-----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, UmvToTjXQXr9wrlpgIURsZm06JygR1LMp7vz3tDlSLAe75Ysd/k7HM0IwCGa2a8T +C9Ec5fHsB1PZa3dM0uLzg== 0000910680-03-000522.txt : 20030604 0000910680-03-000522.hdr.sgml : 20030604 20030604152705 ACCESSION NUMBER: 0000910680-03-000522 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTSERV ONLINE INC CENTRAL INDEX KEY: 0001005698 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133750708 STATE OF INCORPORATION: DE FISCAL YEAR END: 0902 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28008 FILM NUMBER: 03732500 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 10QSB 1 mar312003-10q.txt MARCH 31, 2003 ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 -------------- Commission file number 0-28008 ------- SmartServ Online, Inc. - -------------------------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 13-3750708 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Metro Center, One Station Place, Stamford, Connecticut 06902 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (203) 353-5950 - -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of common stock, $.01 par value, outstanding as of May 28, 2003 was 12,007,912. Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- ================================================================================ SmartServ Online, Inc. Form 10-QSB Index
PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - March 31, 2003 (unaudited) and December 31, 2002......................2 Consolidated Statements of Operations - three months ended March 31, 2003 and 2002 (unaudited)................................................................................4 Consolidated Statement of Changes in Stockholders' Equity (Deficiency) - three months ended March 31, 2003 (unaudited)....................................................................6 Consolidated Statements of Cash Flows - three months ended March 31, 2003 and 2002 (unaudited)....................................................................................7 Notes to Unaudited Consolidated Financial Statements................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................................18 Item 3. Controls and Procedures............................................................................24 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................................25 Item 2. Changes in Securities and Use of Proceeds..........................................................25 Item 6. Exhibits and Reports on Form 8-K...................................................................28 Signatures.........................................................................................29
1 SMARTSERV ONLINE, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2003 2002 -------------------- ------------------- (UNAUDITED) ASSETS Current assets Cash $ 21,749 $ 154,759 Accounts receivable 140,461 55,907 Accrued interest receivable 40,951 50,658 Prepaid compensation 117,500 117,500 Prepaid expenses 72,252 164,258 Deferred financing costs 136,098 -- -------------------- ------------------- Total current assets 529,011 543,082 -------------------- ------------------- Property and equipment, net 1,201,272 1,573,978 Other assets Capitalized software development costs, net of accumulated amortization of $300,562 at March 31, 2003 and $208,681 at December 31, 2002 796,586 888,467 Security deposits 209,974 238,690 Notes receivable from officer, net of an allowance for uncollectibility of $664,640 -- -- Prepaid Compensation 78,333 107,708 -------------------- ------------------- 1,084,893 1,234,865 -------------------- ------------------- Total Assets $ 2,815,176 $ 3,351,925 ==================== ===================
2 SMARTSERV ONLINE, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2003 2002 -------------------- ------------------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities Accounts payable $ 1,900,396 $ 1,307,342 Accrued liabilities 347,721 476,346 Accrued salaries 430,782 295,437 Note payable 733,909 500,000 -------------------- ------------------- Total current liabilities 3,412,808 2,579,125 -------------------- ------------------- Deferred revenues 162,600 193,294 Deferred lease costs 243,494 242,300 Accounts payable - noncurrent -- 163,907 Commitments and Contingencies - Note 9 Stockholders' Equity (Deficiency) Preferred stock - $0.01 par value Authorized - 1,000,000 shares Issued and outstanding - None -- -- Common stock - $.01 par value Authorized - 40,000,000 shares Issued and outstanding - 11,949,088 shares at March 31, 2003 and 11,436,240 shares at December 31, 2002 119,490 114,362 Additional paid-in capital 74,700,977 73,527,939 Notes receivable from officers (609,996) (609,996) Accumulated deficit (75,214,197) (72,859,006) -------------------- ------------------- Total stockholders' equity (deficiency) (1,003,726) 173,299 -------------------- ------------------- Total Liabilities and Stockholders' Equity (Deficiency) $ 2,815,176 $ 3,351,925 ==================== ===================
See accompanying notes. 3 SMARTSERV ONLINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ------------------------------------------ 2003 2002 ------------------- ------------------- Revenues $ 230,987 $ 28,821 ------------------- ------------------- Costs and expenses: Costs of services (1,216,831) (1,531,526) Sales and marketing expenses (276,534) (1,243,354) General and administrative expenses (999,180) (1,021,550) Stock-based compensation (28,194) (172,015) ------------------- ------------------- Total costs and expenses (2,520,739) (3,968,445) ------------------- ------------------- Loss from operations (2,289,752) (3,939,624) Other income (expense) Interest income 4,532 22,684 Interest expense and other financing costs (375,886) (182,241) Gain from extinguishment of debt 305,822 -- Foreign exchange gain (loss) 93 (10,166) ------------------- ------------------- (65,439) (169,723) ------------------- ------------------- Net loss $ (2,355,191) $ (4,109,347) =================== =================== Basic and diluted loss per common share $ (0.20) $ (0.66) =================== =================== Weighted average shares outstanding - basic and diluted 11,738,809 6,255,960 =================== ===================
The following table illustrates the amount of stock-based compensation charges that would have been 4 recorded in the categories of the statement of operations had stock-based compensation not been separately stated therein:
THREE MONTHS ENDED MARCH 31 ---------------------------------------------- 2003 2002 --------------------- --------------------- Costs of services $ 396 $ 26,735 Sales and marketing expenses -- -- General and administrative expenses (28,590) (198,750) --------------------- --------------------- $ (28,194) $ (172,015) ===================== =====================
See accompanying notes. 5 SMARTSERV ONLINE, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
NOTES COMMON STOCK RECEIVABLE ADDITIONAL PAR FROM PAID-IN ACCUMULATED SHARES VALUE OFFICERS CAPITAL DEFICIT ------------- -------------- ------------- --------------- --------------- Balances at December 31, 2002 11,436,240 $ 114,362 $(609,996) $ 73,527,939 $(72,859,006) Issuance of common stock upon exercise of employee stock options 5,749 57 -- 9,595 -- Issuance of common stock upon exercise of warrants 383,562 3,836 -- 322,191 -- Issuance of common stock to vendors to satisfy debt 123,537 1,235 -- 162,672 -- Change in market value of employee stock options -- -- -- (1,323) -- Issuance of warrants related to debt financing -- -- -- 273,540 -- Beneficial conversion feature of 10% notes -- -- -- 406,363 -- Net loss for the period -- -- -- -- (2,355,191) ------------- -------------- ------------- --------------- --------------- Balances at March 31, 2003 11,949,088 $ 119,490 $(609,996) $ 74,700,977 $(75,214,197) ============= ============== ============= =============== ===============
See accompanying notes. 6 SMARTSERV ONLINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ---------------------------------------- 2003 2002 ------------------- ------------------ OPERATING ACTIVITIES Net loss $ (2,355,191) $ (4,109,347) Adjustments to reconcile net loss to net cash used for operating activities: Gain from extinguishment of debt (305,822) -- Depreciation and amortization 464,587 501,750 Noncash compensation costs 28,194 172,015 Amortization of deferred financing costs 338,964 -- Amortization of deferred revenues (168,694) -- Changes in operating assets and liabilities Accounts receivable (84,554) (62,723) Accrued interest receivable 9,707 -- Prepaid expenses 100,756 149,602 Accounts payable and accrued liabilities 631,790 16,371 Deferred revenues 138,000 82,000 Security deposit 28,716 (16,993) ------------------- ------------------ Net cash used for operating activities (1,173,547) (3,267,325) ------------------- ------------------ INVESTING ACTIVITIES Purchase of equipment -- (168,490) Capitalization of software development costs -- (71,798) ------------------- ------------------ Net cash used for investing activities -- (240,288) ------------------- ------------------ FINANCING ACTIVITIES Proceeds from the issuance of notes and warrants - net 1,000,000 -- Proceeds from the issuance of common stock 335,537 11,945 Repayment of note payable (295,000) -- ------------------- ------------------ Net cash provided by financing activities 1,040,537 11,945 ------------------- ------------------ Decrease in cash and cash equivalents (133,010) (3,495,668) Cash - beginning of period 154,759 6,532,323 ------------------- ------------------ Cash - end of period $ 21,749 $ 3,036,655 =================== ==================
See accompanying notes. 7 SMARTSERV ONLINE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 1. NATURE OF BUSINESS SmartServ Online, Inc. ("SmartServ" or the "Company") commenced operations on August 20, 1993 and had its initial public offering on March 21, 1996. The Company offers wireless applications, development and hosting services that allow wireless carriers, content providers and financial services firms to deliver content to their work forces and customers. SmartServ's products can deliver proprietary information, as well as delayed and real-time financial market data, business and financial news, national and local weather reports and other business and entertainment information in a user-friendly manner. The Company's mobile data solutions are designed to generate additional revenue, increase operating efficiency, and extend brand awareness for wireless carriers, enterprises and content providers and are delivered via J2ME, BREW, WAP and SMS, as well as RIM Blackberry and Pocket PC devices. SmartServ has established customer and distribution relationships with a growing network of strategic partners and wireless carriers, including Verizon Wireless, AT&T Wireless, Nextel, ALLTEL Wireless, U.S. Cellular, QUALCOMM and Motorola, as well as content providers, including BusinessWeek Online, S&P Comstock and The Wall Street Journal Online (Dow Jones). The economic downturn in general, and its impact on the telecommunications industry in particular, have caused telecommunications service providers to reduce capital spending, personnel and debt, as well as new service introductions. This has resulted in delays in the build-out of high speed carrier data networks and availability of data-enabled wireless devices, causing the market for SmartServ's financial data and transaction services to be lackluster. In addition, many financial services firms have curtailed new product development to focus on data security and recovery. Consequently, the potential demand for the Company's products and services has been significantly delayed. Such delays have had a very detrimental effect on the Company's operations and have resulted in the Company's inability to implement its business plan and related marketing strategies. Consequently, in May 2002, the Company commenced an effort to realign its infrastructure and related overhead to correlate with reductions in projected revenue. As part of this effort, management closed the Company's UK and Hong Kong sales offices and downsized its domestic operations through staff reductions to a level sufficient to support the Company's projected operations. In both March and May 2003, the Company again reduced its cost structure through the termination of additional personnel. Personnel headcount has been reduced from 66 in May 2002 to the current level of 25. These efforts have reduced the Company's average monthly operating expenses from approximately $1,090,000 in July 2002 to $712,000 in February 2003 to approximately $425,000 commencing June 2003, excluding noncash stock compensation and depreciation and amortization. As a result of the factors identified above, the Company is in need of additional capital to enable it continue as a going concern. The following chart provides an analysis of the Company's capital requirements for the year ending December 31, 2003 based on projected revenues 8 of $3,000,000: % of Revenue Capital Goal Required ------------- ----------------------- 100 $ 3,300,000 50 3,900,000 0 4,800,000 However, no assurance can be given that the Company will be able meet its revenue projections, maintain its cost structure as presently configured, or raise additional capital on satisfactory terms. Should the Company be unable to raise additional debt or equity financing, it will be forced to seek a merger or cease operations. The Company'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. The Company has, since its inception, earned limited revenues and incurred substantial recurring operating losses, including net losses of $2,355,191 for the three month period ended March 31, 2003, net losses of $8,037,173 and $14,819,860 for the years ended December 31, 2002 and 2001, respectively, and net losses of $30,993,559 and $7,124,126 for the years ended June 30, 2000 and 1999, respectively. Additionally, it had an accumulated deficit of $75,214,197 at March 31, 2003. 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. SmartServ's plan of operation to eliminate the uncertainty surrounding its ability to continue as a going concern focuses on licensing its applications and related services to wireless carriers and financial services firms. For wireless carriers, the Company delivers data and branded content that can increase wireless data revenue and customer retention. For content providers, the Company provides an added source of revenue by distributing their content and brand to the wireless users. For financial services firms, the Company offers solutions that can increase productivity and customer retention through the mobile delivery of proprietary data, as well as market data and other useful content. Management believes that SmartServ's primary source of revenues will be derived from revenue-share licensing contracts with its technology partners, content providers and wireless carrier and financial services customers. As an example, SmartServ has launched several products on the Verizon Wireless network. The Company's financial content products have been launched on Verizon's BREW (Binary Runtime Environment for Wireless) network under the Wall Street Journal Online brand name, while its SMS (Short Message Service) financial alert product has been launched on Verizon's V-text portal. Additionally, the Company has launched its AreaWeather and AstroCom Horoscope lifestyle products on Verizon's BREW network. Salomon Smith Barney, in conjunction with SmartServ, has launched a wireless version of its GEO (Global Equities Online) product. GEO combines Salomon's proprietary data, such as morning call notes, with SmartServ's financial data products to form a fully integrated financial tool. While management believes that these relationships are important to the Company's success, no assurance can be given that these customers will be successful in their marketing efforts or that the Company's products and services will be well received in the marketplace. 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions of Form 10-QSB and Rule 310 of Regulation SB and, therefore, do not include all information and notes necessary for a presentation of results of operations, financial position and cash flows in conformity with accounting principles generally accepted in the United States. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the period ended December 31, 2002. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made. Results of operations for the three months ended March 31, 2003 are not necessarily indicative of those expected for the year ending December 31, 2003. PRINCIPLES OF CONSOLIDATION - --------------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Significant intercompany accounts and transactions have been eliminated in consolidation. 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 - ------------------- The Company recognizes revenue from the use of its products and services in accordance with American Institute of Certified Public Accountants' ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition", SOP 98-9, "Modification of SOP 97-2, Software Recognition, With Respect to Certain Transactions", and the SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". Specifically, there must be (1) evidence of an arrangement, (2) delivery of our products and services, (3) fixed and determinable fees and (4) probable collectibility of such fees. Revenues from multi-element revenue agreements are recognized based on vendor specific objective evidence of individual components or, if the elements in the arrangement cannot be separated, as has been the situation to date, recognized as one element ratably over the term of the agreement. Subscription Revenue - -------------------- Subscription revenue consists of fixed and variable charges for the usage of the Company's products and services provided through its relationships with wireless telecommunications carriers and a financial services company. Such revenue is recognized as the services are provided on a monthly basis. Development and Integration Revenue - ----------------------------------- Development and integration fees are charged for the development of private-labeled applications for customers that incorporate their proprietary data into SmartServ's products and services. Such fees are recognized ratably over the term of the agreement. Service Revenue - --------------- Service revenue is derived from consulting or by providing other professional services to customers. Revenue from the performance of such services is recognized when the services are performed. Losses, if 10 any, from professional services contracts are recognized at the time such losses are identified. Maintenance and support fees paid in advance are nonrefundable and are recognized ratably over the term of the agreement, generally 12 months. Hosting Services - ---------------- Hosting service arrangements are based on a flat monthly fee or on the number of users and may include a one-time setup fee. The one-time setup fee is recognized over the term of the hosting arrangement, and the hosting services revenue is recognized monthly as earned on a fixed fee or variable rate basis. DEFERRED REVENUES - ----------------- Deferred revenues, resulting from customer prepayments, are recognized as services are provided throughout the term of the agreement with the respective customer. EARNINGS PER SHARE - ------------------ Basic earnings per share is computed on the weighted average number of common shares outstanding; however, it does not include the unvested portion of restricted shares in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Diluted earnings per share reflects the increase in the weighted average common shares outstanding that would result from the assumed exercise of outstanding stock options calculated using the treasury stock method when dilutive. CAPITALIZED SOFTWARE DEVELOPMENT COSTS - -------------------------------------- In connection with certain contracts entered into between SmartServ and its customers, as well as other development projects, the Company has capitalized costs related to certain product enhancements and application development in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Specifically, all software development costs are charged to expense as incurred until technological feasibility has been established for the product. Thereafter, additional costs incurred for development are capitalized. The Company ceased capitalizing such costs in connection with its current product offering during the quarter ended September 2002 when the products became available for general release to customers. Amortization of capitalized software development costs commences with the products' general release to customers and is provided on a product-by-product basis over the economic life, not to exceed three years, using the greater of the straight-line or a flow of revenue method. On an ongoing basis, SmartServ reviews the future recoverability of its capitalized software development costs for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. When such events or changes in circumstances do occur, an impairment loss is recognized if the undiscounted future cash flows expected to be generated by the asset are less than its carrying value. The impairment loss reduces the asset to its fair value. FAIR VALUE OF FINANCIAL INSTRUMENTS - ----------------------------------- The carrying amounts of our financial instruments approximate fair value due to their terms and maturities. SUPPLEMENTAL CASH FLOW DATA - --------------------------- The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents. During the three months ended March 31, 2003, the Company issued 123,537 shares of common stock to 5 vendors in settlement of the Company's obligations, aggregating $164,000, to such vendors. These transactions are considered non-cash transactions for the purposes of the Statement of Cash Flows. 