for it to issue, deliver, or sell, or cause to be issued, delivered, or sold, any shares of its capital stock, any membership interests or any other equity security, or any securities described in the following clause, or (ii) securities convertible into, exchangeable for, or representing the right to subscribe for, purchase, or otherwise acquire any shares of its capital stock, any membership interests or any other equity security. (c) Except as set forth in Schedule 2.4(c), the Company (i) has no outstanding obligations, contractual or otherwise, to repurchase, redeem, or otherwise acquire any shares of capital stock or other equity securities of the Company, (ii) is not a party to or bound by, and has no knowledge of, any agreement or instrument relating to the voting of any of its securities, and (iii) is not a party to or bound by any agreement or instrument under which any person has the right to require it to effect, or to include any securities held by such person in, any registration under the Securities Act. There are no other agreements, contracts, instruments or documents to which the Company is a party or of which it has knowledge, except as set forth in Schedule 2.4(c), which govern or affect in any way the rights of the holders of securities, including any class of capital stock, of the Company. (d) Intentionally left blank. (e) All of the outstanding shares of capital stock and other securities of the Company were offered, issued, and sold, and the Purchased Shares and other Acquired Securities have been offered and at the Closing will be issued and sold, in compliance with (i) all applicable preemptive or similar rights of all persons, and (ii) assuming the truthfulness and accuracy of the representations made by the Investors in Section 3 hereof, all applicable provisions of the Securities Act and the rules and regulations thereunder, and all applicable state securities laws and the rules and regulations thereunder. No person has any valid right to rescind any purchase of any shares of capital stock or other securities of the Company. (f) The Purchased Shares and other Acquired Securities being issued and sold by the Company hereunder shall, upon issuance pursuant to the terms hereof, be duly authorized and validly issued, fully paid and non-assessable and free and clear of any Lien, security interest, option or other charge or encumbrance. The Common Stock issuable upon the exercise of the Compensation Warrants (if any) shall be duly authorized and validly issued, fully paid and non-assessable and free and clear of any Lien, security interest, option or other charge or encumbrance. The issuance of the Purchased Shares and other Acquired Securities are not and will not be subject to any pre-emptive rights or similar rights with respect to such Purchased Shares and other Acquired Securities. Section 2.5 Financial Statements. The Company has previously delivered to the Investors complete and correct copies of its audited balance sheets, statements of income and statements of cash flows as at and for the fiscal years ended June 30, 1998 and 1999 and unaudited balance sheets, statements of income, changes in stockholders'equity and cash flows as at and for the six (6) months ended December 31, 1999. All such financial statements were prepared from the books and records of the Company, in conformity with GAAP applied on a consistent basis (except in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), are complete and correct, contain provisions for all significant accruals or contingencies and fairly and accurately present the financial position of the Company as of the respective dates thereof and the results of operations and cash flows of the Company for the periods shown therein. No event has occurred and nothing has come to the attention of the Company since the date of the Balance Sheet (as defined below) that would indicate that such financial statements are not true and correct as of the date hereof nor has there been any change in the condition of the Company since the date of the Balance Sheet 3 that would individually, or in the aggregate with other events, have a Material Adverse Effect upon the business, financial condition or prospects of the Company. Section 2.6 No Undisclosed or Contingent Liabilities. Except as set forth in Schedule 2.6, the Company has no liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise and whether due or to become due) which are not fully reflected or reserved against on the balance sheet as of December 31, 1999 (including the footnotes and schedules thereto, the "Balance Sheet") in accordance with GAAP, except for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since the date thereof nor has there been any change in the condition of the Company since the date of the Balance Sheet that would individually, or in the aggregate with other events, have a Material Adverse Effect upon the business, financial condition or prospects of the Company. Section 2.7 SEC Documents. The Company has delivered or made available to the Investors true and complete copies of all documents (the "SEC Documents") filed by the Company with the Securities and Exchange Commission (the "SEC"). The SEC Documents comply in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and rules and regulations of the SEC promulgated thereunder and none of the SEC Documents contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. The Company has effected all filings required by the Securities Act, Exchange Act and the rules and regulations promulgated by the SEC thereunder. Section 2.8 Absence of Certain Changes. (a) Except as set forth on Schedule 2.8 or otherwise disclosed in the SEC Documents, since the date of the Balance Sheet, the Company has conducted its business only in the ordinary course and consistent with past practice, and has not: (b) suffered any Material Adverse Effect; (c) materially increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (d) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities and obligations reflected or reserved against in the Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Balance Sheet; (e) permitted or allowed any of its assets to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge of any kind; (f) incurred any indebtedness not in the ordinary course of business or executed any guarantees on behalf of any person; (g) canceled any material debts or waived any claims or rights of substantial value; (h) sold, transferred or otherwise disposed of any of its properties or assets, except in the ordinary course of business and consistent with past practice; 4 (i) granted any general increase in the compensation of employees (including any such increase pursuant to any bonus, pension, profit sharing or other plan or commitment) or any increase in the compensation payable or to become payable to any employee, other than such increases as are consistent with the Company's past practice or required by agreement or understanding disclosed to the Investors; or experienced any material loss of personnel of the Company, material change in the terms and conditions of the employment of the Company's key personnel, or any labor trouble involving the Company; or entered into any written employment agreement with any Company employee; (j) made any capital expenditure or commitment for additions to its property, equipment or intangible capital assets other than in the ordinary course of business and consistent with past practice; (k) made any change in any method of accounting or accounting practice or failed to maintain its books, accounts and records in the ordinary course of business and consistent with past practice; (l) failed to maintain any properties or material equipment in good operating condition and repair, ordinary wear and tear excepted; (m) failed to maintain in full force and effect all existing policies of insurance at least at such levels as were in effect prior to such date or canceled any such insurance or taken or failed to take any action that would enable the insurers under such policies to avoid liability for claims arising out of occurrences prior to the Closing; (n) entered into any transaction or made or entered into any material contract or commitment, except in the ordinary course of business and consistent with past practice, or terminated or amended any material contract or commitment; (o) taken any action or experienced any development that could have a Material Adverse Effect on its business organization or its current relationships with its employees or others having business relationships with it; (p) declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of its capital stock or other securities; (q) amended its Amended and Restated Certificate of Incorporation or By-laws; or (r) agreed in writing or otherwise taken any action with respect to any of the matters described in this Section 2.8. Section 2.9 No Violation. Neither the execution and delivery of this Agreement, the Lock-Up Agreement, or any of the other Ancillary Agreements, by the Company nor the performance by the Company of its obligations hereunder or thereunder will: (i) conflict with or result in any breach of any provision of its Amended and Restated Certificate of Incorporation or By-laws, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default or give rise to any lien or encumbrance on the Company's properties or assets or any right of termination, cancellation or acceleration under any of the terms or conditions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which the Company is a party or by which it or any of its properties or assets may be bound, or require the consent of any person, or (iii) violate any statute, law, 5 rule, regulation, writ, injunction, judgment, order or decree of any court, administrative agency or governmental authority binding on the Company or any of its properties or assets. Section 2.10 Compliance with Applicable Law. The Company is currently in compliance with all applicable laws (whether statutory or otherwise), rules, regulations, orders, ordinances, judgments, decrees, writs, requirements and injunctions of all governmental authorities, agencies, courts, and administrative tribunals, except for such noncompliance that, individually and in the aggregate, would not have a Material Adverse Effect. Section 2.11 Licenses and Permits. The Company has and maintains, and Schedule 2.11 sets forth a complete and correct list of, all licenses, permits and other authorizations from all governmental authorities as are necessary for the conduct of its business as presently conducted or in connection with the ownership or use of its properties, except for any such licenses, permits, and other authorizations, the failure to obtain or maintain which in effect, both singly or in the aggregate, has not had and could not reasonably be expected to have a Material Adverse Effect, and all of which (except as specifically described in Schedule 2.11) are in full force and effect in all material respects. Section 2.12 Governmental Consents. Except for the filing of any forms required under the federal securities laws (including any registration statement under the Securities Act required to be filed by the Company under Sections 4.18 or 4.19, below, but not including any other registration statement under the Securities Act) and any filings required under state "blue sky" laws, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement, the Lock-Up Agreement or any of the other Ancillary Agreements by the Company or the performance by the Company of its obligations hereunder and thereunder (including without limitation issuance of any of the Acquired Securities as and when required to be issued pursuant to the terms hereof or of any of the Ancillary Agreements), or the continued conduct by the Company of its present business after Closing. Section 2.13 Taxes. Except as set forth on Schedule 2.13, the Company has filed all Tax (as hereinafter defined) reports and returns that it was required to file. All such reports and returns were correct and complete in all material respects. All Taxes owed by the Company (whether or not shown on any report or return) have been paid or, if not yet due, appropriate accruals therefor as required under GAAP have been made on the Company's financial records and on the financial statements described in Section 2.5. No claim has ever been made by a taxing authority in a jurisdiction where the Company does not pay Tax or file tax returns that the Company is or may be subject to Taxes assessed by such jurisdiction. There are no Liens for Taxes (other than current Taxes not yet due and payable) on the assets of the Company. There is no action, suit, investigation, liability, taxing authority proceeding, or audit with respect to any Tax now in progress, pending, or to the best of the Company's knowledge, threatened, against or with respect to the Company, whether in respect of any Tax reports and returns that were not filed in a timely manner or for any other reason. No deficiency or proposed adjustment in respect of Taxes that has not been settled or otherwise resolved has been asserted or assessed by any taxing authority against the Company. The Company has not consented to extend the time in which any Tax may be assessed or collected by any taxing authority. The Company has not requested or been granted an extension of the time for filing any Tax Return to a date on or after the occurrence of Closing. The Company has never been a member of any Affiliated Group, or filed or been included in a combined, consolidated, or unitary tax return. The Company is not a party to or bound by any tax sharing or allocation agreement or has any current or potential contractual obligation to indemnify any other person with respect to Taxes. The Company has withheld and paid all Taxes required to have been withheld and paid by it in connection with amounts paid or owing to any employee, creditor, independent contractor, or other Person. As used in this Section 2.13, the terms "Taxes" and "Tax" mean all federal, state, local and 6 foreign taxes, including, without limitation, income, unemployment, withholding, payroll, social security, real property, personal property, excise, sales, use and franchise taxes, levies, assessments, duties, licenses and registration fees and charges of any nature whatsoever, including interest, penalties and additions with respect thereto and any interest in respect of such additions and penalties. Section 2.14 Litigation, Orders. Except as set forth on Schedule 2.14, there are no claims, actions, suits, proceedings, investigations or inquiries pending before any court, arbitrator or governmental or regulatory official or office, or, to the knowledge of the Company, threatened, against or affecting the Company or its assets or questioning the validity of this Agreement, the Lock-Up Agreement or any of the other Ancillary Agreements, the transactions contemplated hereby or thereby or any action taken or to be taken by the Company pursuant to this Agreement, the Lock-Up Agreement or any of the other Ancillary Agreements, at law or in equity. The Company is not subject to any unsatisfied judgment or any order or decree entered in any lawsuit or proceeding. Section 2.15 Title to Properties; Encumbrances. The Company does not own any real property and, except as set forth on Schedule 2.15, does not lease any real property other than its offices located at One Station Place, Stamford, Connecticut 06902. Except as set forth on Schedule 2.15, the Company has title to all of its properties and assets free and clear of all liens, charges and encumbrances, except liens for taxes not yet due and payable and such liens or other imperfections of title, if any, that do not materially detract from the value of or interfere with the present use of the property affected thereby. There is no existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default) by the Company or, to the Company's knowledge, by the other party thereto under any lease pursuant to which the Company leases real or personal property. The Company is not nor has it been in violation in any material respect of any applicable statute, law, or regulation relating to occupational health or safety, and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand, or notice has been filed or commenced against or received by it alleging any failure by it to comply with any such statute, law, or regulation, nor is there any basis therefor known to the Company. To the Company's knowledge, none of the real properties presently owned, leased, or operated by the Company, nor any leasehold improvements thereto, nor any business conducted by the Company thereon, are in violation of any applicable land use or zoning requirements, including without limitation any building line or use or occupancy restriction, any public utility or other easement, any limitation, condition, or covenant of record, or any zoning or building law, code, or ordinance, where such violation would have a Material Adverse Effect. The Company is not presently, and has never been, in violation of any judgment, decree, order, statute, law, permit, license, rule, or regulation pertaining to environmental matters, including without limitation those arising under any Environmental Laws, nor has it received any written notice alleging any such violation. The Company has not received any notice or request for information from any third party, including without limitation any federal, state, or local governmental authority, (i) that it has been identified by the EPA or any state environmental regulatory authority as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B, or under any equivalent state law; (ii) that any Hazardous Substances that it has generated, transported, or disposed of have been found at any site at which a federal, state, or local agency or other third party has conducted or has ordered it to conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or may be in violation of any environmental laws or is or will or may be a named party to any claim, action, cause of action, complaint, or legal or administrative proceeding arising out of any third party's incurrence of Damages in connection with the release (within the meaning of CERCLA) of any Hazardous Substances or any other environmental matters. No circumstances exist of which the Company is aware that could reasonably be expected to give rise to any such notice or request for information or to any Damages. Section 2.16 Contracts and Commitments. Except as set forth on Schedule 2.16, the Company is not a party or subject to or bound by (whether written or oral) nor has it committed to enter into in the 7 future: (a) any plan or contract providing for collective bargaining or any similar obligations, or any contract or agreement with any labor union; (b) any contract, lease or agreement, including marketing, co-branding, programming and license agreements, creating any obligation of the Company to pay to any third party $50,000 in any one year period or more with respect to any single such contract or agreement or which is otherwise material and not entered into in the ordinary course of business; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $50,000 in any one year period; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee); (f) any joint venture, partnership, manufacturing, development or supply agreement; (g) any royalty, dividend or similar arrangement based on the sales volume of the Company; (h) any acquisition, merger or similar agreement; (i) any agreement requiring it to purchase all or substantially all of its requirements for a particular product or service from a particular supplier or suppliers, or requiring it to supply all of a particular customer's or customers' requirements for a certain service or product; (j) agreement or other commitment pursuant to which it has agreed to indemnify or hold harmless any other person; (k) (i) employment agreement, (ii) consulting agreement, or (iii) agreement providing for severance payments or other additional rights or benefits (whether or not optional) in the event of the sale or other change in control of it; (l) agreement with any current or former Affiliate, stockholder, officer, director, employee, or consultant of the Company, or with any person in which any such Affiliate has an interest; (m) joint venture, partnership or teaming agreement; (n) agreement with any domestic or foreign government or agency or executive office thereof or any subcontract between it and any third party relating to a contract between such third party and any domestic or foreign government or agency or executive office thereof; (o) agreement imposing non-competition or exclusive dealing obligations on it; (p) agreement with respect to the confidentiality of the Company's Proprietary Information (as described in Section 2.20 hereof), and the assignment to the Company of any and all rights employees of the Company might have to acquire with respect to technology, inventions, developments, etc., developed in connection with this employment with the Company; and 8 (q) agreement the performance of which is reasonably likely to result in a loss to it. The Company has delivered or caused to be delivered to the Investors correct and complete copies (or written summaries of the material terms of oral agreements or understandings) of each agreement, instrument, and commitment listed in Schedule 2.16, each as amended to date. Each such agreement, instrument, and commitment is a valid, binding and enforceable obligation of the Company and, to the Company's knowledge, of the other party or parties thereto, and is in full force and effect. The Company is not nor, to the Company's knowledge, is any other party thereto, (nor, to the Company's knowledge, is the Company considered by any other party thereto to be) in breach of or noncompliance with any term of any such agreement, instrument, or commitment (nor is there any basis for any of the foregoing), except for any breaches or noncompliances that singly or in the aggregate would not have a Material Adverse Effect. No claim, change order, request for equitable adjustment, or request for contract price or schedule adjustment, between the Company and any supplier or customer, relating to any agreement, instrument, or commitment listed in Schedule 2.16 is pending or, to the Company's knowledge, threatened, nor is there any basis for any of the foregoing. No agreement, instrument, or commitment listed in Schedule 2.16 includes or incorporates any provision, the effect of which may be to enlarge or accelerate any of the obligations of the Company or to give additional rights to any other party thereto, or will terminate, lapse, or in any other way be affected, by reason of the transactions contemplated by this Agreement. Section 2.17 Intellectual Property. (a) Schedule 2.17 lists all patents, patent applications, trademarks, trade names, service marks, logos, copyrights, and licenses used in or necessary to the Company's business as now being conducted or as proposed to be conducted (collectively, and together with any technology, know-how, trade secrets, processes, formulas, and techniques used in or necessary to the Company's business, "Proprietary Information"). The Company owns, or is licensed or otherwise has the full and unrestricted exclusive right to use, without the payment of royalties or other further consideration, all Proprietary Information, and no other intellectual property rights, privileges, licenses, contracts, or other agreements, instruments, or evidences of interests are necessary to or used in the conduct of its business. (b) In any instance where the Company's rights to Proprietary Information arise under a license or similar agreement (other than for software programs that have not been customized for its use), this is indicated in Schedule 2.17 and such rights are, to the best knowledge of the Company, licensed