<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25759
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1491253
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
40 CUTTER MILL ROAD, 11021
SUITE 405, GREAT NECK, N.Y. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(516) 466 - 8422
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
As of August 1, 1999, there were 21,179,311 shares of AppliedTheory Corporation
common stock, par value $.01, outstanding.
The Index of Exhibits appears on page 35
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APPLIEDTHEORY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets as of December 31, 1998 and June 30, 1999.................................3
Statements of Operations for the three and six months ended
June 30, 1998 and June 30, 1999..........................................................4
Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1999..........................................................5
Notes to Financial Statements............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................18
Item 2. Changes in Securities and Use of Proceeds...............................................18
Item 3. Defaults Upon Senior Securities.........................................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................................19
Item 5. Other Information.......................................................................19
Item 6. Exhibits and Reports on Form 8-K........................................................33
Signatures ........................................................................................34
Exhibit Index ........................................................................................35
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIEDTHEORY CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
(Derived from Audited (Unaudited)
Financial Statements)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,786 $ 6,992
Marketable securities -- 55,123
Accounts receivable, net of allowance for doubtful
accounts of $157 and $187, respectively 3,584 4,650
Due from related parties -- 961
Prepaid expenses and other assets 255 746
-------- --------
Total current assets 5,625 68,472
Property and equipment, net 4,203 6,246
Investment, at cost -- 5,000
Other assets 690 1,116
-------- --------
Total assets $ 10,518 $ 80,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,149 $ 4,439
Accrued payroll 582 761
Accrued expenses 2,473 2,983
Deferred revenue 1,849 2,050
Current portion of long-term debt and capital lease obligations 551 980
Preferred stock dividends payable 420 --
Due to related parties 850 --
-------- --------
Total current liabilities 8,874 11,213
Long-term debt and capital lease obligations 5,979 6,589
Borrowings from NYSERNet.net, Inc. 2,957 --
Other Liabilities 215 188
Redeemable preferred stock - 1,000,000 shares authorized; issued
and outstanding 15,000 shares at December 31, 1998 and 0 shares
at June 30, 1999; cumulative 14% dividend;
$100 per share liquidation value 1,500 --
Stockholders' Equity (Deficit):
Common stock, $.01 par value; 90,000,000 shares authorized;
issued and outstanding 15,094,336 shares at December 31, 1998
and 21,147,902 shares at June 30, 1999 151 211
Additional paid-in capital 6,581 82,590
Accumulated deficit (15,739) (19,764)
Accumulated other comprehensive income (loss) -- (193)
-------- --------
Total stockholders' equity (deficit) (9,007) 62,844
-------- --------
Total liabilities and stockholders' equity (deficit) $ 10,518 $ 80,834
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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APPLIEDTHEORY CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues
Third-party customers $ 2,680 $ 5,970 $ 5,855 $ 10,803
NYSERNet.org, Inc. customers and services 2,102 2,723 4,261 4,757
------------ ------------ ------------ ------------
Total net revenues 4,782 8,693 10,116 15,560
------------ ------------ ------------ ------------
Costs and expenses
Cost of revenues 2,864 5,789 5,804 9,892
Sales and marketing 1,536 2,644 2,974 4,408
General and administrative 1,159 2,055 2,302 3,869
Research and development 74 67 120 130
Depreciation and amortization 399 791 759 1,407
Other expenses -- -- 2 3
------------ ------------ ------------ ------------
Total costs and expenses 6,032 11,346 11,961 19,709
------------ ------------ ------------ ------------
Loss from operations (1,250) (2,653) (1,845) (4,149)
Investment income -- (505) -- (523)
Interest expense 141 146 283 326
------------ ------------ ------------ ------------
NET LOSS (1,391) (2,294) (2,128) (3,952)
Preferred stock dividends 53 21 105 73
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (1,444) $ (2,315) $ (2,233) $ (4,025)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.13) $ (0.12) $ (0.20) $ (0.23)
============ ============ ============ ============
Shares used in computing basic and diluted
loss per share 11,038,208 19,440,599 10,972,642 17,695,081
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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APPLIEDTHEORY CORPORATION
STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,128) $ (3,952)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 759 1,407
Provision for bad debts -- 45
Deferral (payment) of interest expense to NYSERNet.net, Inc., net 101 (270)
Loss on sale of property and equipment 14 3
Non-cash compensation expense 200 627
Changes in assets and liabilities
Accounts receivable (560) (1,111)
Due to (from) related parties (254) (1,812)
Prepaid expenses and other assets (694) (920)
Accounts payable 91 2,290
Accrued payroll 281 179
Accrued expenses and other liabilities 463 484
Deferred revenue 514 201
-------- --------
Net cash used in operating activities (1,213) (2,829)
-------- --------
Cash flows from investing activities
Purchases of property and equipment (840) (2,009)
Purchase of marketable securities -- (55,316)
Purchase of investment -- (5,000)
Payments received on notes receivable -- 3
Proceeds from sale of property and equipment 4 5
-------- --------
Net cash used in investing activities (836) (62,317)
-------- --------
Cash flows from financing activities
Issuance of common stock, net of issuance costs 43 75,442
Payment of preferred stock dividends -- (493)
Redemption of preferred stock -- (1,500)
Borrowings from NYSERNet.net, Inc. -- 800
Repayment of borrowings from NYSERNet.net, Inc. -- (3,487)
Proceeds from line of credit borrowings, net 2,026 70
Principal payments on capital leases (108) (480)
-------- --------
Net cash provided by financing activities 1,961 70,352
-------- --------
Net increase (decrease) in cash and cash equivalents (88) 5,206
Cash and cash equivalents, beginning of period 135 1,786
-------- --------
Cash and cash equivalents, end of period $ 47 $ 6,992
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
AppliedTheory Corporation (formerly AppliedTheory Communications, Inc.) was
incorporated in the State of New York in November 1995 as a wholly owned
subsidiary of NYSERNet.net, Inc. ("NET"), a not-for-profit corporation. NET
is also the sole member of NYSERNet.org, Inc. ("ORG"), a not-for-profit
corporation (in effect ORG is a wholly-owned subsidiary of NET). As a
result of certain transactions completed during 1998 (the exercise of
options for 3,559,335 shares of AppliedTheory Corporation common stock, the
private placement of 1,725,000 shares of AppliedTheory Corporation common
stock and NET's direct sale of 4,875,000 shares of AppliedTheory
Corporation common stock), AppliedTheory Corporation is no longer a
subsidiary of NET.
These financial statements for the three months and six months ended June
30, 1999 and 1998 and the related footnote information are unaudited and
have been prepared on a basis substantially consistent with the audited
financial statements of AppliedTheory Corporation (the "Company") as of and
for the year ended December 31, 1998 included in our Registration
Statement on Form S-1 filed with the Securities and Exchange Commission.
The accompanying unaudited financial statements of AppliedTheory
Corporation have been prepared in accordance with generally accepted
accounting principles for interim financial information, with the
instructions to Form 10-Q and Article 10 of Regulation S-X. All material
adjustments, consisting of only normal and recurring adjustments, which, in
the opinion of management, are necessary for fair presentation of the
results for the interim periods have been reflected. Operating results for
the three month and six month period ended June 30, 1999 and 1998 are not
necessarily indicative of the results that may be expected for any
succeeding quarters or for the full year. The financial statements and
notes thereto should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1998.
In conjunction with its Initial Public Offering (the "IPO"), AppliedTheory
Communications, Inc. reorganized as a Delaware corporation. On January 28,
1999, AppliedTheory Communications, Inc. established its wholly owned
subsidiary, AppliedTheory Corporation. AppliedTheory Communications, Inc.
merged into AppliedTheory Corporation, which is the surviving entity
effective with the completion of its IPO, on May 5, 1999. On April 12,
1999, a committee of the Board of Directors of both AppliedTheory entities
authorized an increase in the number of authorized shares of common stock
and preferred stock to 90,000,000 and 1,000,000, respectively. Further, all
non-voting common shares were converted into voting common shares and a 1.5
to 1 stock split were effective upon completion of the Initial Public
Offering. All per share amounts have been adjusted retroactively.
On May 5, 1999, the Company's IPO became effective. Through the IPO,
5,175,000 shares of the Company's common stock were issued for net proceeds
of approximately $77.0 million after deduction of the underwriting discount
and commission.
NOTE B - LOSS PER SHARE
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per
share is computed using the weighted average number of shares of common
stock outstanding, adjusted for the dilutive effect of potential common
shares issued or issuable pursuant to stock options and stock appreciation
rights. Potential common shares issued are calculated using the treasury
method. All potential common shares have been excluded from the computation
of diluted loss per share as their effect would be antidilutive and
accordingly, there is no reconciliation of basic and diluted loss per share
for the periods presented.
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NOTE C - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and six months ended June 30,
1998 and 1999, was as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,391) $(2,294) $(2,128) $(3,952)
Other comprehensive income (loss):
Unrealized loss on
marketable securities -- (193) -- (193)
------- ------- ------- -------
Comprehensive income (loss) $(1,391) $(2,487) $(2,128) $(4,145)
======= ======= ======= =======
</TABLE>
NOTE D - SEGMENT AND RELATED INFORMATION
The Company operates as one business segment, as a provider of Internet
solutions. The Company had revenues from its major service offerings as
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues
Internet connectivity $ 3,518 $ 4,947 $ 7,095 $ 9,108
Internet integration and
enterprise portal development 943 2,939 2,304 5,034
Web hosting 321 807 717 1,418
------- ------- ------- -------
Total net revenues $ 4,782 $ 8,693 $10,116 $15,560
======= ======= ======= =======
</TABLE>
NOTE E - MARKETABLE SECURITIES
Investments classified as marketable securities represent fixed maturity
instruments (bonds and notes) which are reported at their fair values.
Unrealized gains and losses on these securities, net of related tax effects
are included in stockholders' equity as a component of accumulated other
comprehensive income (loss). The Company categorizes all marketable
securities as available for sale in order to provide the Company
flexibility to respond to various factors, including changes in market
conditions.
Investment income is recognized when earned. Realized gains and losses on
sales, maturities and liquidation of investments are determined on a
specific identification basis. The amortization of premiums and accretion
of discounts are computed on the straight-line basis. Fair values are based
on quoted market prices.
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NOTE F - PROPERTY AND EQUIPMENT
On December 21, 1998, the Company adopted a plan, which was approved by its
Board of Directors, to close a leased facility, which principally is used
as a Web-hosting data center. The facility has experienced operational
difficulties which limited its usability as a Web-hosting site and its
ability to generate sufficient revenues. In connection with the plan of
abandonment, the Company recorded a $900,000 charge to operations for the
year ended December 31, 1998 consisting of (i) a $486,000 write-down of
equipment and leasehold improvements to management's estimate of their fair
value, based on the anticipated discounted future cash flows through the
date of abandonment, of approximately $70,000 in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of" and (ii) a $414,000
accrued liability, included in Accrued Expenses, relating to equipment
leases and facility operating leases, (net of anticipated subrental income)
expiring in October 2001 and May 2006, respectively, in accordance with the
provisions of EITF 94-3, "Liability Recognized for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This accrued
liability provides for only those costs subsequent to exiting the facility,
which is expected to occur in September 1999, and costs prior thereto will
be recognized during the period they are incurred. The plan calls for the
Web-hosting customer base served from this abandoned facility and the
related revenues, which are not significant, to be transitioned to another
facility. As of June 30, 1999, no amounts have been paid against this
liability. Management currently anticipates that the closure date will be
delayed approximately four months later than originally planned.
NOTE G - INVESTMENT IN PLANNING TECHNOLOGIES, INC.
On June 22, 1999, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Planning Technologies, Inc. ("PTI"), a
Georgia corporation which provides consulting and network engineering
services, along with Grumman Hill Investments III, L.P., and certain
shareholders of PTI. Pursuant to the Stock Purchase Agreement, the Company
acquired approximately 10% of the capital stock of PTI on a fully diluted
basis, as defined in the Stock Purchase Agreement, for $5.0 million. The
Company's 10% ownership interest in PTI is represented by 2,976,190 shares
of PTI's Convertible Preferred Stock, which represents approximately 50% of
PTI's outstanding Convertible Preferred Stock. The investment is being
accounted for under the cost method.
The Stock Purchase Agreement provides a definition of service revenues for
PTI for the year ending December 31, 1999. In the event that PTI's service
revenues for that period are below thresholds which are described in the
Stock Purchase Agreement, the Company will receive additional shares of PTI
Convertible Preferred Stock representing up to 5% of the fully diluted
capital stock of PTI.
As a result of its investment in PTI, so long as the Company continues to
hold at least 25% of the total outstanding Convertible Preferred Stock of
PTI, the Company will be entitled to designate and elect one director out
of a total of six seats on the Board of Directors.
Pursuant to the terms of its investment, during the period beginning June
30, 2000 and ending December 31, 2000, the Company will have the option to
purchase all the outstanding capital stock of PTI at a price, which at that
time is determined to be fair market value.
NOTE H - LONG-TERM DEBT
Line of Credit
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On January 20, 1998, the Company entered into a credit agreement with a
bank for an aggregate amount of $7,500,000, which expires on January 19,
2001. The agreement provides for the payment of the unpaid principal
balance of all amounts advanced on January 19, 2001. Interest is charged
and payable on a monthly basis as determined by the Company, either on a
LIBOR plus 50 basis points or a prime rate basis less 200 basis points. The
credit facility is collateralized by substantially all assets of the
Company and by a maximum of $5,500,000 of cash and cash equivalents,
government securities, corporate securities or corporate equities pledged
by NET.
The Company had $5,500,000 outstanding under the line of credit as of June
30, 1999 and, as a result of certain restrictions, had no additional
availability as of June 30, 1999. The average interest rate on outstanding
borrowings was 6.1% at June 30, 1999.
In accordance with the terms of the credit agreement, amended on August
3, 1999, the bank issued a standby letter of credit in the Company's name
for $650,000, expiring July 30, 2000, pursuant to the amended agreement,
collateralizing the Company's obligation to a third party for a real
property lease. The Company's available credit under its line of credit
agreement is effectively reduced by the outstanding amount of the letter of
credit.
Borrowings from NYSERNet.net, Inc.
The Company has an unsecured borrowing facility with NET, which provides
for borrowings to a maximum amount of $6,187,000, less any preferred stock
issued to NET, for working capital requirements. This borrowing facility
expires on January 1, 2002. Interest on the loans accrues at the prime rate
and payments are deferred for five years from the date of each advance or
January 1, 2002, whichever is earlier. All principal borrowings under this
agreement are due and payable on January 1, 2002. On May 5, 1999, the
Company paid down the line of credit and deferred interest in full with the
proceeds from the IPO.
As of June 30, 1999, the Company had no principal borrowings outstanding
under this facility and had $6,187,000 available for additional principal
borrowings.
Capital Lease Obligations
During March 1999, the Company leased approximately $1,449,000 of equipment
under an agreement accounted for as a capital lease. The obligation for the
equipment requires the Company to make monthly payments of approximately
$52,000 through September 2001. In connection with the equipment financing,
the Company was required to deliver a security deposit by placing on
deposit $782,000 as additional collateral. The security deposit was fully
refunded to the Company in June 1999.
Interest paid for the three and six months ended June 30, 1998 and 1999 was
approximately $141,000, $283,000, $485,000 and $665,000, respectively.
NOTE I - REDEEMABLE PREFERRED STOCK
On May 5, 1999, the Company paid approximately $1,993,000 to fully redeem
all outstanding preferred stock and accrued dividends with a portion of the
proceeds from the Company's IPO.
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NOTE J - STOCKHOLDERS' EQUITY
Certain options were granted in 1998 at exercise prices below the fair
market value of the Company's stock. The Company recorded compensation
expense associated with these options of $100,000 and $314,000 for the
three months ended June 30, 1998 and 1999 and a total of $200,000 and
$627,000 for the six months ended June 30, 1998 and 1999, respectively.
During the quarter ended June 30, 1999, options with respect to 2,721
shares of common stock were exercised for aggregate net proceeds of
approximately $500.