11 Interest, debt origination and other financing costs paid during the three months ended March 31, 2003 and 2002 were $70,000 and $187,000, respectively. CONCENTRATION OF CREDIT RISK - ---------------------------- Financial instruments that potentially subject SmartServ to concentrations of credit risk consist solely of accounts receivable. At March 31, 2003 and December 31, 2002, accounts receivable consist principally of amounts due from a financial services company. 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, net of accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of three to ten years. On an ongoing basis, SmartServ reviews the future recoverability of its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. When such events or changes in circumstances do occur, an impairment loss is recognized if the undiscounted future cash flows expected to be generated by the asset are less than its carrying value. The impairment loss reduces the asset to its fair value. ADVERTISING COSTS - ----------------- Advertising costs are expensed as incurred and were approximately $3,561 and $107,000 during the three month periods ended March 31, 2003 and 2002, respectively. STOCK BASED COMPENSATION - ------------------------ Employee Stock Option Plans - --------------------------- The Company maintains several stock option plans for employees and directors that provide for the granting of stock options for a fixed number of common shares with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for such grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, compensation expense is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. Certain options, which have been repriced, are subject to the variable plan requirements of APB No. 25, which requires the Company to record compensation expense for changes in the fair value of its common stock. Non-Employee Compensation - ------------------------- The Company has issued warrants to purchase common stock to non-employee consultants as compensation for services rendered or to be rendered to the Company. The warrants are recorded in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and are valued in accordance with the Black-Scholes pricing methodology. The Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, which was originally provided under SFAS No. 123. SFAS No. 148 also improves the timeliness of disclosures by requiring the information to be included in interim, as well as, annual financial statements. SFAS No. 123 requires companies to recognize compensation expense based on the respective fair values of the options at the date of grant. Companies that choose not to adopt such 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 loss and loss per share, as if the fair value based method of accounting had been applied. 12 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. As such, the pro forma net loss and loss per share are not indicative of future years. SmartServ's pro forma information is as follows:
THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2003 2002 --------------------- ------------------- Net loss as reported $ (2,355,191) $ (4,109,347) Employee stock-based compensation included in net loss 1,393 119,240 Employee stock-based compensation pursuant to SFAS 123 (917,494) (1,091,263) --------------------- ------------------- Proforma net loss $ (3,274,008) $ (5,319,850) ===================== =================== Basic and diluted loss per share $(0.20) $(0.66) ===================== =================== Proforma basic and diluted loss per share $(0.28) $(0.85) ===================== ===================
FOREIGN CURRENCY TRANSLATION - ---------------------------- The financial statements of the Company's foreign subsidiaries whose functional currencies are other than the U.S. dollar, have been translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translation. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average rate for the year. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which provides a single accounting model for measuring impairment of long-lived assets and the disposal of such assets. The adoption of SFAS No. 144 had no impact on the Company's consolidated results of operations, financial position or cash flows. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The Company adopted SFAS No. 145 in 2002. Accordingly, the Company's gain on extinguishment of debt has been recorded in "Other income" in the consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with an Exit or Disposal Activity". SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)", by potentially spreading out the reporting of expenses related to restructuring activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003, as required, and does not believe that the adoption of this new standard will have a material effect on its consolidated results of operations, financial position or cash flows. 13 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: MARCH 31, DECEMBER 31, 2003 2002 ------------------- ----------------- Data processing equipment $ 4,840,737 $ 4,842,941 Office furniture and equipment 151,263 151,263 Display equipment 71,335 71,335 Leasehold improvements 69,852 69,852 ------------------- ----------------- 5,133,187 5,135,391 Accumulated depreciation (3,931,915) (3,561,413) ------------------- ----------------- $ 1,201,272 $ 1,573,978 =================== ================= 4. NOTE RECEIVABLE FROM OFFICER In December 2000, the Company's Board of Directors authorized the issuance of a line of credit to Sebastian Cassetta, SmartServ's Chief Executive Officer, for an amount not to exceed $500,000. Such amount bears interest at the prime rate and matures on March 20, 2004. Pursuant to the terms of the note, interest for the period January 2, 2001 to June 30, 2002 has been accrued and is payable at maturity. Commencing July 1, 2002 until maturity, interest shall be payable semi-annually in arrears on January 1st and July 1st. The Company has received the semi-annual interest for the period July 1, 2002 through December 31, 2002. The financial statements at March 31, 2003 contain a valuation allowance for a potential loss of $552,467, relating to the collectibility of Mr. Cassetta's note and the interest accrued thereon through June 30, 2002. Additionally, the financial statements contain a valuation allowance for a potential loss of $112,173, relating to interest earned by the Company pursuant to the restricted stock purchase agreement between the Company and Mr. Cassetta. 5. NOTES PAYABLE In May 2000, the Company entered into a Business Alliance Agreement with Hewlett-Packard Company ("HP") whereby the companies agreed to jointly market their respective products and services, and to work on the build-out of SmartServ's domestic and international infrastructure. In furtherance of these objectives, HP provided the Company with a line of credit of up to $20,000,000 for the acquisition of approved hardware, software and services. On September 10, 2002, the Company and HP amended the terms of the promissory note to provide for the (i) reduction of SmartServ's aggregate outstanding principal and accrued interest amount of $7,045,000 to $1,000,000, (ii) return of certain unused hardware by SmartServ, (iii) issuance by SmartServ of a warrant for the purchase of 50,000 shares of common stock and (iv) repayment of $500,000 of the amended obligation on September 10, 2002. The remaining $500,000 obligation was evidenced by a note, bearing an interest rate of 11%, secured by the Company's assets exclusive of its internally developed software products, and was satisfied through a partial repayment in February 2003. The Company recorded a gain of $305,822 resulting from the Company's partial repayment of the note in February 2003. In February 2003, the Company issued a convertible note to Global Capital Funding Group, LP ("Global") in consideration for the receipt of $1 million. The note bears interest at the rate of 10% per annum, and is 14 secured by the Company's assets, exclusive of its internally developed software products. The note matures on February 14, 2004, contains certain antidilution provisions, and may be converted into shares of SmartServ common stock at $1.10 per share. As additional consideration, the Company issued Global a warrant for the purchase of 200,000 shares of its common stock at an exercise price of $1.61 per share. The warrants have been valued in accordance with the Black-Scholes pricing methodology and recorded in the financial statements as deferred interest costs and netted against the outstanding obligation. Deferred interest costs are amortized into operations in accordance with the interest method. Alpine Capital Partners, Inc. ("Alpine") received a finder's fee of $70,000, representing 7% of the aggregate purchase price of the convertible note and a warrant to purchase 91,000 shares of common stock exercisable at $1.61 per share, expiring on February 14, 2005, in connection with this transaction. These warrants have been valued in accordance with the Black-Scholes pricing methodology and recorded in the financial statements as deferred compensation costs. This amount is being amortized into operations on a straight-line basis over the 12 month life of the obligation. Also in connection with the 10% convertible notes, the Company has recorded a non-cash charge for other financing costs of $304,772 representing a portion of the intrinsic value of the beneficial conversion feature of the notes. Emerging Issues Task Force ("EITF") Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" ("Issue No. 98-5") as more fully described in EITF Issue No. 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments", defines the beneficial conversion feature as the non-detachable conversion feature that is "in-the-money" at the date of issuance. Issue No. 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. During the quarter ending June 30, 2003, the Company will record a non-cash charge of $101,600 representing the amortization of the remainder of such beneficial conversion feature. In April 2003, the Company borrowed an additional $250,000 from Global and amended the convertible note to include such amount. As additional consideration, the Company issued Global a warrant for the purchase of 20,000 shares of its common stock at an exercise price of $1.20 per share. The warrants issued to Global and Alpine contain certain antidilution provisions and expire on February 14, 2006. 6. EQUITY TRANSACTIONS During the three months ended March 31, 2003, the Company issued 383,562 shares of common stock to investors upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $326,000. In February 2003, the Company issued an aggregate of 123,537 shares of common stock to 5 vendors in satisfaction of obligations for services rendered to the Company aggregating $164,000. The Company's failure to timely file its Form 10-KSB for the year ended December 31, 2002 has affected the following registration rights held by some of its stockholders and warrant holders. The Company is working expeditiously to cure these deficiencies: Obligations to Maintain Effective Registration Statements: - ---------------------------------------------------------- Vertical Ventures Investments, LLC holds a warrant to purchase up to 134,853 shares of common stock that have registration rights. The Registration Statement covering the shares underlying this warrant is no longer effective. The Company is required to pay a fee of $8,250 for the first month of the deficiency and a fee of $16,500 for each month thereafter until the shares underlying the warrant are registered. 15 Investors in the Company's September 2002 Equity Placement hold up to an aggregate of 3,701,943 shares of common stock, and warrants to purchase up to an aggregate of 1,499,723 shares of common stock, all with registration rights requiring the Company to use its commercially reasonable best efforts to maintain the effectiveness of the Registration Statement covering the shares of common stock and the shares underlying the warrants. The Registration Statement is no longer effective. Obligation to File a Registration Statement: - -------------------------------------------- Global Capital Funding Group, L.P. holds warrants to purchase up to 220,000 shares of common stock, and a convertible note convertible into 1,136,364 shares of common stock. The Company was required to file a Registration Statement covering all such shares on April 14, 2003. The Company has not yet filed the Registration Statement, and may be subject to a penalty fee equal to $20,000 for each month that this deficiency remains uncured. 7. 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. Certain of these stock option 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 its common stock. Stock-based compensation for the three months ended March 31, 2003 and 2002 consisted primarily of the impact of changes in the market value of the Company's common stock on the value of options to purchase common stock issued to employees and the amortization of deferred costs associated with the prior issuance of warrants to purchase common stock to various consultants. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended March 31 -------------------------------------------- 2003 2002 --------------------- --------------------- Numerator: Net loss $ (2,355,191) $ (4,109,347) ===================== ===================== Denominator: Weighted average shares - basic and diluted 11,738,809 6,255,960 ===================== ===================== Basic and diluted loss per common share $ (0.20) $ (0.66) ===================== =====================
Outstanding employee stock options and other warrants to purchase an aggregate of 6,296,000 and 4,032,000 shares of common stock at March 31, 2003 and 2002, respectively, were not included in the computations of diluted earnings per share because the Company reported a losses for the periods and, therefore their inclusion would be antidilutive. 16 9. COMMITMENTS AND CONTINGENCIES On or about February 29, 2000, Commonwealth Associates, L.P. ("Commonwealth") filed a complaint against us in the Supreme Court of the State of New York, County of New York. The complaint alleged that in August of 1999, Commonwealth and SmartServ entered into an engagement letter that provided for a nonrefundable fee to Commonwealth of $15,000 payable in cash or common stock at SmartServ's option. The complaint alleged that SmartServ elected to pay the fee in stock and, as a result, Commonwealth sought 13,333 shares of common stock or at least $1,770,000 together with interest and costs. In our defense, we denied that we elected to pay in stock. On March 4, 2003, SmartServ received a favorable decision in this matter after a trial held in the Supreme Court of the State of New York. The decision holds that, consistent with SmartServ's defense, SmartServ is required to pay Commonwealth a retainer fee of only $13,439, plus interest and certain costs. Commonwealth's time to appeal has not yet expired. While the Company intends to vigorously defend any appeal of the decision, the unfavorable outcome of such an appeal could have a material adverse effect on the Company's financial condition, results of operations and cash flows. 10. SUBSEQUENT EVENT In April 2003, the Company issued 58,824 shares of common stock to accredited investors upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $50,000. In May 2003, the Company in consideration of $358,000 issued 3.58 units consisting of convertible notes and warrants to purchase common stock ("Units") to 8 accredited investors. Each Unit consists of a $100,000 convertible note and a warrant to purchase 200,000 shares of the Company's common stock. The convertible notes bear interest at 8% per annum, are convertible into the Company's common stock at $0.744 (the average of the closing bid prices of the Company's common stock for the 5 days prior to the closing of the transaction) per share and mature on the earlier of November 19, 2003 or the closing of a subsequent equity placement of not less than $3 million. The warrants are exercisable at $0.744 per share and expire on May 19, 2006. This transaction represents the initial sale of a maximum of 15 Units contemplated to be sold by the Company ("Bridge Offering"). Spencer Trask Ventures, Inc. ("Spencer Trask") acted as a finder for this transaction. As consideration therefor, Spencer Trask will receive a cash fee equal to 10% of the aggregate purchase price of all of the Units sold and upon receipt of approval from the NASDAQ Stock Market for the sale of the remaining Units will receive (i) a warrant to purchase a number of Units equal to 20% of the Units sold ("Finder's Warrant") and (ii) 33,333 shares of restricted common stock per Unit sold. The Finder's Warrant will be exercisable through May 19, 2008. Such fees are payable to Spencer Trask upon the closing of an aggregate of $1.2 million in the Bridge Offering. In addition, Spencer Trask will receive a non-accountable expense allowance equal to 3% of the aggregate proceeds of all Units sold in the Bridge Offering. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SmartServ Online, Inc. commenced operations on August 20, 1993 and had its initial public offering on March 21, 1996. We offer wireless applications, development and hosting services that allow wireless carriers, content providers and financial services firms to deliver content to their work forces and customers. Our products can deliver proprietary information, as well as delayed and real-time financial market data, business and financial news, national and local weather reports and other business and entertainment information in a user-friendly manner. Our mobile data solutions are designed to generate additional revenue, increase operating efficiency, and extend brand awareness for wireless carriers, enterprises and content providers and are delivered via J2ME, BREW, WAP and SMS, as well as RIM Blackberry and Pocket PC devices. SmartServ has established customer and distribution relationships with a growing network of strategic partners and wireless carriers, including Verizon Wireless, AT&T Wireless, Nextel, ALLTEL Wireless, U.S. Cellular, QUALCOMM and Motorola, as well as content providers, including BusinessWeek Online, Forbes.com, S&P Comstock and The Wall Street Journal Online (Dow Jones). Due to the substantial expenses and negative cash flows from operations that we have incurred, our auditors, in their report contained in our December 31, 2002 financial statements, have indicated that there is substantial doubt about our ability to continue as a going concern. The Company has earned limited revenues and has incurred net losses of $2,355,191 for the three month period ended March 31, 2003, net losses of $8,037,173 and $14,819,860 for the years ended December 31, 2002 and 2001, respectively, and net losses of $30,993,559 and $7,124,126 for the years ended June 30, 2000 and 1999, respectively. Additionally, the Company had an accumulated deficit of $75,214,197 at March 31, 2003. Although the Company'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, unless we are able to increase revenue and raise additional capital from investors, we will not be able to support our operations. Our plan of operation to eliminate the uncertainty surrounding the Company's ability to continue as a going concern focuses on licensing our applications and related services to wireless carriers and financial services firms. Such a strategy provides access to a large number of potential subscribers and allows SmartServ to leverage its market reach at minimal operating costs. For wireless carriers, we deliver data and branded content that can increase wireless data revenue and customer retention. For content providers, we provide an added source of revenue by distributing their content and brand to the wireless users. For financial services firms, we offer solutions that can increase productivity and customer retention through the mobile delivery of proprietary data, as well as market data and other useful content. SmartServ has the ability to customize the information package to be offered to each customer by device. Management believes that SmartServ's primary source of revenues will be derived from revenue-share licensing contracts with its technology partners, content providers and wireless carrier and financial services customers. As an example, the Company has launched several products on the Verizon Wireless network. Our financial content products have been launched on Verizon's BREW (Binary Runtime Environment for Wireless) network under the Wall Street Journal Online brand name, while our SMS (Short Message Service) financial alert product has been launched on Verizon's V-text portal. Additionally, the Company has launched its AreaWeather and AstroCom Horoscope lifestyle products on Verizon's BREW network. Salomon Smith Barney, in conjunction with SmartServ, has launched a wireless version of its GEO (Global Equities Online) product. GEO combines Salomon's proprietary data, such as morning call notes, with 18 SmartServ's financial data products to form a fully integrated financial tool. While management believes that these relationships are important to the Company's success, no assurance can be given that these customers will be successful in their marketing efforts or that the Company's products and services will be well received in the marketplace. As of May 28, 2003, SmartServ employed 25 people, all of whom were employed in the United States. All but one were full-time employees. SmartServ does not anticipate that staffing requirements associated with the implementation of its plan of operation will require the addition of any people during the year ending December 31, 2003. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2003 VERSUS QUARTER ENDED MARCH 31, 2002 During the quarter ended March 31, 2003, we recorded revenues of $230,987. Of such revenues, $208,100 were earned through our licensing agreement with Salomon Smith Barney. During the quarter ended March 31, 2002, we recorded revenues of $28,821. Of such revenues, $26,400 were earned through our licensing agreement with Salomon Smith Barney. During the quarters ended March 31, 2003 and 2002, we recognized $168,700 and $-0-, respectively, from the amortization of deferred revenues associated with this agreement. During the quarter ended March 31, 2003, we incurred costs of services of $1,216,831, a decrease of 20.5% over the quarter ended March 2002. Such costs decreased primarily due to reductions in US personnel, the reduction of computer depreciation and maintenance and the reduction of consulting costs incurred in connection with the development of the Company's systems' architecture and application platform. Components of the costs of service category consist primarily of information and communication costs ($148,900), personnel costs ($576,500), computer hardware leases, depreciation and maintenance costs ($323,100), facilities ($62,000) and amortization expenses relating to capitalized software development costs ($91,900). During the quarter ended March 31, 2002, we incurred costs of services of $1,531,526. Components of these costs consisted primarily of information and communication costs ($193,000), personnel costs ($706,700), systems consultants ($40,300), computer hardware leases, depreciation and maintenance costs ($510,000), and amortization expenses relating to capitalized software development costs ($62,300). During the quarter ended March 31, 2003 and 2002, we capitalized $-0- and $71,800, respectively, of development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("Statement No. 86"). During the quarter ended March 31, 2003, we incurred sales and marketing expenses of $276,534, a decrease of 77.8% over the quarter ended March 2002. Such costs decreased primarily due to travel and personnel reductions associated with the closing of the Company's Hong Kong and London sales offices, US personnel reductions, reductions in advertising and trade shows and reductions in professional fees. Components of the sales and marketing category consist primarily of personnel costs ($205,100), professional fees ($17,800), and travel and lodging ($32,700). During the quarter ended March 31, 2002, we incurred advertising and marketing expenses of $1,243,354. Components of these costs consisted primarily of professional fees ($76,600), personnel ($602,100), travel and lodging ($121,600), facilities ($39,900) and advertising and trade shows ($366,800). During the quarter ended March 31, 2003, we incurred general and administrative expenses of $999,180, a decrease of 2.2% over the quarter ended March 31, 2002. Components of the general and administrative category consist primarily of personnel costs ($319,200), professional fees ($331,100), facilities 19 ($121,400), insurance ($96,000) and computer hardware leases, depreciation and maintenance costs ($40,300). During the quarter ended March 31, 2002, we incurred general and administrative expenses of $1,021,550. Components of these costs consisted primarily for personnel costs ($336,800), facilities ($130,700), insurance ($145,300), computer hardware leases, depreciation and maintenance costs ($54,300) and professional fees ($257,100). During the quarter ended March 31, 2003, the net noncash credit for stock-based compensation amounted to $28,194 compared to a net noncash charge of $172,015 during the quarter ended March 31, 2002. Such noncash amounts are primarily related to the valuation of stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Certain employee stock options are subject to the variable plan requirements of APB No. 25, as they were repriced, and therefore, compensation expense is recognized for changes in the fair value of our common stock. Noncash charges for consulting services for the quarters ended March 31, 2003 and 2002 were $29,375 and $291,255, respectively, resulting primarily from the amortization of deferred costs associated with the prior issuance of warrants to purchase common stock to various financial, marketing and technical consultants. Interest income for the quarters ended March 31, 2003 and 2002 amounted to $4,532 and $22,684, respectively. Such amounts were earned primarily from our investments in money fund accounts and a note receivable from an officer. During the quarters ended March 31, 2003 and 2002, interest and other financing costs were $375,886 and $182,241, respectively. During the quarters ended March 31, 2003 and 2002, interest and other financing costs were incurred in connection with the $20 million line of credit facility with HP and the convertible note issued to Global Capital in February 2003. During the quarter ended March 31, 2003, the Company recorded a gain of $305,822 resulting from the partial repayment, in full settlement, of the amended promissory note issued to Hewlett-Packard Company. Basic and diluted loss per share was $0.20 for the quarter ended March 31, 2003 compared to $0.66 per share for the quarter ended March 31, 2002. The weighted average shares outstanding increased to 11,738,809 at March 31, 2003 from 6,255,960 at March 31, 2002. CAPITAL RESOURCES AND LIQUIDITY At March 31, 2003 and December 31, 2002, the Company had cash of $21,700 and $154,800, respectively. Net cash used in operations was $1,173,500 for the quarter ended March 31, 2003 compared to $3,267,300 during the quarter ended March 31, 2002. The primary reasons for this reduction in were the Company's initiative to close the Hong Kong and United Kingdom sales offices, reduce its US personnel and trim its operations. Other uses of cash during the quarter ended March 31, 2003 were primarily for the partial repayment of our obligation to HP in the amount of $225,000 and the repayment of a $70,000 note issued in January 2003. During the quarter ended March 31, 2003, the Company issued a convertible note in the amount of $1 million and a note in the amount of $70,000 to provide liquidity. Additionally, warrant holders provided funds aggregating approximately $336,000 through the exercise of warrants. During the quarter ended March 31, 2002, warrant holders provided the Company with funds aggregating $12,000 upon the exercise of warrants. In January 2000, America First Associates Corp., acting as placement agent for SmartServ, completed a private placement of 233,000 shares of common stock at $15.00 per share. The Company also completed a private placement of an additional 100,000 shares of common stock at $15.00 per share without the 20 services of a placement agent. In May 2000, Chase Securities Inc., acting as placement agent for SmartServ, completed a private placement of 353,535 shares of common stock at $49.50 a share. The net proceeds of these placements of $21,465,400 were used for general working capital requirements. In May 2000, we entered into a Business Alliance Agreement with HP whereby the companies agreed to jointly market their respective products and services and to work on the build-out of SmartServ's domestic and international infrastructure. In furtherance of these objectives HP provided us with a line of credit of up to $20,000,000 for the acquisition of approved hardware, software and services. As of September 28, 2001, the expiration date of the facility, HP had advanced us $6,723,156 thereunder. In September 2002, the Company and HP amended the terms of the promissory note to provide for the (i) reduction of SmartServ's aggregate outstanding principal and accrued interest amount of $7,045,000 to $1,000,000, (ii) return of certain unused hardware by SmartServ, (iii) issuance by SmartServ of a warrant for the purchase of 50,000 shares of common stock and (iv) repayment of $500,000 of the amended obligation on September 10, 2002. The remaining obligation was evidenced by a note, bearing an interest rate of 11%, to be repaid as follows: $200,000 on December 31, 2002, $200,000 on January 28, 2003 and $100,000 on February 27, 2003. The warrant expires on September 9, 2005 and has an exercise price of $1.166 per share. In connection therewith, the Company recorded a charge to earnings of $38,000 representing the fair value of the warrant as determined in accordance with the Black-Scholes model. Additionally, the Company recognized a net gain of $5,679,261 resulting from the extinguishment of this obligation. In February 2003, the Company and HP amended the terms of their amended promissory note to provide for the settlement of SmartServ's outstanding obligation of $530,800, inclusive of accrued interest of $30,800, in consideration of the payment by SmartServ of $225,000. As a result, during the quarter ended March 31, 2003, the Company recognized an additional gain of $305,800, resulting from the extinguishment of this obligation. In June 2002, First Albany Corporation, acting as placement agent for SmartServ, completed a private placement of units consisting of 785,714 shares of common stock and warrants to purchase common stock in consideration of $1.40 per unit to two accredited investors. The net proceeds of $823,500 from the issuance of these units were used for general working capital requirements. The investors received warrants, callable under certain conditions, for the purchase of an aggregate of 1,428,571 shares of common stock at an exercise price of $1.40 per share through the expiration date on June 5, 2007, as well as non-callable warrants for the purchase of an aggregate of 196,429 shares of common stock, subject to antidilution adjustments, upon the occurrence of certain events, at an exercise price of $1.47 per share through June 5, 2007. In August 2002, pursuant to the terms of the callable warrants, the Company provided the investors with a notice calling the callable warrants. In September 2002, the callable warrants expired unexercised. Subsequent to June 2002, non-callable warrants for the purchase of 204,853 shares of common stock were exercised. Proceeds from such exercises were $176,500. In September 2002, SmartServ issued units consisting of 3,884,209 shares of its common stock and warrants to purchase 1,942,109 shares of common stock, exercisable at $0.85 per share through September 8, 2007, to 22 accredited investors at a purchase price of $0.9125 per unit. Gross proceeds from this transaction amounted to $3,544,346. SmartServ agreed to pay fees consisting of $249,050, an expense allowance of $25,000, and issued warrants to purchase 438,046 shares of common stock at an exercise price of $0.85 per share, expiring on September 8, 2007, as compensation to certain individuals and entities that acted as finders. Additionally, the Company incurred costs and other fees of $28,000 in connection with this transaction. While the warrants to purchase common stock represent an additional source of capital, they expire in September 2007 and are not callable by the Company. Therefore, they cannot be relied upon by the Company as a definite source of capital. The warrantholders may choose to exercise their warrants if the market price of the Company's common stock exceeds the exercise price of the warrant. Subsequent to December 31, 2002, warrants for the purchase of 442,386 shares of common stock were exercised. Proceeds from such exercises were $376,000. 21 During the period January 1, 2000 through December 31, 2002, we issued 2,065,000 shares of common stock to investors upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $6,014,600. Substantially all of these warrants were exercised during the 12 months ended December 31, 2000 when the market value of the Company's common stock was significantly greater that it is currently. During the quarter ended December 2002, the Company recorded a valuation allowance of $664,640 in connection with the potential uncollectibility of loans made to Mr. Sebastian Cassetta, the Company's Chairman and Chief Executive Officer. While these loans do not mature until December 2003 and January 2004, Mr. Cassetta's ability to repay these loans and interest thereon is highly contingent on the market value of his investment in the Company. At December 31, 2002, we had outstanding 1,725,000 public warrants (SSOLW) and 300,000 warrants with terms identical to the public warrants. These warrants were convertible into our common stock at the ratio of 2.5 warrants per share of common stock at an exercise price of $10.50 per share. These warrants were redeemable by SmartServ on not less than 30 days written notice at the redemption price of $0.10 per warrant, provided the average closing bid quotation of the common stock as reported on the Nasdaq Stock Market had been at least 187.5% of the current exercise price of the warrants for a period of 20 consecutive trading days ending on the third day prior to the date on which we give notice of redemption. These warrants expired on March 20, 2003. In January 2003, the Company borrowed $70,000 from Steven B. Rosner which was used for working capital. The debt was evidenced by an unsecured note bearing an interest rate of 12% per annum and was repaid in February 2003. In February 2003, the Company issued a convertible note to Global Capital Funding Group, LP ("Global") in consideration for the receipt of $1 million. The note bears interest at the rate of 10% per annum, and is secured by the Company's assets, exclusive of its internally developed software products. The note matures on February 14, 2004, contains certain antidilution provisions, and may be converted into shares of SmartServ common stock at $1.10 per share. As additional consideration, the Company issued Global a warrant for the purchase of 200,000 shares of its common stock at an exercise price of $1.61 per share. In April 2003, the Company borrowed an additional $250,000 from Global and amended the convertible note to include such amount. As additional consideration, the Company issued Global a warrant for the purchase of 20,000 shares of its common stock at an exercise price of $1.20 per share. The warrant issued to Global contains certain antidilution provisions and expires on February 14, 2006. Proceeds from the notes were used for working capital purposes. In February 2003, the Company issued 123,537 shares of common stock to 5 vendors in settlement of the Company's obligations, aggregating $164,000, to such vendors. In May 2003, the Company in consideration of $358,000 issued 3.58 units consisting of convertible notes and warrants to purchase common stock ("Units") to 8 accredited investors. Each Unit consists of a $100,000 convertible note and a warrant to purchase 200,000 shares of the Company's common stock. The convertible notes bear interest at 8% per annum, are convertible into the Company's common stock at $0.744 (the average of the closing bid prices of the Company's common stock for the 5 days prior to the closing of the transaction) per share and mature on the earlier of November 19, 2003 or the closing of a subsequent equity placement of not less than $3 million. The warrants are exercisable at $0.744 per share and expire on May 19, 2006. This transaction represents the initial sale of a maximum of 15 Units contemplated to be sold by the Company. Proceeds from the sale of the Units were used for working capital purposes. 