exclusively to it except as indicated in Schedule 2.17. No other person has an interest in or right or license to use any of the Proprietary Information. To the best of the Company's knowledge, none of the Proprietary Information is being infringed by others, or is subject to any outstanding order, decree, judgment, or stipulation. No litigation (or other proceedings in or before any court or other governmental, adjudicatory, arbitral, or administrative body) relating to the Proprietary Information is pending or, to the Company's knowledge, threatened, nor, to the best of the Company's knowledge, is there any basis for any such litigation or proceeding. The Company maintains adequate and sufficient security measures for the preservation of the secrecy and proprietary nature of the Proprietary Information. (c) (i) Neither the Company nor any of its employees has infringed or made unlawful use of, or is, to the Company's knowledge, infringing or making unlawful use of, any proprietary or confidential information of any Person, including without limitation any former employer of any past or present employee or consultant of the Company; and (ii) the activities of the Company's employees in connection with their employment do not violate any agreements or arrangements that any such employees or consultants have with any former employer or any other Person. No litigation (or other proceedings in or before any court or other governmental, adjudicatory, arbitral, or administrative body) charging the Company with infringement or unlawful use of any patent, trademark, copyright, or other proprietary right is pending or, to the Company's knowledge, threatened; nor is there any basis for any 9 such litigation or proceeding. (d) No officer, director, employee, or consultant of the Company is presently obligated under or bound by any agreement or instrument, or any judgment, decree, or order of any court of administrative agency, that (i) conflicts or may conflict with his or her agreements and obligations to use his or her best efforts to promote the interests of the Company, (ii) conflicts or may conflict with the business or operations of the Company as presently conducted or as proposed to be conducted, or (iii) restricts or may restrict the use or disclosure of any information that may be useful to the Company. Section 2.18 Insurance. Schedule 2.18 lists the policies of theft, fire, liability, worker's compensation, life, property and casualty, directors' and officers', and other insurance owned or held by the Company and the basis on which such policies provide coverage (i.e., an incurrence or claims-made basis). Such policies of insurance are maintained with, to the best knowledge of the Company, financially sound and reputable insurance companies, funds, or underwriters, are of the kinds and cover such risks, and are in such amounts and with such deductibles and exclusions, as are consistent with prudent business practice. All such policies are, and at all times since the respective dates set forth in Schedule 2.18, have been, in full force and effect, are sufficient for compliance in all respects by the Company with all requirements of law and of all agreements to which it is a party, provide that they will remain in full force and effect through the respective dates set forth in Schedule 2.18, and will not terminate or lapse or otherwise be affected in any way by reason of the transactions contemplated hereby. Section 2.19 Key-Man Insurance. The Company has in force and is the sole beneficiary of key-man life insurance policies on the lives of each of Messrs. Sebastian E. Cassetta and Mario F. Rossi in the amount of $1,000,000 and $500,000, respectively. Section 2.20 Potential Conflicts of Interest. Except as set forth on Schedule 2.20, there are no loans, leases, agreements, understandings, commitments or other continuing transactions between the Company and any officer, director or five percent stockholder of the Company or any person known by the Company to be related by blood or marriage to, or directly or indirectly through one or more intermediaries, to control, be controlled by, or be under common control with, any of the foregoing persons. Except as set forth on Schedule 2.20, neither the Company nor, to the knowledge of the Company, any of its officers, directors, or employees, (i) owns, directly or indirectly, any interest (excepting passive holdings for investment purposes of not more than 1% of the securities of any other publicly held and traded company) in, or is an officer, director, employee, or consultant of, any person that is a competitor, lessor, lessee, customer, or supplier of the Company; (ii) owns, directly or indirectly, any interest in any tangible or intangible property used in or necessary to the business of the Company; or (iii) has any cause of action or other claim whatsoever against the Company, or owes any amount to the Company, except for claims in the ordinary course of business, such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements or under any employment agreements. Section 2.21 Investment Company. The Company is not an "investment company" as such term is defined in the Investment Company Act of 1940, as amended, and will not be an investment company under such Act upon consummation of the transactions contemplated hereby or after giving effect to the use of proceeds from the purchase of the Purchased Shares. Section 2.22 Securities Laws. The offer, sale and issuance of the Purchased Shares and other Acquired Securities without registration (assuming the accuracy of the representations and warranties made by the Investors in Section 3.1 hereof) will not violate the Securities Act, or any applicable state securities or "blue sky" laws. None of the Company, its affiliates or any person acting on its behalf has engaged in any form of general solicitation or advertising (as defined in Rule 502(c) of the Securities Act) 10 or engaged in any action that would require the registration under the Securities Act of the offering and sale of the Common Stock pursuant to this Agreement. Section 2.23 Investment Banking; Brokerage. Except as set forth on Schedule 2.23, there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to attorneys and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of the Company or any of its affiliates. Section 2.24 Disclosure. The representations and warranties made or contained in this Agreement, the schedules and exhibits hereto and the certificates and statements executed or delivered in connection herewith do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading. No event has occurred and nothing material has come to the attention of the Company that would indicate that any of such information (together with any written updates or other written information furnished by the Company) is not true and correct in all material respects as of the date hereof. Except as set forth on Schedule 2.24, there are no facts known to the Company that are reasonably likely to have a Material Adverse Effect and that have not been specifically disclosed herein or in a schedule furnished herewith, other than economic conditions generally affecting the industry in which the Company is engaged. Section 2.25 Labor Relations. The Company is in compliance in all material respects with all applicable federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours, and nondiscrimination in employment, and is not engaged in any unfair labor practice. There is no charge pending or, to the best of the Company's knowledge, threatened, against or with respect to the Company before any court or agency and alleging unlawful discrimination in employment practices, and there is no charge of or proceeding with regard to any unfair labor practice against the Company pending before the National Labor Relations Board. There is no labor strike, dispute, slow-down, or work stoppage pending or, to the Company's knowledge, threatened against or involving the Company. None of the employees of the Company is covered by any collective bargaining agreement, and no such collective bargaining agreement is currently being negotiated. No one has petitioned and, to the Company's knowledge, no one is now petitioning, for union representation of any employees of the Company. The Company has not experienced any work stoppage or other material labor difficulty. Section 2.26 Employee Benefit Plans. (a) Identification of Plans. Except for the arrangements set forth in Schedule 2.26, the Company does not now maintain or contribute to any pension, profit-sharing, deferred compensation, bonus, stock option, share appreciation right, severance, group or individual health, dental, medical, life insurance, survivor benefit, or similar plan, policy or arrangement, whether formal or informal, for the benefit of any director, officer, consultant, or employee of any of them, whether active or terminated; nor has it ever maintained or contributed to any such plan, policy, or arrangement that was subject to ERISA. Each of the arrangements set forth in Schedule 2.26 is herein referred to as an "Employee Benefit Plan." (b) Compliance with Terms and Law. Each Employee Benefit Plan is and has been maintained and operated in compliance in all material respects with the terms of such plan and with the requirements prescribed (whether as a matter of substantive law or as necessary to secure favorable tax treatment) by any and all statutes, governmental, or court orders, or governmental rules or regulations in effect from time to time, including but not limited to ERISA and the Code, and applicable to such plan. Each Employee Benefit Plan that is intended to qualify under Section 401(a) of the Code is so qualified. 11 (c) Absence of Certain Events and Arrangements. (1) There is no pending or, to the Company's knowledge, threatened, legal action, proceeding, or investigation, other than routine claims for benefits, concerning any Employee Benefit Plan, or any fiduciary or service provider thereof and there is no basis for any such legal action or proceeding. (2) No Employee Benefit Plan, nor any party in interest in respect thereof has engaged in a prohibited transaction that could subject the Company, directly or indirectly, to liability under Section 409 or 502(i) of ERISA or Section 4975 of the Code. (3) No communication, report, or disclosure has been made that, at the time made, did not accurately reflect the terms and operations of any Employee Benefit Plan. (4) No Employee Benefit Plan provides welfare benefits subsequent to termination of employment to employees or their beneficiaries (except to the extent required by applicable state insurance laws and Title I, Part 6 of ERISA or by contract with such employee). (5) The Company has not undertaken to maintain any Employee Benefit Plan for any specific period of time and each such plan is terminable at the sole discretion of the Company, subject only to such constraints as may imposed by applicable law. (6) No Employee Benefit Plan is maintained pursuant to a collective bargaining agreement or is or has been subject to the minimum funding requirements of Section 302 of ERISA or Section 412 of the Code. (d) Funding of Certain Plans. With respect to each Employee Benefit Plan for which a separate fund of assets is or is required to be maintained, full payment has been made of all amounts that, under the terms of each such plan, it is required to have paid as contributions to that plan as of the end of such plan's most recently ended year. Section 2.27 Employment of Officers, Employees. The Company has delivered to the Investors (a) a list setting forth the name and current annual salary and other compensation payable by the Company to each of its employees, which list is true, accurate and correct as of the date of this Agreement, and (b) a list setting forth the names of positions and/or persons the Company intends to fill and/or hire within thirty (30) days of the Closing. Section 2.28 Real Property Holding Corporation. The Company hereby represents that it is not a "United States real property holding corporation" within the meaning of Section 897 of the Code, as amended, and Treasury Regulation ss.1.897-2. Section 2.29 Foreign Corrupt Practices Act. The Company has not taken any action which would cause it to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules or regulations thereunder. To the Company's knowledge, there is not now, and there has never been, any employment by the Company of, or beneficial ownership in the Company by, any governmental or political official in any country in the world. Section 2.30 Disclosure. No representation or warranty by the Company in this Agreement, in any schedule to this Agreement, or in the Ancillary Agreements, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein not false or misleading. There is 12 no fact or circumstance relating specifically to the current business operations or condition of the Company that could reasonably be expected to result in a Material Adverse Effect that is not disclosed in a Schedule attached hereto. Section 2.31 Negotiations with Hewlett Packard. Attached hereto as Schedule 2.31 is a summary of the current status of negotiations between Hewlett Packard and the Company as to the contemplated strategic alliance between them. Section 2.32 Nasdaq NMS Relisting. Attached hereto as Schedule 2.32 is a summary of the current prospects of the Company for listing on the Nasdaq National Markets System. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE INVESTORS ----------------------------------------------- Section 3.1 Representations and Warranties. Each Investor represents severally as to itself only that (each of which representations and warranties are true as of the date hereof and as of Closing): (a) It has all requisite power and full legal right to execute and deliver this Agreement, the Lock-Up Agreement and the other Ancillary Agreements to which it is a party and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement, the Lock-Up Agreement, and the performance by it of its obligations hereunder and thereunder, have been duly authorized by it, and no other proceeding therefor on the part of it is required. This Agreement, the Lock-Up Agreement and each of the other Ancillary Agreements to which it is a party have been duly executed and delivered by it and constitute the valid and binding obligations of it, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditors' rights and remedies or by other equitable principles of general application. The execution, delivery and performance by it of this Agreement and the Ancillary Agreements in accordance with their respective terms, and the consummation by it of the transactions contemplated hereby or thereby, will not result (with or without the giving of notice or the lapse of time or both) in any conflict, violation, breach, or default, under or in respect of its charter documents or by-laws. (b) It is purchasing the shares of Common Stock for its own account for investment only and not with a view to or for sale in connection with the distribution thereof, except for sales contemplated by Sections 4.18, 4.19 or 7.10, below, or otherwise in compliance with applicable securities laws. (c) It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto. (d) It is an "accredited investor" as such term is defined in Rule 501 under the Securities Act. (e) It has had the opportunity to ask questions and receive answers concerning the terms and conditions of the offering of securities purchased hereunder, as well as the opportunity to obtain additional information necessary to verify the accuracy of information furnished in connection with such offering that the Company possesses or can acquire without unreasonable effort or expense. 13 (f) It understands that the shares of Common Stock have not been registered under the Securities Act or any state securities laws, and may not be transferred unless subsequently registered thereunder or pursuant to an exemption from registration, and that a legend indicating such restrictions will be placed on the certificates representing such shares. (g) There are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (other than professional fees to attorneys and accountants) in connection with the transactions contemplated by this Agreement, the Lock-Up Agreement or any of the other Ancillary Agreements based on any arrangement or agreement made by or on behalf of it. (h) Neither the execution and delivery of this Agreement or the Lock-Up Agreement or any of the other Ancillary Agreements by it nor the performance by it of its obligations hereunder or thereunder will: (i) conflict with or result in any breach of any provision of its Certificate of Incorporation or By-laws or similar formation or governance documents, if applicable, or (ii) constitute (with or without due notice or lapse of time or both) a default or give rise to any lien or encumbrance on any of its material properties or assets or any right of termination, cancellation or acceleration under any of the terms or conditions of any material note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which it is a party or by which it or any of its material properties or assets may be bound, or (iii) violate any statute, law, rule, regulation, writ, injunction, judgment, order or decree of any court, administrative agency or governmental authority binding on it or any of its material properties or assets. (i) Except for filings required under federal or state securities laws, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required to be made or obtained by it in connection with the execution and delivery of this Agreement or the Lock-Up Agreement or any of the other Ancillary Agreements by it, or the performance by it of its obligations hereunder and thereunder. (j) There are no claims, actions, suits, proceedings, investigations or inquiries pending before any court, arbitrator or governmental or regulatory official or office, or, to the knowledge of it, threatened, against or affecting it which question the validity of this Agreement or the Lock-Up Agreement or any of the other Ancillary Agreements, the transactions contemplated hereby or thereby or any action taken or to be taken by it pursuant to this Agreement or the Lock-Up Agreement or any of the other Ancillary Agreements, at law or in equity. ARTICLE IV COVENANTS OF THE COMPANY AND THE INVESTORS ------------------------------------------ Section 4.1 Rights to Attend Meetings. The Company will call and hold a meeting of its Board of Directors at least once each fiscal quarter. For so long as TecCapital (in the aggregate with its Affiliate(s)) continues to own at least ten percent (10%) of the number of Purchased Shares acquired by TecCapital pursuant to this Agreement (as such number is adjusted from time to time on the occurrence of an Adjustment Event), (i) the Company will give TecCapital at least five business days' prior written notice of the time, place, and subject matter of each quarterly meeting, at least two business days' prior written notice of any other proposed meeting, and reasonable prior notice of any action by written consent of the Board of Directors of the Company, such notice in all cases to include true and complete copies of all documents furnished to any director in connection with such meeting or consent, and (ii) one officer or authorized representative of TecCapital will be entitled to attend as an observer at any such meeting or, if a meeting is held by telephone conference, to participate therein for the purpose of listening thereto; 14 provided that the observer rights granted to TecCapital under this Section 4.1 shall apply only if TecCapital shall not be represented on the Board of Directors of the Company. Section 4.2 Insurance. The Company shall keep its insurable properties insured, upon reasonable business terms, by financially sound and reputable insurers, against liability and the perils of casualty, fire and extended coverage in amounts of coverage at least equal to those customarily maintained by companies of similar size in the same or similar business as the Company. The Company shall also maintain with such insurers insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies of similar size engaged in the same or similar business. The Company shall also maintain key-man insurance on the lives of each of Messrs. Sebastian E. Cassetta and Mario F. Rossi, as long as they are employed by the Company. Section 4.3 Conduct of Business. The Company shall keep in full force and effect its corporate existence, rights, franchises and all Proprietary Information rights and licenses. The Company shall maintain all properties used or useful in the conduct of its business in good repair, working order and condition, ordinary wear and tear excepted, as necessary to permit such business to be properly and advantageously conducted. The undersigned shareholders of the Company shall not do and the Company shall not do, or suffer the occurrence of, any act which would (i) impair or prevent the Company from complying with its obligations hereunder or under any of the Ancillary Agreements, or (ii) the Investors from receiving the economic benefit of the transactions contemplated hereby or by any of the Ancillary Agreements, or (iii) cause or authorize the creation or issuance of any securities or class of securities of the Company with rights as to liquidation, dividends, redemption or registration rights senior to those of the Investor Securities or Acquired Securities, or (iv) amend the charter, by-laws or other constitutive documents of the Company to the detriment of the rights of the Investors hereunder or under any of the Ancillary Agreements, or (v) obligate itself to do any of the foregoing. Section 4.4 Payment of Taxes, Compliance with Laws, Etc. The Company shall pay and discharge all lawful Taxes, assessments and governmental charges or levies imposed upon it or its income or property before the occurrence of any default, as well as all lawful claims for labor, materials and supplies which, if not paid when due, might become a lien or charge upon its property or any part thereof; provided, however, that the Company shall not be required to pay and discharge any such Tax, assessment, charge, levy or claim so long as the validity thereof is being contested by the Company in good faith by appropriate proceedings. The Company shall comply in all material respects with all applicable laws and regulations in the conduct of its business. The Company will comply in all material respects with (a) its charter documents and by-laws, (b) all judgments, decrees, orders, statutes, rules, and regulations binding on or applicable to the Company or its business or properties, and (c) any agreement or instrument to which it is a party or by which it or any of its properties are subject (including, without limitation, the Ancillary Agreements). If at any time any authorization, consent, approval, permit, or license from any officer, agency, or instrumentality of any government becomes necessary or required in order that the Company may fulfill any of its obligations hereunder, the Company will promptly take or cause to be taken all necessary steps within its power to obtain such authorization, consent, approval, permit, or license and will, upon written request, promptly furnish each such holder with evidence thereof. Section 4.5 SEC Filings. The Company shall provide to the Investors copies of all filings made with the SEC as and when they are made. Section 4.6 Inspection. The Company shall, upon reasonable prior notice from an Investor to the Company, permit an Investor who continues to own at least ten percent (10%) of the Purchased Shares (as adjusted from time to time on the occurrence of an Adjustment Event) acquired by it pursuant to the terms hereof and its authorized representatives to visit and inspect any of the properties of the Company, 15 including