NOTE K - RELATED PARTY TRANSACTIONS
Transactions with NET and ORG
The Company has entered into an Internet service provider agreement with
ORG to serve as ORG's sole source provider for Internet solutions to ORG's
customer base under contractual arrangements. ORG's customers consist of
(i) unrelated customers for which ORG serves as a conduit to the sales
transactions between the Company and these customers and (ii) member
institutions of ORG for which ORG provides pricing terms below that charged
by the Company to ORG. The Company's revenues from ORG's customer base for
the following periods are (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Unrelated customers $ 789 $ 743 $1,621 $1,442
Member institutions 1,119 1,235 2,238 2,355
Services to ORG 194 745 402 960
------ ------ ------ ------
$2,102 $2,723 $4,261 $4,757
====== ====== ====== ======
</TABLE>
During each of the three and six months ended June 30, 1998 and 1999, the
Company charged NET approximately $25,000 and $50,000 and ORG $75,000 and
$150,000, respectively, in management fees.
The excess of the Company's revenues over amounts charged by ORG to its
member institutions was approximately $708,000 and $775,000 for the three
months ended June 30, 1998 and 1999 and $1,415,000 and $1,473,000 for the
six months ended June 30, 1998 and 1999, respectively.
NOTE L - COMMITMENTS
During July and August 1999, the Company entered into noncancelable
operating leases for office facilities with terms ranging from seven to ten
years. Certain operating leases for the office facilities include rent
holidays and scheduled base rent increases over the term of the lease. The
total amount of the base rent is charged to expense on the straight-line
method over the terms of the lease. The Company's total future minimum
annual lease payments under these noncancelable operating leases are
approximately $800,000 through 2006 and approximately $650,000 during the
period from 2007 through 2009.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read and consider the following discussion in conjunction
with our audited financial statements and notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as of
and for the year ended December 31, 1998 which is included the Registration
Statement Form S-1 (File No. 333-72133), as filed with the Securities and
Exchange Commission in connection with our initial public offering of common
stock.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or those of the industry in which we operate, to be materially
different from any expected future results, performance or achievements
expressed or implied by these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed in Part II, Item 5 of this Form 10-Q
and in the Registration Statement for our initial public offering of common
stock.
Unless the context otherwise requires, references in this Form 10-Q to
"AppliedTheory", the "Company, "we", "our" and "us" refer to AppliedTheory
Corporation.
OVERVIEW
We are a leading provider of one-stop Internet solutions to the
business mid-market and public sector, offering an extensive array of high
performance, reliable and scalable Internet technology products and services.
Our products and services can be tailored to meet our customers' requirements.
We provide the following products and services, either individually or as part
of a one-stop package:
- Internet integration and enterprise portal development,
including custom software application development, Web site
design and development and upgrading of legacy systems;
- Web hosting, consisting of custom hosting solutions and
outsourcing, shared server, dedicated server and co-location
hosting solutions; and
- Internet connectivity, including virtual private network
solutions, network and security consulting and dedicated
Internet access.
We market our products and services to the business mid-market and
public sector institutions. We believe these businesses and institutions are
increasingly demanding one-stop solutions for Internet services due to the
difficulty and expense of managing and integrating the products and services of
multiple vendors. Our comprehensive suite of products and services enables our
customers to capitalize on the wide variety of critical data communication
opportunities made possible by the Internet.
Historically, we have generated our revenues using a small sales force
and have expanded our customer base primarily through word of mouth. We are
rapidly building our sales and marketing efforts nationally to more aggressively
pursue customers. We have targeted 20-30 metropolitan areas throughout the
United States which have high concentrations of businesses and intend to grow
our direct sales force by more than 100 over the next two years. These targeted
markets, where we plan to have a physical
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local presence, coincide with the planned points of presence, or POPs, of our
strategic partner, IXC Internet Services, Inc.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1998
REVENUE. Total net revenues were approximately $8.7 million for the
three months ended June 30, 1999, an increase of $3.9 million or 81%, from $4.8
million in the three months ended June 30, 1998. Total net revenues were
approximately $15.6 million for the six months ended June 30, 1999, an increase
of $5.5 million or 54%, from $10.1 million in the six months ended June 30,
1998. Approximately $2.0 million of the growth during the six months ended June
30, 1999 from the same period ended June 30, 1998 was from Internet connectivity
revenue, which resulted primarily from the addition new of customers and from
additional revenue derived from existing customers who upgraded their level of
service. Web hosting revenue increased by approximately $0.7 million during the
same period. This increase resulted from an approximately equal increase in Web
monitoring, management and hosting services for the New York State Department
Labor in connection with America's Job Bank and from our managed dedicated web
hosting product. The remaining increase in total net revenues of approximately
$2.8 million was derived from Internet integration and enterprise portal
development services. These services include:
- linking existing databases and legacy systems with the Web;
and
- creating open, universal interfaces to business-critical
information and standards-based software used to link with the
systems of suppliers, partners and customers.
The increase of Internet integration and enterprise portal development
was primarily derived from the expansion of these services to the New York State
Department of Labor in connection with America's Job Bank as well as from the
addition of contracts for services with other state agencies and commercial
customers.
For the six months ended June 30, 1999, as a percentage of total net
revenues, Internet connectivity represented 59%, Internet integration and
enterprise portal development represented 32% and Web hosting represented 9%.
For the six months ended June 30, 1998, as a percentage of total net revenues,
Internet connectivity represented 70%, Internet integration and enterprise
portal development represented 23% and Web hosting represented 7%.
COST OF REVENUE. Cost of revenue consists principally of backbone and
Internet access costs, including charges from local exchange carriers and
personnel costs to operate our network and data centers and provide Internet
Integration and enterprise portal development services. Cost of revenue totaled
approximately $5.8 million (67% of revenue) for the three months ended June 30,
1999, an increase of approximately $2.9 million from the $2.9 million (60% of
revenue) for the three months ended June 30, 1998. Cost of revenue totaled
approximately $9.9 million (63% of revenue) for the six months ended June 30,
1999, an increase of approximately $4.1 million from the $5.8 million (57% of
revenue) for the six months ended June 30, 1998. The increase in both periods is
primarily attributable to the upgrade of our network to support customer growth
and improve the efficiency and performance of our Internet connectivity
services. Additionally, approximately $1.1 million was derived from an increase
in labor and other professional service costs associated with the expansion of
Internet integration and enterprise portal development services.
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SALES AND MARKETING. Sales and marketing expense consists principally
of advertising and marketing programs, including personnel, occupancy and other
professional service expenses. Sales and marketing expense was approximately
$2.6 million (30% of revenue) for the three months ended June 30, 1999, an
increase of $1.1 million, or 73% from 1.5 million (31% of revenue) for the three
months ended June 30, 1998. Sales and marketing expense was approximately $4.4
million (28% of revenue) for the six months ended June 30, 1999, an increase of
$1.4 million, or 47% from $3.0 million (30% of revenue) for the six months ended
June 30, 1998. These increases reflect a substantial investment in the sales and
marketing organizations necessary to support our expanded customer base,
advertising campaigns and efforts to establish national sales and marketing
programs.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
principally of costs relating to personnel, including customer support,
occupancy, general operating costs and professional fee expenses. General and
administrative expense was approximately $2.1 million (24% of revenue) for the
three months ended June 30, 1999, an increase of $.9 million, or 75% from $1.2
million (25% of revenue) for the three months ended June 30, 1998. General and
administrative expense was approximately $3.9 million (25% of revenue) for the
six months ended June 30, 1999, an increase of $1.6 million, or 69% from $2.3
million (23% of revenue) for the six months ended June 30, 1998. The increase in
general and administrative expenses was primarily attributable to:
- compensation expense relating to stock compensation expense;
- costs related to recruiting new personnel; and
- increases necessary to manage the financial, legal and
administrative aspects of our business.
RESEARCH AND DEVELOPMENT. Research and development costs are
principally focused in our Internet integration and enterprise portal
development and web hosting service offerings. For the three and six months
ended June 30, 1999 and 1998, research and development expenses have not
significantly fluctuated.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization consist
principally of depreciation of computer equipment, office furniture and
leasehold improvements. Depreciation and amortization expense was approximately
$.8 million (9% of revenue) for the three months ended June 30, 1999, an
increase of $.4 million, or 100% from $.4 million (8% of revenue) for the three
months ended June 30, 1998. Depreciation and amortization was approximately $1.4
million (24% of revenue) for the six months ended June 30, 1999, an increase of
$.6 million, or 75% from $.8 million (8% of revenue) for the six months ended
June 30, 1998. Depreciation and amortization costs have increased as a result of
capital expenditures associated with our Internet integration and enterprise
portal development and web hosting products, as well as computer equipment and
office furniture for personnel supporting our national expansion.
INTEREST INCOME. Interest income was approximately $.5 million for the
three and six months ended June 30, 1999 and insignificant for the same periods
in 1998. The increase is a result of the investment on May 5, 1999 of the net
proceeds from the Company's IPO.
INTEREST EXPENSE. Interest expense was approximately $.2 million for
the three months ended June 30, 1999 and 1998, and approximately $.3 million for
the six months ended June 30, 1999 and 1998.
NET LOSS. Net loss attributable to common stockholders for the quarter
ended June 30, 1999 was $2.3 million, or $0.12 per share, compared with $1.4
million, or $.13 per share, for the quarter ended June 30, 1998. Net loss
attributable to common stockholders for the six months ended June 30, 1999 was
$4.0
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million, or $.23 per share compared with $2.2 million, or $.20 per share for the
six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES.
We had an accumulated deficit of $19.8 million at June 30. 1999, and
have used $11.6 million in cash in the aggregate to fund operations during the
period since our inception on October 1, 1996, through June 30, 1999. Until the
successful completion of our initial public offering, we have satisfied our cash
requirements primarily through the sale of common and preferred stock and
borrowings under credit agreements and equipment financing arrangements. Our
principal uses of cash are to fund operations, for working capital requirements
and for capital expenditures. At June 30, 1999, we have $6.9 million in cash and
cash equivalents and working capital of approximately $57.3 million. The Company
used approximately $2.8 million of cash in operations during the six months
ended June 30, 1999, compared to $1.2 million for the six months ended June 30,
1998. Net cash used in investing activities for the six months ended June 30,
1999 and 1998 was approximately $62.3 million and $.8 million, respectively. The
increase of approximately $61.5 million is associated with the purchase of
marketable securities and an investment using net proceeds of our initial public
offering ("IPO") which closed on May 5, 1999. Net cash provided by financing
activities was approximately $70.3 in the six months ended June 30, 1999 and
approximately $2.0 million for the six months ended June 30, 1998. This increase
of approximately $68.3 million consists principally of $75 million in net
proceeds received from issuance of 5,175,000 shares of our common stock in
connection with our IPO, less repayment of all outstanding borrowings from
NYSERNet.net, Inc., including deferred interest of approximately $3.5 million
and redemption of preferred stock including dividends payable of approximately
$1.9 million.
Capital expenditures, including capital leases, amounted to
approximately $3.5 million for the six months ended June 30, 1999, as compared
to $.8 million for the six months ended June 30, 1998.
On January 20, 1998, we obtained a secured revolving line of credit
with Fleet National Bank for $7.5 million, which expires on January 19, 2001.
Borrowings under this line are secured by substantially all our assets and by a
maximum of $5.5 million of cash and cash equivalents, government securities and
corporate securities or corporate equities pledged by NYSERNet .net, Inc., a
not-for-profit corporation of which we were formerly a wholly owned subsidiary,
and which is currently one of our principal stockholders. (For further details
of this relationship, please see the discussion in Note A to the Financial
Statements provided in Part I, Item I of this Form 10-Q and in the Registration
Statement on Form S-1 for our IPO.) At June 30, 1999, borrowings under this line
amounted to $5.5 million. The credit agreement provides for the payment on
January 19, 2001, of the unpaid principal balance of all amounts advanced.
Interest is charged and payable on a monthly basis as determined by us either at
LIBOR plus 50 basis points or at the prime rate less 200 basis points. As of
June 30, 1999, as a result of restrictions under the line of credit, no
additional credit was available under this agreement. In accordance with the
terms of this credit agreement, as amended on August 3, 1999, the bank issued a
standby letter of credit in the Company's name for $650,000 that expires July
30, 2000.
We also have an unsecured revolving borrowing facility with
NYSERNet.net, which provides for borrowings up to a maximum amount of
approximately $6.2 million, less any preferred stock issued to NYSERNet.net.
Interest on the loans accrues at the prime rate and payments are deferred until
December 31, 2001. As of June 30, 1999, approximately $6.2 million was available
under this borrowing facility. In connection with our IPO, we fully redeemed our
outstanding preferred stock and paid down all outstanding line of credit
borrowings to NYSERNet.net.
We believe that the net proceeds from our IPO, will be sufficient to
meet our anticipated cash needs for expanding our sales and marketing efforts,
expanding our customer support services, building
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new distributed data centers, and for other working capital requirements and
general corporate purposes. However, there can be no assurance regarding the
period of time through which our financial resources will be adequate to support
our operations. We may need to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that additional financing, if needed, will be available on terms
acceptable to us, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available may involve
restrictive covenants and significant interest expense. Strategic arrangements,
if necessary to raise additional funds, may require us to relinquish rights to
some of our technologies.
YEAR 2000 COMPLIANCE
Our business operations and revenues are very sensitive to the effects
of Year 2000 problems. These problems may originate within our own systems and
products or within the systems of our third party suppliers or our customers.
Some of our non-information technology systems, such as equipment or machinery,
may also be affected by Year 2000 problems.
OUR YEAR 2000 COMPLIANCE PROGRAM
During the second quarter of 1998, we formed a working group to ensure
that our products and services are Year 2000 compliant. These include:
- our commercial product line;
- internal software business applications;
- hardware;
- desktop support;
- telephone systems;
- office equipment; and
- facilities.
All of these components are undergoing a rigorous Year 2000 readiness
verification process, which includes:
- component inventory and assessment, including vendor and third
party evaluation;
- component remediation;
- component testing;
- system testing; and
- contingency planning.
As of June 30, 1999, all product lines and internal systems are being
tested. Although we anticipate testing to continue throughout the year, all
major components are expected to be compliant by the end of September 1999.
Based on requested Year 2000 readiness statements from each of our third party
vendors, software upgrades have been applied where appropriate. To date, there
are no responses from vendors that cause concern as far as achieving compliance.
Our Total Estimated Costs Associated with Year 2000. We estimate that
we will incur expenses of approximately $45,000 to test and upgrade our products
and applications for Year 2000 readiness. We also expect 500 to 750 additional
hours of labor will be necessary to complete the testing and upgrading. The
costs associated with our internal applications compliance are expected to be
limited to 150 to 250 hours of labor, and the balance of our estimated expenses
in cash and hours of labor will be committed to ensuring the readiness of our
products and services.
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YEAR 2000 AND OUR INTERNAL APPLICATIONS
Our State of Readiness. All of our internally developed systems,
upgrades and applications are Year 2000 ready or in the process of being tested.
Most of our system packages have also been deemed compliant by our vendors. Even
though we will continue to test our systems, we anticipate full compliance
during 1999.
Contingency Plans. If during our testing in 1999 we find results that
warrant concern, we will dedicate programming staff to procure readiness and to
complete re-testing. Additionally, certain major applications will be run in
test during January 2000 and manually checked for accuracy prior to release.
YEAR 2000 AND OUR SERVICES AND PRODUCTS.
Our State of Readiness. We expect that any problems related to our
Internet access products will be resolved before the end of 1999. For example,
we are currently changing our dial-up network to a dial-up access service
provided by a third party that has been represented to us as Year 2000 ready.
We are in the midst of full testing of our entire product line. Test
servers have been built, and web hosting, access and software testing is
underway. The tests are simulating the Internet access services and Web hosting
services for the two calendar weeks before and after January 1, 2000 plus
software. Software testing is ensuring date processing does not cause any
problems. The goal of these tests is to identify any problematic operations and
create a plan for rectifying problems. We are in the final stages of the first
phase and to date have not uncovered any significant problems. The second phase
of testing will commence in mid-August of 1999.
We are currently assessing the Year 2000 readiness of the different
operational aspects of our Internet access and value-added services such as mail
and news, and almost all components are Year 2000 ready. Any component that is
found not to be Year 2000 ready will be upgraded and tested further. Any third
party vendor of products that we use for these services that has been noted as
not yet Year 2000 ready had been sent a letter requesting its readiness plans.
Regarding our security services offerings, while versions 4.0a and
higher of the Gauntlet firewall software program have been tested and are Year
2000 ready, we have recommended that all of our Gauntlet customers upgrade to
version 4.2 or higher. We have sent the Gauntlet version 4.2 or higher to all
our existing Gauntlet customers.
We deliver Web hosting services through integration of third party
hardware and software. This creates an environment in which our clients may
place and run their Web sites in our data centers. As of March 1, 1999, we had
requested Year 2000 readiness plans from all 40 of our third party vendors for
our Web hosting services. Based on responses, software upgrades have been
applied to those in need, and product testing is underway. We are testing
outside software used by our customers in the same manner as internally designed
software when there is no third party vendor liable for upgrades and patches.