22 The Company'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. The Company has, since its inception, earned limited revenues and incurred substantial recurring operating losses, including net losses of $2,355,191 for the three month period ended March 31, 2003, net losses of $8,037,173 and $14,819,860 for the years ended December 31, 2002 and 2001, respectively, and net losses of $30,993,559 and $7,124,126 for the years ended June 30, 2000 and 1999, respectively. Additionally, it had an accumulated deficit of $75,214,197 at March 31, 2003. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Such concern was expressed by our auditors, Ernst & Young LLP, in their audit report regarding the financial statements included in our Form 10-KSB for the year ended December 31, 2002. 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 economic downturn in general, and its impact on the telecommunications industry in particular, have caused telecommunications service providers to reduce capital spending, personnel and debt, as well as new service introductions. This has resulted in delays in the build-out of high speed carrier data networks and availability of data-enabled wireless devices, causing the market for SmartServ's financial data and transaction services to be lackluster. In addition, many financial services firms have curtailed new product development to focus on data security and recovery. Consequently, the potential demand for the Company's products and services has been significantly delayed. Such delays have had a very detrimental effect on the Company's operations and have resulted in the Company's inability to implement its business plan and related marketing strategies. Consequently, in May 2002, the Company commenced an effort to realign its infrastructure and related overhead to correlate with reductions in projected revenue. As part of this effort, management closed the Company's UK and Hong Kong sales offices and downsized its domestic operations through staff reductions to a level sufficient to support the Company's projected operations. In both March and May 2003, the Company again reduced its cost structure through the termination of additional personnel. Personnel headcount has been reduced from 66 in May 2002 to the current level of 25. These efforts have reduced the Company's average monthly operating expenses from approximately $1,090,000 in July 2002 to $712,000 in February 2003 to approximately $425,000 commencing June 2003, excluding noncash stock compensation and depreciation and amortization. As a result of the factors identified above, the Company is in need of additional capital to enable it continue as a going concern. The following chart provides an analysis of the Company's capital requirements for the year ending December 31, 2003 based on projected revenues of $3,000,000: % of Revenue Capital Goal Required ------------- ----------------------- 100 $ 3,300,000 50 3,900,000 0 4,800,000 However, no assurance can be given that the Company will be able meet its revenue projections, maintain its cost structure as presently configured, or raise additional capital on satisfactory terms. Should the Company be unable to raise additional debt or equity financing, it will be forced to seek a merger or cease operations. 23 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS - ---------------------------------------------- Forward-looking statements in this document and those made from time-to-time by our employees are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements concerning future plans or results are necessarily only estimates and actual results could differ materially from expectations. Certain factors that could cause or contribute to such differences include, and are not limited to, potential fluctuations in quarterly results, the size and timing of awards and performance on contracts, dependence on large contracts and a limited number of customers, dependence on wireless and/or internet networks of third-parties for certain products and services, lengthy sales and implementation cycles, availability and cost of key components, market acceptance of new or enhanced products and services, proprietary technology and changing technology, competitive conditions, system performance, management of growth, the risk that our current and future products and services may contain errors or be affected by technical problems that would be difficult and costly to detect and correct, dependence on key personnel and general economic and political conditions and other factors affecting spending by customers, and other risks described in this Quarterly Report on Form 10-QSB and our other filings with the Securities and Exchange Commission. ITEM 3. CONTROLS AND PROCEDURES (a) Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended. Based upon the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective. (b) There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 24 PART 2. OTHER INFORMATION SMARTSERV ONLINE, INC. ITEM 1. LEGAL PROCEEDINGS On or about June 4, 1999, Michael Fishman, our former Vice President of Sales, commenced an action against us and certain directors and officers, in the Connecticut Superior Court for the Judicial District of Stamford/Norwalk at Stamford (Michael Fishman v. SmartServ Online, Inc., et al.). On February 11, 2003, we received a favorable trial decision in this matter. This decision, entered after a trial in the Superior Court of Connecticut, found no liability by SmartServ or the individual defendants on any of Mr. Fishman's claims. Mr. Fishman's time to appeal has expired. On or about February 29, 2000, Commonwealth Associates, L.P. ("Commonwealth") filed a complaint against us in the Supreme Court of the State of New York, County of New York. The complaint alleged that in August of 1999, Commonwealth and SmartServ entered into an engagement letter that provided for a nonrefundable fee to Commonwealth of $15,000 payable in cash or common stock at SmartServ's option. The complaint alleged that SmartServ elected to pay the fee in stock and, as a result, Commonwealth sought 13,333 shares of common stock or at least $1,770,000 together with interest and costs. In our defense, we denied that we elected to pay in stock. On March 4, 2003, SmartServ received a favorable decision in this matter after a trial held in the Supreme Court of the State of New York. The decision holds that, consistent with SmartServ's defense, SmartServ is required to pay Commonwealth a retainer fee of only $13,439, plus interest and certain costs. Commonwealth's time to appeal has not yet expired. While we intend to vigorously defend any appeal of the decision in the Commonwealth matter, the unfavorable outcome of such an appeal could have a material adverse effect on our financial condition, results of operations and cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS At the time of issuance, each investor or recipient of unregistered securities was either an accredited investor or a sophisticated investor. Each investor had access to SmartServ's most recent Form 10-KSB, all quarterly and periodic reports filed subsequent to such Form 10-KSB and the Company's most recent proxy materials. In January 2003, the Company issued 219,178 shares of common stock to Robert Gorman, an accredited investor in the September 2002 financing, upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $186,301. In February 2003, the Company issued 35,295 shares of common stock to Frazier Investments, an accredited investor in the September 2002 financing, upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $30,000. In March 2003, the Company issued 129,089 shares of common stock to Frazier Investments, an accredited investor in the September 2002 financing, upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $109,726. In April 2003, the Company issued 58,824 shares of common stock to Joel Rotter, an accredited investor in the September 2002 financing, upon the exercise of warrants to purchase such shares. Proceeds from the exercise of these warrants were $50,000. No sales commissions were paid in connection with the above transactions. These shares and warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. 25 In February 2003, the Company issued a convertible note to Global Capital Funding Group, LP ("Global"), an accredited investor, in consideration for the receipt of $1 million. The note bears interest at the rate of 10% per annum and is secured by the Company's assets, exclusive of its internally developed software products. The note matures on February 14, 2004, contains certain antidilution provisions, and may be converted into shares of SmartServ common stock at $1.10 per share. As additional consideration, the Company issued Global a warrant for the purchase of 200,000 shares of its common stock at an exercise price of $1.61 per share. The warrant contains certain antidilution provisions and expires on February 14, 2006. Alpine Capital Partners, Inc., an accredited investor, received a finder's fee of $70,000, representing 7% of the aggregate purchase price of the convertible note and warrants to purchase 91,000 shares of common stock at $1.61 per share expiring on February 14, 2006 in connection with this transaction. In April 2003, the Company borrowed an additional $250,000 from Global and amended the convertible note to include such amount. As additional consideration, the Company issued Global a warrant for the purchase of 20,000 shares of its common stock at an exercise price of $1.20 per share. The warrant contains certain antidilution provisions and expires on February 14, 2006. The note, amended note and the warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. In February 2003, the Company issued 25,647 shares of common stock to G. S. Schwartz & Company, a sophisticated investor, in full satisfaction of a $33,854 obligation to G. S. Schwartz & Company for services rendered to the Company. No sales commissions were paid in connection with such transaction. The shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. In February 2003, the Company issued 62,500 shares of common stock to Vox, Inc., an accredited investor, in full satisfaction of an $82,500 obligation to Vox, Inc. for services rendered to the Company. No sales commissions were paid in connection with such transaction. The shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. In February 2003, the Company issued 12,576 shares of common stock to Creative Management Services dba MC2, an accredited investor, in full satisfaction of a $16,600 obligation to MC2 for services rendered to the Company. No sales commissions were paid in connection with such transaction. The shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. In February 2003, the Company issued 12,100 shares of common stock to NexVue Information Systems, a sophisticated investor, in satisfaction of a $15,953 obligation to NexVue Information Systems for services rendered to the Company. No sales commissions were paid in connection with such transaction. The shares were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. In May 2003, the Company in consideration of $358,000 issued 3.58 units consisting of convertible notes and warrants to purchase common stock ("Units") to 8 accredited investors. Each Unit consists of a $100,000 convertible note and a warrant to purchase 200,000 shares of the Company's common stock. The convertible notes bear interest at 8% per annum, are convertible into the Company's common stock at $0.744 (the average of the closing bid prices of the Company's common stock for the 5 days prior to the closing of the transaction) per share and mature on the earlier of November 19, 2003 or the closing of a subsequent equity placement of not less than $3 million. The warrants are exercisable at $0.744 per share and expire on May 19, 2006. This transaction represents the initial sale of a maximum of 15 Units contemplated to be sold by the Company ("Bridge Offering"). Spencer Trask Ventures, Inc. ("Spencer Trask"), an accredited investor, acted as a finder for this transaction. As consideration therefor, Spencer Trask will receive a cash fee equal to 10% of the aggregate purchase of all of the Units sold and upon receipt of Nasdaq Stock Market approval for the sale of the remaining Units will receive (i) a warrant to 26 purchase a number of Units equal to 20% of the Units sold ("Finder's Warrant") and (ii) 33,333 shares of restricted common stock per Unit sold. The Finder's Warrant will be exercisable through May 19, 2008. Such fees are payable to Spencer Trask upon the closing of an aggregate of $1.2 million under the Bridge Offering. In addition, Spencer Trask will receive a non-accountable expense allowance equal to 3% of the aggregate proceeds of all Units sold in this Bridge Offering. These shares and warrants were issued in reliance upon the exemption from registration provided by Section 4 (2) of the Securities Act. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.1 Form of Warrant for the Investors in the May 2003 Placement (the "Investors") 4.2 Form of Registration Rights Agreement, dated May 19, 2003, between SmartServ and the Investors 10.1 Form of Securities Purchase Agreement, dated May 19, 2003, between SmartServ and the Investors 10.2 Form of Convertible Debenture for the Investors (b) REPORTS ON FORM 8-K On March 3, 2003, the Company filed a report on Form 8-K under Items 2 and 5 thereof referencing a press release, dated March 3, 2003, announcing the completion of a debt financing with Global Capital Funding Group, L.P. ("Global"). The debt is evidenced by a $1,000,000 Convertible Note, dated February 14, 2003, secured by substantially all of the assets of the Company and convertible into shares of SmartServ common stock at a price of $1.10 per share. Additionally, the Form 8-K announced the favorable trial decision the Company received in the matter of Fishman vs. SmartServ et al. On May 1, 2003, the Company filed a report on Form 8-K under Items 5, 7 and 12 thereof referencing a press release, dated April 30, 2003, announcing that it had satisfied the requirements for continued listing on the Nasdaq SmallCap Market set forth in Marketplace Rule 4310(c)(14) by filing its Form 10-KSB with the Securities and Exchange Commission. The Company also announced in such press release that it had received a Nasdaq Staff Determination, dated April 28, 2003, indicating that, based on a review of its Form 10-KSB filed with the Securities and Exchange Commission the preceding week, the Company is not in compliance with the shareholders' equity/market value of listed securities/net income requirement for continued listing as set forth in Marketplace Rule 4310 (c)(2)(B). As a result, the Company's common stock is subject to delisting from the Nasdaq SmallCap Market. The Company has requested and been granted a hearing. Additionally, the Form 8-K announced the issuance, on April 25, 2003, of a press release announcing the Company's financial results for the year ended December 31, 2002. 28 SMARTSERV ONLINE, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SmartServ Online, Inc. (Registrant) By: Date: June 4, 2003 /s/ SEBASTIAN E. CASSETTA ------------ ------------------------------------------- Sebastian E. Cassetta Chairman of the Board, Chief Executive Officer Date: June 4, 2003 /s/ THOMAS W. HALLER ------------ ------------------------------------------- Thomas W. Haller Sr. Vice President, Chief Financial Officer, Treasurer 29 Certification of Chief Executive Officer I, Sebastian E. Cassetta, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of SmartServ Online, Inc. ("Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions); a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and; 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were any significant changes in internal controls or in other factors that could significantly affect controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ SEBASTIAN E. CASSETTA ------------------------------------ Sebastian E. Cassetta Chief Executive Officer Dated: June 4, 2003 30 Certification of Chief Financial Officer I, Thomas Haller, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of SmartServ Online, Inc. ("Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions); a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and; 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were any significant changes in internal controls or in other factors that could significantly affect controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ THOMAS W. HALLER --------------------------------------- Thomas W. Haller Senior Vice President and Chief Financial Officer Dated: June 4, 2003 31 EX-4 3 ex4-1to10q.txt 4.1 Exhibit 4.1 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. SMARTSERV ONLINE, INC. WARRANT Warrant No. W-___ Date of Original Issuance: May ___, 2003 SmartServ Online, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, ____________ or his registered assigns (the "Holder"), is entitled to purchase from the Company up to a total of ______ [200,000 shares for each Unit purchased] shares of common stock, $.01 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $_________ per share [the lesser of (i) the average closing bid price per share of Common Stock as quoted on the Nasdaq SmallCap Market during the five Trading Days immediately prior to the First Closing Date or an Additional [global change] Closing Date, as applicable, or (ii) the closing bid price of Common Stock as quoted on the Nasdaq SmallCap Market on the day immediately prior to the First Closing Date or an Additional Closing Date, as applicable](as adjusted from time to time as provided in Section 9, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including May ___, 2006 [3 years after the First Closing Date or an Additional Closing Date, as applicable] (the "Expiration Date"), and subject to the following terms and conditions. 1. Definitions. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement, dated as of May ___, 2003 between the Company, the original Holder and other original holders named therein (the "Purchase Agreement"). 2. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. 3. Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration of transfer, an exchange Warrant to purchase Common Stock, in substantially the form of this Warrant (any such exchange Warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant. Warrants and Warrant Shares may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Warrant Shares other than pursuant to an effective registration statement, to the Company or to an Affiliate of a Holder, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act. 4. Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder, in whole or in part, at any time and from time to time on or after the date hereof to and including 5:30 p.m., New York City time, on the Expiration Date. The Exercise Price is payable in immediately available funds or as otherwise provided in Section 13. At 5:30 p.m., New York City time on the Expiration Date, the portion of this Warrant available for exercise and not exercised prior thereto shall be and become void and of no value. 5. Delivery of Warrant Shares and Exercise of Warrant. Upon delivery of the Form of Election to Purchase, which Form shall specify the number of shares of Common Stock to be purchased, and this Warrant to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall, within three business days, issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise with the appropriate legend, if required. As used in this Agreement, a "Date of Exercise" means the date on which the Holder shall have delivered to the Company (i) the Form of Election to Purchase attached hereto, appropriately completed and duly signed, (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased and (iii) this Warrant. If the Warrant has not been fully exercised, the Company will deliver a replacement Warrant to the Holder for the number of Warrant Shares remaining subject to the Warrant, which replacement Warrant shall in all other respects be identical to this Warrant or, at the election of the Company, an appropriate notation shall be made on this Warrant, which shall then be returned to the Holder. 6. Charges, Taxes and Expenses. Issuance and delivery of New Warrants, replacement Warrants issued upon a partial exercise, and certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, 2 all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft, destruction, or mutilation and customary and reasonable indemnity, if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall also deliver such mutilated Warrant to the Company as a condition precedent to the Company's obligation to issue the New Warrant. 8. Reservation of Warrant Shares. The Company covenants that it has and will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of all Warrants issued pursuant to the Purchase Agreement. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid, and non-assessable and free from all preemptive rights of any stockholder of the Company and from all taxes, liens, and charges with respect to the issue thereof (other than transfer taxes), and if the Common Stock of the Company is then listed on any national securities exchange (as defined in the Exchange Act) or eligible for trading on The Nasdaq Stock Market or the Nasdaq OTC Bulletin Board, shall be duly listed or eligible thereon, as the case may be. 9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9. (a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or 3 combination. If any event requiring an adjustment under this paragraph occurs during the period that an Exercise Price is calculated hereunder, then the calculation of such Exercise Price shall be adjusted appropriately to reflect such event. (b) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all holders of Common Stock (i) evidence of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, "Distributed Property"), then, at the request of any Holder delivered before the 30th day after the record date fixed for determination of stockholders entitled to receive such distribution, the Company will deliver to such Holder, within seven days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which such Holder's Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon any exercise of the Warrant that occurs after such record date, such Holder shall be entitled to receive, in addition to the Warrant Shares otherwise issuable upon such conversion, the Distributed Property that such Holder would have been entitled to receive in respect of such number of Warrant Shares had the Holder been the record holder of such Warrant Shares immediately prior to such record date. (c) Fundamental Transactions. If, at any time while this Warrant is outstanding, (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a "Fundamental Transaction"), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, in lieu of any other consideration, the same amount and kind of securities, cash or property as he would have been entitled to receive upon the occurrence of such Fundamental Transaction if he had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the "Alternate Consideration"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company or its successor or the surviving entity following such Fundamental Transaction shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration he receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder's option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall, either (1) issue to the Holder a New Warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder's right to purchase the Alternate Consideration for the aggregate 5 Exercise Price upon exercise thereof, or (2) purchase the Warrant from the Holder for a purchase price, payable in cash within seven days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and ensuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (d) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment. (e) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company's Transfer Agent. (g) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction at least 20 days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to ensure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. 5 10. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would otherwise be issuable, the Company shall issue the next highest number of whole Warrant Shares. 11. Notices. Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 11 prior to 5:30 p.m. (New York City time) on a day on which banks in the State of Delaware are not required or permitted to close (a "Business Day"), (ii) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 11 on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, (iii) the Business Day following the date of mailing, if sent for next day delivery by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, SmartServ Online, Inc., One Station Place, Stamford, CT 06902, Facsimile No.: (203) 353-5984, Attn: Chief Financial Officer, or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 20 days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Cashless Exercise. Notwithstanding anything to the contrary contained herein, if this Warrant will expire within five days or if, one year from the date hereof, there is not then and has not theretofore been a currently effective Registration Statement covering the resale of the Warrant Shares, this Warrant may be exercised in whole or in part by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the holder shall surrender this Warrant (or portion thereof) for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the closing price per share of the Common Stock on the trading day immediately prior to the date of exercise and the Exercise Price, and the denominator of which shall be such closing price per share of Common Stock. 6 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) (each, a "Proceeding") shall be exclusively commenced in the state and federal courts sitting in the State of New York in New York County (the "Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Courts for any Proceeding, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each of the Company and the Holder hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any Proceeding. If any party shall commence an action or proceeding to enforce any provisions of this Warrant, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with such Proceeding. (c) The Company shall not by any action avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company will (i) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the exercise of this Warrant and (b) use its best efforts to obtain all such authorizations, exemptions, or consents from any public or regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. 7 (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. (f) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. All terms defined in this Agreement in their singular or plural forms have correlative meanings when used herein in their plural or singular forms, respectively. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. SMARTSERV ONLINE, INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 8 FORM OF ELECTION TO PURCHASE To SMARTSERV ONLINE, INC.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of common stock ("Common Stock"), $.01 par value per share, of SMARTSERV ONLINE, INC. and encloses herewith $________ in cash, certified or official bank check or checks or other immediately available funds, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The Holder hereby represents, warrants and covenants that he is an accredited investor within the meaning of Regulation D under the Securities Act of 1933, as amended, and has sold or will sell the shares of Common Stock issuable upon this exercise pursuant to the Company's registration statement covering the resale by the Holder of such shares and, in connection therewith, has complied or will comply with the prospectus delivery requirements under Federal securities laws. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of SMARTSERV ONLINE, INC. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of SMARTSERV ONLINE, INC. with full power of substitution in the premises. Dated: _______________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-4 4 ex4-2to10q.txt 4.2 Exhibit 4.2 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of May 19, 2003, by and among (a) SmartServ Online, Inc., a Delaware corporation (the "Company"), and (b) the purchasers of units consisting of a $100,000 convertible debenture and a warrant to purchase 200,000 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), listed on Schedule A hereto (individually, a "Purchaser" and collectively, the "Purchasers") pursuant to the Securities Purchase Agreement of even date herewith (the "Purchase Agreement") among the Company and the Purchasers. R E C I T A L S WHEREAS, in order to induce the Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the Purchasers with the registration rights set forth in this Agreement; and WHEREAS, the execution and delivery of this Agreement are express conditions to the closing under the Purchase Agreement. NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the Purchase Agreement. As used in this Agreement, the following capitalized terms shall have the following meanings: "Affiliate" means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Holder and shall include an individual's spouse, parents, siblings or issue or entity created primarily for the benefit of any such person. "Affiliated Group" has the meaning given to it in Section 1504 of the Internal Revenue Code of 1986, as amended, and in addition includes any analogous combined, consolidated, or unitary group, as defined under any applicable state, local, or foreign income Tax law. "Agreement" means this Registration Rights Agreement, as it hereinafter may be amended from time to time. "Debenture" or "Debentures" shall have the meaning set forth in Section 1.1 of the Purchase Agreement. "Closing Date" shall have the meaning set forth in Section 1.3 of the Purchase Agreement. "Common Stock" shall have the meaning set forth in the Preamble hereof. "Company" shall have the meaning set forth in the Preamble hereof. "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. "Holder" means a Purchaser or a Permitted Transferee of a Purchaser. "Indemnified Company Party" means the Company, its directors, officers and Affiliates. "Indemnified Holder Party" means the Holder of Registrable Securities and any officer, director, member, manager, partner, trustee, beneficiary or Affiliate of the Holder. "Losses" means any losses, damages, liabilities or expenses (including reasonable attorneys' fees and disbursements). "Misstatement" means an untrue statement of a material fact or an omission to state a material fact required to be stated in a Registration Statement or Prospectus or necessary to make the statements in a Registration Statement, Prospectus or preliminary prospectus not misleading. "Permitted Transferee" means (i) an Affiliate or member of an Affiliated Group of the transferor or (ii) with the consent of the Company, which shall not be unreasonably withheld, delayed, or conditioned, any party that is an "accredited investor" (as such term is defined in Rule 501 under the Securities Act). "Person" means a natural person, partnership, corporation, limited liability company, business trust, association, joint venture or other entity or a government or agency or political subdivision thereof. "Prospectus" means the prospectus included in any Registration Statement, as supplemented by any and all prospectus supplements and as amended by any and all post-effective amendments and including all material incorporated by reference in such prospectus. "Purchase Agreement" shall have the meaning set forth in the Preamble hereof. "Purchaser" shall have the meaning set forth in the Preamble hereof. "Registrable Securities" means (a) any Common Stock hereafter acquired or purchasable on (i) conversion of a Debenture by the Holder (if such 2 stock is not already registered with the SEC) or (ii) exercise of a Warrant by a Holder (if such stock is not already registered with the SEC), and (b) any securities issued or issuable with respect to the Common Stock referred to in clause (a) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, (ii) such securities shall have been sold pursuant to Rule 144 (or any successor provision) under the Securities Act or are eligible for sale under Rule 144(k) (or any successor provision) without being subject to any volume limitation and the Company has removed any restrictive legend with respect thereto, (iii) such securities shall have been otherwise transferred to a person who is not a Permitted Transferee, or (iv) such securities shall have ceased to be outstanding. "Registration Expenses" means the out-of-pocket expenses of a Registration Statement, including: (1) all registration and filing fees (including, without limitation, fees with respect to filings required to be made with the National Association of Securities Dealers, Inc.); (2) fees and expenses of compliance with securities or blue sky laws (including, without limitation, state filing fees and fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities and determinations of their eligibility for investment under the laws of such jurisdictions as the managing underwriters, if any, may designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company; (5) fees and disbursements of all independent certified public accountants of the Company incurred in connection with such Registration Statement; (6) premiums and other costs of securities acts liability insurance if the Company so desires; and (7) fees and expenses of any other Persons retained by the Company. "Registration Statement" means any registration statement under the Securities Act on an appropriate form (to the extent such form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements required by the SEC to be filed therewith) which covers Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus included in such registration statement, amendments (including post-effective amendments) and supplements to such registration statement, and all exhibits to and all material incorporated by reference in such registration statement. 3 "Securities Act" means the Securities Act of 1933, as from time to time amended. "SEC" means the Securities and Exchange Commission. "Units" means the security comprising Warrants and Debentures sold pursuant to the Purchase Agreement. "Warrant" or "Warrants" shall have the meaning set forth in Section 1.1 of the Purchase Agreement. 2. Registration. At any time before the third anniversary of the date of this Agreement, whenever the Company proposes to file a registration statement pursuant to the Securities Act with the SEC, other than a registration relating to the offering or issuance of shares in connection with (i) employee compensation or benefit plans or (ii) one or more acquisition transactions under a Registration Statement on Form S-4 or Form S-1 under the Securities Act (or a successor to Form S-4 or Form S-1), the Company shall give each Holder of Registrable Securities written notice (the "Company Notice") of the Company's intention to file a registration statement at least fifteen days prior to the date the Company proposes to file such registration statement. The Company shall include in such registration statement the Registrable Securities unless either (i) the Registrable Securities are included in a Registration Statement that is effective under the Securities Act, or (ii) a Holder gives the Company notice not to include such Holder's Registrable Securities in the registration statement within ten days of such Holder's receipt of the Company Notice. Each Holder agrees that within five business days of receiving a written request from the Company for information required by the SEC to be in a Registration Statement in order for such Registration Statement to be declared effective (the "Required Information"), such Holder shall provide the Required Information to the Company. If a Holder does not provide the Required Information to the Company within five business days of receiving a request from the Company for the Required Information, the Company shall not be required to register the Holder's Registrable Securities on such Registration Statement. The Holder's right to have such Holder's Registrable Securities registered pursuant to a subsequent registration statement shall not be abridged by such Holder's failure to provide the Required Information on a previous registration statement. 3. Registration Procedures. In connection with the Company's registration obligations under Section 2, the Company will effect the registration for resale of the Registrable Securities in accordance with the intended plan of distribution thereof. The Company shall provide to each Holder such information and documents as the Company provides to the other selling stockholders under the Registration Statement. 4 4. Registration Expenses. The Company shall bear all Registration Expenses incurred in connection with any Registration Statement. The Company also will pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with any listing of the securities to be registered on a securities exchange or the National Association of Securities Dealers, Inc., and the fees and expenses of any Person, including special experts, retained by the Company. 