its books of account and make copies thereof, and to discuss its affairs, finances and accounts with its senior executive officers and independent accountants, all at such reasonable times as may be reasonably requested (provided that such investigation shall not be disruptive to the conduct of the Company's business) and at the Investor's expense. Section 4.7 Preemptive Rights. (a) Participation Rights. Subject to the exclusions set forth in Section 4.7(c), below, and to the provisions of the following sentence in this Section 4.7(a), if at any time after the Closing the Company authorizes the offer, issuance, or sale, or offers, issues or sells to any Person (the "Offeree") any shares of Common Stock, Derivative Securities or other securities of the Company (whether as newly issued shares or other securities or from the Company's treasury) in an offering not registered under the Securities Act, the Company will first offer to sell, by written notice, to each Investor a portion (such holder's "Portion") of such shares or securities authorized to be offered, issued or sold, or proposed to be offered, issued or sold equal to the product obtained by multiplying (i) the number of such shares or securities authorized to be offered, issued or sold, or proposed to be offered, issued or sold, by (ii) the quotient obtained by dividing (A) the number of shares of Common Stock held by such Investor (including for purposes hereof any such shares (x) issuable but not issued to such Investor by operation of Section 4.8, below, and (y) issuable to such Investor on exercise of any Compensation Warrant(s) (if any) issued or issuable to such Investor), by (B) the aggregate number of shares of Common Stock issued and outstanding (on a Fully Diluted Basis) as of such date. (b) Procedure. Each Investor will be entitled (but not obligated) to purchase, simultaneously with the closing of the acquisition of such Company securities by an Offeree, all or part of such holder's Portion at the same price and on the same terms as such stock or securities are to be offered to the Offeree. The Company may sell so much, and only so much, of any Portion as to which no Investors, having been offered the right to purchase such Portion in accordance with all of the provisions of this Section 4.7, have exercised such purchase rights, to the Offeree at the same price and on the same terms as those offered to such holder, provided, that if the whole of such holder's Portion of such securities is not sold to the Offeree within 60 days following the lapse of the 10-day exercise period provided to the Investors, such unsold securities will once again be subject to the purchase rights hereunder. If shares of Common Stock or Derivative Securities are authorized to be issued and sold by the Company for services, property, or other non-cash consideration, each Investor will be allowed to participate in such issue and sale by substituting cash in the amount of the fair market value, per share, of such non-cash consideration. (c) Excluded Transactions. The prohibitions and rights provided in this Section 4.7 will not apply to Excluded Transactions. (d) The preemptive rights granted under this Section 4.7 shall expire upon, and shall not be applicable with respect to, an underwritten public offering of the Company's equity securities pursuant to a registration statement filed with, and declared effective by, the SEC under the Securities Act. Section 4.8 Anti-Dilution Adjustments. (a) If the Company shall issue, or shall be deemed to issue, any New Securities, then the Company shall, as an adjustment to the Per Share Purchase Price paid by each of the Investors for each of the Purchased Shares acquired at Closing and without any additional consideration being due therefor, simultaneously with any such issuance or deemed issuance, issue to each holder of Investor Securities a number of shares of Common Stock ("Top-Up Shares") equal to the difference obtained in subtracting from (y) the product obtained by multiplying (i) the number of shares of Investor Securities held by such holder, by (ii) the Applicable Rate (determined as provided in Section 4.8(b), below), (z) the number of Investor Securities held by such holder immediately prior to such issuance of Top-Up Shares. As used herein, the term "Investor Securities" shall mean, collectively, the 16 Purchased Shares, any other Acquired Securities and any securities (including without limitation any Top-Up Shares) issued in respect thereof. (b) Applicable Rate. The "Applicable Rate" applicable to Investor Securities at any time shall equal the quotient obtained by dividing (A) the sum of (I) $49.50 (as adjusted on the occurrence of an Adjustment Event), plus (II) an amount equal to all accrued but unpaid dividends on each share of Investor Securities, if any, by (B) the Applicable Value then in effect, calculated as hereinafter provided. (c) Applicable Conversion Values. The "Applicable Value" in effect initially, and until first (and subsequently) adjusted in accordance with Section 4(e) hereof, shall be equal to $49.50. (d) Intentionally left blank. (e) Adjustments for Dilutive Issues. (i) Except as otherwise provided below in this Section 4.8(e), if at any time while there are any shares of Investor Securities outstanding, (x) the Company issues or is deemed to issue any additional shares of Common Stock at a Net Consideration Per Share (as hereinafter defined) less than the Applicable Value in effect immediately prior to such issuance or deemed issuance, and (y) any such issuance or deemed issuance does not constitute an Excluded Transaction, then and in each such case, such Applicable Value will be adjusted to equal the result of the following formula: New Applicable Value = (P1 x Q1) + (P2 x Q2) --------------------- (Q1 + Q2) where: P1 = the Applicable Value in effect immediately prior to such issuance or deemed issuance of additional shares of Common Stock; Q1 = the aggregate number of shares of Common Stock outstanding (including shares of Common Stock issuable upon conversion of all outstanding shares of preferred stock and the conversion, exchange and/or exercise of all outstanding warrants, options and other convertible securities and/or Derivative Securities, each to the extent then convertible, exchangeable and/or exercisable) immediately prior to such issuance or deemed issuance of additional shares of Common Stock; P2 = the Net Consideration Per Share (as hereinafter defined) received by the Company for the shares of Common Stock issued and/or deemed issued in respect of such issuance of additional shares of Common Stock; and Q2 = the number of shares of Common Stock issued and/or deemed issued in respect of such issuance or deemed issuance of additional shares of Common Stock. For purposes of this Section 4.8(e), if a part or all of the consideration received by the Company in connection with the issuance or deemed issuance of shares of Common Stock or the issuance or deemed issuance of any of the securities described below in paragraph (ii) of this Section 4.8(e) consists of property other than cash, such consideration shall be deemed to have the same value as is recorded on the books of the Company with respect to receipt of such property so long as such recorded value was determined reasonably and in good faith and with due care by the Board of Directors of the Company, and shall otherwise be deemed to have a value equal to its fair market value. 17 The Applicable Value, as so reduced, shall be further reduced in the same manner upon the happening of any successive event or events that cause reduction under this Section 4.8(e)(i). (ii) For purposes of this Section 4.8(e), the issuance of any Derivative Securities shall be deemed an issuance of shares of Common Stock with respect to Section 4.8(e)(i)(A) and with respect to Section 4.8(e)(i)(B) if the Net Consideration Per Share (as defined in Section 4.8(e)(ii)(A) and (B) hereof) that may be received by the Company for such Common Stock is less than the Applicable Value in effect immediately prior to the time of such issuance, and except as hereinafter provided, an adjustment in the Applicable Value shall be made upon each such issuance of Derivative Securities in the manner provided in Section 4.8(e)(i)(A) and (B), as appropriate, as if such deemed Common Stock were issued for such Net Consideration Per Share. No adjustment of the Applicable Value shall be made under this Section 4.8(e) upon the issuance of any additional shares of Common Stock that are issued upon the exercise, conversion, or exchange of any Derivative Securities if any such adjustment was previously made upon the issuance of such Derivative Securities. Any adjustment of the Applicable Value with respect to this Section 4.8(e)(ii) shall be disregarded if, as, and to the extent that the Derivative Securities that gave rise to such adjustment expire or are canceled without having been exercised, so that the Applicable Value effective immediately upon such cancellation or expiration shall be equal to the Applicable Value that otherwise would have been in effect immediately prior to the time of the issuance of the expired or canceled Derivative Securities, with such additional adjustments as subsequently would have been made to that Applicable Value had the expired or canceled Derivative Securities not been issued. In the event that the terms of any Derivative Securities previously issued by the Company are changed (whether by their terms or for any other reason, including without limitation, as a result of the effects of any anti-dilution adjustments contained therein) so as to lower the Net Consideration Per Share payable with respect thereto (whether or not the issuance of such Derivative Securities originally gave rise to an adjustment of the Applicable Value), the Applicable Value shall be recomputed as of the date of such change, so that the Applicable Value effective immediately upon such change shall be equal to the Applicable Value in effect at the time of the issuance of the Derivative Securities subject to such change, adjusted for the issuance thereof in accordance with the terms thereof after giving effect to such change, and with such additional adjustments as subsequently would have been made to that Applicable Value had the Derivative Securities been issued on such changed terms. For purposes of this Section 4.8(e)(ii), the Net Consideration Per Share that may be received by the Company shall be determined as follows: (A) "Net Consideration Per Share" shall mean the amount equal to the total amount of consideration, if any, received by the Company for the issuance of such Derivative Securities or Common Stock, as the case may be, plus, in the case of Derivative Securities, the minimum amount of additional consideration, if any, payable to the Company upon exercise, conversion, and/or exchange thereof for shares of Common Stock, divided by the number of shares of Common Stock issued or the maximum number of shares of Common Stock that would be issued if all such Derivative Securities were exercised or converted, as the case may be. (B) The Net Consideration Per Share that may be received by the Company shall be determined in each instance as of the date of issuance of Derivative Securities or Common Stock, as the case may be, without giving effect to any possible future price adjustments or rate adjustments that may be applicable with respect to such Derivative Securities and which are contingent upon future events; provided, that in the case of an adjustment to be made as a result of a change in terms of such Derivative Securities, including such changes as may result from the effects of any anti-dilution adjustments contained therein, the Net Consideration Per Share shall be determined as of the date of such change. (f) Intentionally Left Blank. 18 (g) Intentionally Left Blank. (h) Certificate as to Adjustments. In each case of an adjustment or readjustment of the Applicable Rate, the Company will promptly furnish each holder of Investor Securities with a certificate, prepared by the chief financial officer of the Company, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. (i) Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon issuance of shares of Investor Securities. Instead of any fractional shares of Common Stock that would otherwise be issuable upon any issuance of shares of Investor Securities, the Company shall pay to the holder of the shares of Investor Securities that are required to be issued a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock (as determined in a manner reasonably prescribed by the Board of Directors) at the close of business on the applicable Conversion Date. (j) Intentionally Left Blank. (k) Expiration of Antidilution Protections. Notwithstanding any other provisions hereof, the anti-dilution protective provisions of this Section 4.8 shall terminate upon the occurrence of all of the following: (i) the Purchased Shares shall have been registered with the SEC and a registration statement in respect of the Purchased Shares shall be in effect and the Purchased Shares shall have been accepted for trading upon the Nasdaq National Market System; and (ii) four (4) calendar months shall have elapsed since the expiration of the Lock Up Agreements and any restrictions on the sale or other disposition of any Acquired Securities set forth therein; and (iii) TecCapital (or, as applicable, a transferee of TecCapital to which TecCapital has transferred its rights hereunder pursuant to Section 7.10, below) shall no longer own or be deemed to own, in the aggregate with any Affiliate(s) thereof (or, as applicable, of a transferee of TecCapital to which TecCapital has transferred its rights hereunder pursuant to Section 7.10, below), a number of shares of Common Stock equal, on a Fully Diluted Basis, to fifty percent (50.00%) (as adjusted from time to time on the occurrence of an Adjustment Event) of all of the Acquired Securities from time to time acquired by TecCapital (and/or any Affiliate of TecCapital) pursuant to this Agreement or any of the Ancillary Agreements. Section 4.9 Appointment of Board Member. For so long as (i) TecCapital, any Affiliate of TecCapital, or any other permitted transferees and assigns of TecCapital shall continue to own, in the aggregate, not less than 66.6% of the aggregate number of Purchased Shares purchased by it pursuant to this Agreement, and (ii) a majority of the equity interests of TecCapital are not held by a direct competitor of the Company, TecCapital shall be entitled to designate one (1) member of the Company's Board of Directors (the "TecCapital Director"). The Company agrees to take such actions as are necessary, and the undersigned shareholders of the Company agree to exercise the voting rights of any equity securities issued by the Company and held by them, so as to elect the TecCapital Director (and any successor designated from time to time by TecCapital) to the Board of Directors of the Company. Section 4.10 Consent Rights. For so long as the Investors and their Affiliate(s) in the aggregate own at least 30% of the number of shares of Common Stock (subject to adjustment from time to time on the occurrence of an Adjustment Event) purchased hereunder, without the prior consent of a majority in interest of the Investors, the Company shall not issue equity securities senior to those purchased by the Investors under this Agreement or effectuate any amendment to its Amended and Restated Certificate of Incorporation or By-laws that may adversely affect the rights of the Investors. Section 4.11 Further Assurances. The Company and each Investor shall execute and deliver, or cause to be executed and delivered, such additional instruments and other documents and shall take 19 such further actions as the Company or the Investors, as the case may be, may reasonably require to effectuate, carry out and comply with all of the terms of this Agreement, the Lock-Up Agreement, the other Ancillary Agreements and the transactions contemplated hereby and thereby. Section 4.12 Investments. The Company will not have outstanding, or acquire or commit itself to acquire or hold, any investment except (a) investments in corporations, limited liability companies, partnerships or other entities made in the ordinary course of the Company's business, (b) investments in marketable direct obligations issued or guaranteed by the United States of America that mature within one year from the date of acquisition thereof or which are subject to a repurchase agreement, exercisable within ninety (90) days from the date of acquisition of such agreement, with any commercial bank or trust company incorporated under the laws of the United States of America or any State thereof or the District of Columbia, (c) investments in commercial paper maturing within one year from the date of acquisition thereof and having, at the date of acquisition thereof, the highest rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's Corporation, (d) investments in bankers' acceptances eligible for rediscount under Federal Reserve Board requirements accepted by any commercial bank or trust company referred to in clause (b) hereof, (e) investments in deposits or certificates of deposit maturing within one year from the date of acquisition thereof issued by any commercial bank or trust company referred to in clause (b) hereof and having capital and surplus of at least $500,000,000, (f) investments in certificates of deposit issued by banks organized under the laws of any other jurisdiction, each having combined capital and surplus of not less than $500,000,000, and (g) investments in money market funds, so long as consistent with the Company's internal investment policy. Section 4.13 Employee Benefit Plans. The Company will take all actions necessary to maintain, fund, and administer its Employee Benefit Plans in all material respects in accordance with applicable federal, state, and local law. Section 4.14 Compensation of Officers and Senior Management. The compensation of all officers and senior management of the Company will be as determined from time to time by the Compensation Committee (if any) of the Board of Directors. Section 4.15 Reservation of Shares; Compliance with Securities Laws. The Company will at all times reserve the appropriate number of shares of Common Stock solely for the purpose of issuance upon exercise of the Compensation Warrants (if any). The Company will file within the required time periods all filings, notices and other documents required by applicable federal and state securities laws in connection with the transactions contemplated by this Agreement. Section 4.16 Senior Management and Employee Non-Disclosure Agreement. The Company will at all times ensure that (a) each employee, including each member of senior management, has executed and delivered to the Company the standard form agreement (approved by the non-management members of the Company's Board of Directors) with respect to the confidentiality of the Company's proprietary and confidential information and the assignment to the Company of any and all rights each employee might have or acquire with respect to technology, inventions, developments, etc., developed in connection with his/her employment with the Company, and (b) each member of the Company's senior management and certain other key employees, in each case that the Chief Executive Officer and the Chief Operating Officer shall have determined is appropriate, has executed and delivered to the Company a confidentiality, non-disclosure, inventions assignment and non-competition and non-solicitation agreement approved by the non-management members of the Board of Directors. Section 4.17 U.S. Real Property Holding Corporation. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" as 20 that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended ("USRPHC"), and the regulations thereunder. The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in the manner and at the times required under Reg. 1.897-2(h), or any supplementary or successor provision thereto. Within 30 days of a request from an Investor, the Company will inform the requesting party, in the manner set forth in Reg. 1.897-2(h) or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of Internal Revenue Code Section 897(c)(1) and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. Section 4.18 Registration Requirements. (a) The Company shall on or before the 45th calendar day after the Closing Date (the "Filing Due Date"), (i) file with the SEC a registration statement on Form SB-2 or other appropriate form (together with any prospectus included therein, a "Registration Statement") pursuant to Rule 415 of the Securities Act in order to register with the SEC the continuous resale by the Investors, from time to time, of all Purchased Shares that may be acquired by the Investors, whether through the Nasdaq National Market System (the "NNMS") or the facilities of any national securities exchange on which the Common Stock is then traded, or in privately-negotiated transactions, and (ii) file an application for listing (a "Listing Application") of such Purchased Shares on the NNMS or any other nationally recognized securities exchange (collectively with the NNMS, the "Exchange"). The Company shall use its best efforts to cause (x) such Registration Statement to be declared effective by the SEC, and (y) such Listing Application to be accepted and declared effective by the Exchange, in each case on or before the 120th day after the Closing Date; provided, however, that if (aa) the SEC shall not have declared such Registration Statement effective, or (bb) the Exchange shall not have accepted and declared effective such Listing Application, each on or before the 120th day after the Closing Date, then the Company shall issue a Compensation Warrant to each Investor on the 121st day (the "Compensation Trigger Date") after the Closing Date and, thereafter, an additional Compensation Warrant on each 30-day anniversary of such Compensation Trigger Date for so long as the SEC shall not have declared such Registration Statement effective and/or the Exchange shall not have accepted and declared effective such Listing Application. The Company shall further be required pursuant to the provisions of this Section 4.18 to file Registration Statement(s) and Listing Application(s) in respect of any Top-Up Shares on or before the 45th calendar day after the issuance (or, if any of such securities were not issued, the date on which such securities were required to be issued) of any such Top-Up Shares to any Investors; provided, however, that in any such case the Filing Due Date shall be the forty-fifth (45th) calendar day, and the Compensation Trigger Date shall be the one hundred and twenty-first (121st) calendar day, following the date on which any such Top-Up Shares were issued, or required to be issued, to the Investors. The Company further agrees to provide unlimited piggyback registration rights with respect to any shares issued (or required to be issued) (if any) on exercise of any Compensation Warrant(s) (if any). Each Investor agrees to furnish promptly to the Company in writing all information required for preparation of any Registration Statement or thereafter required from time to time to be disclosed in order to make the information previously furnished to the Company by such holder not misleading. (b) If at any time following the filing of a Registration Statement by the Company, the Company shall qualify to file a registration statement on Form S-3 under the Securities Act, the Company shall thereafter be entitled to replace any Form SB-2 registration statement referred to in Section 4.18(a) above with a registration statement on Form S-3 that has been declared effective by the SEC. Any such Form S-3 used to replace a Form SB-2 pursuant to this Section 4.18(b), together with any prospectus included in such Form S-3, shall thereafter be referred to as a "Registration Statement" and any Form SB-2 that is so replaced shall cease to be referred to by that term for purposes of this Agreement. 