We expect that our Internet integration and enterprise portal
development services will be for the most part unaffected by the Year 2000
issue. There may be cases where incoming data feeds from customers will need to
be adjusted or slight modifications will need to be made on the Web server.
However, because Internet integration and enterprise portal development is a
fairly new business line, Year 2000 compliance was addressed from its inception.
Additionally, Internet integration and enterprise portal development projects
have been implemented almost exclusively by in-house technical
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programmers who have helped to ensure that Year 2000 standards, as well as other
programming standards, were adhered to.
Risks of our Products and Services' Year 2000 Issues. The worst case
scenario for our Internet access services would be the unavailability of access
to all customers. Although this risk is unlikely, given the high level of Year
2000 readiness already in place for the components of this product line, it is
possible that we could suffer minor access problems.
In the case of our Web hosting services, the worst case scenario would
be the inability to access the Web sites we manage. A more likely risk would be
that our service would be unavailable to some sites for time periods of less
than one week. In such cases we may give service credits to our customers whose
service is interrupted.
Our Web enabling solutions applications may experience problems such as
a customer data feed not being Year 2000 ready or customers failing to make
necessary changes. In such a case, our technical support and operations groups
would help customers fix these problems to the best of our ability.
Contingency Plans. If our Internet access and value-added services are
not Year 2000 ready, we are prepared to move customers' local loop access
services to other providers or to offer service credits. We do not currently
have any information that would cause us to believe that any of our third party
vendors will experience substantial Year 2000 problems. However, if during the
course of our Year 2000 testing we find that any particular vendor is being
unresponsive, we will attempt to locate a replacement for that vendor.
Additionally, we will communicate with our customers throughout the year in
order to alert them to third party issues that may affect them.
In the case of our Web hosting services, we plan on adding new data
centers and additional data center capacity in our existing data centers over
the course of 1999 and plan to provide additional redundancy for our customers'
Web sites if they so desire when the new data centers and expansion are
completed.
If, during the course of the Year 2000 testing of our Internet
integration and enterprise portal development solutions, we discover that a
customer will be required to alter or correct a data feed and that the customer
is unable to do so, we will try to correct the data feed and reform it as
necessary. This correction would likely involve a small amount of additional
labor on our part.
In any event, we will fully staff our technical support and operations
groups during the last week of December and all of January 2000 to fix any
problems in our systems and help customers to the best of our ability with any
problems they may experience.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 1999, we completed our initial public offering of 5,175,000
shares of our common stock, par value $.01 per share. The offering was made
pursuant to a Registration Statement on Form S-1 (File No. 333-72133) which
registered up to 5,175,000 shares of our common stock and was declared effective
on April 29, 1999. The offering commenced on April 30, 1999 and all 5,175,000
shares registered in our offering were sold at an initial public offering price
of $16.00 per share. The managing underwriters were Bear, Stearns & Co. Inc.,
CIBC World Markets Corp., Lehman Brothers Inc. and Wit Capital Corporation.
Gross proceeds from the offering were $82.8 million, $5.8 million of which was
applied to the underwriting discount. As of July 15, 1999, approximately $1.7
million was applied to expenses related to our offering. As a result, net
proceeds from the offering are approximately $75.3 million. Except as discussed
herein with respect to our repayment of a revolving line of credit and
redemption of our preferred stock to NYSERNet.net, none of the net proceeds of
our offering were paid by us, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person or entity owning 10
percent or more of our equity securities or the equity securities of any of our
affiliates.
On May 5, 1999, we paid approximately $3.8 million to repay outstanding
borrowings under our revolving line of credit with NYSERNet.net, including
accrued interest. We also paid approximately $2.0 million to redeem our
outstanding preferred stock, including accrued dividends, from NYSERNet.net.
NYSERNet.net owns approximately 23.1% of our common stock and has one
representative on our board of directors. On June 22, 1999, the Company
purchased Convertible Preferred Stock of Planning Technologies, Inc. for $5.0
million. For additional information about this investment, please see our report
on Form 8-K (File No. 000-25749), filed with the Securities and Exchange
Commission on July 7, 1999. We intend to use the remaining $65.0 million of the
net proceeds from the offering for general corporate purposes and working
capital requirements, including the following:
- to expand our sales and marketing efforts in 20-30
metropolitan areas and increase our direct sales force by over
100 employees nationally;
- to build a new network operation center;
- to expand our customer support services, and
- for working capital requirements and other general corporate
purposes, including possible acquisitions.
No portion of the proceeds has been allocated for any specific purpose
referred to above. We have discretionary authority over the use of net proceeds
from the offering. In addition, we intend to use a portion of the net proceeds
from this offering to build new data centers in connection with the planned
construction of the Gemini2000 Network.
Pending the above uses, we intend to invest the proceeds of the
offering in short-term, interest bearing securities of investment grade.
During the quarter ended June 30, 1999, proceeds of approximately $500
were generated from the exercise of options for 2,721 shares of our common
stock. There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. These options had been granted
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under our 1996 Incentive Stock Option Plan and were exercised by certain
employees and directors. We issued the shares in reliance on the exemption from
registration provided by Rule 701 under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15, 1999, a special meeting of the stockholders of
AppliedTheory Communications, Inc. was held pursuant to a notice dated April 5,
1999, which was mailed to all stockholders. The meeting was called in order to
solicit the stockholders' approval of the 1999 Stock Option Plan which was
adopted by the Board of Directors of AppliedTheory Communications on March 8,
1999, as well as of the 1999 Employee Stock Purchase Plan, which was adopted by
the Board of Directors of AppliedTheory Communications, Inc. on March 16, 1999.
Both the 1999 Stock Option Plan and the 1999 Employee Stock Purchase Plan
received stockholders' approval at this meeting. Holders of the following shares
were present in person or by proxy at this meeting and votes were cast in the
following manner:
Common Stock: 15,970,179 shares outstanding, 14,985,749 shares present
and voting in favor of approving the 1999 Stock Option Plan and the
1999 Employee Stock Purchase Plan, representing 94 % of the common
stock outstanding; and
Preferred stock: 15,000 shares outstanding, 15,000 shares present and
voting in favor of approving the 1999 Stock Option Plan and the 1999
Employee Stock Purchase Plan, representing 100 % of the preferred stock
outstanding.
ITEM 5. OTHER INFORMATION
RISK FACTORS
From time to time, in both written and in oral statements by our senior
management, we express expectations and other statements regarding future
performance. These forward-looking statements are inherently uncertain and you
must recognize that events could turn out to be different than such expectations
and statements. We discuss key factors impacting current and future performance
in the registration statement for our initial public offering on Form S-1
(Commission File No. 333-72133) filed with the Securities and Exchange
Commission and in our other filings and reports. In addition, you should
consider the following risk factors as well as any other information in this
Quarterly Report in evaluating our business and us. Any investment in our common
stock involves a high degree of risk.
WE HAVE A LIMITED OPERATING HISTORY AND MAY SUCCESSFULLY IMPLEMENT OUR BUSINESS
PLAN.
We have a limited operating history, and our business model is still in
development. We were incorporated in 1995 and commenced operations in late 1996.
As an early stage Internet company we are subject to expenses and difficulties
associated with implementing our business plan that are not typically
encountered by more mature companies. The risks associated with implementing our
business plan relate to:
- building out our operations infrastructure;
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- expanding our sales structure and marketing programs;
- increasing awareness of our brand;
- providing services to our customers that are reliable and
cost-effective;
- responding to technological development or service offerings
by competitors; and
- attracting and retaining qualified personnel.
If we are not successful in implementing our business plan, our
business or future financial or operating results could suffer.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO INCREASE IN
THE FORESEEABLE FUTURE.
We have incurred significant net losses and negative cash flows from
operations in each quarterly and annual period since inception and expect to
continue to do so for the foreseeable future. At June 30, 1999, we had an
accumulated deficit of approximately $19.8 million. We incurred net losses of
$2.3 million and $1.4 million in the three months ended June 30, 1999 and 1998,
respectively, and a year to date net loss of approximately $4.0 million for the
six months ended June 30, 1999 compared with a net loss of approximately $2.3
million for the six months ended June 30, 1998. In connection with our expansion
plans, we anticipate making significant investments in sales and marketing, new
distributed data centers, customer support and personnel. As a result of our
expansion plans, we expect our net losses and negative cash flows from
operations on a quarterly and annual basis to increase in the foreseeable
future. Our ability to achieve profitability is dependent in large part upon the
successful completion of the Gemini2000 Network over which we have no control,
and the successful implementation of our nationwide expansion strategy. The
Gemini 2000 Network is the first coast-to-coast, next generation Internet
backbone network, which is designed to carry both research and commercial
traffic. We are deploying this network with IXC Communications, Inc., an
affiliate of one of our significant stockholders. We cannot assure you that we
will achieve or sustain revenue growth or profitability on either a quarterly or
annual basis.
TO DATE, MOST OF OUR REVENUES HAVE BEEN DERIVED FROM CUSTOMERS LOCATED IN NEW
YORK STATE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR NATIONWIDE GROWTH STRATEGY.
To date, most of our revenues have been derived from customers located
in New York State. Our business strategy is to become a leading national
provider of advanced Internet technology solutions to the business mid-market
and select public sector organizations. The risks we may encounter in executing
our nationwide growth strategy include the possibility that:
- our products and services are not accepted beyond our current
market;
- there are significant delays in the roll-out of the Gemini2000
Network or our new data centers;
- the technology upon which the Gemini2000 Network is based is
overtaken;
- we fail to successfully implement our sales and marketing
strategy on a national scale;
- we fail in our efforts to build a national sales force; and/or
- we fail to develop a nationally recognized brand.
OUR RAPID GROWTH STRATEGY IS LIKELY TO PLACE A SIGNIFICANT STRAIN ON OUR
RESOURCES.
Our future success depends in large part on our ability to manage any
achieved growth in our business. For our nationwide growth strategy to succeed,
we will need:
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- to expand our business with new and current customers;
- to develop and offer successful new products and services;
- to retain key employees and hire new employees; and
- to ensure that any future business we may develop or acquire
will perform in a satisfactory manner.
These activities are expected to place a significant strain on our
resources. Also, we cannot guarantee that any of these will occur or that we
will succeed in managing the results of any success in our nationwide growth
strategy.
OUR ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF
OPERATIONS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
We have experienced significant fluctuations in our results of
operations on a quarterly and annual basis. We expect to continue to experience
significant fluctuations in our future quarterly and annual results of
operations due to a variety of factors, many of which are outside of our
control, including:
- demand for and market acceptance of our services;
- customer retention;
- the timing and success of our marketing efforts;
- the timing and magnitude of capital expenditures, including
costs relating to the expansion of operations;
- the timely expansion of existing facilities and completion of
new facilities;
- the ability to increase bandwidth as necessary;
- fluctuations in bandwidth used by customers;
- introductions of new services or enhancements by us and our
competitors;
- increased competition in our markets;
- growth of Internet use and establishment of Internet
operations by mainstream enterprises; and
- changes in our and our competitors' pricing policies.
A RELATIVELY LARGE PORTION OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM. AS A
RESULT, OUR RESULTS OF OPERATIONS WILL BE PARTICULARLY SENSITIVE TO FLUCTUATIONS
IN REVENUE.
A relatively large portion of our expenses are fixed in the short-term,
particularly in respect of data and telecommunications costs, depreciation, real
estate interest expense and personnel. Because we will be required to incur
these fixed expenses, irrespective of our revenue, our future results of
operations are particularly sensitive to fluctuations in revenue.
THE EXPECTED CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES MAY
NOT MATERIALIZE OR MAY MATERIALIZE IN A MANNER WE HAVE NOT ANTICIPATED.
Our market is new and rapidly evolving. Whether, and the manner in
which, the market for our products and services will continue to grow is
uncertain. The market for our products and services may be inhibited for a
number of reasons, including:
- the reluctance of businesses to outsource their Internet
integration, enterprise portal development, Web hosting and
Internet connectivity needs;
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- our failure to successfully market our products and services
to new customers; and
- the inability to maintain and strengthen our brand awareness.
OUR SUCCESS DEPENDS IN LARGE PART ON THE CONTINUED GROWTH OF THE INTERNET
MARKET.
Our business would be hurt if Internet usage does not continue to grow.
Internet usage may be inhibited for a number of reasons, including:
- access costs;
- inadequate network infrastructure;
- security concerns;
- uncertainty of legal and regulatory issues concerning use of
the Internet;
- inconsistent quality of service; and
- lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could, in the future,
grow more slowly or decline. This could hurt our business.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The Internet-based services market is extremely competitive and many of
our competitors are more established and have greater financial resources than
us. In addition, there are no substantial barriers to entry in this market. We
also expect that competition will intensify in the future. Many of our
competitors have greater market presence, engineering and marketing capabilities
and financial, technological and personnel resources than we do. As a result, as
compared to us our competitors may:
- develop and expand their network infrastructures and service
offerings more efficiently or more quickly;
- adapt more swiftly to new or emerging technologies and changes
in customer requirements;
- take advantage of acquisitions and other opportunities more
effectively; and
- more effectively leverage existing relationships with
customers or exploit a more recognized brand name to market
and sell their services.
Our current and prospective competitors, both in New York State and
nationally, generally may be divided into the following three groups:
- Internet service providers including Concentric Network Corp.,
Exodus Communications, Inc., Globix Corporation, AboveNet
Communications, Inc., PSINet Inc., UUNET Technologies, Inc.,
Frontier Global Center, GTE Internetworking, Digex, Inc.,
Verio Inc. and other national and regional providers;
- telecommunications companies, such as AT&T Corp., Cable &
Wireless plc, Sprint Corporation, MCI WorldCom, Inc., Qwest
Communications International Inc., regional telecommunications
companies and various cable companies; and
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- network and system integrators, including IBM Corporation,
Oracle Corporation, the Big 5 accounting firms, EDS
Corporation and similar entities.
We believe that we may also face competition from other large computer
hardware and software companies and other media, technology and
telecommunications companies.
The number of businesses providing Internet-related services is rapidly
growing. We are aware of other companies, in addition to those named above, that
have entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
WE COULD ENCOUNTER SIGNIFICANT PRICING PRESSURE AS A RESULT OF INCREASED
COMPETITION AND INDUSTRY CONSOLIDATION.
As a result of increased competition and consolidation in the industry,
we could encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of our services. We may not
be able to offset such price reductions even if we obtain an increase in the
number of our customers, derive higher revenue from enhanced services or manage
to reduce our costs. Increased price or other competition could erode our market
share and could significantly hurt our business. We cannot assure you that we
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully in that environment.
OUR REVENUES ARE HEAVILY DEPENDENT ON TWO CUSTOMERS. IF WE LOSE EITHER OF THESE
CUSTOMERS, IF EITHER OF THEM REDUCE THE AMOUNT OF WORK THEY DO WITH US, OR IF WE
FAIL TO DIVERSIFY OUR CUSTOMER BASE, OUR BUSINESS WILL SUFFER.
We currently derive a substantial portion of our total revenue from two
customers - NYSERNet.org, Inc., a not-for-profit corporation that is also
affiliated with one of our major stockholders, and the New York State Department
of Labor. The loss of either of these customers could significantly hurt our
business. For the three and six months ended June 30, 1999, revenue from
NYSERNet.org, Inc. represented approximately 31% of our total revenue compared
to 44% and 42% for the three and six months ended June 30, 1998, respectively.
Revenue under the agreement with the New York State Department of Labor for both
the three and six months ended June 30, 1999 represented 35% of our total
revenue compared to 22% and 25% for the three and six months ended June 30,
1998, respectively.
We have an agreement with NYSERNet to provide NYSERNet and its
customers with services. This agreement has an initial term of three years,
ending October 1, 2001, and is automatically renewable for successive one-year
terms. While the agreement only allows termination by either party under special
circumstances, it is still possible that NYSERNet could terminate the agreement
or cease working with us. Our contract with the New York State Department of
Labor is for the development and maintenance of the America's Job Bank Web site.
This agreement is subject to cancellation by the New York State Department of
Labor upon 15 days notice.
On June 14, 1999, we concluded a contract with NYSERNet to enhance,
operate and maintain NYSERNet's next generation Internet backbone network
(NYSERNet2000). We completed construction of the network in April 1999. Under
the terms of the contract, which extends until 2002, we will enhance and
maintain the first OC-12 research network backbone in New York State. We will
receive $5.2 million for our services over the term of the contract.