5. Indemnification. (a) Company Indemnification. The Company shall indemnify and hold harmless each Indemnified Holder Party against any Losses to which such Indemnified Holder Party may become subject under the Securities Act or any other applicable law, insofar as such Losses (or actions in respect thereof) arise out of or are based upon (i) any alleged untrue statement of any material fact contained, on the effective date thereof, in any Registration Statement under which securities were registered under the Securities Act, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereto, or (ii) any alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading, except insofar as such Losses are directly and primarily caused by any such actual untrue statement or omission so made in conformity with information furnished in writing to the Company by such Indemnified Holder Party seeking indemnification expressly for use therein, or (iii) any violation by the Company of any federal or state rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration.; provided, however, that the Company shall not be liable to an Indemnified Holder Party for any untrue statement included in any Prospectus, which statement has been corrected in writing by the Company in an amended or supplemented Prospectus filed with the SEC before the sale from which such Loss occurred. (b) Holders' Indemnification. In connection with any Registration Statement in which the Holders of Registrable Securities are participating, each Holder so participating will indemnify and hold harmless each Indemnified Company Party against any Losses to which the Company or any Indemnified Company Party may become subject, insofar as such Losses (or actions in respect thereof) arise out of or are based directly and primarily upon information in writing furnished to the Company by such Holder of Registrable Securities expressly for use in (and such information is contained in) any registration statement under which securities were registered under the Securities Act at the request of the Holders of Registrable Securities, any preliminary prospectus or final prospectus contained therein or any amendment or supplement thereto. Notwithstanding the provisions of this paragraph (b) or paragraph (d) below, no Holder of Registrable Securities shall be required to indemnify any Person pursuant to this Section 5 or to contribute pursuant to paragraph (d) below in an amount in excess of the amount of the aggregate net proceeds received by such Holder of Registrable Securities in connection with any such Registration Statement under the Securities Act. 5 (c) Procedure. Promptly after receipt by any indemnified party of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying party pursuant to this Section 5, such indemnified party shall notify the indemnifying party 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 party and the indemnifying party shall have been notified thereof, the indemnifying party 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 party. After notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal expenses subsequently incurred by such indemnified party 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 party for the same counsel to represent both the indemnified party and such indemnifying party or any affiliate or associate thereof, the indemnified party shall be entitled to retain its own counsel at the expense of such indemnifying party. (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an indemnified party (by reason of public policy or otherwise), then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5, any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the proceeding exceeds the amount of any damages that such 6 Holder 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 indemnity and contribution agreements contained in this Section are in addition to any liability that the indemnifying parties may have to the indemnified parties. 6. Exchange Act Reporting Requirements. The Company shall timely file such information, documents and reports as the SEC may require or prescribe under the Exchange Act. In addition, the Company shall timely file such other information, documents and reports as shall hereafter be required by the SEC as a condition to the availability of Rule 144 under the Securities Act (or any successor provision). The Company agrees to take no action to deregister its securities under the Exchange Act by filing of SEC Form 15 or otherwise, nor will it engage in any other "going private" transaction, in each case, until such time as all Registrable Securities have been sold by the Holders; provided, however, that the Company may enter into an arms-length going private transaction with a non-affiliated third party and, upon consummation thereof, the Company may deregister its securities. The Company shall, upon reasonable request, (i) furnish the Holders of Registrable Securities with (a) a written statement by the Company that it has complied with such reporting requirements, (b) a copy of the most recent annual or quarterly report of the Company, and (c) such other reports and documents filed by the Company with the SEC as the Holders may reasonably request in availing themselves of an exemption for the sale of Registrable Securities without registration under the Securities Act pursuant to Rule 144 thereunder and (ii) make such additional filings with the SEC as will enable the Holders to make sales of the Registrable Securities pursuant to Rule 144. 7. Suspension of Sales. Upon receipt of written notice from the Company that a Registration Statement or Prospectus contains a Misstatement, the selling Holders of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until the Holders have received copies of the supplemented or amended Prospectus required by Section 3 hereof, or until the Holders are advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, each Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in the Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. The Company shall use its commercially reasonable best efforts to promptly (and in no event more than thirty (30) days) update the Registration Statement so that the Misstatement is corrected. 7 8. Transfer of Registration Rights. Neither this Agreement nor any of the rights or obligations hereunder may be assigned (excluding any assignment by operation of law) by the Company without the prior written consent of the Holders, which consent will not be unreasonably withheld. The Holders of Registrable Securities may assign their rights and obligations hereunder to any Person to which the applicable Registrable Securities are assigned, without the prior consent of the Company or any other person, provided that such assignment may only be to a Permitted Transferee who is not a direct competitor of the Company. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns including any person to whom Registrable Securities are transferred and any person with whom the Company may merge and no other Person shall have any right, benefit or obligation hereunder. The Company shall be given written notice by a Holder of Registrable Securities at the time of any such transfer of such securities by such Holder stating the name and address of the transferee, including a writing by such transferee to the effect that such transferee agrees to be bound by the terms hereof and identifying the securities with respect to which the rights hereunder are being transferred. 9. Miscellaneous. (a) Remedies. The Holders of Registrable Securities, in addition to being entitled to exercise all rights provided herein and granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement and reasonable attorneys' fees and expenses in connection with the exercise of such rights. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company shall not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or conflicts with the provisions hereof. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the prior written consent of the Holders. The foregoing notwithstanding, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of each Holder of Registrable Securities whose shares are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of Registrable Securities may be given by the Holders of a majority of the shares of Registrable Securities being sold pursuant to such Registration Statement. 8 (d) Notices. 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 or by telecopy that has been confirmed as received by 5:00 P.M. on a business day, one (1) business day after being sent by nationally recognized overnight courier or received by telecopy after 5:00 P.M. on any day, or five (5) business days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, to the following addresses: If to the Company: SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Attn: Chief Financial Officer Facsimile: (203) 353-5984 With a copy to: SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Attn: General Counsel Facsimile: (203) 353-5984 And: Jenkens & Gilchrist 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. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 9 (g) Governing Law. This Agreement shall be governed by and construed, interpreted and the rights of the parties determined in accordance with the internal laws of the State of Delaware, without regard to the conflict of law principles thereof, except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (i) Facsimile Signature. A facsimile signature on this Agreement shall be considered the same as an original and a signature to this Agreement may be delivered by facsimile. (j) Entire Agreement. This Agreement, the Purchase Agreement and the Ancillary Documents (as defined in the Purchase Agreement) are intended by the parties as the final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein with respect to the registration rights granted by the Company with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [Remainder of page intentionally left blank] 10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SMARTSERV ONLINE, INC. By:_______________________________ Name: Thomas W. Haller Title: Senior Vice President and Chief Financial Officer Purchasers: If an Individual: _________________________________ Name: If an entity: Name of entity:__________________ By:______________________________ Name: Title: 11 SCHEDULE A
Name and Address Number of Purchased Units Aggregate Purchase Price ---------------- ------------------------- ------------------------ Golden Gate Ventures 0.5 50,000 11 Darius Ct. Dix Hills, NY 11746 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund I LP 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund II LP 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund III LLC 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Jonathan D. Fleisig 1.0 100,000 11 North End Ave, Ste 1321 New York, NY 10282 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Investment Partners LLC 0.88 88,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Elisha Rothman 0.5 50,000 225 W.83rd St #11-1 New York, NY 10024 - ------------------------------------------- --------------------------------------- ---------------------------------- Adam K. Stern 0.1 10,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ----------------------------------
EX-10 5 ex10-1to10q.txt 10.1 Exhibit 10.1 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May 19, 2003, among SMARTSERV ONLINE, INC., a Delaware corporation (the "Company") and the investors listed on Exhibit A hereto, as the same may be hereafter amended, (collectively, the "Investors", and each, individually, an "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 UNITS 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 units (collectively, the "Purchased Units") 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 Exhibit A hereto) is divided by the "Per Unit Purchase Price" (as such term is defined in Section 1.2 below), up to a maximum of 15 Purchased Units. Each Purchased Unit shall consist of a $100,000 convertible debenture (each a "Debenture", and collectively the "Debentures"), the form of which is attached hereto as Exhibit B, and a warrant (each a "Warrant", and collectively, the "Warrants") to purchase 200,000 shares of Common Stock, par value $0.01 per share, of the Company ("Common Stock"), the form of which is attached hereto as Exhibit C. Section 1.2 Purchase Price. The purchase price per Purchased Unit (the "Per Unit Purchase Price") is $100,000. Section 1.3 Closing. At such time as there are Investors purchasing 3.5 Purchased Units (the "First Investors"), there shall be a closing for the purchase and sale of such Purchased Units (the "First Closing") at the offices of Jenkens & Gilchrist Parker Chapin LLP, counsel to the Company, at such time and date as is mutually agreed upon by the Company and the First Investors, or at such other place as is mutually agreed upon by the Company and the First Investors. Subsequent to the First Closing, there shall be one or more subsequent closings for the purchase and sale of any additional Purchased Units (each a "Subsequent Closing"; and collectively with the First Closing, the "Closings") at the offices of Jenkens & Gilchrist Parker Chapin LLP at such time and date as is mutually agreed upon by the Company and the Investors purchasing Purchased Units at each Subsequent Closing (the "Subsequent Investors"), or at such other place as is mutually agreed upon by the Company and the Subsequent Investors. The date and time of the First Closing and each Subsequent Closing are referred to herein as the "First Closing Date" and the "Subsequent Closing Date", respectively. 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 the First Closing Date and each Subsequent Closing Date: 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, copies of which are attached hereto as Exhibit D. As used in this Agreement, "Material Adverse Effect" means any event, circumstance or development which individually or in the aggregate could have a material adverse effect on the business, properties, operations, condition (financial or otherwise), assets, liabilities, tradability of the Common Stock (excluding a failure of the Company to meet the minimum stockholders' equity requirement contained in Rule 4310 of the Nasdaq Marketplace Rules based on the stockholders' equity reflected in the Company's Form 10-KSB for the fiscal year ended December 31, 2002), earnings or results of operations of the Company or on the transactions contemplated hereby. Section 2.2 Subsidiaries. Except as set forth in Schedule 2.2, 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 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 Closings, 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 Amended and Restated Certificate of Incorporation 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. 2 Section 2.4 Capitalization. (a) Immediately prior to the First Closing, not giving effect to the sale and purchase of the Purchased Units, 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. 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. Except as set forth in Schedule 2.4, 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 Units 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). (b) Except as set forth on Schedule 2.4, the Company does not have, is not bound by, and has no obligation to grant or enter into, any 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 other equity security, or any securities convertible into, exchangeable for, or representing the right to subscribe for, purchase, or otherwise acquire any shares of its capital stock or any other equity security. (c) Except as set forth in Schedule 2.4, 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 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 (as defined in Section 2.7). (d) All of the Purchased Units have been offered and at the Closings 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 and other applicable securities laws and regulations. (e) The Purchased Units (which, for purposes of this Section 2.4(e) shall be deemed to include all shares of Common Stock issuable upon conversion of the Debentures and all shares of Common Stock issuable upon exercise of the Warrants) shall, upon issuance pursuant to the terms hereof and/or the terms of the Debentures, as the case may be, 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 and free of all preemptive and other third party rights. Section 2.5 Financial Statements. The Company has previously delivered to the Investors, or made the Investors aware of how to obtain, complete and correct copies of its audited balance sheets, statements of income and statements of cash flows as of and for the fiscal years ended December 31, 2002, 2001 and 2000. All such financial statements were prepared from the books and records of the Company, in conformity with GAAP applied on a consistent basis, 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. 3 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, 2002 (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. Section 2.7 SEC Documents. The Company has delivered to the Investors, or made the Investors aware of how to obtain, true and complete copies of all documents filed by the Company with the Securities and Exchange Commission (the "SEC") (such documents, the "SEC Documents"). 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 and has made all such filings on a timely basis within the last 12 months, except as set forth in Schedule 2.7. Section 2.8 Absence of Certain Changes. 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: (a) suffered any Material Adverse Effect; (b) materially increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (c) 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; (d) permitted or allowed any of its assets to be subjected to any Lien of any kind; (e) incurred any indebtedness not in the ordinary course of business or executed any guarantees on behalf of any person; (f) canceled any material debts or waived any claims or rights of substantial value; (g) sold, transferred or otherwise disposed of any of its properties or assets, except in the ordinary course of business and consistent with past practice; (h) 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), 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 4 personnel of the Company, material change in the terms and conditions of the employment of the Company's key personnel, loss of any of the five most highly compensated employees of the Company or entered into any written employment agreement with any Company employee; (i) 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; (j) made any change in any method of accounting or accounting practice, changed accountants or auditors or failed to maintain its books, accounts and records in the ordinary course of business and consistent with past practice; (k) failed to maintain any material properties or equipment in good operating condition and repair, ordinary wear and tear excepted; (l) 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; (m) 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; (n) amended its Amended and Restated Certificate of Incorporation or By-laws; (o) taken, suffered, or permitted any action which would render untrue any of the representations or warranties of the Company herein contained, and not omitted to take any action, the omission of which would render untrue any such representation or warranty; or (p) agreed in writing or otherwise committed to take actions in furtherance of, 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 or any of the 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 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 material properties or assets may be bound, or require the consent of any person, (iii) violate any statute, law, 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, or (iv) violate any provision (including those requiring the furnishing of notice prior to the taking of specific actions) of the Nasdaq Marketplace Rules (or the rules of any other marketplace on which the Common Stock of the Company is listed or quoted). 