21 (c) The Company shall pay all Registration Expenses (as defined below) in connection with any registration, qualification or compliance hereunder, and each Investor shall pay all Selling Expenses (as defined below) and other expenses that are not Registration Expenses relating to the Common Stock resold by such Investor. "Registration Expenses" shall mean all expenses, except for Selling Expenses, incurred by the Company in complying with the registration provisions herein described, including without limitation, all registration, qualification and filing fees (including all SEC and Nasdaq fees), printing expenses, escrow fees, fees and disbursements of counsel for the Company and for any underwriter (unless paid by such underwriter), blue sky fees and expenses, the expense of any special audits incident to or required by any such registration and the reasonable fees and disbursements of one counsel to all selling Investors. "Selling Expenses" shall mean only selling commissions, underwriting discounts and stock transfer taxes applicable to the Common Stock sold by each Investor and all fees and disbursements of counsel for any Investor (which counsel, if any, shall be additional to the one counsel to all selling Investors referenced in the preceding sentence). (d) In the case of the registration effected by the Company pursuant to these registration provisions, the Company will use its best efforts to: (1) keep such registration statement on Form SB-2 or Form S-3 effective until the earlier of (A) the second anniversary of the date on which such Registration Statement first becomes effective, (B) the date as of which all of the Acquired Securities have been resold, or (C) the time as of which all of the Common Stock held by the Investors can be sold within a given three-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144; (2) prepare and file with the SEC such amendments and supplements to any Registration Statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement; (3) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Investor from time to time may reasonably request; (4) cause all Common Stock registered as described herein to be listed on each securities exchange and quoted on each quotation service on which the common equity securities of the Company are then listed or quoted; (5) provide a transfer agent and registrar for all Common Stock registered pursuant to any Registration Statement and a CUSIP number for all such Common Stock; (6) otherwise use its best efforts promptly to comply with all applicable rules and regulations of the SEC; (7) file the documents required of the Company and otherwise use its best efforts promptly to obtain, if applicable, and maintain requisite blue sky clearance in (A) all jurisdictions in which any of the Acquired Securities are originally sold, and (B) all other states specified in writing by a Investor, provided as to clause (B), however, that the Company shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented; and (8) with respect to the initial filing of any Registration Statement as of the date of declaration of effectiveness, obtain an opinion of counsel to the Company in customary form and 22 reasonably acceptable to each Investor addressed to each Investor selling registrable securities pursuant to the Registration Statement. The Company shall use its best efforts to be listed on the NNMS market and maintain such listing unless listed on another national exchange. (e) The Company shall furnish to each Investor upon request a reasonable number of copies of the prospectus and a supplement to or an amendment of such prospectus as may be necessary in order to facilitate the public sale or other disposition of all or any of the Common Stock held by the Investor. (f) With a view to making available to the Investors the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Investor to sell Common Stock to the public without registration or pursuant to registration, the Company covenants and agrees to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) the second anniversary of the Closing Date or (B) the date as of which all of the Acquired Securities shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and (iii) furnish to any Investor upon request, as long as the Investor owns any Acquired Securities, (A) a written statement by the Company that it has complied with the reporting requirements of the Exchange Act, (B) a copy of the most recent annual or quarterly report of the Company, and (C) such other information as may be reasonably requested in order to avail any Investor of any rule or regulation of the SEC that permits the selling of any such Acquired Securities without registration. (g) The Company may, at any time, refuse to permit an Investor to resell any Acquired Securities pursuant to a Registration Statement; provided, however, that in order to exercise this right at any time, the Company must deliver a certificate in writing to the Investors, signed by a senior executive officer of the Company, to the effect that suspension of the sale of shares under the Registration Statement until such time as the Company can make an appropriate filing with the SEC is necessary in the good faith determination of the Company's Board of Directors because a sale pursuant to the Registration Statement, in its then current form, would be reasonably likely to constitute a violation of the federal securities laws, which certificate shall specify whether such filing is required to correct information in the Registration Statement which was incorrect when included therein (a "Corrective Filing") or to update or supplement the information therein to reflect new information (a "Supplemental Filing"). In such an event, the Company shall use its best efforts to amend the Registration Statement if necessary and take all other actions necessary to allow such sale under the federal securities laws, and shall notify the Investors promptly after it has determined that such sale has become permissible under the federal securities laws. Notwithstanding the foregoing, the Company shall not be entitled to exercise its right to suspend any sales under the Registration Statement for a Corrective Filing more than one (1) time in any twelve (12) month period, and the Company shall use its best efforts to limit any period during which such Registration Statement may be withdrawn, whether for a Corrective Filing or a Supplemental Filing, to a period not in excess of thirty (30) days; provided, that all officers and directors of the Company, and any other Persons to whom the Company has given registration rights, also agree to suspend the sales of any of the Company's securities owned by such Person during any such period in the case of a Supplemental Filing, and pursuant to such Registration Statement, in the case of a Corrective Filing. 4.19 Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Investor and its officers, directors, controlling persons and affiliates (each, an "Investor Indemnitee")from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which such Investor Indemnitee may become subject (under the Securities Act, state law, common law or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are 23 based upon, any untrue statement of a material fact contained in, or omission of a material fact from, any Registration Statement, or arise out of any failure by the Company to fulfill any undertaking included in any Registration Statement or this Agreement, and the Company will, as incurred, reimburse such Investor Indemnitee for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Investor Indemnitee specifically for use in preparation of such Registration Statement. The Company will reimburse each Investor Indemnitee for any legal (but only in respect of one counsel to all Investor Indemnitees) or other expenses reasonably incurred and documented in investigating, defending or preparing to defend any such action, proceeding or claim notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this section and the possibility that such payments might later be held to be improper, provided, that to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them. (b) Each Investor, severally and not jointly, agrees to indemnify and hold harmless the Company and its officers, directors, controlling persons and affiliates (each, a "Company Indemnitee") from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which any such Company Indemnitee may become subject (under the Securities Act, state law, common law or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Investor specifically for use in preparation of such Registration Statement; provided, however, that no Investor shall be liable in any such case for any untrue statement included in any Prospectus which statement has been corrected, in writing, by such Investor and delivered to the Company before the sale from which such loss occurred and in no event shall any Investor be liable for any amount in excess of the net proceeds received for the sale of its Common Stock pursuant to such Registration Statement. (c) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 4.19, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and the indemnifying person shall have been notified thereof, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying person to such indemnified person of the indemnifying person's election to assume the defense thereof, the indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate in the reasonable judgment of the indemnified person for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person. (d) If the indemnification provided for in this Section 4.19 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) hereof in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is 24 appropriate to reflect the relative fault of the Company on the one hand and the Investors on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or an Investor on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investors agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Investors were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Investor shall be required to contribute any amount in excess of the amount, if any, by which the amount received by the Investor from the sale of the Common Stock to which such loss relates exceeds the amount of any damages which such Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Investors' obligations in this subsection (d) to contribute are several in proportion to their respective sales of Common Stock. ARTICLE V CLOSING CONDITIONS ------------------ Section 5.1 Investor Closing Conditions. The obligation of the Investors to consummate the transactions contemplated hereby is subject to satisfaction or waiver of each of the following conditions at or prior to Closing: (a) Secretary's Certificate. The Company shall have delivered to the Investors a certificate of the Secretary of the Company, dated as of the Closing Date, certifying: (i) the adoption by the Company's Board of Directors of attached resolutions authorizing, among other things, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, (ii) the incumbency and signatures of the officers of the Company executing this Agreement and the other agreements and instruments contemplated hereby, (iii) the attached copies of the bylaws and certificate of incorporation of the Company, and (iv) the attached copy of a certificate of good standing, issued by the Delaware Secretary of State, and dated no later than 10 days prior to Closing. (b) Intentionally Left Blank. (c) Lock-Up Agreement. The Company shall have executed and delivered the Lock-Up Agreement substantially in the form of Exhibit 5.1(c) hereto (the "Lock Up Agreement"). (d) Tag Along Agreement. Messrs. Sebastian E. Cassetta and Mario F. Rossi shall have executed and delivered the Tag Along Agreement substantially in the form of Exhibit 5.1(d) hereto (the "Tag Along Agreement"). 25 (e) Wire Transfer Instructions. The Company shall have provided to each of the Investors written wire transfer instructions with respect to the portion of the Aggregate Purchase Price being paid by each Investor at Closing. (f) Stock Certificates. The Company shall have delivered to each Investor a certificate representing the Purchased Shares acquired by such Investor pursuant to the terms hereof. (g) Closing Certificate. The Company shall have delivered to the Investors a certificate of an authorized officer of the Company certifying that the representations and warranties of the Company contained in this Agreement, the Lock-Up Agreement and in each certificate or document delivered by the Company to the Investors in connection with the transactions contemplated hereby and thereby are true and correct in all material respects on and as of the date of this Agreement and the Company shall have performed all obligations and complied in all material respects with all agreements, undertakings, covenants and conditions required hereunder or thereunder to be performed by it prior to the Closing. (h) Opinion of Counsel. The Investors shall have received at the Closing from Parker Chapin, LLP, counsel to the Company, a favorable written opinion dated as of the Closing Date which shall be to the effect set forth in Exhibit 5.1(h) hereto. (i) No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (j) Appointment of Board Members. Charles Klotz shall have been appointed to the Board of Directors of the Company. (k) Aggregate Equity Investment. The Company shall have obtained at least an aggregate of $17.5 million from the sale of the Common Stock. Section 5.2 Company Closing Conditions. The obligation of the Company to consummate the transactions contemplated hereby is subject to the satisfaction or waiver of each of the following conditions at or prior to Closing: (a) Payment of Purchase Price. Each of the Investors shall tender payment by wire transfer of that portion of the Aggregate Purchase Price being paid by such Investor at Closing. (b) No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (c) Lock-Up Agreement. The Investors shall have executed and delivered the Lock-Up Agreement. ARTICLE VI DEFINITIONS ----------- Section 6.1 Certain Defined Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth or cross-referenced in this Section 6: 26 "Acquired Securities" means (i) the Purchased Shares, (ii) any Top-Up Shares (if any) issued and/or issuable pursuant to the terms hereof, (iii) any Compensation Warrants (if any) issued and/or issuable pursuant to the terms hereof, (iv) any shares of Common Stock (if any) issued and/or issuable on exercise of the Compensation Warrants (if any), and (v) any securities issued and/or issuable in respect of any of the foregoing upon the occurrence of an Adjustment Event or upon exercise or conversion of any of the foregoing. "Adjustment Event" means the occurrence of any of the following with respect to the Company and/or any relevant class of its equity securities: a stock dividend, stock split, exchange, combination or division of shares or other equity interests, recapitalization, reclassification, merger, consolidation, reorganization, or the like. "Affiliate" means any other person directly or indirectly controlling, controlled by, or under direct or indirect common control with any referenced person and includes without limitation, (a) any Person who is an officer, director, or direct or indirect beneficial holder of at least 5% of the then outstanding capital stock of any referenced Person, and any of the Family Members of any such Person, (b) any Person of which a referenced Person and/or its Affiliates (as defined in clause (a) above), directly or indirectly, either beneficially own(s) at least 5% of the then outstanding equity securities or constitute(s) at least a 5% equity participant, (c) in the case of a specified Person who is an individual, Family Members of such Person, and (d) in the case of the Investors, any entities for which an Investor or any of its Affiliates serve as general partner and/or investment adviser or in a similar capacity, and all mutual funds or other pooled investment vehicles or entities under the control or management of such Investor or the general partner or investment adviser thereof, or any Affiliate of any of them, or any Affiliates of any of the foregoing. "Affiliated Group" has the meaning given to it in Section 1504 of the Code, and in addition includes any analogous combined, consolidated, or unitary group, as defined under any applicable state, local, or foreign income Tax law. "Ancillary Agreements" means the Lock-Up Agreement, the Compensation Warrant(s) (if any) issued from time to time pursuant to the terms hereof, and any other agreement or document delivered or executed in connection with this Agreement or the transactions contemplated hereby. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Code" means the Internal Revenue Code of 1986, as amended. "Compensation Warrants" shall mean a warrant, substantially in the form of Exhibit 4.18 hereto, exercisable for cash or by cashless exercise (reducing the numbers of shares received) for a number of shares of Common Stock equal to ten percent (10%) of the aggregate number of Purchased Shares acquired by the warrant holder (in the aggregate with its Affiliate(s)) pursuant to the terms hereof at an exercise price per share of Common Stock issuable on exercise thereof equal to seventy percent (70%) of the average trading price of the Common Stock over the 5 trading days immediately prior to the issue date of the warrant (in each case, as adjusted from time to time on the occurrence of an Adjustment Event) for a period of 2 years from the issue date and providing for piggyback registration rights for shares issuable on exercise of each such Compensation Warrant. "Damages" means all damages, losses, claims, demands, actions, causes of action, suits, litigations, arbitrations, liabilities, costs, and expenses, including without limitation court costs and the fees and expenses of counsel and experts. 27 "Derivative Securities" means (i) all shares of stock and other securities that are convertible into or exchangeable for shares of Common Stock, and (ii) all options, warrants, and other rights to acquire shares of Common Stock or any class of stock or other security or securities convertible into or exchangeable for shares of Common Stock or any class of stock or other security. "Environmental Laws" means, collectively, the Resource Conservation and Recovery Act, CERCLA, the Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, and any and all state or local statutes, regulations, ordinances, orders, and decrees relating to health, safety, or the environment, each, as the case may be, as amended. "Excluded Transactions" means (i) the issuance of shares of Common Stock by the Company on the occurrence of an Adjustment Event; (ii) issuances (other than issuances described in clause (iii) below) of stock, options or warrants from time to time after the date hereof to employees, consultants or directors, so long as all of such issuances do not exceed, in the aggregate and on a Fully-Diluted Basis, 208,308 shares of Common Stock (as such number may be adjusted from time to time on the occurrence of an Adjustment Event); (iii) issuances upon the exercise of currently outstanding options and warrants set forth on Schedule 2.4 hereto, so long as all of such issuances, in the aggregate and on a Fully Diluted Basis, do not exceed 5,446,916 shares of Common Stock (as such number may be adjusted from time to time on the occurrence of an Adjustment Event). "Family Members" means, as applied to any individual, any parent, spouse, child, spouse of a child, brother or sister of the individual, and each trust created for the benefit of one or more of such persons and each custodian of a property of one or more such persons and the estate of any such persons. "Fully Diluted Basis" means that the relevant calculation of the ownership or percentage ownership (as applicable) of any Person of the equity securities of the Company shall be performed as if (i) all Derivative Securities have been exercised or converted, as the case may be, into shares of Common Stock of the Company, and (ii) all shares of preferred stock or any other series of equity securities of the Company shall have been converted into shares of Common Stock of the Company. "GAAP" means generally accepted accounting principles that are (i) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors, (ii) applied on a basis consistent with prior periods, and (iii) such that, insofar as the use of accounting principles is pertinent, a certified public accountant could deliver an unqualified opinion with respect to financial statements in which such principles have been properly applied. "Hazardous Substances" means, collectively, any hazardous waste, as defined by 42 U.S.C. ss. 6903(5), any hazardous substances as defined by 42 U.S.C. ss. 9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss. 9601(33), or any toxic substance, methane gas, oil, or hazardous materials or other chemicals or substances regulated by any Environmental Laws. "Liens" means any and all liens, claims, mortgages, security interests, charges, encumbrances, and restrictions on transfer of any kind, except: (i) in the case of references to securities, any of the same arising under applicable securities laws solely by reason of the fact that such securities were issued pursuant to exemptions from registration under such securities laws or are subject to the Lock Up Agreement, (ii) real estate taxes not yet due and payable, and (iii) any 28 lien in favor of any landlord for unpaid rent, additional rent, or other charges, which lien is created by statute or under any lease under which the Company or any of its Subsidiaries is lessee. "Person" or "person" (regardless of whether capitalized) means any natural person, entity, or association, including without limitation any corporation, partnership, limited liability company, government (or agency or subdivision thereof), trust, joint venture, or proprietorship. "Subsidiary" or "Subsidiaries" means, with respect to any person, any corporation a majority (by number of votes) of the outstanding shares of any class or classes of which are at the time owned by such person or by a Subsidiary of such person, if the holders of the shares of such class or classes (a) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons performing similar functions) of the issuer thereof, even though the right so to vote has been suspended by the happening of such a contingency, or (b) are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the issuer thereof, whether or not the right so to vote exists by reason of the happening of a contingency. "TecCapital" means TecCapital, Ltd., a Bermuda corporation. Section 6.2 Terms Defined Elsewhere. The following terms are defined herein in the sections identified below: TERM SECTION ---- ------- Aggregate Purchase Price 1.1 Agreement Preamble Applicable Rate 4.8(b) Applicable Value 4.8(c) Balance Sheet 2.6 Closing 1.3 Closing Date 1.3 Common Stock 1.1 Company Preamble Compensation Trigger Date 4.18(a) Corrective Filing 4.18(g) Employee Benefit Plan 2.26 Exchange 4.18(a) Exchange Act 2.7 Extraordinary Common Stock Event 4.8(d) Filing Due Date 4.18(a) Investor Preamble Investor Securities 4.8(a) Listing Application 4.18(a) Lock-Up Agreement 5.1(c) Material Adverse Effect 2.1 Net Consideration Per Share 4.8(e)(ii)(A) NNMS 4.18(a) Offeree 4.7(a) Per Share Purchase Price 1.2 Proprietary Information 2.17 Purchased Shares 1.1 Registration Expenses 4.18(c) 29 Registration Statement 4.18(a) SEC 2.7 SEC Documents 2.7 Securities Act 2.7 Selling Expenses 4.18(c) Supplemental Filing 4.18(g) Tag Along Agreement 5.1(d) Tax 2.13 TecCapital Director 4.9 Top-Up Shares 4.8(a) ARTICLE VII MISCELLANEOUS ------------- Section 7.1 Amendments, Waivers and Consents. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between the Company and the Investors and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof or thereof. No provision hereof may be waived except by a written instrument signed by the party so waiving such provision; provided, however, that changes in or additions to, and any consents required by, this Agreement may be made, and compliance with any covenant, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) by the consent of Investors holding, in the aggregate, ___% of the Purchased Shares being acquired pursuant to the terms hereof. Except as expressly provided in the preceding sentence, no supplement or modification of this Agreement shall be binding unless executed in writing by each party to be bound thereby. Section 7.2 Governing Law; Jurisdiction; Venue etc. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles of conflicts of law thereof. The state and federal courts of the State of New York located in New York County shall have exclusive jurisdiction to hear and determine any claims or disputes between the Investors and the other party or parties hereto pertaining directly or indirectly to this Agreement and all documents, instruments and agreements executed pursuant hereto, or to any matter arising therefrom (unless otherwise expressly provided for therein); the exclusive choice of forum set forth in this Section 7.2 shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action to enforce the same in any other appropriate jurisdiction. All of the parties hereto waive all rights to trial by jury in any action or proceeding instituted by any party against any other party arising out of, on or by reason of this agreement or the documents and transactions contemplated herein. Section 7.3 Headings. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction or interpretation of any provision thereof or hereof. Section 7.4 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. Section 7.5 Notices and Demands. Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, or nationally recognized overnight courier, or five (5) days 30 after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, to the following addresses: If to the Company: One Station Place Stamford, Connecticut 06902 Attn: Sebastian E. Cassetta, Chief Executive Officer Facsimile: (203) 353-5962 With a copy to: Parker Chapin LLP The Chrysler Building 405 Lexington Avenue New York, New York 10174 Attn: Michael J. Shef, Esq. Facsimile: (212) 704-6288 If to the Investors: To their respective addresses set forth on Schedule A. With a copy to: Bingham Dana LLP 150 Federal Street Boston, MA 02110 Attn: Roger D. Feldman, Esq. Facsimile: (617) 951-8736 Section 7.6 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement, provided, however, that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. Section 7.7 Integration. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes any other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. Section 7.8 Publicity. The Company and the Investors shall have the right to approve before issuance any press releases or any other public statements sought to be made by the other with respect to the transactions contemplated hereby, except for any disclosures required in connection with obtaining any consents to the transactions contemplated by this Agreement. The Company shall have the right to issue any press release or other public statement in connection with the transaction contemplated hereby, excluding the identity of the Investors, without the prior consent of the Investors, but may disclose the identity of the Investors upon prior written consent of the Investors, which shall not be unreasonably withheld. 31 Section 7.9 Expenses. The Company and the Investors will each bear their own costs and expenses and those of their respective advisors related to the transactions herein contemplated; provided that up to an aggregate amount of $15,000 of legal fees and expenses of the Investors relating to the transactions herein contemplated, will be paid by the Company at the Closing and that the Company will further pay any costs and expenses required by it to be paid pursuant to the terms of Sections 4.18 and 4.19, above. Section 7.10 Assignment. (a) The Company may not assign this Agreement or its rights and obligations hereunder. (b) Notwithstanding the provisions of the Lock-Up Agreement, any other of the Ancillary Agreements, or any other provision hereof, this Agreement and the rights and obligations hereunder and the Purchased Shares and all other Acquired Securities may be transferred by each of the Investors in its sole discretion at any time, in whole or in part, to any Affiliate(s) or Affiliated Group(s) of the transferor, without the consent of any other party thereto. (c) Without prejudice to any of the rights of the Investors under Section 7.10(b), above, and notwithstanding any other provision hereof or of any of the Ancillary Agreements other than the Lock Up Agreement, this Agreement and any and all the rights and obligations hereunder, and the Purchased Shares and all other Acquired Securities, may also be transferred by each of the Investors in its sole discretion at any time, in whole or in part, to any Person or entity as and when permitted pursuant to the terms of the Lock Up Agreement. (d) Notwithstanding the other provisions of this Section 7.10, no Person acquiring any Acquired Securities in a trade on an Exchange shall receive the benefit of any of the covenants set forth in this Agreement as an assignee thereof. (e) Subject to clause (d), immediately above, any Person acquiring any Acquired Securities and/or rights of an Investor under this Agreement shall constitute an Investor for purposes of this Agreement and any reference to an Investor in this Agreement shall also refer to any such Person. Section 7.11 Equitable Relief. Each of the parties acknowledges that any breach by such party of his, her, or its obligations under this Agreement would cause substantial and irreparable damage to one or more of the other parties and that money damages would be an inadequate remedy therefor. Accordingly, each party agrees that the other parties or any of them will be entitled to an injunction, specific performance, and/or other equitable relief to prevent the breach of such obligations. Section 7.12 Aggregation of Interests. For purposes of determining whether, for any provision hereof, the number of shares of Common Stock, Purchased Shares, Investor Securities or other securities of the Company held by any Investor or permitted transferee(s) of such Investor is sufficient to meet a required threshold, such Investor or permitted transferee(s) (as the case may be) shall be deemed to hold the number of shares of Common Stock, Purchased Shares, Acquired Securities or other securities of the Company, as the case may be, as are held by such Investor and its Affiliate(s) and/or members of its Affiliated Group(s) (as the case may be). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 32 IN WITNESS WHEREOF, the parties have caused this Stock Purchase Agreement to be duly executed and delivered as of the day and year first above written. SMARTSERV ONLINE, INC. By:______________________________________ Name: Title: INVESTORS: TECCAPITAL, LTD. - --------- By:_______________________________________ Name: Charles R. Klotz Title: Director THE ABERNATHY GROUP By:_______________________________________ Name: Title: CONSECO EQUITY FUND By: CONSECO CAPITAL MANAGEMENT, INC. By:_______________________________________ Name: Title: CERTAIN STOCKHOLDERS: - -------------------- ------------------------------------------ Sebastian E. Cassetta ------------------------------------------ Mario F. Rossi 33
Exhibit A --------- Investor Number of Purchased Shares Aggregate Purchase Price -------- -------------------------- ------------------------ TecCapital, Ltd. 303,030 $15,000,000.00 The Abernathy Group 20,202 $1,000,000.00 Conseco Equity Fund 30,303 $1,500,000.00 -------------- TOTAL 353,535 $17,500,000.00
34 EX-5.1 5 0005.txt OPINION OF PARKER CHAPIN LLP EXHIBIT 5.1 August 4, 2000 SmartServ Online, Inc. One Station Place Stamford, CT 06902 Gentlemen: We have acted as counsel for SmartServ Online, Inc., a Delaware corporation (the "Company"), in connection with its Registration Statement on Form SB-2 (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") relating to the registration of 668,715 shares of Common Stock, par value $ .01 per share (the "Shares"), of which 375,761 Shares are outstanding and 292,954 Shares are issuable upon exercise of warrants granted by the Company (the "Warrants"). In connection with the foregoing, we have examined, among other things, the Registration Statement, the Warrants and originals or copies, satisfactory to us, of all such corporate records and of all such other agreements, certificates and documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original documents of documents submitted to us as copies. As to any facts material to such opinion, we have, to the extent that relevant facts were not independently established by us, relied on certificates of public officials and certificates, oaths and declarations of officers or other representatives of the Company. Based upon and subject to the foregoing, we are of the opinion that the 375,761 outstanding Shares being registered pursuant to the Registration Statement are validly issued, fully paid and non-assessable and the 292,954 Shares issuable upon exercise of the Warrants will be, when issued pursuant to the terms and provisions of the Warrants, validly issued, fully paid and non-assessable. We hereby consent to the use of our name under the caption "Legal Matters" in the Prospectus constituting a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended (the "Act"), the rules and regulations of the Commission promulgated thereunder or Item 509 of Regulation S-B promulgated under the Act. Very truly yours, /s/Parker Chapin LLP Parker Chapin LLP EX-10.8 6 0006.txt 1999 STOCK OPTION PLAN 1999 STOCK OPTION PLAN OF SMARTSERV ONLINE, INC. 1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to provide an incentive to key employees (including directors and officers who are key employees) and to consultants and directors who are not employees of SmartServ Online, Inc., a Delaware corporation (the "Company"), or any of its Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement in obtaining the services of such persons. The Plan provides for the grant of nonqualified stock options which do not qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the aggregate number of shares of common stock, $.01 par value per share, of the Company ("Common Stock") for which options may be granted under the Plan shall not exceed 400,000. Such shares of Common Stock may, in the discretion of the Board of Directors of the Company (the "Board of Directors"), consist either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock held in the treasury of the Company. Subject to the provisions of Paragraph 13, any shares of Common Stock subject to an option which for any reason expires, is canceled or is terminated unexercised or which ceases for any reason to be exercisable shall again become available for the granting of options under the Plan. The Company shall at all times during the term of the Plan reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a committee of the Board of Directors (the "Committee") consisting of not less than two directors; provided, however, that, with respect to options granted to Non-Employee Directors (as defined in Paragraph 19), the Plan shall be administered by the Board of Directors (any reference herein to the Committee shall refer to Board of Directors where the context so requires). During such time as the Company has a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Act"), each member of the Committee shall be a "non-employee director" within the meaning of Rule 16b-3 (as the same may be in effect and interpreted from time to time, "Rule 16b-3"). A majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all members without a meeting, shall be the acts of the Committee. Subject to the express provisions of the Plan, the Committee shall have the authority, in its sole discretion: to determine those key employees who shall be granted options, the consultants who shall be granted options and the Non-Employee Directors who shall be -1- granted options; the times when options shall be granted; the number of shares of Common Stock to be subject to each option; the term of each option; the date each option shall become exercisable; whether an option shall be exercisable in whole, in part or in installments and, if in installments, the number of shares of Common Stock to be subject to each installment, whether the installments shall be cumulative, the date each installment shall become exercisable and the term of each installment; whether to accelerate the date of exercise of any option or installment; whether shares of Common Stock may be issued upon the exercise of an option as partly paid and, if so, the dates when future installments of the exercise price shall become due and the amounts of such installments; the exercise price of each option; the form of payment of the exercise price; whether to restrict the sale or other disposition of the shares of Common Stock acquired upon the exercise of an option and, if so, whether to waive any such restriction; whether to subject the exercise of all or any portion of an option to the fulfillment of contingencies as specified in the contract referred to in Paragraph 11 (the "Contract"), including without limitation, contingencies relating to entering into a covenant not to compete with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph 19), to financial objectives for the Company, any of its Subsidiaries or a Parent, a division of any of the foregoing, a product line or other category, and/or the period of continued employment of the optionee with the Company, any of its Subsidiaries or a Parent, and to determine whether such contingencies have been met; whether an optionee is Disabled (as defined in Paragraph 19); the amount, if any, necessary to satisfy the Company's obligation to withhold taxes or other amounts; the fair market value of a share of Common Stock; to construe the respective Contracts and the Plan; with the consent of the optionee, to cancel or modify an option, provided, that the modified provision is permitted to be included in an option granted under the Plan on the date of the modification; to prescribe, amend and rescind rules and regulations relating to the Plan; to approve any provision which under Rule 16b-3 requires approval by the Board of Directors of the Company, a committee of Non-Employee Directors or the stockholders of the Company in order to be exempt under Rule 16b-3 (unless otherwise specifically provided herein); and to make all other determinations necessary or advisable for administering the Plan. Any controversy or claim arising out of or relating to the Plan, any option granted under the Plan or any Contract shall be determined unilaterally by the Committee in its sole discretion. The determinations of the Committee on the matters referred to in this Paragraph 3 shall be conclusive and binding on the parties. No member or former member of the Committee shall be liable for any action, failure to act or determination made in good faith with respect to the Plan or any option hereunder. 4. ELIGIBILITY; GRANTS. The Committee may from time to time, in its sole discretion, consistent with the purposes of the Plan, grant options to key employees (including officers and directors who are key employees), consultants and Non-Employee Directors of the Company or any of its Subsidiaries. Such options granted shall cover such number of shares of Common Stock as the Committee may determine, in its sole discretion; provided, however, that the maximum number of shares subject to options that may be granted to any key employee during any calendar year under the Plan (the "162(m) Maximum") shall not exceed 125,000 shares. 5. EXERCISE PRICE. The exercise price of the shares of Common Stock under each option shall be determined by the Committee in its sole discretion. -2- The fair market value of a share of Common Stock on any day shall be (a) if the principal market for the Common Stock is a national securities exchange, the average of the highest and lowest sales prices per share of Common Stock on such day as reported by such exchange or on a composite tape reflecting transactions on such exchange, (b) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is quoted on The Nasdaq Stock Market ("Nasdaq"), and (i) if actual sales price information is available with respect to the Common Stock, the average of the highest and lowest sales prices per share of Common Stock on such day on Nasdaq, or (ii) if such information is not available, the average of the highest bid and lowest asked prices per share of Common Stock on such day on Nasdaq, or (c) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on Nasdaq, the average of the highest bid and lowest asked prices per share of Common Stock on such day as reported on the OTC Bulletin Board Service or by National Quotation Bureau, Incorporated or a comparable service; provided, however, that if clauses (a), (b) and (c) of this Paragraph are all inapplicable, or if no trades have been made or no quotes are available for such day, the fair market value of the Common Stock shall be determined by the Board by any method consistent with applicable regulations adopted by the Treasury Department relating to stock options. 6. TERM. The term of each option granted pursuant to the Plan shall be such term as is established by the Committee, in its sole discretion. 7. EXERCISE. An option (or any part or installment thereof), to the extent then exercisable, shall be exercised by giving written notice to the Company at its principal office stating which option is being exercised, specifying the number of shares of Common Stock as to which such option is being exercised and accompanied by payment in full of the aggregate exercise price therefor (a) in cash or by certified check or (b) if the applicable Contract permits, with previously acquired shares of Common Stock having an aggregate fair market value on the date of exercise (determined in accordance with Paragraph 5) equal to the aggregate exercise price of all options being exercised, or with any combination of cash, certified check or shares of Common Stock. The Company shall not be required to issue any shares of Common Stock pursuant to any such option until all required payments, including any required withholding, have been made. The Committee may, in its sole discretion, permit payment of the exercise price of an option by delivery by the optionee of a properly executed notice, together with a copy of his irrevocable instructions to a broker acceptable to the Committee to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay such exercise price. In connection therewith, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. A person entitled to receive Common Stock upon the exercise of an option shall not have the rights of a stockholder with respect to such shares of Common Stock until the date of issuance of a stock certificate to him for such shares; provided, however, that until such stock certificate is issued, any optionee using previously acquired shares of Common Stock in payment of an option exercise price shall continue to have the rights of a stockholder with respect to such previously acquired shares. -3- In no case may a fraction of a share of Common Stock be purchased or issued under the Plan. 8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly provided in the applicable Contract, any option granted to an employee or consultant whose relationship with the Company, its Parent and Subsidiaries has terminated for any reason (other than as a result of the death or Disability of the optionee) may exercise such option, to the extent exercisable on the date of such termination, at any time within three months after the date of termination, but not thereafter and in no event after the date the option would otherwise have expired; provided, however, that if such relationship is terminated either (a) for cause, or (b) without the consent of the Company, such option shall terminate immediately. For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of the determination, the individual was an employee of such corporation for purposes of Section 422(a) of the Code. As a result, an individual on military, sick leave or other bona fide leave of absence shall continue to be considered an employee for purposes of the Plan during such leave if the period of the leave does not exceed 90 days, or, if longer, so long as the individual's right to reemployment with the Company (or a related corporation) is guaranteed either by statute or by contract. If the period of leave exceeds 90 days and the individual's right to re-employment is not guaranteed by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. Except as may otherwise be expressly provided in the applicable Contract, options granted to a key employee or consultant under the Plan shall not be affected by any change in the status of the optionee so long as the optionee continues to be an employee of, or a consultant to, the Company, or any of the Subsidiaries or a Parent (regardless of having changed from one to the other or having been transferred from one corporation to another). Except as otherwise provided in the applicable Contract, any option granted to a Non-Employee Director shall not be affected by the optionee ceasing to be a director of the Company or becoming an employee of, or consultant to, the Company, any of its Subsidiaries or a Parent; provided, however, that if (a) he is terminated as a director of the Company for cause, such option shall terminate immediately, or (b) he ceases to be a director of the Company because he is not nominated by the Board of Directors for reelection as a director, such option may be exercised at any time within one year after he ceases to be a director of the Company, but not thereafter and in no event after the date the option otherwise would have expired. Nothing in the Plan or in any option granted under the Plan shall confer on any optionee any right to continue in the employ of, or as a consultant to, the Company, any of its Subsidiaries or a Parent, or as a director of the Company, or interfere in any way with any right of the Company, any of its Subsidiaries or a Parent or the stockholders of the Company to terminate the optionee's relationship at any time for any reason whatsoever without liability to the Company, any of its Subsidiaries or a Parent. -4- 9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be expressly provided in the applicable Contract, if an optionee who is an employee of, or consultant to, the Company, any of its Subsidiaries or a Parent dies (a) while he is such an employee or consultant, (b) within three months after the termination of such relationship (unless such termination was for cause or without the consent of the Company) or (c) within one year following the termination of such relationship by reason of his Disability, his option may be exercised, to the extent exercisable on the date of his death, by his Legal Representative (as defined in Paragraph 19) at any time within one year after his death, but not thereafter and in no event after the date the option would otherwise have expired. Except as may otherwise be expressly provided in the applicable Contract, any optionee whose relationship as an employee of, or consultant to, the Company, its Parent and Subsidiaries has terminated by reason of such optionee's Disability may exercise his option, to the extent exercisable upon the effective date of such termination, at any time within one year after such date, but not thereafter and in no event after the date the option would otherwise have expired. The term of an option granted to a Non-Employee Director shall not be affected by the death or Disability of the optionee. If an optionee holding such an option dies during the term of such option, the option may be exercised at any time during its term by his Legal Representative. 10. COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its sole discretion, as a condition to the exercise of any option that either (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock to be issued upon such exercise shall be effective and current at the time of exercise, or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. Nothing herein shall be construed as requiring the Company to register shares subject to any option under the Securities Act or to keep any Registration Statement effective or current. The Committee may require, in its sole discretion, as a condition to the exercise of any option that the optionee execute and deliver to the Company his representations and warranties, in form, substance and scope satisfactory to the Committee, which the Committee determines are necessary or convenient to facilitate the perfection of an exemption from the registration requirements of the Securities Act, applicable state securities laws or other legal requirement, including without limitation that (a) the shares of Common Stock to be issued upon the exercise of the option are being acquired by the optionee for his own account, for investment only and not with a view to the resale or distribution thereof, and (b) any subsequent resale or distribution of shares of Common Stock by such optionee will be made only pursuant to (i) a Registration Statement under the Securities Act which is effective and current with respect to the shares of Common Stock being sold, or (ii) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the optionee shall prior to any offer of sale or sale of such shares of Common Stock provide the Company with a favorable written opinion of counsel satisfactory to the Company, in form, substance and scope satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. -5- In addition, if at any time the Committee shall determine, in its sole discretion, that the listing or qualification of the shares of Common Stock subject to such option on any securities exchange, Nasdaq or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issuance of shares of Common Stock thereunder, such option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an appropriate Contract which shall be duly executed by the Company and the optionee, and shall contain such terms, provisions and conditions not inconsistent herewith as may be determined by the Committee. 12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other provision of the Plan, in the event of a stock dividend, recapitalization, merger in which the Company is the surviving corporation, spin-off, split-up, combination or exchange of shares or the like which results in a change in the number or kind of shares of Common Stock which is outstanding immediately prior to such event, the aggregate number and kind of shares subject to the Plan, the aggregate number and kind of shares subject to each outstanding option and the exercise price thereof, and the number and kind of shares subject to the 162(m) Maximum shall be appropriately adjusted by the Board of Directors, whose determination shall be conclusive and binding on all parties. Such adjustment may provide for the elimination of fractional shares which might otherwise be subject to options without payment therefor. All outstanding options shall become immediately exercisable in full upon the occurrence of a "Change in Control". For this purpose, a Change in Control shall be deemed to have occurred if (a) there has occurred a change in control as the term "control" is defined in Rule 12b-2 promulgated under the Act; (b) when any "person" (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Act), except for an employee stock ownership trust (or any of the trustees thereof), becomes a beneficial owner, directly or indirectly, of securities of the Company representing 15% or more of the Company's then outstanding securities having the right to vote on the election of directors, unless the transaction in which such person becomes such a beneficial owner was approved by a vote of at least two-thirds of the directors then still in office who were directors before such transaction was consummated; (c) during any period of not more than two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or nomination for election was previously approved, cease for any reason to constitute at least 51% of the entire Board of Directors; (d) when a majority of the directors elected at any annual or special meeting of stockholders (or by written consent in lieu of a meeting) are not individuals nominated by the Company's incumbent Board of Directors; (e) if the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the holders of voting securities of the Company outstanding immediately prior thereto being the holders of at least 80% of the voting -6- securities of the surviving entity outstanding immediately after such merger or consolidation; (f) if the stockholders of the Company approve a plan of complete liquidation of the Company; or (g) if the stockholders of the Company approve an agreement for the sale or disposition of all or substantially all of the Company's assets. 13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the Board of Directors on October 13, 1999. No option may be granted under the Plan after October 12, 2009. The Board of Directors, without further approval of the Company's stockholders, may at any time suspend or terminate the Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable; provided, however, that no amendment shall be effective without the requisite prior or subsequent stockholder approval which would make any change for which applicable law or regulatory authority requires stockholder approval. No termination, suspension or amendment of the Plan shall, without the consent of the holder of an existing and outstanding option affected thereby, adversely affect his rights under such option. The power of the Committee to construe and administer any options granted under the Plan prior to the termination or suspension of the Plan nevertheless shall continue after such termination or during such suspension. 14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised, during the lifetime of the optionee, only by the optionee or his Legal Representatives. Except to the extent provided above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process, and any such attempted assignment, transfer, pledge, hypothecation or disposition shall be null and void ab initio and of no force or effect. 15. WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject to any limitations under Rule 16b-3, shares of Common Stock to be issued with respect thereto having an aggregate fair market value on the exercise date (determined in accordance with Paragraph 5), or (c) any combination thereof, in an amount equal to the amount which the Committee determines is necessary to satisfy the Company's obligation to withhold Federal, state and local income taxes or other amounts incurred by reason of the grant or exercise of an option, its disposition, or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the holder to pay to the Company such amount, in cash, promptly upon demand. 16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or legends upon the certificates for shares of Common Stock issued upon exercise of an option under the Plan and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act and any applicable state securities laws, or (b) implement the provisions of the Plan or any agreement between the Company and the optionee with respect to such shares of Common Stock. -7- The Company shall pay all issuance taxes with respect to the issuance of shares of Common Stock upon the exercise of an option granted under the Plan, as well as all fees and expenses incurred by the Company in connection with such issuance. 17. USE OF PROCEEDS. The cash proceeds from the sale of shares of Common Stock pursuant to the exercise of options under the Plan shall be added to the general funds of the Company and used for such corporate purposes as the Board of Directors may determine. 18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board of Directors may, without further approval by the stockholders, substitute new options for prior options of a Constituent Corporation (as defined in Paragraph 19) or assume the prior options of such Constituent Corporation. 19. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below: (a) Constituent Corporation. The term "Constituent Corporation" shall mean any corporation which engages with the Company, any of its Subsidiaries or a Parent in a transaction to which Section 424(a) of the Code applies, or any Parent or any Subsidiary of such corporation. (b) Disability. The term "Disability" shall mean a permanent and total disability within the meaning of Section 22(e)(3) of the Code. (c) Legal Representative. The term "Legal Representative" shall mean the executor, administrator or other person who at the time is entitled by law to exercise the rights of a deceased or incapacitated optionee with respect to an option granted under the Plan. (d) Non-Employee Director. The term "Non-Employee Director" shall mean a person who is a director of the Company but who is not a salaried employee of the Company or any of its Subsidiaries. (e) Parent. The term "Parent" shall have the same definition as "parent corporation" in Section 424(e) of the Code. (f) Subsidiary. The term "Subsidiary" shall have the same definition as "subsidiary corporation" in Section 424(f) of the Code. 20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be granted hereunder and all related matters shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict of law provisions. Neither the Plan nor any Contract shall be construed or interpreted with any presumption against the Company by reason of the Company causing the Plan or Contract to be -8- drafted. Whenever from the context it appears appropriate, any term stated in either the singular or plural shall include the singular and plural, and any term stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter. 21. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability of any provision in the Plan or any Contract shall not affect the validity, legality or enforceability of any other provision, all of which shall be valid, legal and enforceable to the fullest extent permitted by applicable law. 22. STOCKHOLDER APPROVAL. The Plan shall not be subject to approval by the Company's stockholders. -9- EX-10.16 7 0007.txt AMENDED RESTRICTED STOCK PURCHASE AGREEMENT EXHIBIT 10.16 SEBASTIAN E. CASSETTA 7 MORNINGSIDE LANE WESTPORT, CONNECTICUT 06880 December 31, 1999 SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Gentlemen: For good and valuable consideration which is hereby acknowledged, I, Sebastian E. Cassetta, agree to amend a certain Restricted Stock Purchase Agreement, dated December 28, 1998 between myself and SmartServ Online, Inc. to convert the interest portion of the note obligation thereunder for the payment of 618,239 shares of restricted common stock from a non-recourse obligation to a recourse obligation. Accordingly, the Promissory Note dated December 29, 1998 in the amount of $1,360,125.80 shall be cancelled and a new note in the amount of $457,496.86 shall be executed. Sebastian E. Cassetta - --------------------------- EX-10.17 8 0008.txt AMENDED PROMISSORY NOTE DATED JANUARY 4, 2000 EXHIBIT 10.17 PROMISSORY NOTE Stamford, Connecticut January 4, 2000 $457,496.86 FOR VALUE RECEIVED, Sebastian E. Cassetta promises to pay to SmartServ Online, Inc., a Delaware corporation (the "Company"), or order, the principal sum of Four Hundred Fifty-Seven Thousand Four Hundred Ninety-Six Dollars and Eighty-Six Cents ($457,46.86), together with interest on the unpaid principal hereof from the date hereof at the rate of 7.5% [such interest equal to one point below the prime rate as of the date of this Note] per annum, compounded annually. Notwithstanding the foregoing, the principal amount of the Note shall be subject to an automatic reduction to the principal amount pursuant to the terms of the Purchase Agreement (as defined below). This Note shall be due and payable in full on December 29, 2003 (the "Due Date"), unless accelerated as provided herein. Upon the termination of employment of Sebastian E. Cassetta from the Company for Cause, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. In the event that Sebastian E. Cassetta terminates his employment with the Company for Good Reason, the whole unpaid balance on this Note of principal and interest shall be due and payable upon the earlier of the Due Date or six (6) months from the Date of Termination. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay without penalty all or any portion of the principal owing hereunder. This Note is subject to the terms of that certain Restricted Stock Purchase Agreement by and between the Company and Sebastian E. Cassetta, dated as of December 29, 1998, as amended (the "Purchase Agreement") and capitalized terms used herein which are not otherwise defined shall have the meanings ascribed to them in the Purchase Agreement or in an employment agreement between the Company and Sebastian E. Cassetta, dated as of January 1, 1999. This Note is secured by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith (the "Security Agreement") and is subject to all the provisions thereof. This Note is intended to evidence a non-recourse obligation with respect to the principal hereof to secure the purchase of the Company's Common Stock pursuant to the Purchase Agreement. Accordingly, this Note shall be without recourse with respect to the principal against Sebastian E. Cassetta and no person entitled to payment under this Note shall have any right to his assets other than the collateral given for this Note and earnings attributable to such collateral or the investment of such collateral, if any. The obligation to repay interest pursuant to the terms of this Note shall be a recourse obligation. This Note shall be governed and construed in accordance with the laws of the State of Connecticut. - ------------------------- Sebastian E. Cassetta EX-10.18 9 0009.txt AMENDED SECURITY AGREEMENT EXHIBIT 10.18 SECURITY AGREEMENT This Security Agreement is made as of January 4, 2000 between SmartServ Online, Inc., a Delaware corporation ("Pledgee"), and Sebastian E. Cassetta ("Pledgor"). Recitals Pursuant to Pledgor's purchase of Stock under the Restricted Stock Purchase Agreement dated December 28, 1998, between Pledgor and Pledgee (the "Purchase Agreement"), and Pledgor's election to pay for such Stock with his promissory note (the "Note"), Pledgor has purchased 618,239 shares of Pledgee's Common Stock (the "Shares") at a price of $0.75 per share, for a total purchase price of $463,679.25. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Purchase Agreement, Pledgor, pursuant to the Connecticut Uniform Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Pledgee, who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock shall be held by the Pledgee as security for the repayment of the Note, and the Pledgee shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities the Pledgor and the Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares or other securities as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgee shall be immediately delivered to Pledgee, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or b. Pledgor fails to perform any of the covenants set forth in the Restricted Stock Purchase Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Connecticut Uniform Commercial Code. 7. Release of Collateral. There shall be released from this pledge a portion of the pledged Shares held by Pledgee hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount (or in the event that the initial principal amount on the Note has been adjusted pursuant to Section 1 of that certain Restricted Stock Purchase Agreement by and between the Company and Sebastian E. Cassetta, dated as of December 29, 1998, as amended (the "Purchase Agreement"), the Adjusted Principal Amount) of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 12. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and -2- the term "Pledgee" as used herein shall be deemed to include, for all purposes, their respective designees, successors, assigns, heirs, executors and administrators. 13. Governing Law. This Security Agreement shall be interpreted and governed under the laws of the State of Connecticut without regard to its conflict of laws provisions. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" Sebastian E. Cassetta - ----------------------- 7 Morningside Lane Westport, Connecticut 06880 "PLEDGEE" SMARTSERV ONLINE, INC. a Delaware corporation - -------------------------- Thomas W. Haller Chief Financial Officer EX-10.19 10 0010.txt AMENDED RESTRICTED STOCK PURCHASE AGREEMENT EXHIBIT 10.19 MARIO F. ROSSI 22 SPLIT ROCK ROAD TRUMBULL, CONNECTICUT 06611 December 31, 1999 SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Gentlemen: For good and valuable consideration which is hereby acknowledged, I, Mario F. Rossi, agree to amend a certain Restricted Stock Purchase Agreement, dated December 28, 1998 between myself and SmartServ Online, Inc. to convert the interest portion of the note obligation thereunder for the payment of 206,080 shares of restricted common stock from a non-recourse obligation to a recourse obligation. Accordingly, the Promissory Note dated December 29, 1998 in the amount of $453,376.00 shall be cancelled and a new note in the amount of $152,499.20 shall be executed. Mario F. Rossi - --------------------------- EX-10.20 11 0011.txt AMENDED PROMISSORY NOTE EXHIBIT 10.20 PROMISSORY NOTE Stamford, Connecticut January 4, 2000 $152,499.20 FOR VALUE RECEIVED, Mario F. Rossi promises to pay to SmartServ Online, Inc., a Delaware corporation (the "Company"), or order, the principal sum of One Hundred Fifty-Two Thousand Four Hundred Ninety-Nine Dollars and Twenty Cents ($152,499.20), together with interest on the unpaid principal hereof from the date hereof at the rate of 7.5% [such interest equal to one point below the prime rate as of the date of this Note] per annum, compounded annually. Notwithstanding the foregoing, the principal amount of the Note shall be subject to an automatic reduction to the principal amount pursuant to the terms of the Purchase Agreement (as defined below). This Note shall be due and payable in full on December 29, 2003 (the "Due Date"), unless accelerated as provided herein. Upon the termination of employment of Mario F. Rossi from the Company for Cause, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. In the event that Mario F. Rossi terminates his employment with the Company for Good Reason, the whole unpaid balance on this Note of principal and interest shall be due and payable upon the earlier of the Due Date or six (6) months from the Date of Termination. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay without penalty all or any portion of the principal owing hereunder. This Note is subject to the terms of that certain Restricted Stock Purchase Agreement by and between the Company and Mario F. Rossi, dated as of December 29, 1998, as amended (the "Purchase Agreement") and capitalized terms used herein which are not otherwise defined shall have the meanings ascribed to them in the Purchase Agreement or in an employment agreement between the Company and Mario F. Rossi, dated as of January 1, 1999. This Note is secured by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith (the "Security Agreement") and is subject to all the provisions thereof. This Note is intended to evidence a non-recourse obligation with respect to the principal hereof to secure the purchase of the Company's Common Stock pursuant to the Purchase Agreement. Accordingly, this Note shall be without recourse with respect to the principal against Mario F. Rossi and no person entitled to payment under this Note shall have any right to his assets other than the collateral given for this Note and earnings attributable to such collateral or the investment of such collateral, if any. The obligation to repay interest pursuant to the terms of this Note shall be a recourse obligation. This Note shall be governed and construed in accordance with the laws of the State of Connecticut. - ------------------------- Mario F. Rossi EX-10.21 12 0012.txt AMENDED SECURITY AGREEMENT EXHIBIT 10.21 SECURITY AGREEMENT This Security Agreement is made as of January 4, 2000 between SmartServ Online, Inc., a Delaware corporation ("Pledgee"), and Mario F. Rossi ("Pledgor"). Recitals Pursuant to Pledgor's purchase of Stock under the Restricted Stock Purchase Agreement dated December 28, 1998, between Pledgor and Pledgee (the "Purchase Agreement"), and Pledgor's election to pay for such Stock with his promissory note (the "Note"), Pledgor has purchased 206,080 shares of Pledgee's Common Stock (the "Shares") at a price of $0.75 per share, for a total purchase price of $154,560.00. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Purchase Agreement, Pledgor, pursuant to the Connecticut Uniform Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Pledgee, who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock shall be held by the Pledgee as security for the repayment of the Note, and the Pledgee shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities the Pledgor and the Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares or other securities as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgee shall be immediately delivered to Pledgee, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or b. Pledgor fails to perform any of the covenants set forth in the Restricted Stock Purchase Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Connecticut Uniform Commercial Code. 7. Release of Collateral. There shall be released from this pledge a portion of the pledged Shares held by Pledgee hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount (or in the event that the initial principal amount on the Note has been adjusted pursuant to Section 1 of that certain Restricted Stock Purchase Agreement by and between the Company and Mario F. Rossi, dated as of December 29, 1998, as amended (the "Purchase Agreement"), the Adjusted Principal Amount) of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 12. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and -2- the term "Pledgee" as used herein shall be deemed to include, for all purposes, their respective designees, successors, assigns, heirs, executors and administrators. 13. Governing Law. This Security Agreement shall be interpreted and governed under the laws of the State of Connecticut without regard to its conflict of laws provisions. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" Mario F. Rossi - ----------------------- 22 Split Rock Road Trumbull, Connecticut 06611 "PLEDGEE" SMARTSERV ONLINE, INC. a Delaware corporation - -------------------------- Thomas W. Haller Chief Financial Officer EX-10.22 13 0013.txt EMPLOYMENT AGREEMENT EXHIBIT 10.22 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT dated as of the 29th day of May 2000, between SmartServ Online, Inc., a Delaware Corporation, with its principal executive offices at Metro Center, One Station Place, Stamford, Connecticut 06902 (the "Company"), and Alan G. Bozian, an individual and resident of New York, New York (the "Executive"). WHEREAS, the Executive desires to commit himself to serve the Company in accordance with the terms set forth herein; WHEREAS, the Company desires to employ the Executive in accordance with the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and intending to be legally bound hereby, the Company and the Executive hereby agree as follows: 1. Position and Duties. a. The Company agrees to employ the Executive for the term of this Agreement as Senior Vice President and Chief Financial Officer, and the Executive agrees to perform such duties commensurate with such positions as the Executive may reasonably be directed to perform by the Chief Executive Officer or the Board of Directors of the Company, including, but not limited to, (i) supervision and control over and responsibility for the corporate finance, treasury and merger and acquisition activities of the Company and (ii) supervision and control over and responsibility for the investor relations department of the Company. It is hereby understood that all accounting, tax and audit functions of the Company shall report directly to the Executive. b. The Executive shall have the right to observe any and all meetings of the Board of Directors of the Company; provided, however, that the Executive may be excluded from Board meetings (or portions thereof) in the event that the Board is meeting in executive session or discussing personnel matters relating to the performance of executive officers of the Company. The Executive shall be considered for election to the Board of Directors following the first anniversary of the Effective Date (as defined in Section 2 below). c. The Executive shall have the right to devote a reasonable amount of time to (i) industry, community or charitable organizations and (ii) and the management of personal investments so long as such activities do not interfere or conflict with the performance by the Executive of his obligations hereunder. Subject to the provisions of Section 9 and Section 10 hereof, the Executive may serve as a director of other companies with the consent of the Board of Directors of the Company, which consent shall not be unreasonably withheld. d. The Executive hereby accepts such employment and agrees faithfully to perform to the best of his ability the duties described in Section l(a). 2. Term. Subject to Section 4 hereof, the term of employment of the Executive under this Agreement shall commence as of May 29, 2000 (the "Effective Date") and shall terminate on the third anniversary of the Effective Date (the "Expiration Date"). The Company shall give the Executive notice at least 180 days prior to the Expiration Date of whether it wishes to enter into an employment agreement with the Executive in respect of the Executive's employment with the Company after the Expiration Date, and if the Executive desires to continue employment with the Company after the Expiration Date, the Company shall negotiate in good faith with the Executive to extend, renew, amend or replace this Agreement. 3. Compensation. In consideration for the Executive's agreements contained herein, and as compensation to the Executive for the performance of the services required hereunder, the Company shall pay or grant to him the following salary and other compensation and benefits: a. a base salary, payable in equal installments not less frequently than bi-weekly, at such annual rate not less than $250,000 per year (the "Base Salary"), and determined from time to time by the Board of Directors or an appropriate committee thereof, provided, however, that, commencing with the first anniversary of the Effective Date (or promptly thereafter) and annually thereafter, the Executive's base salary shall be reviewed by the Board of Directors and shall be increased if the Board of Directors determines that an increase is appropriate on the basis of the types of factors it generally takes into account in increasing the salaries of executive officers of the Company provided that the Base Salary shall 2 automatically be adjusted annually to reflect the increase, if any, in the cost of living by adding to the Base Salary an amount obtained by multiplying the Base Salary by the percentage by which the Consumer Price Index for All-Urban Consumers, as reported by the Bureau of Labor Statistics of the United States Department of Labor, has increased over its level from the previous twelve month period ending December 31st of each year; b. the Executive shall have the opportunity to receive an annual aggregate bonus in the amount of up to fifty percent (50%) of the Base Salary (the "Cash Bonus"). The payment of the Cash Bonus will be dependent upon (i) the yearly revenue growth and profitability of the Company and (ii) the Executive's individual performance, which performance shall be based upon his achievement of predetermined goals relating to the following matters, among others: (1) the successful management and completion of financings; (2) merger and acquisition activities of the Company; and (3) the successful management of the corporate expansion of the Company. For the calendar year ending December 31, 2000, the amount of the Cash Bonus shall be determined without pro-ration. The Cash Bonus shall be paid in cash and shall be paid within ninety (90) days of the end of the calendar year to which the Cash Bonus relates; c. on the Effective Date, the Executive shall be granted nonqualified stock options to purchase an aggregate of 175,000 shares of Common Stock of the Company on the terms and conditions set forth in the Nonqualified Stock Option Contract attached hereto and in connection therewith the Company shall cause a registration statement on Form S-8 (or an amendment to a previously filed registration statement on Form S-8) to be filed with the Securities and Exchange Commission with respect to such shares within ten (10) business days of the Effective Date and the Company shall maintain the effectiveness of such registration statement while any of the options are outstanding; d. such other awards under the Company's 1999 Stock Option Plan (the "Plan") or under any other stock option, incentive compensation or other compensation plan, program or arrangement now existing, or hereafter adopted and applicable to executive officers of the Company, as the Board of Directors, or an appropriate committee thereof administering such plan, program or arrangement, may determine appropriate in light of the duties and responsibilities of the Executive in respect to other executive officers; 3 e. participation on the same terms and conditions as all other employees in all employee benefit plans, whether or not qualified within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code"), as may be now or hereafter sponsored or maintained for all employees of the Company, and participation on the same terms and conditions as other executive officers in such other plan, program or arrangement as may be now or hereafter sponsored or maintained for executive officers of the Company; f. a monthly allowance of $700.00 for reasonable travel within the New York metropolitan area in connection with the performance of services under this Agreement, covering a vehicle allowance for business mileage at the applicable mileage rate as established by the Internal Revenue Service, maintenance, gas, insurance, parking and all other related expenses and the Company shall further reimburse the Executive for all reasonable other travel and other expenses incurred by the Executive in connection with the performance of services under this Agreement, upon presentation of expense statements or vouchers and such other support information as it may from time to time request, provided that such expenses meet the usual test of being business related in accordance with the Company's usual procedures in this regard; g. vacation entitlement of not less than four (4) weeks per year (to be taken at reasonable times and for durations commensurate with the Executive's duties and obligations under this Agreement), absences on account of temporary illness and fringe benefits customarily enjoyed by employees or officers of the Company under the terms and conditions of the Company's policy in respect thereto, provided, however, that such benefits shall be pro-rated for the calendar year ending December 31, 2000 based upon the Effective Date; h. reimbursement of up to $12,000 to cover dues, assessments and expenses incurred by the Executive relating to membership or participation in professional or social groups or organizations which the Executive determines are useful or necessary for the purpose of promoting and maintaining the business of the Company; i. reimbursement of up to $3,000 to cover the cost of premiums on a life insurance policy on the life of the Executive and the Executive shall have the right to designate his beneficiaries under such policy; 4 j. reimbursement of the cost of an annual health physical for the Executive, to the extent not covered by the Company's medical insurance plan in which the Executive participates; and k. during the 18 months following the Effective Date, the Company shall provide payment for the following with respect to the Executive's relocation to the Stamford, Connecticut area: (i) reasonable expenses of moving the Executive's household belongings, including full replacement value insurance, (ii) closing costs associated with a new residence, not to exceed $10,000, (iii) one month's Base Salary (i.e., $20,833.33) to cover miscellaneous expenses associated with the relocation, (iv) reasonable expenses associated with househunting trips (with immediate family members), not to exceed two trips and an aggregate of seven days, including hotel, meals and transportation and (v) temporary living expenses solely for the Executive, including rent and utilities, for 180 days following the Effective Date, provided that all such expenses are pre-approved by the Company. Payments to the Executive pursuant to clauses (i) and (ii) of this subsection k shall be increased by the amount necessary such that the net amount retained by the Executive, after the deduction of any federal, state and local income taxes (including any interest or penalties), including without limitation, any income taxes (including any interest or penalties) imposed upon the additional amount, will be equal to the expenses and costs covered by the Company. 4. Termination of Employment. This Agreement shall terminate upon the Expiration Date or upon the death of the Executive. The Company may terminate this Agreement prior to the Expiration Date (and the Executive's employment hereunder shall terminate) for "Disability" or "Cause". Termination of this Agreement by the Company for any reason not set forth in the preceding sentence shall not be deemed a permitted termination and shall be deemed a breach of this Agreement. In the event of any termination of this Agreement prior to the Expiration Date, whether a permitted termination or otherwise, the provisions of Section 5 of this Agreement shall determine the amount, if any, of any compensation thereafter due the Executive in respect to such termination. As used in this Agreement, the following terms shall have the meanings set forth: a. Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Company on a full-time basis for four (4) consecutive months, and within thirty days after written notice of termination is given by the Company, 5 the Executive shall not have returned to the full-time daily performance of his duties, the Executive shall be deemed to have experienced a Disability and the Company may terminate the Executive's employment. The Executive shall be entitled to leaves of absence from the Company in accordance with the Company's policy generally applicable to executives for illness or other temporary disabilities for a period or periods not exceeding an aggregate of four months in any calendar year, and his compensation and status as an employee hereunder shall continue during any such period or periods. b. Cause. Termination by the Company of employment for "Cause" shall mean termination upon: (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board of Directors which specifically identifies the manner in which the Board of Directors believes that the Executive has not substantially performed his duties, and which failure has not been cured within thirty days after such written demand; or (ii) the willful and continued engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection (b), no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive in bad faith and without reasonable belief that such action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than 51% of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors the Executive was guilty of conduct set forth above in clauses (i) or (ii) of the first sentence of this Subsection (b) and specifying the particulars thereof in detail. c. Notice of Termination. Any purported termination by the Company or any termination by the 6 Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 16 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination, resignation or retirement provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination, resignation or retirement under the provision so indicated. d. Date of Termination, Etc. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time daily basis during such thirty-day period), (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which shall not be less than thirty days nor more than sixty days, from the date such Notice of Termination is given), or (iii) if within thirty days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). Any party giving notice of a dispute shall pursue the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay the Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Executive as a participant in all compensation, employee benefit and insurance plans, programs and arrangements in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection (d). 5. Compensation Upon Termination. a. Death. If the Executive's employment hereunder terminates by reason of his death, the Company shall be obligated to pay to his surviving widow, or to his legal representatives if he leaves no surviving widow or if his surviving widow dies prior to fulfillment of the Company's obligations, (i) the 7 Executive's then current base salary for a twelve (12) month period commencing on the first day of the month following the Executive's death, or until the Expiration Date, whichever shall be the first to occur; and (ii) any benefits to which the Executive is entitled under any insurance policies on the life of the Executive, under the Company's insurance programs and other employee benefit plans, programs and arrangements then in effect and under the Company's pension plan for salaried employees, if any. In addition to the foregoing, the Company shall be obligated to continue coverage, to the extent not prohibited by law, for a period of twelve (12) months from the date of the Executive's death for the Executive's eligible dependents under all of the Company's benefit plans in effect and applicable to the Executive's eligible dependents as of the date of death, provided that in the event that such eligible dependents, cannot be covered or fully covered under any or all of the Company's benefit plans, the Company shall continue to provide such eligible dependents with the same level of such coverage in effect prior to the Executive's death, on an unfunded basis if necessary. b. Disability. If the Executive's employment hereunder terminates by reason of his Disability, the Company shall (i) continue to pay to the Executive, in accordance with the payroll practices of the Company in effect prior to the Date of Termination, the Executive's then current base salary for twelve (12) months after the Date of Termination, reduced by any benefits to which the Executive may be entitled under any Company sponsored disability income or income protection plan, policy or arrangement, the premiums for which or benefits under which are paid by the Company, (ii) for the first year after the Date of Termination pay an amount equal to the highest annual bonus that the Executive received in the three years prior to the Date of Termination, payable in a lump sum at approximately the same time as annual bonuses were paid by the Company in the year prior to the Date of Termination, and (iii) continue coverage, to the extent not prohibited by law, for a period of twelve (12) months from the Date of Termination or until comparable benefits are made available to the Executive in connection with subsequent employment, whichever period is shorter, for the Executive and his eligible dependents under all of the Company's benefit plans in effect and applicable to the Executive and his eligible dependents as of the Date of Termination, provided that in the event that the Executive and his eligible dependents, because of the Executive's terminated status, cannot be covered or fully covered under any or all of the 8 Company's benefit plans, the Company shall continue to provide the Executive and/or his eligible dependents with the same level of such coverage in effect prior to termination, on an unfunded basis if necessary. If the Executive dies prior to the date on which such additional amounts would have ceased to be payable under this Subsection (b), the amount that would have been payable by the Company had he lived shall continue to be paid by the Company to his surviving widow at the same times and rates as it would have been payable to him. c. Cause. If the Executive's employment hereunder is terminated by the Company for Cause, the Company shall pay to the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligations to the Executive under this Agreement. d. Voluntary Resignation or Retirement. In the event the Executive retires or resigns other than for Good Reason (as defined below), the Company shall pay to the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and, except as provided in Section 8, the Company shall have no further obligations to the Executive under this Agreement. e. Other. If the Executive's employment hereunder is terminated by the Company other than for Cause or Disability or by the Executive for Good Reason (as defined below), then the Executive shall be entitled all to the benefits provided below: (i) the Company shall pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as severance pay to the Executive, not later than the fifteenth day following the Date of Termination, a lump sum severance payment equal to the Executive's full base salary for the then remaining term of this Agreement (without regard to the date of such Notice of Termination) at the rate then in effect (the "Lump Sum Payment"), discounted to present value at a discount rate of 8% per annum applied to each future payment from the time it would have become payable; 9 (iii) in lieu of shares of common stock issuable upon exercise of outstanding stock options ("Options"), if any, or any stock appreciation rights ("SAR"), if any, whether or not such Options or SARs are vested or then exercisable pursuant to their respective terms, granted to the Executive under the Plan or another of the Company's stock option or stock appreciation rights plans or otherwise (which Options and SARs shall be canceled upon the making of the payment referred to below), the Executive shall receive, not later than the fifteenth day following the Date of Termination, an amount in cash equal to the product of (x) the difference (to the extent that such difference is a positive number) obtained by subtracting the per share exercise price of each Option and each SAR held by the Executive, whether or not then fully exercisable, from the closing price of the Common Stock (on the Date of Termination) as reported on the National Association of Securities Dealers Automatic Quotation System/National Market System or such quotation system or stock exchange as the Common Stock is then listed or principally traded (or if not traded on the Date of Termination, the closing price on the next preceding business day on which the Common Stock traded and in the event that there is no established trading market for the Common Stock, the per share exercise price shall be subtracted from the fair market value of the Common Stock on the Date of Termination as determined in good faith by the Board of Directors of the Company and approved by an independent accounting firm), and (y) the number of shares of Common Stock covered by each such Option or SAR; (iv) the Company shall remove all restrictions on vesting and any and all forfeiture provisions or repurchase options applicable to any shares of restricted stock held by the Executive shall automatically lapse and be of no further force or effect; (v) the Company shall continue coverage, to the extent not prohibited by law, for a period of twelve (12) months from the Date of Termination or the remaining term of this Agreement, whichever period is shorter, for the Executive and his 10 eligible dependents under all of the Company's benefit plans in effect and applicable to the Executive and his eligible dependents as of the Date of Termination, provided that in the event that the Executive and his eligible dependents, because of the Executive's terminated status, cannot be covered or fully covered under any or all of the Company's benefit plans, the Company shall continue to provide the Executive and/or his eligible dependents with the same level of such coverage in effect prior to termination, on an unfunded basis, if necessary; (vi) the Company shall also pay to the Executive all legal fees and expenses incurred by the Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided by the Company under this Section 5(e); (vii) the payments under this Subsection (e) are intended by the parties to be due and payable under the circumstances of a termination for the reasons set forth above whether or not such circumstances are preceded by a change in control of the Company. If, notwithstanding the intentions of the parties, it is asserted by any governmental agency, in any tax audit, administrative proceeding or otherwise, that any payments provided under this Section 5(e) (the "Severance Payments") are or will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code and/or that a federal income tax deduction for amounts paid as Severance Payments will not be allowed to the Company for any year by reason of Section 28OG of the Code, the Executive may contest or refute such assertion with respect to the Excise Tax in any appropriate forum (the "Executive's Contest") and the Company shall diligently and vigorously contest or refute such assertion with respect to the disallowance of such deduction in all administrative proceedings and in the federal district court or the Tax Court, whichever shall have jurisdiction (the "Company's Contest"). The Executive's Contest and the Company's Contest shall be conducted and presented separately unless the Executive, in his discretion but with the consent of the Company, joins in the Company's Contest. In any 11 event, the Executive shall be entitled to retain attorneys and other experts deemed necessary or appropriate by the Executive to the proper presentation of the Executive's Contest and shall not be compelled by the Company to compromise, settle or otherwise terminate the Executive's Contest without his written consent thereto. The Company and the Executive shall cooperate one with the other and each shall provide to the other copies of all documents relevant to or useful in connection with either the Executive's Contest or the Company's Contest as may reasonably be requested by the other. The Executive shall attend any hearing, deposition or other proceeding at which his attendance in person is material to the Company's Contest. The Company shall cause the appropriate authorized officer or officers of the Company to attend any hearing, deposition or other matter at which the Company's appearance is requested by any party. In the event that the Severance Payments are finally determined to be subject to the Excise Tax, then the Company shall pay to the Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties), including, without limitation, any income taxes (including any interest or penalties) and Excise Tax imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Severance Payments; and (viii) The payments provided for in this Subsection (e), shall be made not later than the fifteenth day following the Date of Termination, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination provided that any Gross-Up Payment shall be made within thirty days of the final determination that the Severance Payments are 12 subject to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). f. For purposes of this Agreement, Good Reason shall mean the occurrence of any one of the following events: (i) a material breach by the Company of this Agreement, (ii) the Company's assignment to Executive of duties inconsistent in any material respect with his position (including status and reporting) or any other diminution of authority, duties or responsibilities, excluding any isolated action by the Company not taken in bad faith and which is remedied by the Company within 15 days after receipt of notice from the Executive, (iii) a Change of Control (as defined below), other than a Change of Control Transaction (as defined below) that was approved by a majority of the Continuing Directors (as defined below), or (iv) the relocation of the Executive's principal place of employment to a location more than 50 miles from his principal place of employment on the date of this Agreement (unless such relocation is closer to the Executive's principal residence). g. For purposes of this Agreement, a Change of Control shall occur if: (i) at any time less than 60% of the members of the Board of Directors shall be individuals who were either (x) Directors on the effective date of this Agreement or (y) individuals whose election, or nomination for election, was approved by a vote (including a vote approving a merger or other agreement providing for the membership of such individuals on the Board of Directors) of at least two-thirds of the Directors then still in office who were Directors on the effective date of this Agreement or who were so approved (the "Continuing Directors"); or (ii) the shareholders of the Company shall approve an agreement or plan providing for the Company to be merged, consolidated or otherwise combined with, or for all or substantially all its assets or stock to be acquired by, another corporation, as a consequence of which the former shareholders of the Company will own, immediately after such merger, consolidation, combination or acquisition, less than a majority of the voting power of such surviving or acquiring corporation or the parent thereof (a "Change of Control Transaction"). 