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We cannot assure you that revenue from these two customers or from
other customers that have accounted for significant revenue in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period. In addition we may not succeed in
diversifying our customer base in future periods.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF OUR SERVICES. IF IXC DOES NOT COMPLETE THIS NETWORK, OUR BUSINESS
COULD SUFFER.
Our business model assumes that we will use IXC's Gemini2000 Network
for the delivery of our services. While we believe that we could transfer our
business to another network supplier if this network was not available, we may
not find an alternate network, which would provide comparable technology at a
competitive cost. At this time, IXC has not completed construction of the
network. Any failure by IXC or Cincinnati Bell, Inc. after its announced merger
with IXC to complete construction of, or deploy and maintain, the Gemini2000
Network could hurt our business. While IXC had previously publicly announced its
intention to complete construction of the Gemini2000 Network, we do not have a
written agreement with them, which requires them to do so.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF OUR SERVICES. IF PROBLEMS OCCUR AS A RESULT OF A CHANGE OF OWNERSHIP
OF IXC INTERNET SERVICES, INC. AND THE GEMINI2000 NETWORK, OUR BUSINESS COULD
SUFFER.
On July 21, 1999, Cincinnati Bell, Inc. announced its intention to
merge with IXC Communications Inc., parent of a major stockholder of the Company
and owner of the Gemini2000 Network. Our business model assumes we will use this
network for delivery of our services. As noted above, any failure by IXC (or
Cincinnati Bell and IXC after their merger) to complete construction of, or
deploy and maintain, the Gemini2000 Network could hurt our business.
OUR BUSINESS AND EXPANSION MODELS ASSUME THAT WE WILL BE ABLE TO EASILY SCALE
THE NETWORK INFRASTRUCTURE WE USE TO ACCOMMODATE INCREASING NUMBERS OF CUSTOMERS
AND INCREASED TRAFFIC. HOWEVER, THE SCALABILITY OF THE GEMINI2000 NETWORK IS
UNPROVEN.
Due to its limited deployment, the ability of the Gemini2000 Network to
connect and manage a large number of customers or a large quantity of traffic at
high transmission speeds is unproven. This network's ability to be scaled up to
meet our expected customer usage levels while maintaining superior performance
is also unproven. As the number of our customers grows or as network usage
increases, we many need to make additional investments to expand and adapt our
network infrastructure and maintain adequate data transmission speeds. Any
future expansion and adaptation of our telecommunications and hosting facility
infrastructure could require substantial financial, operational, technical and
management resources. Furthermore, additional network capacity many not be
available from IXC or other third-party suppliers as it is needed by us, and, as
a result, our network may not be able to achieve or maintain a sufficiently high
capacity for data transmission. Any failure on our part to achieve or maintain
high data transmission capacity could significantly reduce customer demand for
our services and hurt our business. If we are required to expand our network
significantly and rapidly due to increased usage, additional stress will be
placed upon our network hardware, traffic management systems and hosting
facilities.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH WOULD AFFECT
OUR ABILITY TO COMPETE.
Interruptions in service to our customers could hurt our business. To
succeed, we must be able to operate our network management infrastructure 24
hours per day, seven days per week, without interruption. Our operations depend
upon our ability to protect our network infrastructure, our equipment
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and customer data against damage from human error or "acts of God." Even if we
take precautions, the occurrence of a natural disaster or other unanticipated
problems could result in interruptions in the services we provide to our
customers.
At this time, we do not have a formal disaster recovery plan. Although
we have attempted to build redundancy into our network and hosting facilities,
our network is currently subject to various single points of failure. For
example, a problem with one of our routers or switches could cause an
interruption in the services we provide to some of our customers. Any
interruptions in service could:
- cause end users to seek damages for losses incurred;
- require us to spend more money replacing existing equipment,
expanding facilities or adding redundant facilities;
- cause us to spend money on existing or new equipment and
infrastructure earlier than we plan;
- damage our reputation for reliable service;
- cause existing end-users and resellers to cancel our
contracts; or
- make it more difficult for us to attract new end-users and
partners.
Any of these results could hurt our business.
Failure of the national telecommunications network and Internet
infrastructure to continue to grow in an orderly manner could result in service
interruptions. While the national telecommunications network and Internet
infrastructure have historically developed in an orderly manner, there is no
guarantee that this will continue as the network expands and more services,
users and equipment connect to the network. Failure by our telecommunications
providers to provide us with the data communications capacity we require could
cause service interruptions, which could hurt our business.
WE ARE DEPENDENT ON NETWORKS BUILT AND OPERATED BY OTHERS. IF WE DO NOT HAVE
CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER.
In delivering our services, we rely on networks, which are built and
operated by others. We do not have control over these networks, nor can we
guarantee that we will continue to have access on terms that fit our business
needs.
Our use of the infrastructure of other communications carriers presents
risks. Our success partly depends upon the capacity, scalability, reliability
and security of the network infrastructure provided to us by telecommunications
network suppliers, including IXC, Bell Atlantic Corp. and Sprint Corporation.
Our nationwide expansion plans require rapid expansion of network capacity,
which we expect will be satisfied through the completion of the Gemini2000
Network. Without this expanded capacity, our ability to execute our business
strategy could be hurt. In addition, future expansion and adaptation of our
network infrastructure may require substantial financial, operational and
management resources. We may not be able to expand or adapt our network
infrastructure on a timely basis and at a commercially reasonable cost to meet
additional demand, changing customer requirements or evolving industry
standards. In addition, if demand for usage of our network were to increase
faster than projected or were to exceed our current forecasts, the network could
experience capacity constraints which would hurt its performance.
We also depend on our telecommunications suppliers to provide
uninterrupted and error-free service through their telecommunications networks.
If these suppliers greatly increased the prices for their services or if the
telecommunications capacity available to us was insufficient for our business
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purposes, and we were unable to use alternative networks or pass along any
increased costs to our customers, it could hurt our business.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS
WHICH COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM OUR REPUTATION.
Despite the implementation of network security measures, the core of
our network infrastructure is vulnerable to computer viruses, break-ins and
similar disruptive problems caused by Internet users. This could result in our
liability for damages, and our reputation could suffer, thereby deterring
potential customers from working with us. Security problems caused by third
parties could lead to interruptions and delays or to the cessation of service to
our customers. Furthermore, inappropriate use of the network by third parties
could also jeopardize the security of confidential information stored in our
computer systems and in those of our customers.
We rely upon encryption and authentication technology listed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. Although we intend to continue to
implement industry-standard security measures, in the past some of these
standards have occasionally been circumvented by third parties. Therefore, we
cannot assure you that the measures we implement will not be circumvented. The
costs and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service to
our customers, which could hurt our business.
OUR BRAND IS NOT WELL KNOWN, AND FAILURE TO DEVELOP BRAND RECOGNITION COULD HURT
OUR BUSINESS.
To successfully execute our strategy, we must strengthen our brand
awareness. While many of our competitors have well-established brands in
Internet services, to date, our market presence has been limited principally to
New York State. We have generated our existing revenue primarily through a small
sales force and word of mouth. In order to build our brand awareness, our
marketing efforts must succeed, and we must provide high quality services. We
expect to increase our marketing budget substantially as part of our brand
building efforts. We cannot assure you that these investments will succeed as
planned. If we do not build our brand awareness, our ability to realize our
strategic and financial objectives could be hurt.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD SUFFER.
If we do not successfully use or develop new technologies, introduce
new services or enhance our existing services on a timely basis, or new
technologies or enhancements used or developed by us do not gain market
acceptance, our business could be hurt. The Internet industry is characterized
by rapidly changing technology, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
future success will depend, in part, on our ability to accomplish all of the
following in a timely and cost-effective manner, all while continuing to develop
our business model and rolling-out our services on a national level:
- effectively use and integrate leading technologies;
- continue to develop our technical expertise;
- enhance our products and current networking services;
- develop new products and services that meet changing customer
needs;
- have the market accept our services;
- advertise and market our products and services; and
- influence and respond to emerging industry standards and other
changes.
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We cannot assure you that we will successfully use or develop new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies or enhancements used or developed by us
will achieve market acceptance. Our pursuit of necessary technological advances
may require substantial time and expense. In addition, we cannot assure you
that, if required, we will successfully adapt our network and services to
alternate access devices and conduits.
If our services do not continue to be compatible and interoperable with
products and architectures offered by other industry members, our ability to
compete could be impaired. Our ability to compete successfully is dependent, in
part, upon the continued compatibility and interoperability of our services with
products and architectures offered by various other members of the industry.
Although we intend to support emerging standards in the market for Internet
access, we cannot assure you that we will be able to conform to new standards in
a timely fashion and maintain a competitive position in the market. Our services
rely on the continued widespread commercial use of Transmission Control
Protocol/Internetwork Protocol, commonly known as TCP/IP, which is an industry
standard to facilitate the transfer of data. Alternative open protocol and
proprietary protocol standards could emerge and become widely adopted. A
resulting reduction in the use of TCP/IP could render our services obsolete and
unmarketable. Our failure to anticipate the prevailing standard or the failure
of a common standard to emerge could hurt our business.
WE DERIVE SIGNIFICANT REVENUE FROM CONTRACTS WITH GOVERNMENT AGENCIES. THESE
CONTRACTS OFTEN ARE SUBJECT TO A COMPLEX PROCUREMENT PROCESS, REQUIRE COMPLIANCE
WITH VARIOUS GOVERNMENT REGULATIONS AND POLICIES AND MAY BE SUBJECT TO
UNILATERAL TERMINATION OR MODIFICATION BY THE GOVERNMENT. IN ADDITION, CHANGES
IN GOVERNMENT FUNDING AND OTHER POLICY DECISIONS COULD JEOPARDIZE OUR CONTRACTS
WITH GOVERNMENT AGENCIES.
Contracts with various government agencies accounted for approximately
50% of our revenues in the three and six months ended June 30, 1999. Government
contracts are often subject to a competitive bidding process, which is governed
by applicable federal and state statutes and regulations. The procurement
process for government contracts is complex and can be very time consuming.
Because of our contracts with governmental agencies, we are required to
comply with various government regulations and policies. For instance, we are
required to maintain employment policies relating to equal opportunity, and we
are subject to audit by the government to confirm our compliance with these
policies. If we fail to comply with regulations which apply to government
contractors, we may face sanctions, including substantial fines and
disqualification from being awarded government contracts in the future.
Contracts with governmental agencies are subject to the risk of
unilateral termination by the government for its convenience and reductions in
services, or modifications in contractual terms, due to changes in the
government's requirements or to budgetary restraints.
In addition, the government may not continue to fund the projects and
programs with which we work. Even if funding continues, we may not obtain this
funding. We cannot assure you that we will be able to procure additional
government contracts, that we will be able to retain our existing government
contracts or, if retained, that these contracts will be fully funded.
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WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS, INCLUDING INTEGRATION
RISKS AND RISKS ASSOCIATED WITH METHODS OF FINANCING AND THE IMPACT OF
ACCOUNTING TREATMENT. COMPLETED ACQUISITIONS MAY NOT ENHANCE OUR BUSINESS.
A component of our strategy is to acquire network assets,
Internet-related technologies and businesses complementary to our operations.
Any future acquisitions would be accompanied by the risks commonly encountered
in acquisitions, including:
- the difficulty of assimilating the operations and personnel of
acquired companies;
- the potential disruption of our business;
- the inability of our management to maximize our financial and
strategic position by the incorporation of an acquired
technology or business into our service offerings;
- the difficulty of maintaining uniform standards, controls,
procedures and policies; and
- the potential loss of key employees of acquired businesses,
and the impairment of relationships with employees and
customers as a result of changes in management.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash,
including proceeds of this offering, could be used to consummate the
acquisitions. If we were to consummate one or more acquisitions in which the
consideration consisted of stock, our stockholders could suffer significant
dilution of their interest in us. In addition, we could incur or assume
significant amounts of indebtedness in connection with acquisitions.
Acquisitions required to be accounted for under the purchase method could result
in significant goodwill and/or amortization charges for acquired technology.
WE ARE DEPENDENT ON OUR HARDWARE AND SOFTWARE SUPPLIERS TO PROVIDE US WITH THE
PRODUCTS AND SERVICES WE NEED TO SERVE OUR CUSTOMERS.
We rely on outside vendors to supply us with computer hardware,
software and networking equipment. These products are available from only a few
sources. We purchase virtually all of these products from Sun Microsystems,
Inc., Compaq Computer Corporation and Cisco Systems, Inc. We cannot assure you
that we will be able to obtain the products and services that we need on a
timely basis and at affordable prices.
We have in the past experienced delays in receiving shipments of
equipment purchased for resale. To date, these delays have not adversely
affected us, but we cannot guarantee that we will not be adversely affected by
delays in the future. We may not be able to obtain computer equipment on the
scale and at the times required by us at an affordable cost. Our suppliers may
enter into exclusive arrangements with our competitors or stop selling us their
products or services at commercially reasonable prices. If our sole or limited
source suppliers do not provide us with products or services, our business,
financial condition and results of operations may be significantly hurt.
WE OPERATE IN AN UNCERTAIN REGULATORY AND LEGAL ENVIRONMENT. NEW LAWS AND
REGULATIONS COULD HARM OUR BUSINESS.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. Our
business could suffer depending on the extent to which our activities are
regulated or proposed to be regulated.
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While there are currently few laws or regulations which specifically
regulate Internet communications, laws and regulations directly applicable to
online commerce or Internet communications are becoming more prevalent. There is
much uncertainty regarding the market-place impact of these laws. In addition,
various jurisdictions already have enacted laws covering intellectual property,
privacy, libel and taxation that could affect our business by virtue of their
impact on online commerce. Further, the growth of the Internet, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. If we become subject to claims that we have violated
any laws, even if we successfully defend against these claims, our business
could suffer. Moreover, new laws that impose restrictions on our ability to
follow current business practices or increase our costs of doing business could
hurt our business.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR DISTRIBUTING OR PUBLISHING CONTENT OVER
THE INTERNET, WHICH COULD BE COSTLY FOR US TO DEFEND.
It is possible that claims will be made against online services
companies and Internet access providers in connection with the nature and
content of the materials disseminated through their networks. Several private
lawsuits are pending which seek to impose liability upon online services
companies and Internet access providers as a result of the nature and content of
materials disseminated over the Internet. If any of these actions succeed, we
might be required to respond by investing substantial resources in connection
with this increased liability or by discontinuing some of our service or product
offerings. Also, any increased attention focused upon liability issues relating
to the Internet could also have a negative impact on the growth of Internet use.
Although we carry general liability insurance, it may not be adequate to
compensate us or it may not cover us in the event we become liable for
information carried on or disseminated through our networks. Any costs not
covered by insurance that we incur as a result of liability or asserted
liability for information carried on or disseminated through our networks could
hurt our business.
OUR COMPUTER SYSTEMS AND THOSE OF OUR BUSINESS PARTNERS MAY NOT BE YEAR 2000
COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF OPERATIONS.
The risks posed by the Year 2000 issue could hurt our business in a
number of significant ways. Many currently installed computer systems and
software products accept only two digit entries in the date code field and will
not distinguish 21st century dates from 20th century dates. This may result in
system failures or miscalculations causing disruptions of operations, including
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
We are currently completing a Year 2000 readiness review that included
assessment, implementation, testing and contingency planning. After evaluating
our internally developed software, we believe that this software is Year 2000
compliant. However, we utilize software and hardware developed by third parties
both for our network and for our internal information systems. We sought
assurances from our vendors that their products are Year 2000 compliant. To
date, we have not received any responses from our vendors that lead us to
believe that we will be unprepared for the year 2000.
We expect to continue assessing and testing our internal information
technology systems throughout this year. However, we may experience material
unanticipated problems and costs caused by undetected errors or defects in our
systems.
In addition, Year 2000 issues may also impact other entities with which
we do business, including those responsible for maintaining telephone and
Internet communications. If these entities fail to take preventative or
corrective actions in a timely manner, the Year 2000 issue could hurt our
business in ways which are not now quantifiable.
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We do not have any information regarding the Year 2000 status of our
customers, most of whom are private companies. If our customers experience Year
2000 problems which result in business interruptions or otherwise impact their
operations, we could experience a decrease in the demand for our services, which
could hurt our business.
To date, we have not incurred and do not foresee any significant
expenses associated with our Year 2000 plan. Apart from the risk that we may not
achieve Year 2000 compliance, we believe that a loss of revenues, which could be
significant, would arise if our major customers or providers fail to achieve
Year 2000 readiness.