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. The Company has not received any notice or request for information from any federal, state, or local governmental authority (i) that the Company has been identified by the 5 Environmental Protection Agency 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; or (ii) 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 any environmental matters. Section 2.11 Licenses and Permits. The Company has and maintains 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 licenses, permits and other authorizations that the failure to obtain or maintain in effect, either singly or in the aggregate, has not had and could not reasonably be expected to have a Material Adverse Effect. 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 the Registration Rights Agreement) 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 or any of the Ancillary Agreements by the Company or the performance by the Company of its obligations hereunder and thereunder, or the continued conduct by the Company of its present business after the Closings. Section 2.13 Taxes. Except as set forth in 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 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 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 which is not accrued on the Balance Sheet. The Company has not consented to extend the time in which any Tax may be assessed or collected by any taxing authority. As used in this Section 2.13, the terms "Taxes" and "Tax" mean all federal, state, local and 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. Except as set forth in Schedule 2.14 or in the Company's annual report on Form 10-KSB for the fiscal year ended December 31, 2002, there is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of a decision which could have a Material Adverse Effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or which challenges the validity of this Agreement or any Ancillary Agreement. 6 Section 2.15 Title to Properties. The Company does not own any real property. 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 under any lease pursuant to which the Company leases real or personal property. Section 2.16 Contracts and Commitments. Except as set forth in 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 future: (a) any agreement, which, in the future, would lead to (i) an acquisition, merger or similar transaction with respect to the Company, or (ii) a debt or equity financing for the Company (other than this Agreement and the Ancillary Agreements); (b) 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; (c) any agreement with any current or former Affiliate, officer or director of the Company, or with any person in which any such Affiliate has an interest; and (d) any 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. Section 2.17 Intellectual Property. (a) All patents, patent applications, trademarks, trade names, service marks, logos and copyrights and other intellectual property used in or material 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 material to the Company's business, "Proprietary Information") are either owned or licensed by the Company. (b) To 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 Company's knowledge, is there any basis for any such litigation or proceeding. (c) To the Company's knowledge, it is not infringing on or making unlawful use of any intellectual property or any proprietary or confidential information of any 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, to the Company's knowledge, is there any basis for any such litigation or proceeding. Section 2.18 Insurance. Except as set forth on Schedule 2.18, the Company maintains policies of insurance with, to the knowledge of the Company, financially sound and reputable insurance companies, funds, or underwriters, which are of the kinds and which cover such risks, and are in such amounts and with such deductibles and exclusions, as are consistent with prudent business practice for similarly situated businesses in the Company's business. Except as set forth on Schedule 2.18, all such policies are in full force and effect, are 7 sufficient for compliance in all respects by the Company with all requirements of law and of all agreements to which it is a party and will not terminate or lapse or otherwise be affected in any way by reason of the transactions contemplated hereby. Section 2.19 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 Units. Section 2.20 Securities Laws. The offer, sale and issuance of the Purchased Units 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 or other applicable 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) or engaged in any action that would require the registration under the Securities Act of the offering and sale of the Purchased Units pursuant to this Agreement. Section 2.21 Investment Banking; Brokerage. Except as set forth on Schedule 2.21, 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 2.22 Labor Relations. There is no charge pending or, to 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 believes its relationships with its employees is satisfactory. Section 2.23 Disclosure. The Company confirms that neither it nor, to its knowledge, any other person acting on its behalf has provided any of the Investors or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. The Company understands and confirms that the Investors may rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Investors regarding the Company, its business and the transactions contemplated hereby, including the schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Investor makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3. Section 2.24 Internal Accounting Controls. Except as set forth in Schedule 2.24, the Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit 8 preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company that could reasonably be expected to delay the filing or processing of a registration statement with the SEC. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company's Form 10-KSB or 10-QSB, as the case may be, is being prepared. The Company's certifying officers have evaluated the effectiveness of the Company's controls and procedures as of a date within 90 days prior to the filing date of the Form 10-KSB for the year ended December 31, 2002 (such date, the "Evaluation Date"). The Company presented in the Form 10-KSB for the year ended December 31, 2002 the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Company's internal controls (as such term is defined in Item 307(b) of Regulation S-B under the Exchange Act) or, to the Company's knowledge, in other factors that could significantly affect the Company's internal controls. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Section 3.1 Representations and Warranties. Each Investor represents severally as to himself only that (each of which representations and warranties are true as of the date hereof and as of the Closing (either the First Closing or any Subsequent Closing) in which such Investor participates): (a) He has all requisite power and full legal right to execute and deliver this Agreement and the Ancillary Agreements to which he is a party and to carry out his obligations hereunder and thereunder. The execution and delivery of this Agreement and the Ancillary Agreements to which he is a party and the performance by him of his obligations hereunder and thereunder, have been duly authorized by him, and no other proceeding therefor on his part is required. This Agreement and each of the Ancillary Agreements to which he is a party have been duly executed and delivered by him and constitute his valid and binding obligations, enforceable against him 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. (b) He is purchasing the Purchased Units for his own account for investment only and not with a present view to the distribution thereof. (c) He has such knowledge and experience in financial and business matters that he 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) He is an "accredited investor" as such term is defined in Rule 501 under the Securities Act, and that he has truthfully filled out the questionnaire attached hereto as Exhibit E. Such Investor understands that the Company is relying on the information contained in such questionnaire. 9 (e) He 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. (f) He understands that the Purchased Units 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 the Warrants and the Debentures. (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 or any of the Ancillary Agreements based on any arrangement or agreement made by or on behalf of him. (h) Neither the execution and delivery of this Agreement or any of the Ancillary Agreements by him nor the performance by him of his obligations hereunder or thereunder will: (i) 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 his 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 he is a party or by which he or any of his material properties or assets may be bound, or (ii) to his knowledge violate any statute, law, rule, regulation, writ, injunction, judgment, order or decree of any court, administrative agency or governmental authority binding on him or any of his material properties or assets. (i) Except for filings required under federal or state securities laws, to his knowledge, 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 him in connection with the execution and delivery of this Agreement or any of the Ancillary Agreements by him, or the performance by him of his 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 his knowledge, threatened, against or affecting him which question the validity of this Agreement or any of the Ancillary Agreements, the transactions contemplated hereby or thereby or any action taken or to be taken by him pursuant to this Agreement or any of the Ancillary Agreements, at law or in equity. (k) Except as set forth on Schedule 3.1, to his knowledge he is not an Affiliate of any other Investor. (l) He has adequate means of providing for his current financial needs and foreseeable contingencies and has no need for liquidity of the investment in the Units for an indefinite period of time. (m) He is aware that an investment in the Units involves a number of very significant risks and has carefully read and considered the information set forth herein and in the Company's disclosure schedules annexed hereto, including the risk that the Common Stock is subject to delisting from the Nasdaq SmallCap Market. 10 ARTICLE IV COVENANTS OF THE COMPANY AND THE INVESTORS Section 4.1 Further Assurances. The Company and each Investor shall execute and deliver, or cause to be executed and delivered each Ancillary Agreement to be executed and delivered by it or him. The Company shall execute and deliver, or cause to be executed and delivered, all such additional instruments and other documents and shall take such further actions as the Investors may reasonably require to effectuate, carry out and comply with all of the terms of this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby. Section 4.2 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 Warrants and conversion of the Debentures. 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 4.3 Non-Public Information. The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Investor or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Investor shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Investor shall be relying on the foregoing covenant in effecting transactions in securities of the Company. Section 4.4 Future Financings. From the date hereof until the date that all Debentures have been fully paid or converted, the Company shall not effect an equity financing (a "Subsequent Financing") at a price per share less than the then applicable Conversion Price (as defined in the Debenture), unless the Company receives the prior written consent for such issuance from the Investors holding at least 51% of the principal balance of the Debenture then outstanding, provided, however, that if Investors holding at least 51% of the principal balance of the Debentures then outstanding do not consent to such Subsequent Financing, the Company may prepay the Debentures on five business days advance written notice by paying to each Debenture holder the outstanding principal, accrued interest and an amount equal to 10% of the principal amount of such Debenture. Section 4.5 Inter-Creditor Agreement. Each Investor hereby agrees that the payment of all amounts due under the Debentures shall be shared in proportion to the amount owed to each Investor pursuant to their Debenture. To the extent that any Investor receives a Debenture payment in excess of the payment amount due to such Investor pursuant to such Investor's Debenture, the other Investors shall immediately be notified and such excess amounts shall be paid to such parties on a pro-rata basis. If an Event of Default (as defined in the Debentures) occurs under any Debenture and any Investor collects proceeds pursuant to its rights hereunder and under the Debentures, the other Investors shall be immediately notified and such proceeds shall be shared with the other Investors on a pro-rata basis. To the extent that any Investor receives a payment that is in excess of its pro-rata portion of the payment received by all Investors, such excess payment shall be deemed to be held in trust by such Investor on behalf of the other Investors. 11 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 the First Closing and any Subsequent 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 First Closing Date or any Subsequent Closing Date, as applicable, 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 Ancillary Agreements and the consummation of the transactions contemplated herein, and (ii) the incumbency and signatures of the officers of the Company executing this Agreement, the Ancillary Agreements and the other agreements and instruments contemplated herein. (b) Certificates. The Company shall have delivered to each Investor certificates evidencing the Warrant and the Debenture acquired by such Investor pursuant to the terms hereof, each duly executed by the appropriate Company officers. (c) 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 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 when made on the date hereof and shall be true and correct in all material respects on and as of the First Closing Date or any Subsequent Closing Date, as applicable, as though made on and as of such date 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 First Closing or any Subsequent Closing, as applicable. (d) Opinion of Counsel. The Investors shall have received at the Closings from Jenkens & Gilchrist Parker Chapin LLP, counsel to the Company, a favorable written opinion dated as of the First Closing Date or any Subsequent Closing Date, as applicable, which shall be in the form attached hereto as Exhibit F hereto. Section 5.2 Company Closing Conditions for the First Closing. The obligation of the Company to consummate the transactions contemplated hereby at the First Closing is subject to the Company having received payment by wire transfer or check payable to the order of the Company of $350,000 at or prior to the First Closing. Section 5.3 Company Closing Conditions for Subsequent Closings. The obligation of the Company to consummate the transactions contemplated hereby at each Subsequent Closing is subject to the satisfaction or waiver of each of the following conditions at or prior to such Subsequent Closing: (a) Payment of Purchase Price. The Company shall have received payment by wire transfer or check payable to the order of the Company for the balance of the Purchased Units being purchased by the Investors. (b) First Closing. The First Closing shall have taken place. Section 5.4 Mutual Closing Condition for the First Closing and each Subsequent Closing. The obligation of the Company and the Investors to consummate the transactions contemplated hereby at the First Closing or any Subsequent Closing is subject to the satisfaction or waiver of each of the following conditions at or prior to the First Closing or any Subsequent Closing: 12 (a) Injunctions. There not being 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. (b) Last Closing Date. No Closing shall take place after June 25, 2003. 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: "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 Warrants, Debentures, the Registration Rights Agreement 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. "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. "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. 13 "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. "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, limited partnership or limited liability company created primarily for the benefit of one or more of such persons and each custodian of a property of one or more such persons and the personal representative or 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 in the United States 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. "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, (ii) real estate taxes not yet due and payable, and (iii) any 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, unless the Company is given written notice of the imposition of any such lien described in this clause (iii). "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. "Registration Rights Agreement" means the Registration Rights Agreement dated as of the First Closing Date or any Subsequent Closing Date, as applicable, by and among the Company and the Investors participating in such closing, in the form attached hereto as Exhibit G. "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. 14 "Trading Day" means a day on which the Company's Common Stock is able to be traded on the Nasdaq SmallCap Market. 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 Balance Sheet 2.6 Closings 1.3 Common Stock 1.1 Company Preamble Debenture and Debentures 1.1 Evaluation Date 2.24 Exchange Act 2.7 First Closing 1.3 First Closing Date 1.3 First Investors 1.3 Investor Preamble Material Adverse Effect 2.1 Per Unit Purchase Price 1.2 Proprietary Information 2.17 Purchased Units 1.1 SEC 2.7 SEC Documents 2.7 Subsequent Closing 1.3 Subsequent Closing Date 1.3 Subsequent Investors 1.3 Securities Act 2.7 Tax 2.13 Warrant 1.1 Warrants 1.1 ARTICLE VII MISCELLANEOUS Section 7.1 Independent Nature of Purchasers' Obligations and Rights. The Company acknowledges each of the following: The obligations of each Investor participating in this transaction are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor. Nothing contained herein or in any other agreement, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a "group" (within the meaning of Sections 13 and 16 of the Exchange Act and any rules promulgated thereunder), in each case with respect to such obligations or the transactions contemplated hereunder. Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other agreements relating to this transaction, and it shall not be necessary for any other Investor to be joined as an additional 15 party in any proceeding for such purpose. Each Investor has been represented by its own separate legal counsel (or has chosen not to be represented by legal counsel) in its review and negotiation of this agreement and the related transaction documents. The Company has elected to provide various Investors with the same terms and agreements for the convenience of the Company and not because it was required or requested to do so by the Investors. Section 7.2 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. Section 7.3 Governing Law; Jurisdiction; Venue etc. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, 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 7.3 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 7.4 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 7.5 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 7.6 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 or by telecopy that has been confirmed as received by 5:00 P.M. on a business day, one (1) business day after being sent by nationally recognized overnight courier or received by telecopy after 5:00 P.M. on any day, or five (5) business days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, to the following addresses: If to the Company: SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Attn: Chief Financial Officer Facsimile: (203) 353-5984 16 With a copy to: SmartServ Online, Inc. One Station Place Stamford, Connecticut 06902 Attn: General Counsel Facsimile: (203) 353-5984 And: Jenkens & Gilchrist 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 Exhibit A. Section 7.7 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 7.8 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 7.9 Publicity. The Company and the Investors shall have the right to approve before issuance of any press releases or any other public statements is 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. The Company shall also have the right to file this Agreement and the Ancillary Agreements with the SEC under the Securities Act or the Exchange Act if required by such acts or regulations thereunder. Section 7.10 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. Section 7.11 Assignment. (a) The Company may not assign this Agreement or its rights and obligations hereunder. (b) The rights and obligations hereunder and the Purchased Units (or a component thereof) may be transferred by each of the Investors in its sole discretion at any time, in whole or in part, to (i) any Affiliate(s) or 17 Affiliated Group(s) of the transferor or (ii) with the consent of the Company, which shall not be unreasonably withheld, delayed, or conditioned, any party that is an "accredited investor" (as such term is defined in Rule 501 under the Securities Act), without the consent of any other party thereto. (c) Notwithstanding the other provisions of this Section 7.11, no Person acquiring any Common Stock in a public trade shall receive the benefit of any of the covenants set forth in this Agreement as an assignee thereof. (d) Subject to clause (c) immediately above, any Person acquiring, in a manner permitted by this Agreement, any Units (or components thereof) 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 7.12 Equitable Relief. Each of the parties acknowledges that any breach by such party of his 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 7.13 Usage. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. All terms defined in this Agreement in their singular or plural forms have correlative meanings when used herein in their plural or singular forms, respectively. Section 7.14 Facsimile Signatures. A facsimile signature on this Agreement or an original signature delivered by facsimile shall be considered the same as an original. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, the parties have caused this Securities Purchase Agreement to be duly executed and delivered as of the day and year first above written. EXECUTION OF THIS AGREEMENT BY ANY INVESTOR SHALL BE DEEMED TO CONSTITUTE EXECUTION OF THE REGISTRATION RIGHTS AGREEMENT BY SUCH INVESTOR. SMARTSERV ONLINE, INC. By:_________________________________ Name: Title: INVESTORS: If an individual: ____________________________________ Name: If an entity: Name of Entity:_____________________ By:_________________________________ Name: Title: 19 Exhibit A First Investors:
Name and Address Number of Purchased Units Aggregate Purchase Price ---------------- ------------------------- ------------------------ Golden Gate Ventures 0.5 50,000 11 Darius Ct. Dix Hills, NY 11746 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund I LP 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund II LP 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Private Equity Fund III LLC 0.2 20,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Jonathan D. Fleisig 1.0 100,000 11 North End Ave, Ste 1321 New York, NY 10282 - ------------------------------------------- --------------------------------------- ---------------------------------- Spencer Trask Investment Partners LLC 0.88 88,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ---------------------------------- Elisha Rothman 0.5 50,000 225 W.83rd St #11-1 New York, NY 10024 - ------------------------------------------- --------------------------------------- ---------------------------------- Adam K. Stern 0.1 10,000 535 Madison Avenue - 18th Fl New York, NY 10022 - ------------------------------------------- --------------------------------------- ----------------------------------
20 Exhibit A continued:
Subsequent Investors: Name and Address Number of Purchased Units Aggregate Purchase Price
21 EX-10 6 ex10-2to10q.txt 10.2 Exhibit 10.2 NEITHER THIS DEBENTURE NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS DEBENTURE haVE been registered under the Securities Act of 1933, as amended (the "Act") or under the securities laws of any state. NEITHER THIS DEBENTURE NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS DEBENTURE may be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the DEBENTUREs under such act or an opinion of counsel reasonably satisfactory to the company that such registration is not required pursuant to a valid exemption therefrom under the Act. SMARTSERV ONLINE, INC. CONVERTIBLE DEBENTURE May ____, 2003 $XXXXX.00 FOR VALUE RECEIVED, the undersigned SmartServ Online, Inc., a Delaware corporation (referred to herein as "Borrower"), promises to pay to the order of _________, with an address at ______________("Lender"), the principal sum of XXXXX and 00/100 Dollars ($XX,XXX.00), or such lesser principal amount as is then outstanding on the earlier of (i) six months from the date of issuance or (ii) the date that the Borrower consummates closing(s) of an equity financing with aggregate gross proceeds of at least $3 million (the "Maturity Date"); and interest thereon at a rate equal to eight percent (8%) per annum, payable at maturity. The principal balance then outstanding under this convertible debenture ("Debenture") plus accrued but unpaid interest shall be paid in full on the Maturity Date along with payment of any other amounts due hereunder. Neither principal nor interest may be prepaid in whole or in part without the prior written consent of the Lender, except as provided in the immediately following paragraph. From the date hereof until the date that all Debentures have been fully paid or converted, the Borrower shall not effect an equity financing (a "Subsequent Financing") at a price per share less than the then applicable Conversion Price (as defined below), unless the Company receives the prior written consent for such issuance from Lenders holding at least 51% of the aggregate principal balance of the Debentures then outstanding, provided, however, that if Lenders holding at least 51% of the aggregate principal balance of the Debentures then outstanding do not consent to such Subsequent Financing, the Borrower may prepay the Debentures on five business days advance written notice by paying to each Lender the outstanding principal, accrued interest and an amount equal to 10% of the principal amount of such Debenture. Notwithstanding any other provision hereof, interest paid or becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. All amounts due hereunder are payable in lawful money of the United States of America to the Lender at the address above indicated. This is the Debenture referred to in the Securities Purchase Agreement ("Securities Purchase Agreement"), dated as of the date hereof, by and between the Lender and the Borrower. The terms and conditions of the Securities Purchase Agreement and all other documents and instruments delivered in connection therewith (collectively, the "Loan Documents") are incorporated by reference herein and made a part hereof. Notwithstanding anything contained herein or in the Loan Documents, this Debenture shall be in default and Lender shall have all rights and remedies available to it under the law, in the event that Borrower shall not pay any amounts hereunder when due. All capitalized terms not otherwise defined herein shall have their respective meanings as set forth in the Securities Purchase Agreement. At any time from the date hereof through the date that this Debenture is paid in full, Lender shall have the right, in its sole discretion, to convert the principal balance of this Debenture then outstanding plus accrued but unpaid interest, in whole or in part, into shares of Common Stock, par value $.01 per share ("Common Stock") of the Borrower at a conversion price equal to $[the lower of the closing bid price on the date prior to the closing or the average closing bid price on the five trading days prior to the closing], subject to adjustment as provided herein (the "Conversion Price"). Should the Common Stock be delisted from the Nasdaq SmallCap Market, the then applicable Conversion Price shall be reduced to 75% of the average closing bid price of the Common Stock during the last ten trading days within the first twenty trading days following such delisting, provided that such price is less than the then applicable Conversion Price. Lender may convert this Debenture at the then applicable Conversion Price by the surrender of this Debenture (properly endorsed) at the principal office of the Borrower, or at such other agency or office of the Borrower in the United States of America as the Borrower may designate by notice in writing to the Lender at the address of Lender appearing herein. Upon any partial exercise of this Debenture, there shall be executed and issued to the Lender a new Debenture in respect of such outstanding amounts of principal and accrued but unpaid interest hereunder as to which Lender shall not have converted. In the event of the conversion of all or a portion of this Debenture, a certificate or certificates for the securities so converted, as applicable, registered in the name of the Lender, shall be delivered to the Lender as soon as practicable after the receipt by Borrower of this Debenture and Lender's written request for conversion. If the Borrower, at any time while this Debenture is outstanding, (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of 2 capital stock of the Borrower, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. In case of any consolidation or merger of the Borrower with or into another corporation or the conveyance of all or substantially all of the assets of the Borrower to another corporation, this Debenture shall thereafter be convertible (to the extent such conversion is permitted hereunder) into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Borrower deliverable upon conversion of this Debenture would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of this Debenture, to the end that the provisions set forth herein shall be thereafter applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Debenture. Upon the occurrence of each adjustment or readjustment of the Conversion Price hereunder, the Borrower at its expense promptly shall compute such adjustment or readjustment and furnish to the holder of this Debenture a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Debenture and any of the rights granted hereunder are freely transferable by the Lender, in its sole discretion, subject to federal and state securities law restrictions, if any. The Borrower covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of this Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Lender, not less than such number of shares of the Common Stock as shall be issuable upon the conversion of the outstanding principal amount of this Debenture. The Borrower covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable. Upon a conversion hereunder the Borrower shall not be required to issue stock certificates representing fractions of shares of the Common Stock, and in lieu of any fractional shares which would otherwise be issuable, the Borrower shall issue the next highest whole number of shares of Common Stock. If (i) the Borrower shall declare a dividend (or any other distribution) on the Common Stock; (ii) the Borrower shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (iii) the 3 Borrower shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (iv) the approval of any stockholders of the Borrower shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Borrower is a party, any sale or transfer of all or substantially all of the assets of the Borrower, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Borrower shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Borrower; then, in each case, the Borrower shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Lender at its last address as shall appear upon the debenture records of the Borrower, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distribution, redemption, rights or warrants are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Lender is entitled to convert this Debenture during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. The issuance of certificates for shares of the Common Stock or other securities on conversion of this Debenture shall be made without charge to the Lender for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Borrower shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Lender and the Borrower shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Borrower or its designee the amount of such tax or shall have established to the satisfaction of the Borrower that such tax has been paid. Any payment of principal or interest which remains unpaid for more than five (5) days after such payment is due shall be subject to a penalty equal to three percent (3%) per month of the amount of such payment then outstanding. Borrower agrees, that in the event any amounts due and payable hereunder are collected by law or through an attorney at law, to pay all costs of collection, including, without limitation, reasonable attorney's fees. 4 Nothing herein shall limit any right granted to Lender by any other instrument or document or by law or equity. The undersigned for itself, and its respective successors and assigns, hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance or endorsement of this Debenture. Each of the following events, if occurring while any of the principal or interest of this Debenture remains unpaid, shall constitute an "Event of Default" hereunder: (a) The Borrower shall fail to pay the principal or interest of this Debenture or any other amounts payable to the Lender hereunder when due whether at scheduled maturity, upon acceleration or otherwise. (b) Any representation or warranty made or deemed to be made by the Borrower (or any of its officers, directors, employees or agents) under or in connection with this Debenture or in any Loan Document shall prove to have been false or incorrect in any material respect when made. (c) The Borrower shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any material breach of any of the Loan Documents. (d) The Borrower or any of its active subsidiaries shall commence, or there shall be commenced against the Borrower or any such active subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Borrower commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any active subsidiary thereof or there is commenced against the Borrower or any active subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Borrower or any active subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any active subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Borrower or any active subsidiary thereof makes a general assignment for the benefit of creditors; or the Borrower shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Borrower or any active subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Borrower or any active subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Borrower or any active subsidiary thereof for the purpose of effecting any of the foregoing; 5 Immediately upon the occurrence of an Event of Default, at Lender's option, (i) the Maturity Date shall be deemed to have occurred automatically and (ii) the entire principal amount of this Debenture then outstanding, all other amounts payable by the Borrower hereunder shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower, anything herein to the contrary notwithstanding. Any and all notices or other communications or deliveries to be provided by the Lender hereunder, including, without limitation, any conversion notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Borrower, at the address set forth above, facsimile number, Attn: (203) 353-5984 or such other address or facsimile number as the Borrower may specify for such purposes by notice to the Lender delivered in accordance with this paragraph. Any and all notices or other communications or deliveries to be provided by the Borrower hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Lender at the address of such Lender appearing on the books of the Borrower, or if no such address appears, at the principal place of business of the Lender. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission if delivered by hand or by telecopy that has been confirmed as received by 5:00 P.M. on a business day, (ii) one business day after being sent by nationally recognized overnight courier or received by telecopy after 5:00 P.M. on any day, or (iii) five business days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested. Upon the occurrence and during the continuation of an Event of Default and the declaration of the Maturity Date, the Lender shall have, in addition to all other rights and remedies under this Agreement, this Debenture and related documents, all other rights and remedies provided under each applicable jurisdiction and other applicable laws, which rights shall be cumulative. This Debenture and the provisions hereof are to be construed according to and are governed by the laws of the State of New York, without regard to principles of conflicts of laws thereof. IN WITNESS WHEREOF, the undersigned has duly executed this document, enforceable against the Borrower in accordance with its terms, on the day of May, 2003. SMARTSERV ONLINE, INC. By: __________________________________ Name: Title: 6 EX-99 7 ex99-1to10q.txt 99.1 Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the filing of the Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2003 (the "Report") by SmartServ Online, Inc. ("Registrant"), each of the undersigned hereby certifies that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Sebastian E. Cassetta ------------------------------------- Sebastian E. Cassetta Chairman & Chief Executive Officer Dated: June 4, 2003 /s/ Thomas W. Haller ------------------------------------- Thomas W. Haller Sr. Vice President, Chief Financial Officer & Treasurer Dated: June 4, 2003 A signed original of this written statement required by Section 906 has been provided to SmartServ Online, Inc. and will be retained by SmartServ Online, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----