13 h. The Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by the Executive as the result of employment by another employer, or otherwise. i. In addition to all other amounts payable to the Executive under this Section 5, the Executive shall be entitled to receive all benefits payable to him under the Company's retirement savings plan and pension plan, if any, and any other plan, program or arrangement relating to retirement, profit sharing, or other benefits including, without limitation, any employee stock ownership plan or any plan established as a supplement to any such plans. No amount payable to the Executive under Subsection 5(e) shall be considered for any benefit calculation or other purpose under the Company's pension plan, if any. 6. Change of Control In the event of a Change of Control, the Company shall provide the Executive with the following benefits: (i) in lieu of shares of common stock issuable upon exercise of outstanding stock options ("Options"), if any, or any stock appreciation rights ("SAR"), if any, whether or not such Options or SARs are vested or then exercisable pursuant to their respective terms, granted to the Executive under the Plan or another of the Company's stock option or stock appreciation rights plans or otherwise (which Options and SARs shall be canceled upon the making of the payment referred to below), the Executive shall receive, not later than the fifteenth day following the date of the Change of Control, an amount in cash equal to the product of (x) the difference (to the extent that such difference is a positive number) obtained by subtracting the per share exercise price of each Option and each SAR held by the Executive, whether or not then fully exercisable, from the closing price of the Common Stock (on the date of the Change of Control) as reported on the National Association of Securities Dealers Automatic Quotation System/National Market System or such quotation system or stock exchange as the Common Stock is then listed 14 or principally traded (or if not traded on the date of the Change of Control, the closing price on the next preceding business day on which the Common Stock traded and in the event that there is no established trading market for the Common Stock, the per share exercise price shall be subtracted from the fair market value of the Common Stock on the date of the Change of Control as determined in good faith by the Board of Directors of the Company and approved by an independent accounting firm), and (y) the number of shares of Common Stock covered by each such Option or SAR; (ii) the Company shall remove all restrictions on vesting and any and all forfeiture provisions or repurchase options applicable to any shares of restricted stock held by the Executive shall automatically lapse and be of no further force or effect. (iii) to the extent that the payment provided under this Section 6 is subject to the Excise Tax, the Company shall pay to the Executive an additional payment (the "Change of Control Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties), including, without limitation, any income taxes (including any interest or penalties) and Excise Tax imposed on the Gross-Up Payment, the Executive retains an amount of the Change of Control Gross-Up Payment equal to the Excise Tax imposed upon the payment under this Section 6. 7. Retirement Nothing contained in this Agreement shall be deemed to limit the Executive's ability to retire for any reason and to receive benefits under the Company's retirement policies and pension plan for salaried employees, if any and to thereby receive all benefits for which he is eligible under such plans and any other plan, program or arrangement relating to retirement. 8. Indemnification a. The Company shall indemnify and hold harmless to the fullest extent not prohibited by law, as the same exists or may hereinafter be amended, interpreted or implemented (but, in the case of any 15 amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than are permitted the Company to provide prior to such amendment), each person who was or is made a party or is threatened to be made a party to or is otherwise involved in (as a witness or otherwise) any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether or not by or in the right of the Company or otherwise, (hereinafter, a "proceeding") by reason of the fact that he or she, or a person of whom he or she is the heir, executor, or administrator, is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer or trustee of another company or of a partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit plans), or where the basis of such proceeding is any alleged action or failure to take any action by such person while acting in an official capacity as a director or officer of the Company or in any other capacity on behalf of the Company while such person is or was serving as a director or officer of the Company, against all expenses, liability and loss, including but not limited to attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement whether with or without court approval, actually incurred or paid by such person in connection therewith. b. Notwithstanding the foregoing, except as provided in Section 8(f) below, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. c. Subject to the limitation set forth above concerning proceedings initiated by the person seeking indemnification, the right to indemnification conferred in this Section 8 shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding (or part thereof) or in enforcing his or her rights under this Section 8 in advance of the final disposition thereof promptly after receipt by the Company of a request therefor stating in reasonable detail the expenses incurred; provided, however, that to the extent required by law, the payment of such expenses incurred by a director or officer of the Company in advance of the final disposition of a proceeding shall be made only upon receipt of an undertaking, by or on behalf of such person, to repay all amounts so advanced 16 if and to the extent it shall ultimately be determined by a court that he or she is not entitled to be indemnified by the Company under this Section 8, or in the case of a criminal action, the majority of the Board of Directors so determines that he or she is not entitled to be indemnified by the Company, or otherwise. d. The right to indemnification and advancement of expenses provided herein shall continue as to a person who has ceased to be a director or officer of the Company or to serve in any of the other capacities described herein, and shall inure to the benefit of the heirs, executors and administrators of such person. e. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Section 8, except with respect to indemnification for liabilities arising under the Securities Act of 1933, that the Company has undertaken to submit to a court for adjudication, shall be decided only by arbitration as provided in Section 15 of this Agreement. f. The Company shall reimburse an indemnified person or his representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending any arbitration pursuant to Section 15 of this Agreement. g. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of a final disposition conferred in this Section 8 and the right to payment of expenses conferred in Section 13 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses hereunder may be entitled under any Bylaw, agreement, vote of shareholders, vote of directors or otherwise, both as to actions in his or her official capacity and as to actions in any other capacity while holding that office, the Company having the express authority to enter into such agreements or arrangements as the Board of Directors deems appropriate for the indemnification of and advancement of expenses to present or future directors and officers as well as employees, representatives or agents of the Company in connection with their status with or services to or on behalf of the Company or any other Company, partnership, joint venture, trust or other enterprise, including any employee benefit plan, for which such person is serving at the request of the Company. h. The Company may create a fund of any nature which may, but need not be, under the control 17 of a trustee, or otherwise secure or insure in any manner its indemnification obligations, including its obligation to advance expenses, whether arising under or pursuant to this Section 8 or otherwise. i. The Company may purchase and maintain insurance on behalf of any person who is or was a director or officer or representative of the Company, or is or was serving at the request of the Company as a representative of another Company, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Company has the power to indemnify such person against such liability under the laws of this or any other state. Neither the modification, amendment, alteration or repeal of this Section 8 or any of its provisions nor the adoption of any provision inconsistent with this Section 8 or any of its provisions shall adversely affect the rights of any person to indemnification and advancement of expenses existing at the time of such modification, amendment, alteration or repeal or the adoption of such inconsistent provision. 9. Non-Competition. During the term of this Agreement and for one year after the Date of Termination, the Executive shall refrain from competing with the Company or any subsidiary of the Company except with the Company's prior written consent. The phrase "refrain from competing with the Company or any subsidiary of the Company" shall mean that the Executive will not engage, directly or indirectly (including, by way of example only, as a principal, partner, venturer, employee or agent) nor have any direct or indirect interest in any enterprise (a "Competing Enterprise") which competes with the Company or any subsidiary thereof by engaging a web or wireless based stock trading/transactional e-commerce services business or in substantial and direct competition with any other business operation actively conducted by the Company or its subsidiaries at the Date of Termination. It is agreed that the foregoing provisions shall not restrict the Executive from either (i) being a director of or having any investments or other interests in an enterprise which is not a competing enterprise, or (ii) having any investments in any competing enterprise the stock of which is listed on a national securities exchange or traded publicly over-the-counter so long as such investment does not give the Executive more than five percent (5%) of the voting stock of such enterprise. Provided further that if the Executive's employment hereunder is terminated pursuant to Section 5(e) and the Executive provides a written waiver of the Lump Sum Payment, the Executive shall 18 be automatically released from the limitations imposed by this Section 9 and this Section shall be of no force and effect. 10. Non-Solicitation of Customers and Suppliers. The Executive agrees that during his employment with the Company he shall not, directly or indirectly, solicit the trade of, or trade with, any customer, prospective customer, supplier, or prospective supplier of the Company (provided that it shall not be deemed a breach of this Agreement if the Executive solicits such persons for goods or services unrelated to any business of the Company) for any business purpose other than for the benefit of the Company. The Executive further agrees that for two (2) years following termination of his employment with the Company, including without limitation termination by the Company for cause or without cause, the Executive shall not, directly or indirectly, solicit the trade of, or trade with, any customers or suppliers, or prospective customers or suppliers, of the Company. Provided further that if the Executive's employment hereunder is terminated pursuant to Section 5(e) and the Executive provides a written waiver of the Lump Sum Payment, the Executive shall be automatically released from the limitations imposed by this Section 10 and this Section shall be of no force and effect. 11. Non-Solicitation of Employees. The Executive agrees that, during his employment with the Company and for two (2) years following termination of the Executive's employment with the Company, including without limitation termination by the Company for cause or without cause, the Executive shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, (other than pursuant to general, non-targeted advertisements) any employee of the Company to leave the Company for any reason whatsoever, or hire any employee of the Company. Provided further that if the Executive's employment hereunder is terminated pursuant to Section 5(e) and the Executive provides a written waiver of the Lump Sum Payment, the Executive shall be automatically released from the limitations imposed by this Section 11 and this Section shall be of no force and effect. 12. Confidentiality and Inventions. The Executive agrees: a. To keep secret all confidential matters of the Company and its subsidiaries and affiliates and not to disclose them to anyone outside the Company or its subsidiaries and affiliates, either during or after his employment with the Company, except with the Company's prior written consent or as required by law; 19 b. To deliver promptly to the Company on termination of employment of the Executive by the Company all memoranda, notes, records, reports and other documents (and all copies thereof) with respect to any such confidential matters and other proprietary information (such as customers lists, suppliers lists, etc.) which the Executive may then possess or have under his control (For purposes of this Section 12, all information which is not publicly available shall be deemed to be confidential and covered by the foregoing provisions); c. He will promptly and fully disclose to the Company or such officer or other agent as may be designated by the Company any and all inventions made or conceived by Executive (whether made solely by Executive or jointly with others) during employment with the Company (i) which are along the line of the business, work or investigations of the Company, or (ii) which result from or are suggested by any work which Executive may do for or on behalf of the Company; and d. He will assist the Company and its nominees during and subsequent to such employment in every proper way (entirely at its or their expense) to obtain for its or their own benefit patents for such inventions in any and all countries; the said inventions, without further consideration other than such salary as from time to time may be paid to him by the Company as compensation for his services in any capacity, shall be and remain the sole and exclusive property of the Company or is nominee whether patented or not; and e. He will keep and maintain adequate and current written records of all such inventions, in the form of but not necessarily limited to notes, sketches, drawings, or reports relating thereto, which records shall be and remain the property of and available to the Company at all times. f. Promptly upon termination of his employment, he will disclose to the Company, or to such officer or other agent as may be designated by the Company, all inventions which have been partly or wholly conceived, invented or developed by him during employment with the Company (i) which are along the line of the business, work or investigations of the Company, or (ii) which result from or are suggested by any work which Executive may do for or on behalf of the Company for which applications for patents have not been made and will thereafter execute all such instruments of the character hereinbefore referred to, and will take such steps as may be necessary to secure and assign to the Company the exclusive rights in 20 and to such inventions and any patents that may be issued thereon any expense therefor to be borne by the Company. g. He will not at any time aid in attacking the patentability, scope, or validity of any invention to which the provisions of subparagraphs (c) through (f), above, apply. 13. Legal Fees. In the event that (i) Executive institutes any legal action to enforce his rights under, or to recover damages for breach of this agreement, or (ii) the Company institutes any action to avoid making any payments due to Executive under this agreement, Executive, if he is the prevailing party, shall be entitled to recover from the Company any actual expenses for attorney's fees and other disbursements incurred by him in relation thereto. 14. Expenses of Agreement. The Company shall pay all legal fees and expenses incurred by the Executive (or reimburse the Executive for any such fees or expenses previously paid by him), to a maximum cost to the Executive of $5,000 in respect of the negotiation and preparation of this Agreement and advice related thereto. 15. Arbitration. Any disputes hereunder shall be settled as follows: a. Election Of Arbitration. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. b. Selection Of Arbitrators. The arbitrators shall be selected as follows: In the event the Company and Executive agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and Executive do not so agree, the Company and Executive shall each select one independent, qualified arbitrator, and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. c. Conduct Of Arbitration. Arbitration shall take place in Stamford, Connecticut or any other 21 location mutually agreeable to the parties. Reasonable notice of the time and place of arbitration shall be given to all persons as shall be required by law, and such persons or their authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. d. Secrecy Of Proceedings. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or Executive and their respective attorneys and their respective experts, who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. e. Relief. The arbitrators, who shall act by majority vote, shall be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 16. Notices. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be delivered personally or by registered or certified mail addressed to the party concerned at the following addresses: If to the Company: SmartServ Online, Inc. Metro Center One Station Place Stamford, CT 06902 Attention: General Counsel With a copy to: James J. Barnes, Esq. Buchanan Ingersoll Professional Corporation One Oxford Centre, 20th Floor 301 Grant Street Pittsburgh, PA 15219-1410 If to the Executive: 22 Mr. Alan G. Bozian 50 East 89th Street New York, NY 10028 With a copy to: J. Gregory Milmoe, Esq. Skadden, Arps, Slate, Meagher & Flom 4 Times Square New York, NY 10036 or to such other address as shall be designated by notice in writing to the other party in accordance herewith. Notices and other communications hereunder shall be deemed effectively given when personally delivered, or, if sent by overnight courier, upon receipt, or, if mailed, 48 hours after deposit in the United States first class mail, postage prepaid. 17. Miscellaneous. a. This Agreement supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. b. (i) This Arrangement shall inure to the benefit of the Executive's heirs, representatives or estate to the extent stated herein. (ii) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers the agreement provided for in this Subsection 17 (b) (ii) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. c. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect the right at a later time to enforce such provisions thereafter. No waiver by either party of the breach of any term or covenant 23 contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach or a waiver of the breach of any other term or covenant contained in this Agreement. d. In the event any one or more of the covenants, terms or provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity of the remaining covenants, terms and provisions contained herein shall be in no way affected, prejudiced or disturbed thereby. e. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except as provided in Subsection 17(b) above. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this Subsection 17(e) the Company shall have no liability to pay any amount so attempted to be assigned or transferred. f. This Agreement shall be governed by laws of the State of New York, without regard to its choice of law provisions. 24 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. ATTEST: SMARTSERV ONLINE, INC: By: By: ------------------------- ------------------------ WITNESS: EXECUTIVE: - ------------------------- --------------------------- Alan G. Bozian 25 EX-23.1 14 0014.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 13, 1999 in the Registration Statement (Form SB-2) and related Prospectus of SmartServ Online, Inc. for the registration of 668,715 shares of its common stock and Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 (File No. 333-114) for the registration of 1,047,672 shares of its common stock. /s/ Ernst & Young LLP Stamford, CT August 2, 2000 -----END PRIVACY-ENHANCED MESSAGE-----