WE MAY NEED ADDITIONAL FUNDS WHICH, IF AVAILABLE, COULD RESULT IN DILUTION OF
YOUR SHAREHOLDINGS OR AN INCREASE IN OUR INTEREST EXPENSE. IF THESE FUNDS ARE
NOT AVAILABLE, OUR BUSINESS COULD BE HURT.
We intend to use the proceeds from our recently completed initial
public offering to fund the expansion of our sales and marketing efforts, build
our new data centers, expand our customer support services and for working
capital and general corporate purposes. While we believe that the proceeds from
this offering will be sufficient for these purposes, we may need to raise
additional funds through public or private debt or equity financings in order
to:
- take advantage of anticipated opportunities or acquisitions of
complementary assets, technologies or businesses;
- develop new products; or
- respond to unanticipated competitive pressures.
If additional funds become necessary, additional financing may not be
available on terms favorable to us or available at all. If adequate funds are
not available or are not available on acceptable terms when needed, our business
could be hurt.
If additional funds are raised through the issuance of equity
securities, the percentage ownership of our then current stockholders may be
reduced, and the new equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. If additional
funds are raised through the issuance of debt securities, these securities would
have some rights, preferences and privileges senior to those of the holders of
our common stock, and the terms of this debt could impose restrictions on our
operations and result in significant interest expense to us.
SIGNIFICANT STOCKHOLDERS AND CURRENT MANAGEMENT CONTROL APPROXIMATELY 74% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
IXC Internet Services, Inc., NYSERNet.net, Inc. and Grumman Hill
Investments, L.P. control approximately 26.7%, 23.0% and 13.4%, respectively, of
our outstanding common stock. In addition, our executive officers and directors
may be deemed to beneficially own in the aggregate approximately 74% of our
outstanding common stock, including shares of our common stock owned by IXC,
NYSERNet.net and Grumman Hill that may be deemed to be owned by some of our
officers and directors as a result of their relationships with these entities.
Accordingly, IXC, NYSERNet.net, Grumman Hill and our officers and directors,
whether acting alone or together, are able to exert considerable influence over
any stockholder vote, including any vote on the election or removal of directors
and any merger, consolidation or sale of all or substantially all of our assets,
and control our management and affairs. Such control could discourage others
from initiating potential merger, takeover or other change in control
transactions. As a consequence, our business could be hurt. IXC, Grumman Hill
and NYSERNet.net each have one representative on our board of directors. In
addition, three of our directors and/or executive officers are also directors of
NYSERNet.net and NYSERNet.org, Inc., a not-for-profit
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corporation that is also affiliated with NYSERNet.net. Two of our executive
officers are executive officers of NYSERNet.net and/or NYSERNet.org. Grumman
Hill has a significant equity interest in IXC. NYSERNet.net, NYSERNet.org, IXC,
Grumman Hill and our officers and directors may have conflicts of interest among
themselves, and their interests could conflict with the interests of our other
stockholders.
WE ARE DEPENDENT ON KEY PERSONNEL AND OPERATE IN AN INDUSTRY WHERE IT IS
DIFFICULT TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
We expect that we will need to hire additional personnel in all areas
of our business. The competition for personnel throughout our industry is
intense. At times, we have experienced difficulty in attracting qualified new
personnel. If we do not succeed in attracting new, qualified personnel or
retaining and motivating our current personnel, our business could suffer. We
are also dependent on the continued services of our key personnel, including our
senior management. We have entered into employment agreements with Richard
Mandelbaum, Lawrence B. Helft, James D. Luckett, Denis J. Martin, Mark A. Oros
and David A. Buckel. We have also secured key man insurance policies on the
lives of Messrs. Mandelbaum, Oros and Martin.
OUR STOCK PRICE MAY BE VOLATILE.
Pursuant to our initial public offering, we began offering our common
stock to the public on April 30, 1999, and the public market for our common
stock is not well-established. We cannot assure you that an active trading
market will develop or be sustained, nor can we provide you with any guarantees
as to how liquid that market might become. Further, we cannot guarantee that the
price of our common stock will not decline. Stock prices of technology
companies, especially Internet-related companies, have been highly volatile. The
current trading price of our common stock may not be indicative of prices that
will prevail in the trading market. Various factors could cause the market price
of our common stock to fluctuate substantially. These factors may include:
- variations in our revenue, earnings and cash flow;
- announcements of new service offerings, technological
innovations or price reductions by us, our competitors or
providers of alternative services; and
- changes in analysts' recommendations or projections and
general economic and market conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company in question. If we become subject to securities
litigation, we could incur substantial costs and experience a diversion of
management's attention and resources.
Also, a substantial number of shares of common stock issuable upon
exercise of outstanding stock options are available for resale in the public
market as a result of our registering a Form S-8 with the Securities and
Exchange Commission on July 19, 1999 (File No. 333-83177) in order to register
the shares issued and issuable upon the exercise of options granted under the
1996 Incentive Stock Option Plan, or granted and to be granted under our 1999
Stock Option Plan and our 1999 Employee Stock Purchase Plan.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR FUTURE SALE.
THE FUTURE SALE OF LARGE AMOUNT OF OUR STOCK, OR THE PERCEPTION THAT THESE SALES
COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
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The market price of our common stock could drop as a result of future
sales of a large number of shares of common stock in the market after the
offering.
As a result of our re-offer prospectus filed on Form S-8 with the
Securities and Exchange Commission on July 19, 1999, approximately 21.3% of the
shares of our outstanding common stock no longer qualify as "restricted
securities" under Rule 144 of the Securities Act and, under the Securities Act,
these shares may be freely re-offered and re-sold. However, stockholders who
sell shares of our common stock under this re-offer prospectus must comply with
the volume of sale limitations imposed under Rule 144(e) of the Securities Act.
In addition, holders of 94.0% of the shares covered by the re-offer prospectus
are parties to lock-up agreements which are further discussed in the
registration statement for our initial public offering and under which the
holders of these shares have agreed not to sell or otherwise dispose of any of
their shares during the 180-day lock-up period.
Upon effectiveness of the re-offer prospectus, an additional 54.2% of
the shares of our common stock continue to be restricted securities. The holders
of these shares are also parties to the lock-up agreements described above and
in the registration statement for our initial public offering. The holders of
these restricted shares have registration rights with respected to these
restricted shares and with respect to any after-acquired shares and these
registration rights could be exercised after expiration of the 180-day lock-up
period. Also, under Rule 144 these shares become freely tradable in the future.
Therefore, through the re-offer prospectus, as a result of registration
rights and under Rule 144, large amounts of the shares of our common stock may
become freely tradable and affect the market for our stock.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a.) EXHIBITS.
The following Exhibits are filed or incorporated by reference herewith:
<TABLE>
<CAPTION>
<S> <C>
Exhibit 10.1 Master Service Agreement between AppliedTheory
Corporation and NYSERNet.org, Inc. dated June 14, 1999.
Exhibit 10.2 Amendment No. 6 to Agreement between AppliedTheory
Corporation and the New York State Department of Labor,
dated August 11, 1998.
Exhibit 10.3 Amendment No. 7 to Agreement between AppliedTheory
Corporation and the New York State Department of Labor,
dated July 1, 1999.
Exhibit 10.4 Sublease Agreement between AppliedTheory Corporation
and Time Square Studios LTD, dated July 20, 1999
Exhibit 11.1 Calculation of basic and diluted loss per share and
weighted average shares used in calculation for the three
months ended June 30, 1999.
Exhibit 11.2 Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the three
months ended June 30, 1998.
Exhibit 11.3 Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the six
months ended June 30, 1999.
Exhibit 11.4 Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the six
months ended June 30, 1998.
Exhibit 27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information only.
</TABLE>
(b.) REPORTS ON FORM 8-K.
On July 7, 1999, we filed a Current Report on Form 8-K that
included information relating to our investment on June 22, 1999 of
$5.0 million in Planning Technologies, Inc. through the purchase of
approximately 10% of the fully diluted capital stock of that company.
We did not file any financial statements with that report.
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APPLIEDTHEORY CORPORATION
FORM 10-Q
JUNE 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
AppliedTheory Corporation
Date: August 16, 1999 by: /s/ Richard Mandelbaum
--------------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: August 16, 1999 and: /s/ David Buckel
--------------------------------------------
David Buckel
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
34
<PAGE> 35
EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference herewith:
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Exhibit 10.1 Master Service Agreement between AppliedTheory Corporation and
NYSERNet.org, Inc. dated June 14, 1999.
Exhibit 10.2 Amendment No. 6 to Agreement between AppliedTheory Corporation
and the New York State Department of Labor, dated August 11, 1998
Exhibit 10.3 Amendment No. 7 to Agreement between AppliedTheory Corporation
and the New York State Department of Labor, dated July 1, 1999.
Exhibit 10.4 Sublease Agreement between AppliedTheory Corporation and Time
Square Studios LTD, dated July 20, 1999
Exhibit 11.1. Calculation of basic and diluted loss per share and weighted
average shares used in calculation for the three months ended
June 30, 1999.
Exhibit 11.2. Calculation of Basic and diluted loss per share and weighted
average shares used in calculation for the three months ended
June 30, 1998.
Exhibit 11.3. Calculation of Basic and diluted loss per share and weighted
average shares used in calculation for the six months ended
June 30, 1999.
Exhibit 11.4. Calculation of Basic and diluted loss per share and weighted
average shares used in calculation for the six months ended
June 30, 1998.
Exhibit 27.1. Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only.
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35
<PAGE> 1
EXHIBIT 10.1
Master Service Agreement between
AppliedTheory Corporation
And
NYSERNet
V1.0
This Master Service Agreement (this "Agreement") is made as of the date of last
execution below (the "Effective Date") and entered into by and between
AppliedTheory Corporation, having its principal place of business at 125 Elwood
Davis Road, Syracuse, NY 13212, and NYSERNet.Org, a not-for-profit corporation
("NYSERNet"), having its principal place of business at 125 Elwood Davis Road,
Syracuse, NY 13212.
Whereas NYSERNet seeks to build and operate an advanced next generation
Internet, NYSERNet 2000, for its member institutions and others;
Whereas NYSERNet desires to obtain telecommunications services as described in
the Exhibits (the "Services"), in support of its network from AppliedTheory, and
AppliedTheory is willing to provide the Services for the rates attached hereto;
Whereas NYSERNet and AppliedTheory seek to further their strategic alliance by
working together on the development of advanced networking technologies which
will initially be deployed and tested in the NYSERNet 2000 network;
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, the parties hereto agree as follows:
TERMS AND CONDITIONS
A. DEFINITIONS
A. "NYSERNet" means NYSERNet.Org.
B. "AppliedTheory" means AppliedTheory Corporation and any of its
successors, subsidiaries, sub-contractors, parent, and agents.
C. "Agreement" means this Master Services Agreement together with all
Exhibits that are attached hereto and/or incorporated herein by
reference.
1. SERVICES TO BE PROVIDED
Subject to the terms hereof, AppliedTheory agrees to provide to NYSERNet the
services as are described in Task Orders, incorporated herein or which may be
executed from time to time by both parties (the "Task Orders"). Task Orders are
attached as consecutively lettered Exhibits.
AppliedTheory Master Services Agreement
-Page 1-
<PAGE> 2
Exhibit A: Task Order Numbers 99-001A and 99-001B for
Collocation and Transport Services
Exhibit B: Task Order Number 99-002 for Contract Administration
Services
Exhibit C Task Order Number 99-003 for Network Management and
Customer Support Services
Task Orders may be added to this Agreement or may be modified by subsequent Task
Orders by the mutual agreement of the parties. Each Task Order shall become
effective only upon execution by both parties, whereupon such Task Order shall
be deemed a part hereof. Each Task Order will contain a description of the
services to be performed, a timetable for performance and a price. A Task Order
may contain additional terms and conditions as applicable or as the parties may
desire.
When both parties agree to change a Task Order, the initiating party will
prepare a written description of the agreed change (a "Change Authorization").
Acceptance of the proposed change will be indicated by authorized signature of
the Change Authorization by both parties. The terms of a Change Authorization
prevail over those of the applicable Task Order and any of its previous Change
Authorizations. Any change in the Task Order may affect the charges or other
terms. When a change in charges is necessary, AppliedTheory will provide a
written quote and these charges will be included in the Change Authorization.
Work will only begin on both party's acceptance and written authorization of the
Change Authorization.
2. TERM
This Agreement shall begin on the Effective Date and shall continue for three
years or until the end of the committed term length for any Task Order,
whichever is later (the "Initial Term".) Upon expiration of the Initial Term,
this Agreement shall be renewed for three additional one-year terms, at rates to
be renegotiated by the parties, unless written notice is provided by either
party to the other at least sixty (60) calendar days before the expiration of
the Initial Term, or any renewal of such term.
Additional Services not Co-Terminous. If NYSERNet requests additional Services
under this Agreement AppliedTheory will use its best efforts to secure contracts
which have termination dates coinciding with this Agreement. AppliedTheory will
advise NYSERNet of the termination dates of all contracts it enters into in
support of this Agreement. If termination dates for additional Services are not
co-terminous with this Agreement, and such Services are terminated early,
AppliedTheory will pass through to NYSERNet the actual termination costs imposed
by such third parties. Any amendment to this Agreement or its Exhibits, or any
Task Order adding additional Services will include the specific termination
penalties of contracts AppliedTheory proposes to enter into in support of this
Agreement or details about the calculation of any such penalty for pre-approval
by NYSERNet.
3. RATES
The prices for Services provided hereunder are set forth in the applicable Task
Orders.
AppliedTheory Master Services Agreement
-Page 2-
<PAGE> 3
4. PAYMENT AND INVOICING
NYSERNet agrees to pay all charges incurred in accordance with the Task Orders.
Charges shall be invoiced monthly and payment in US currency shall be due upon
receipt. Interest charges of one and one half percent (1.5%) per month or the
highest rate permitted by law, whichever is less will accrue daily on all
amounts which are not paid within forty-five (45) days of the date of the
invoice. NYSERNet will pay all applicable taxes, as well as duties or levies, on
the Services except taxes based on the income of AppliedTheory.
5. TERMINATION
5.1 Termination for Default. Either party may terminate this Agreement or any
individual Task Order, in the event of default by the other, provided that the
non-defaulting party so advises the defaulting party in writing of the event of
alleged default and the defaulting party does not remedy the alleged default
within thirty (30) days after receipt of written notice thereof. Default is
defined to include:
A. either party's insolvency or initiation of bankruptcy or
receivership proceedings by or against the party unless said
procedure is dismissed within 60 days;
B. either party's material breach of any of the other terms or
conditions hereof including the failure to make any payment
when due, if the amount of the payment due is not in dispute;
C. the execution by either party of an assignment for the benefit
of creditors, or;
D. failure by AppliedTheory to meet the Performance Criteria as
described in the Exhibits.
5.2 Termination for Other Reasons. The rates and charges under which the
Services are provided are based on certain minimum periods as indicated in the
attached Task Orders. If NYSERNet terminates all or a portion of a Task Order
prior to the expiration of the Term specified in the Task Order, NYSERNet agrees
to pay AppliedTheory a service cancellation charge as outlined in the Task
Order. The effective date of cancellation shall be no earlier than thirty (30)
days after AppliedTheory's receipt of NYSERNet's written request to cancel such
Service or Task Order. Any cancellation charges imposed by a third party access
provider will be passed along to NYSERNet to the extent specified in the Task
Order.
5.3 Termination of this Agreement, a Task Order, or Service for any cause shall
not release either party from any liability which at the time of termination has
already accrued to the other party or which thereafter may accrue in relation to
the period prior to termination or from any obligation which is expressly stated
herein to survive termination.
6. Force Majeure.
Neither party shall be liable for any failure of performances if such failure is
due to any cause or causes beyond the reasonable control of such party,
including, without limitation, acts of God, fire, explosion, vandalism, cable
cut, adverse weather conditions, governmental action, labor difficulties and
supplier failures.
7. LIABILITY
AppliedTheory shall be liable for damages of any nature arising from errors,
mistakes, omissions, interruptions, or delays ("Errors" and individually and
"Error") of or caused by
AppliedTheory Master Services Agreement
-Page 3-
<PAGE> 4
AppliedTheory, its agents, servants, or employees, in the course of
establishing, furnishing, rearranging, moving, terminating, or changing the
service or facilities or equipment provided that AppliedTheory's liability for
an Error shall not exceed the amount paid or due by NYSERNet to AppliedTheory
for that portion of any Task Order to which the Error shall relate. In no event
will AppliedTheory be liable to NYSERNet or to any of NYSERNet's own customers
for any incidental, indirect, special or consequential damages (including lost
revenues or profits) arising from any act or omission under this Agreement or
any Task Order. WITH THE EXCEPTION OF THE COVENANTS AND WARRANTIES CONTAINED IN
THIS AGREEMENT INCLUDING ITS EXHIBITS APPLIEDTHEORY MAKES NO WARRANTY TO
NYSERNET OR ANY OTHER PERSON OR ENTITY, WHETHER EXPRESS OR IMPLIED AS TO THE
DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY PURPOSE
OF ANY SERVICE PROVIDED HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY OTHER
MATTER, ALL OF WHICH WARRANTIES BY APPLIEDTHEORY ARE HEREBY EXCLUDED AND
DISCLAIMED.
8. INDEMNIFICATION
8.1 By NYSERNet. NYSERNet shall indemnify, defend and hold harmless
AppliedTheory against any and all losses, damages, injuries, expenses and
liabilities of any type, including attorney's fees, incurred in connection with
(i) any and all claims, proceedings, actions or suits ("Claims") for libel,
slander, infringement of copyright or unauthorized use of any trademark, trade
name or service mark arising out of the content transmitted over facilities or
equipment provided by AppliedTheory; and (ii) claims for infringement of any
third party's patent, copyright, trademark, trade secret or other intellectual
property right ("Intellectual Property Rights" and individually, a "Intellectual
Property Right") arising from combining or connecting AppliedTheory's facilities
or equipment with facilities, equipment, apparatus or systems of NYSERNet; (iii)
all Claims of any kind by NYSERNet's end users, except claims arising from
AppliedTheory's actions or failure to act, and (iv) all other Claims (including,
without limitation, claims for damage to any business or property, or injury to,
or death of, any person) arising out of any act or omission of NYSERNet, or
NYSERNet's agents or end users, in connection with any product, service,
facilities or equipment provided by AppliedTheory.
8.2. By AppliedTheory. AppliedTheory shall indemnify, defend and hold harmless
NYSERNet and its subsidiaries and affiliates against any and all losses,
damages, injuries, expenses and liabilities of any type, including attorney's
fees, incurred in connection with (i) any and all Claims for damages to property
or injuries, including death, as a result of an act (whether intentional,
negligent or otherwise) or omission on the part of AppliedTheory or any of its
successors, subsidiaries or affiliates in connection with the Services provided
under this Agreement and (ii) any and all Claims that the Services furnished by
AppliedTheory in the course of this Agreement, or any resulting use, sale,
license, or sublicense of any such Services as authorized herein constitutes an
infringement of such third party's Intellectual Property Rights that occurs
during the term of the Agreement. This Section 8.2 states the sole obligation
and exclusive liability of AppliedTheory (express, implied, statutory, or
otherwise), and the sole remedy of NYSERNet, for any third-party claims of
infringement of any Intellectual Property Rights, subject to Section 8.4.
AppliedTheory Master Services Agreement
-Page 4-
<PAGE> 5
8.3 Conditions. Each party's obligation to indemnify the other party for a claim
pursuant to this Article 8 is contingent upon the following conditions: (i) that
the indemnified party notify the indemnifying party in writing within ten (10)
days of the assertion of any such claim, proceeding, action or suit and agrees
not to settle, compromise or otherwise dispose of any such claim, proceeding,
action or suit without the prior written consent of the indemnifying party; (ii)
that the indemnified party allows the indemnifying party to control the defense
and settlement of the claim; and (iii) that the indemnified party provides to
the indemnifying party commercially reasonable information, assistance, and
authority (at the indemnifying party's sole expense, as applicable) reasonably
necessary or useful for the indemnifying party's handling and defense of the
claims ; and (iv) that each party's aggregate liability and obligations arising
out of this Article 8 shall not exceed the lesser of (a.) the total charges paid
by NYSERNet to AppliedTheory under this Agreement during the 12 months preceding
the events giving rise to the Claim at issue and (b) one million dollars
($1,000,000). Notwithstanding the indemnifying party's right to control the
defense and settlement of such claims, the indemnified party may, at its sole
option and expense, participate in such defense and settlement with counsel of
its own choosing.
8.4 Election of Remedy. If NYSERNet's license to or use of AppliedTheory's
Services, as permitted under this Agreement, is enjoined based on a Claim by a
third party that the Services furnished by AppliedTheory in the course of this
Agreement, or any resulting use, sale, license or sublicense of any such
Services as authorized herein constitutes an infringement of such third party's
Intellectual Property Rights, AppliedTheory must, at AppliedTheory's option and
expense:
(i) procure for NYSERNet and its customers the continued right to
use the Services as permitted herein; or
(ii) replace the Services with substantially equivalent
non-infringing Services;
or
(iii) modify the Services so they become non-infringing; or
(iv) if neither (i), (ii), nor (iii) is commercially feasible,
discontinue the Services or remove any equipment relating to
such Services and refund to NYSERNet an amount equal to the
total compensation due AppliedTheory under this Agreement,
less a commercially reasonable fee for NYSERNet's use of the
Services for the period commencing on the Effective Date
hereof and concluding on the effective date of such
injunction.
8.5 No Special Damages. Except for the indemnity provisions contained in this
Article 8, neither party will be liable to the other for special, indirect, or
consequential loss of damage, whether or not such loss or damage is caused by
the fault or negligence of that party, its employees, agents, or subcontractors.
8.6 Exception. AppliedTheory will not have any obligations under this Article 8
in connection with any Claim which is based on the use of the Services (a) other
than for the
AppliedTheory Master Services Agreement
-Page 5-
<PAGE> 6
purposes for which they were supplied by AppliedTheory, unless the use of the
Services for such purposes was authorized by AppliedTheory, (b) in a manner
other than as directed by AppliedTheory, unless the use of the Services in such
manner was authorized by AppliedTheory or (c) in combination with products,
goods, or services not supplied by AppliedTheory, unless (i) such combination
was authorized by AppliedTheory and/or (ii) AppliedTheory would otherwise have
an obligation under this section 8.6 in the absence of such combination.
8.7 Survival of Indemnity. Both part indemnity obligations under this Article 8
will survive the expiration or termination of the Agreement.
9. NO ACCEPTABLE USE POLICY
APPLIEDTHEORY WILL NOT IMPOSE AN ACCEPTABLE USE POLICY ON THE SERVICES PROVIDED
THROUGH THIS AGREEMENT. ALL USES OF THE NYSERNET 2000 NETWORK WILL BE CONTROLLED
BY NYSERNET AND ITS MEMBER'S INSTITUTIONS.
10. BUSINESS RELATIONSHIP
This Agreement shall not create any agency, employment, joint venture,
partnership, representation, or fiduciary relationship between the parties.
Neither party shall have the authority to, nor shall any party attempt to,
create any obligation on behalf of the other party.
11. INSURANCE
Unless specified differently in the Task Orders, throughout the term of this
Agreement and any extension thereof, each party shall maintain, and, upon
written request, shall provide to the other party proof of comprehensive general
liability insurance with a limit of not less than $2,000,000 per occurrence for
bodily injury liability and property damage liability, including coverage
extensions for blanket contractual liability, personal injury liability and
products and completed operations liability.
12. MISCELLANEOUS
Assignment
Neither party shall assign or transfer this Agreement without the prior written
consent of the other party, such consent not to be unreasonably withheld.
Dispute Resolution
Disputes relating to this Agreement will be settled in arbitration before a
single arbiter held in accordance with the Commercial Arbitration rules of the
American Arbitration Association and will be governed by the U.S. Arbitration
Act, 9 U.S.C. ss 1, et. Seq., and judgement may be entered in any court of
competent jurisdiction. The arbitration will be held in the Syracuse, NY area.
AppliedTheory Master Services Agreement
-Page 6-
<PAGE> 7
Legal Construction
This Agreement shall be governed by the laws of the State of New York pertaining
to contracts made and to be performed in New York without giving effect to
conflicts of laws principles.
Survival
The covenants and agreements of both parties contained in this Agreement with
respect to payment of amounts due, confidentiality and indemnification shall
survive any termination of this Agreement. The rights and obligations under this
Agreement shall survive any merger or sale of either party and shall be binding
upon the successors and permitted assigns of each party.
Amendments
This Agreement may not be modified except by written amendment by the parties.
No agent, employee or representative of AppliedTheory or NYSERNet has authority
to bind the parties to any representation or warranty unless such is
specifically included in this Agreement, any Task Order or written amendments
thereto.
Entire Agreement
This Agreement and the Exhibits attached hereto constitute the entire agreement
between the parties with respect to the subject matter contained herein and
supersedes in full the Memorandum of Understanding dated June 1, 1998 and the
Collocation Services Agreement dated September 23, 1998 between the parties. Any
prior agreements, representations, statements, negotiations, understandings, or
undertakings of AppliedTheory or NYSERNet relating to the subject matter herein
are of no force and effect if not contained in this Agreement or in a Task
Order.
No Implied Waivers
Except as provided herein, no term or provision of this Agreement shall be
deemed waived, no breach or default shall be deemed excused, no waiver or any
breach of any provision of this Agreement shall constitute a waiver of any
prior, concurrent or subsequent breach of the same or any other provisions
hereof, and no waiver shall be effective unless such waiver or consent is made
in writing and is signed by an authorized representative of the party to be
charged with such waiver or consent.
Severability
In the event that any provision of this Agreement shall be determined illegal or
otherwise unenforceable, such provision shall be severed and the entire
Agreement shall not fail on account thereof and the balance of the Agreement
shall continue in full force and effect.
AppliedTheory Master Services Agreement
-Page 7-
<PAGE> 8
Notices
Except as otherwise provided in this Agreement, all notices required or
permitted to be given hereunder shall be in writing and shall be valid and
sufficient if dispatched by U.S. registered mail, postage prepaid, return
receipt requested, in any post office of the United States, addressed as
follows:
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If to AppliedTheory: If to NYSERNet
-------------------- --------------
AppliedTheory Corporation NYSERNet.Org
125 Elwood Davis Road 125 Elwood Davis Road
Syracuse, New York 13212 Syracuse, New York 13212
Attn. Contracts Manager Attn. Contracts Manager
</TABLE>
Notices so given will be effective on the date of receipt unless otherwise
specified in the notification.
Exhibits
The terms of all Exhibits referenced herein are incorporated herein and made a
part hereof by reference.
Non-Disclosure of Terms
NYSERNet and AppliedTheory each warrant, represent and agree that it will not
disclose the terms and conditions of this Agreement, including but not limited
to pricing, without the other's prior written consent, to any party other than
such parties' accountants, auditors, attorneys, or financial advisors, except to
the extent required by any applicable law. Notwithstanding the foregoing,
NYSERNet hereby consents to disclosure of the terms and conditions of this
Agreement, including but not limited to pricing, in any forms or documents which
AppliedTheory shall file with the Securities and Exchange Commission to the
extent required.
IN CONSIDERATION OF THE MUTUAL PROMISES AND COVENANTS SET FORTH HEREIN,
APPLIEDTHEORY AND NYSERNET AGREE TO BE BOUND BY THIS AGREEMENT AND ATTACHMENTS
HERETO.
AppliedTheory Corporation NYSERNet.Org
/S/ ANGELO A. GENCARELLI III /S/ TIMOTHY LANCE
- ---------------------------- ---------------------
Angelo Gencarelli Tim Lance
Sr. Dir. Accounting/Controller Chairman of the Board
of Directors/President
6/14/99 6/14/99
- ---------------------------- ---------------------
Date Date
AppliedTheory Master Services Agreement
-Page 8-
<PAGE> 1
Exhibit 10.2
AMENDMENT NO. 6 TO CONTRACT C000525
THIS AMENDMENT, made this Twenty-fourth day of July in the
year One thousand nine hundred and ninety-eight serves to change the vendors
name to AppliedTheory Communications, Inc., formerly known as NYSERNET, and
increases the contract amount to $13,387,237.12 as per the July 1998 Scope of
Work.
WITNESSETH, that AppliedTheory and the Department of Labor, in
consideration of the agreements incorporated herein, do hereby agree as follows:
ARTICLE I.
The party of the first part shall provide Consulting,
Applications Development, Systems Integration, Help Desk Services and Training
as per the July 1998 Scope of Work and the Software Licensing Agreement
attached, which together with all appendices is hereby made a part of this
agreement.
ARTICLE II.
It is hereby mutually agreed between the parties hereto that
the sum to be paid by the party of the second part to the party of the first
part for said services shall be as follows:
This Amendment increases the Contract amount by $5,000,000.00.
All other terms and conditions remain the same.
IN WITNESS WHEREOF, the parties hereto, have set their hand
and seals, the day and year written above.
STATE OF NEW YORK, COUNTY OF ONONDAGA SS:
On the 30th Day of July, Nineteen Hundred and Ninety-eight
before me personally came Angelo A. Gencarelli, III to me known, who being by me
duly sworn, did depose and say that he resides at: 4007 Arrowhead Lane,
Liverpool, New York 13090, and that he is the Senior Director of
Accounting/Controller of AppliedTheory Communications, Inc., the corporation
described in and which executed the foregoing instrument, and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Malinda J. Amerman
------------------------------------
NOTARY PUBLIC (affix stamp)
<PAGE> 2
Page 2 of 2
Agency Certification
"In addition to the acceptance of this contract, I also certify that
original copies of this signature page will be attached to all other exact
copies of this contract."
VENDOR NYS DEPARTMENT OF LABOR
/s/ Angelo A. Gencarelli /s/ Laurel Dawson
- --------------------------------------- ---------------------------------
Authorized Signature Authorized Signature
- --------------------------------------- ---------------------------------
Printed Name Printed Name
Senior Director of Accounting/Controller (Purchasing) Agent
- --------------------------------------- ---------------------------------
Title Title
7/30/98 8/11/98
- --------------------------------------- ---------------------------------
Date Date
STATE ATTORNEY GENERAL STATE COMPTROLLER
/s/ Peter Favretto /s/ Illegible
- --------------------------------------- ---------------------------------
8/18/98 9/30/98
- --------------------------------------- ---------------------------------
Date Date
<PAGE> 1
Exhibit 10.3
AMENDMENT NO. 7 TO CONTRACT C000525
THIS AMENDMENT, made this Seventeenth day of June in the year
One thousand nine hundred and ninety-nine serves to increases the contract
amount to $16,387,237.12 as per the April 1999 Scope of Work.
WITNESSETH, that AppliedTheory and the Department of Labor, in
consideration of the agreements incorporated herein, do hereby agree as follows:
ARTICLE I.
The party of the first part shall provide Consulting,
Applications Development, Systems Integration, Help Desk Services and Training
as per the April 1999 Scope of Work and the Software Licensing Agreement
attached, which together with all appendices is hereby made a part of this
agreement.
ARTICLE II.
It is hereby mutually agreed between the parties hereto that
the sum to be paid by the party of the second part to the party of the first
part for said services shall be as follows:
This Amendment increases the Contract amount by $3,000,000.00.
All other terms and conditions remain the same.
IN WITNESS WHEREOF, the parties hereto, have set their hand
and seals, the day and year written above.
STATE OF NEW YORK, COUNTY OF ONONDAGA SS:
On the 25th Day of June, Nineteen Hundred and Ninety-nine
before me personally came Angelo A. Gencarelli, III to me known, who being by me
duly sworn, did depose and say that he resides at: Liverpool, New York, and that
he is the Senior Director of Accounting/Controller of AppliedTheory, the
corporation described in and which executed the foregoing instrument, and that
he signed his name thereto by order of the Board of Directors of said
corporation.
/s/ Patricia J. Foster
----------------------------------------
NOTARY PUBLIC (affix stamp)
<PAGE> 2
Page 2 of 2
Agency Certification
"In addition to the acceptance of this contract, I also certify that
original copies of this signature page will be attached to all other exact
copies of this contract."
VENDOR NYS DEPARTMENT OF LABOR
/s/ Angelo A. Gencarelli /s/ Paul D. Danaher
- --------------------------------------- ---------------------------------
Authorized Signature Authorized Signature
- --------------------------------------- ---------------------------------
Printed Name Printed Name
Senior Director of Accounting/Controller Principal Accountant(ES)
- --------------------------------------- ---------------------------------
Title Title
6/26/99 7/1/99
- --------------------------------------- ---------------------------------
Date Date
STATE ATTORNEY GENERAL STATE COMPTROLLER
- --------------------------------------- ---------------------------------
/s/ Peter Favretto /s/ Illegible
7/1/99 7/26/99
- --------------------------------------- ---------------------------------
Date Date
<PAGE> 1
Exhibit 10.4
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "SUBLEASE") is entered into as of July 20, 1999,
by and between TIMES SQUARE STUDIOS LTD, a New York corporation ("SUBLANDLORD"),
and APPLIED THEORY CORPORATION, a Delaware corporation ("SUBTENANT"), with
reference to the following facts:
A. Zapco 1500 Investment, L.P., a Delaware limited partnership ("MASTER
LANDLORD"), as landlord, and Disney Enterprises, Inc. ("DISNEY
ENTERPRISES"), as tenant, entered into that certain Amended and
Restated Lease dated as of November 11, 1997 which, together with all
exhibits, schedules and other attachments thereto are referred to
herein as the "MASTER LEASE".
B. Pursuant to that certain Assignment and Assumption Agreement dated as
of June 11, 1998, between Disney Enterprises and Sublandlord, Disney
Enterprises assigned its interest as tenant under the Master Lease to
Sublandlord.
C. Under the Master Lease, as assigned, Sublandlord currently leases
certain space from Master Landlord consisting of approximately 76,897
rentable square feet in the Building, which is commonly known as 1500
Broadway, New York, New York 10036 (the "MASTER PREMISES"). A full and
complete copy of the Master Lease (with certain economic terms
redacted) is attached hereto as EXHIBIT A.
D. Sublandlord wishes to sublease to Subtenant, and Subtenant wishes to
hire from Sublandlord, a portion of the Master Premises consisting of
approximately 22,193 rentable square feet (17,311 usable square feet)
on the third floor of the Building (collectively, the "PREMISES"). The
Premises are depicted on EXHIBIT B attached hereto.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Sublandlord and Subtenant agree as follows:
1. GRANT; SUBLEASE SUBJECT TO MASTER LEASE.
(a) Sublandlord hereby subleases the Premises to Subtenant, and
Subtenant hereby hires the Premises from Sublandlord, according to the terms and
conditions of this Sublease. Where not expressly inconsistent with the terms
hereof and except as otherwise stated herein to the contrary, this Sublease is
subject and subordinate to all of the terms and conditions of the Master Lease.
All of the terms and conditions of the Master Lease, except as otherwise set
forth herein, are hereby incorporated into this Sublease and shall be binding
upon Subtenant and Sublandlord to the same extent as if Subtenant were named as
Tenant and Sublandlord were named as Landlord under the Master Lease; provided,
however, that Sublandlord shall not be liable for any defaults by Master
Landlord. For purposes of this Sublease, with respect to the incorporation of
the terms of the Master Lease herein, all references in the Master Lease to
"Premises" shall be deemed to refer to the Premises herein defined and not to
any other portion of the
<PAGE> 2
Master Premises. Terms defined in the Master Lease have the same meaning when
used herein unless such terms are specifically defined herein. In the event of a
conflict between the Master Lease and this Sublease, the terms of this Sublease
shall prevail; provided, however, that if there is a conflict between the Master
Lease and this Sublease with respect to obligations owed to Master Landlord, the
Master Lease shall prevail.
(b) For purposes of incorporation herein, the terms of the Master Lease
are subject to the following modifications:
(i) With respect to the Tax Payment, Subtenant's
share ("SUBTENANT'S SHARE") shall be
calculated by dividing (a) the actual number
of rentable square feet of floor space
within the Premises, measured to the
exterior faces of exterior walls (which is
currently 22,193 rentable square feet) by
(b) the actual number of rentable square
feet in the Building, which is currently
501,429 rentable square feet. For purposes
of this Sublease, the "BASE TAXES" shall
mean Taxes for the Tax Year commencing on
July 1, 1998 and ending on June 30, 1999.
All references to Tenant's Share in the
Master Lease shall be deemed to refer to
Subtenant's Share for purposes of this
Sublease.
(ii) With respect to Article 27 of the Master
Lease, Subtenant shall have no obligation to
pay for increases in or escalations of the
Operating Payment, or otherwise contribute
toward the payment of Operating Expenses
payable by Sublandlord under the Master
Lease, whether or not attributable to the
Premises, it being hereby stipulated and
agreed that Subtenant's Share of Operating
Expenses (including all escalations and
increases) is included in the Fixed Rent
reserved hereunder.
(iii) Subject to compliance with all Requirements,
the Premises shall be used and occupied by
Subtenant solely as general office space and
for no other purpose. All other provisions
of the Master Lease referencing permitted
uses of the Premises are specifically
excluded from this Sublease.
(iv) With respect to Section 9.2 of the Master
Lease, Subtenant shall have no right to
self-insure.
(v) With respect to Section 13 of the Master
Lease, Subtenant shall have no right to
elect direct metering.
(vi) With respect to Article 27 of the Master
Lease, Subtenant shall have no right to
cause Sublandlord or Landlord to initiate
tax reduction proceedings.
(vii) In all provisions of the Master Lease
requiring the approval or consent of Master
Landlord, Subtenant shall be required to
obtain
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the approval or consent of both Sublandlord
and Master Landlord, which consent by Master
Landlord and Sublandlord (as if Sublandlord
were Master Landlord) shall be subject to
the qualifications contained in the Master
Lease unless otherwise provided herein;
(viii) The term "Indemnitees" shall mean
Sublandlord, Landlord, Agent and their
respective direct and indirect partners,
shareholders, officers, directors, employees
and contractors.
(ix) In all provisions of the Master Lease
requiring Sublandlord to submit, exhibit to,
supply or provide Master Landlord with
evidence, certificates, or any other matter
or thing related to the Premises, Subtenant
shall be required to submit, exhibit to,
supply or provide, as the case may be, the
same to Sublandlord. In any such instance,
Sublandlord shall determine if such
evidence, certificate or other matter or
thing shall be satisfactory in accordance
with the standards set forth in the Master
Lease; and
(x) Sublandlord shall have no obligation to
Subtenant to restore or rebuild any portion
of the Premises after any destruction and/or
taking by eminent domain but Sublandlord's
obligations to Master Landlord shall remain
as stated in the Master Lease.
(c) In addition to any provisions specifically excluded above, the
following provisions of the Master Lease are specifically excluded from this
Sublease (provided, however, that if terms are defined in any of such provisions
of the Master Lease, such definitions will not be excluded from this Sublease):
the definition of "Tenant's Share," Sections 1.1, 1.2, 1.3, 1.4, 2.1(C), (D) and
(F), 2.4, 3.2, the 3rd sentence of Section 3.3(B), Sections 3.3(H), 3.6(B) and
3.8, the 2nd sentence of Section 10.3, Sections 12.4(B), 13.3(A)-(D), 16.1(B),
18.2, 27.1(C), 27.3 28.2, 31.1(B)(ii), 31.2(B) and 31.6; and Articles 26, 34,
39, 43, 46, 48, 49 and 50. Further, all provisions in the Master Lease regarding
or relating to either the "Ex-Landlord's Work" and/or "Asbestos Removal Work"
are specifically excluded from this Sublease (including, without limitation,
Exhibit 3 of the Master Lease), and Subtenant shall have no liability or
obligation with respect thereto.
2. TERM; OPTION TO TERMINATE. The term of this Sublease (the "SUBLEASE TERM")
shall commence on the date this Sublease is executed by both parties (the
"SUBLEASE COMMENCEMENT DATE") and shall continue through the day before the 10th
anniversary of the Sublease Rent Commencement Date (as defined below). This
Sublease may be terminated prior to the expiration of the Sublease Term on the
following terms and conditions:
(a) SUBLANDLORD'S TERMINATION OPTION. Sublandlord shall have a one-time
right to terminate this Sublease, which termination shall be effective as of the
day before the fifth (5th) anniversary of the Sublease Rent Commencement Date
(the "EARLY
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TERMINATION DATE") to allow Sublandlord or a Related Entity of Sublandlord to
use the Premises; provided that Sublandlord delivers written notice of its
intent to terminate this Sublease to Subtenant at least seven (7) months prior
to the Early Termination Date.
(b) SUBTENANT'S TERMINATION OPTION. Subtenant shall have a one-time
right to terminate this Sublease, which termination shall be effective as of the
Early Termination Date; provided that Subtenant delivers written notice of its
intent to terminate this Sublease ("SUBTENANT'S TERMINATION NOTICE") to
Sublandlord at least six (6) months prior to the Early Termination Date and
provided, further, that Subtenant delivers to Sublandlord, together with
Subtenant's Termination Notice, the sum of all the following: (a) the
unamortized portion of the Tenant Improvement Allowance, the Brokerage
Commission and the Free Rent (all of which terms are defined below), which
amounts shall be amortized over the full Sublease Term at an annual interest
rate of nine percent (9%), and (b) the amount that is equal to five (5) months
of Fixed Rent (collectively, the "TERMINATION FEE"). The Termination Fee is
equal to Eight Hundred Ninety Thousand Eight Hundred Seventy-six Dollars and
Thirty-Three Cents ($890,876.33).
(c) SUBTENANT DEFAULT. If this Sublease is terminated prior to the end
of the Sublease Term because of an Event of Default by Subtenant, then in
addition to any other amounts due Sublandlord, Subtenant shall pay to
Sublandlord the sum of the unamortized portions of the Tenant Improvement
Allowance, the Brokerage Commission and the Free Rent, which amount shall be
amortized over the full Sublease Term at an annual interest rate of nine percent
(9%).
(d) NO OBLIGATION TO OPERATE. Anything contained in the Master Lease or
this Sublease to the contrary notwithstanding, it is expressly acknowledged that
this Sublease contains no implied or express covenant for Subtenant to conduct
business in the Premises, continuously or otherwise, or (when conducting
business in the Premises) to operate during any particular hours or, subject to
the terms of this Sublease and the Master Lease, to conduct its business in any
particular manner; provided, however, that Subtenant shall be obliged to
illuminate the Premises during Business Hours pursuant to Subsection 31.1(B)(i)
of the Master Lease, and provided further, that Subtenant shall comply with all
of its obligations under this Sublease, including, without limitation, the
obligation to pay Rent hereunder, to maintain and secure the Premises, and to
insure the Premises.
3. RENT. Subtenant shall pay Rent (defined in Section 3(b) below) to Sublandlord
without prior demand, deduction or set-off, other than as provided in this
Sublease. Subtenant shall pay Rent to Sublandlord or, upon written notice from
Sublandlord, to Sublandlord's designee, during the Sublease Term by check to
Sublandlord's primary notice address (set out in Section 13 below) or to such
other place as Sublandlord may from time to time designate in writing to
Subtenant.
(a) FIXED RENT. Subtenant shall pay to Sublandlord, without prior
demand, the following annual "FIXED RENT" during the Sublease Term, in equal
monthly installments, on the first day of each calendar month during the
Sublease Term,
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commencing on the date that is one hundred twenty (120) days following the
Sublease Commencement Date (the "SUBLEASE RENT COMMENCEMENT DATE"). The period
between the Sublease Commencement Date and the Sublease Rent Commencement Date
shall be a free rent period and the value attributed to such free rent period is
One Hundred Eighty Thousand Dollars ($180,000.00) (the "FREE RENT"). Annual
Fixed Rent shall be:
(i) Five Hundred Forty Thousand Dollars
($540,000.00) or Sublease Year (defined
below) 1;
(ii) Five Hundred Forty-Nine Thousand Four
Hundred Fifty Dollars ($549,450.00) for
Sublease Year 2.
(iii) Five Hundred Fifty-Nine Thousand Sixty-Five
Dollars and Thirty-Seven Cents ($559,065.37)
for Sublease Year 3;
(iv) Five Hundred Sixty-Eight Thousand Eight
Hundred Forty-Nine Dollars and Two Cents
($568,849.02) for Sublease Year 4;
(v) Five Hundred Seventy-Eight Thousand Eight
Hundred Three Dollars and Eighty-Eight Cents
($578,803.88) for Sublease Year 5;
(vi) Six Hundred Sixty Thousand Dollars
($660,000.00) for Sublease Year 6;
(vii) Six Hundred Seventy-One Thousand Five
Hundred Fifty Dollars ($671,550.00) for
Sublease Year 7;
(viii) Six Hundred Eighty-Three Thousand Three
Hundred Two Dollars and Twelve Cents
($683,302.12) for Sublease Year 8;
(ix) Six Hundred Ninety-Five Thousand Two Hundred
Fifty-Nine Dollars and Ninety-One Cents
($695,259.91) for Sublease Year 9; and
(x) Seven Hundred Seven Thousand Four Hundred
Twenty-Six Dollars and Ninety-Six Cents
($707,426.96 for Sublease Year 10.
For purposes of calculating Rent under this Sublease, each "SUBLEASE YEAR" shall
be a period of one year (or, for the Sublease Year in which this Sublease
expires or is terminated, a portion of one year), the first of which periods
shall begin on the first day of the month in which the Sublease Rent
Commencement Date occurs.
(b) ADDITIONAL RENT. All monetary obligations of Subtenant under this
Sublease that are in addition to Fixed Rent, including but not limited to any
taxes, fees, charges, insurance obligations, costs, expenses, obligations,
assessments, payments, disbursements, reimbursements and other amounts
whatsoever payable by, attributable to or the responsibility of Subtenant, are
intended as and shall be deemed "ADDITIONAL
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RENT." Fixed Rent and Additional Rent are sometimes collectively referred to
herein as "RENT."
(c) INTEREST. Any amount due from Subtenant which is not paid within
five (5) days of when due shall bear interest for the benefit of Sublandlord at
the lower of (i) the maximum rate per annum permitted under applicable law, or
(ii) three percent (3%) per annum plus the Base Rate (such lower rate referred
to herein as the "SUBLEASE RATE"); provided, however, that no such interest
shall be due from Subtenant for the first payment of Fixed Rent in each calendar
year which Subtenant pays after the due date therefor, but within five (5) days
of receipt of notice from Sublandlord that the same is past due. Interest shall
accrue from the date such payment is due until paid, but the payment of such
interest shall not excuse or cure any uncured default by Subtenant under this
Sublease. Such rate shall remain in effect after the occurrence of any breach or
default hereunder by Subtenant to and until payment of the entire amount due.
(d) LATE FEES. In the event Subtenant is more than five (5) days late
in paying any of its obligations under this Sublease, Subtenant shall pay
Sublandlord a late charge equal to three percent (3%) of the delinquent amount;
provided, however, that no late fee shall be due from Subtenant for the first
payment of Fixed Rent in each calendar year which Subtenant pays after the due
date therefor, but within five (5) days of receipt of notice from Sublandlord
that the same is past due. The parties agree that it would be impractical or
extremely difficult to fix Sublandlord's actual damages due to a late payment by
Subtenant and that the amount of such late charge represents a reasonable
estimate of the cost and expense that would be incurred by Sublandlord in
processing each delinquent payment by Subtenant and that such late charge shall
be paid to Sublandlord in processing each delinquent payment by Subtenant and
that such late charge shall be paid to Sublandlord as liquidated damages for
each delinquent payment. The parties further agree that the payment of late
charges and the payment of interest provided for in Section 3(c) above are
distinct and separate from one another in that the payment of interest is to
compensate Sublandlord for the use of Sublandlord's money by Subtenant, while
the payment of a late charge is to compensate Sublandlord for the additional
administrative expense incurred by Sublandlord in handling and processing
delinquent payments. The payment of any late charge by Subtenant and the
acceptance thereof by Sublandlord shall not be deemed a waiver by Sublandlord of
its rights regarding any default by Subtenant under this Sublease.
4. SECURITY DEPOSIT.
(a) SECURITY DEPOSIT. Concurrently with the execution of this Sublease,
Subtenant shall deposit with Sublandlord the sum of Six Hundred Fifty Thousand
Dollars ($650,000) (the "SECURITY DEPOSIT"), which shall be held by Sublandlord
as security for the full and faithful performance by Subtenant of its covenants
and obligations under this Sublease. The Security Deposit is not an advance Rent
deposit, an advance payment of any other kind, nor a measure of Sublandlord's
damage in case of Subtenant's default. If Subtenant defaults in the full and
timely performance of any or all of Subtenant's covenants and obligations set
forth in this Sublease, and each default shall continue beyond any applicable
period of notice or cure, then Sublandlord may, from time to time,
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<PAGE> 7
upon written notice to Subtenant, but without waiving any other remedy available
to Sublandlord, use the Security Deposit, or any portion thereof, to the extent
necessary, in Sublandlord's judgment, to cure or remedy the default or to pay
Sublandlord for all or a part of the damages sustained by Sublandlord resulting
from Subtenant's default. Subtenant shall deposit with Sublandlord within ten
(10) days following Sublandlord's written demand, the amount so applied in order
to restore the Security Deposit to its required amount, and Subtenant's failure
to immediately do so shall constitute a default under this Sublease. Upon
written request by Subtenant, Sublandlord agrees to provide copies of invoices,
receipts or other documentation supporting the amount applied by Sublandlord to
such default, but delivery of such documentation may be used by Subtenant only
to verify the amount of the Security Deposit applied by Sublandlord, and
Subtenant shall not be entitled to dispute Sublandlord's judgment. Subtenant may
not assign or encumber the Security Deposit, and any attempt to do so shall be
void and shall not be binding on Sublandlord. If Subtenant is not in default
with respect to any of the covenants and obligations set forth in this Sublease
at the expiration or earlier termination of the Sublease, Sublandlord shall
cause the Security Deposit to be returned to Subtenant after the expiration or
earlier termination of this Sublease. If Subtenant is in default with respect to
any of the covenants and obligations set forth in this Sublease at the
expiration or earlier termination of this Sublease, Subtenant shall be required
to cure such default before Sublandlord is required to cause the Security
Deposit to be returned to Subtenant; provided, however, if the cure of such
default requires that Subtenant have access to the Premises and Subtenant no
longer has access to the Premises, or if the default is otherwise incapable of
being cured by Subtenant, Sublandlord may deduct an amount necessary, in
Sublandlord's judgment, to cure or remedy the default to pay Sublandlord for the
damages sustained by Sublandlord resulting from Subtenant's default.
Sublandlord's obligations with respect to the Security Deposit are those of a
debtor and not a trustee. Sublandlord shall not be required to maintain the
Security Deposit separate and apart from its general or other funds and may
commingle the Security Deposit with any of its general or other funds. Subtenant
shall not at any time be entitled to interest on the Security Deposit.
(b) LETTER OF CREDIT. In lieu of delivering the Security Deposit to
Sublandlord, Subtenant may, at Subtenant's sole option, concurrently with the
execution of this Sublease, deliver to Sublandlord an unconditional, irrevocable
letter of credit (the "LETTER OF CREDIT") in the amount of the Security Deposit
as security for the full and faithful performance by Subtenant of its covenants
and obligations under this Sublease. The Letter of Credit shall be in form and
substance reasonably satisfactory to Sublandlord, and shall be issued by a bank
reasonably acceptable to Sublandlord. Sublandlord shall cause the Letter of
Credit to include the requirements set forth on Exhibit C attached hereto (the
"L/C CONDITIONS"). The Letter of Credit shall not contain any conditions
precedent to Sublandlord's ability to draw on the Letter of Credit other than
the L/C Conditions. Subtenant shall pay all costs, expenses, points and fees
incurred in connection with obtaining the Letter of Credit. Subtenant shall
cause the Letter of Credit to be in effect during the Sublease Term and for
sixty (60) days after the expiration or earlier termination of the Sublease
Term. Subtenant may, from time to time, replace any existing Letter of Credit
with a new Letter of Credit if the new Letter of Credit: (i) becomes effective
at least thirty (30) days before the expiration of the Letter of Credit it
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replaces; (ii) is in the required amount; (iii) is issued by a bank reasonably
acceptable to Sublandlord; and (iv) otherwise complies with the requirements of
this Section 4(b). The Letter of Credit is not an advance Rent deposit, an
advance payment of any other kind, nor a measure of Sublandlord's damage in case
of Subtenant's default. If Subtenant defaults in the full and timely performance
of any or all of Subtenant's covenants and obligations set forth in this
Sublease, then Sublandlord may, from time to time, without waiving any other
remedy available to Sublandlord, draw on the Letter of Credit, or any portion
thereof, to the extent necessary to cure or remedy the default or to pay
Sublandlord for all or a part of the damages sustained by Sublandlord resulting
from Subtenant's default; provided, however, that Sublandlord shall comply with
the L/C Conditions if such conditions are included in the Letter of Credit. Any
amount of the Letter of Credit that is drawn on by Sublandlord but not applied
shall be held by Sublandlord as a security deposit (the "L/C SECURITY DEPOSIT")
which may be applied by Sublandlord for the purposes described in Section 4(a)
above, unless Subtenant delivers a replacement Letter of Credit in the full face
amount required hereunder, in which event Sublandlord shall refund the amount of
any L/C Security Deposit within ten (10) Business Days of Sublandlord's receipt
of the replacement Letter of Credit. If Sublandlord has drawn on the Letter of
Credit in accordance with the provisions of this Section and the L/C Conditions,
and has applied the sums in accordance with this Section 4(b), Subtenant shall
replace the Letter of Credit, within ten (10) days following Sublandlord's
written demand therefor, with a Letter of Credit in the required amount, and
Subtenant's failure to immediately do so shall constitute a default under this
Sublease. If Subtenant fails to renew or replace the existing Letter of Credit
at least thirty (30) days prior to its expiration, Sublandlord may, without
prejudice to any other remedy it may have, draw on all of the Letter of Credit.
Notwithstanding the drawing of the Letter of Credit pursuant to the foregoing
sentence, Sublandlord shall remit all sums so drawn to Subtenant within ten (10)
Business Days of Sublandlord's receipt of replacement Letter of Credit in the
full face amount required hereunder and payment of all costs and expenses
incurred by Sublandlord with respect to the same. If Subtenant shall fail to
replace the Letter of Credit after its expiration, the sums drawn by Sublandlord
shall be held by Sublandlord as an L/C Security Deposit and shall be applied by
Sublandlord for the purposes described in Section 4(a) above, in accordance with
the terms and conditions of such Section. Subtenant may not assign or encumber
its interest in the Letter of Credit or the L/C Security Deposit, and any
attempt to do so shall be void and shall not be binding on Sublandlord. If there
is a good faith dispute as to whether or not Landlord has the right to draw down
funds from the Letter of Credit and Subtenant obtains an arbitration decision
(in accordance with the terms of Section 41.1 of the Master Lease, as
incorporated herein) stating that Landlord has inappropriately drawn down all or
any part of the Letter of Credit, Sublandlord shall reimburse Subtenant for the
funds inappropriately drawn down.
(c) FIRST REDUCTION. The amount of the Security Deposit or the Letter
of Credit, as applicable, shall be reduced to Five Hundred Twenty-Five Thousand
Dollars ($525,000) at the conclusion of the thirtieth (30th) month following the
month in which the Sublease Rent Commencement Date occurs (the "FIRST REDUCTION
DATE"), and if Subtenant has delivered the Security Deposit, Sublandlord shall
refund the difference of One Hundred Twenty-Five Thousand Dollars ($125,000) on
or before thirty (30) days
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after Subtenant's request therefor (which request may not be made earlier than
the First Reduction Date), or if Subtenant has delivered the Letter of Credit,
Subtenant may deliver a replacement Letter of Credit (in accordance with the
requirements of Section 4(b) above) in the reduced amount; provided that no
breach or default shall exist and be continuing as of the First Reduction Date
and Sublandlord has had no occasion to use any portion of the Security Deposit
or draw on the Letter of Credit on or before the First Reduction Date.
(d) SECOND REDUCTION. The amount of the Security Deposit or the Letter
of Credit, as applicable, shall be further reduced to Four Hundred Thousand
Dollars ($400,000) at the conclusion of the sixtieth (60th) month following the
month in which the Sublease Rent Commencement Date occurs (the "SECOND REDUCTION
DATE"), and if Subtenant has delivered the Security Deposit, Sublandlord shall
refund the difference of One Hundred Twenty-Five Thousand Dollars ($125,000)
within thirty (30) days of Subtenant's request therefor (which request may not
be made earlier than thirty (30) days prior to the Second Reduction Date), or if
Subtenant has delivered the Letter of Credit, Subtenant may deliver a
replacement Letter of Credit (in accordance with the requirements of Section
4(b) above) in the reduced amount; provided that no breach or default shall
exist and be continuing as of the Second Reduction Date, and Sublandlord has had
no occasion to use any portion of the Security Deposit or draw on the Letter of
Credit on or before the Second Reduction Date.
(e) TRANSFER OF THE PREMISES. If Sublandlord disposes of its interest
in the Premises, Sublandlord may deliver or credit the Security Deposit, or
transfer or assign the Letter of Credit, as applicable, to Sublandlord's
successors-in-interest in the Premises and thereby be relieved of further
responsibility with respect to the Security Deposit or the Letter of Credit, as
applicable. If Sublandlord does not so deliver or credit the Security Deposit,
or transfer or assign the Letter of Credit, as the case may be, Sublandlord
shall return the Security Deposit or transfer the Letter of Credit, as
appropriate, to Subtenant within fifteen (15) days of the effective date of the
transfer of its interest in the Premises.
5. TAXES, UTILITIES AND OTHER CHARGES.
(a) TAXES. Subtenant shall pay Subtenant's Share of the Tax Payment, as
the same may be increased form time to time pursuant to Article 27 of the Master
Lease, to Sublandlord no later than thirty (30) days after receipt of
Sublandlord's request for payment of Subtenant's Share of Taxes, which request
shall be accompanied by a breakdown of the determination of Subtenant's Share of
Taxes and a copy of the tax bill from the taxing authority. Under no
circumstances shall the Tax Payment include penalties or interest due to the
later payment of the Tax Payment by Sublandlord.
(b) HVAC. At Sublandlord's cost and expense, Sublandlord shall provide
building standard heating, ventilation and air conditioning ("HVAC") via
perimeter window heating/cooling induction units and interior air supply from
the base Building Systems, and in accordance with base Building design, to that
portion of the Premises depicted on EXHIBIT D attached hereto, which area is not
currently served by HVAC (the "RECAPTURED Space"). Sublandlord will cause the
interior air supply into the Premises to
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be at least 8200 CFM (cubic feet per minute). Subtenant acknowledges and agrees
that (i) the work to supply perimeter HVAC to the Recaptured Space will be
performed concurrently with Subtenant's Work and will not affect the Sublease
Commencement Date or the Sublease Rent Commencement Date; (ii) the work to
supply interior air HVAC to the Recaptured Space will not include any means or
method of distributing HVAC within or through the Recaptured Space or the
Premises; and (iii) Sublandlord is not performing any work on the system which
is currently in place to provide HVAC to that portion of the Premises which does
not constitute the Recaptured Space.
(c) ELECTRICITY. The Premises may be directly metered or submetered as
determined by Sublandlord in its sole and absolute discretion. If the Premises
is directly metered, Subtenant shall be responsible for its actual electrical
usage. If the Premises is submetered, Subtenant shall pay its share of
electrical usage based on the average cost per kilowatt-hour to Sublandlord, as
determined under Section 13.1(B) of the Master Lease, and Subtenant shall pay
its share to Sublandlord no later than thirty (30) days after receipt of
Sublandlord's request for payment therefor (including supporting documentation
and calculation of Subtenant's share). The Premise shall have a minimum total
connected load of at least six (6) watts of power per useable square foot
throughout the Sublease Term.
(d) OTHER CHARGES. Upon written request by Sublandlord, Subtenant shall
reimburse Sublandlord within thirty (30) days of written request therefor, which
request shall include reasonable supporting documentation of the amounts set
forth therein, for any bona fide charges which are billed by Master Landlord to
Sublandlord under the Master Lease (including, without limitation, charges for
Overtime Periods or After Hours Periods, subject, however, to the provisions of
this Section 5(d)), provided that such charges are reasonably and appropriately
attributable to the Premises or Subtenant's use thereof during the Sublease
Term. All such charges are intended to be and shall be deemed Additional Rent.
Without limiting the generality of the foregoing, Subtenant shall reimburse
Sublandlord for all amounts attributable to the Premises and paid to Master
Landlord for services provided to office space to the extent such services are
reasonably available to and either requested by or made use of by Subtenant, and
excluding any services provided during any After Hours Periods and/or Overtime
Periods for which Subtenant did not request services and during which periods
the Premises are not being used by Subtenant. Such charges shall specifically
exclude the following:
(i) the cost of any service(s) which, although available
to Subtenant, are provided at the request of
Sublandlord or other tenant of the Building and which
are not used by Subtenant; and
(ii) payments for Electricity, Taxes and Operating
Expenses, provisions for the payment of which are
expressly provided for elsewhere in this Sublease.
Sublandlord agrees that no charges, costs, or expenses billed to Subtenant
pursuant to this Section 5(d) shall be duplicative of any charges, costs or
expenses paid or payable by Subtenant pursuant to the provisions of this
Sublease. Subtenant hereby confirms that
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Master Landlord has confirmed that the current overtime charge for base Building
HVAC is $350 per hour, inclusive of the personnel required to operate such
machinery.
6. DELIVERY OF POSSESSION. Sublandlord agrees to deliver the Premises in broom
clean condition to the possession of Subtenant by or after 8:00 am on the day
following mutual execution of this Sublease. The Premises are leased without any
representation or warranty by Sublandlord whatsoever (except as may be expressly
set forth herein), "AS IS", "WHERE IS" and in their existing condition as of the
date hereof, subject to all faults and defects whatsoever. Subtenant further
acknowledges that Subtenant has verified to Subtenant's satisfaction (among
other things Subtenant deems relevant), zoning, the size and dimensions of the
Premises (including, without limitation, the size and location of load-bearing
walls, beams and columns), ceiling height, size, access for loading, and
Subtenant's ability to obtain all permits, licenses or other governmental
approvals or consents (including, without limitation, a certificate of occupancy
(or its local equivalent)) as may be required for the design, construction,
improvement, occupancy and use of the Premises by the applicable laws, statutes,
ordinances, rules and regulations of the jurisdictions in which the Premises is
located (collectively, the "PERMITS"). Subtenant, at its sole cost and expense,
shall obtain any and all Permits and shall deliver copies of all Permits to
Sublandlord prior to commencing Subtenant's Work (defined below).
7. SUBTENANT'S WORK; TENANT IMPROVEMENT ALLOWANCE.
(a) Subtenant shall be responsible, at its sole cost and expense, for
the design and construction of all improvements required to construct a
first-class office space in accordance with the requirements of this Sublease
and all Requirements, pursuant to the provisions of the Master Lease, including,
without limitation, the provisions of Article 3 of the Master lease, as modified
herein (collectively, "SUBTENANT'S WORK"). Notwithstanding anything to the
contrary contained herein or in the Master Lease, Subtenant agrees that, it
shall not at any time place or construct any kitchen, bathroom or other
facilities which involve running water ("WATER FACILITIES") such that the same
shall be located in the area of the Premises which is directly above the portion
of the Master Premises that will be operated as a broadcasting studio (the
"RESTRICTED AREA"). However, Subtenant shall have no obligation to relocate any
Water Facilities existing as of the Sublease Commencement Date, whether or not
now or hereafter located in a Restricted Area, nor any obligation at any time to
relocate Water Facilities located in a non-restricted area as of the Sublease
Rent Commencement Date, which later become located within a Restricted Area due
to the construction, expansion and/or relocation of the broadcasting studio
after the date of the construction of the respective Water Facilities. In
addition, Subtenant agrees that any ducts, pipes, and/or conduits installed by
Subtenant that are placed within the Restricted Area by Subtenant will be sealed
watertight. Subtenant shall deliver all items required to be delivered under the
terms of the Master Lease to Sublandlord at least five (5) Business Days prior
to the date such items are required to be delivered to master landlord under the
terms of the Master Lease, and Sublandlord shall have a period of five (5)
Business Days in addition to the time periods provided in the Master Lease to
consider any matter to be approved by Master Landlord under the terms of the
Master Lease. Sublandlord covenants and agrees that it
11
<PAGE> 12
shall contribute the lesser of (i) Six Hundred Twelve Thousand Two Hundred
Fifty-Five Dollars ($612,255) or (ii) Subtenant's actual out-of-pocket cost to
complete Subtenant's Work (the "TENANT IMPROVEMENT ALLOWANCE"), to be paid upon
the completion of Subtenant's Work within thirty (30) days of the date that
Subtenant delivers bona-fide receipts and underlying support documentation
reasonably acceptable to Sublandlord in connection with the construction of
Subtenant's Work.
(b) In connection with any construction-related meetings Sublandlord or
its representatives may have with Master Landlord or its representatives,
Subtenant agrees to reasonably cooperate in providing such information, plans or
documentation as Sublandlord may request.
(c) Subtenant acknowledges that Sublandlord intends to begin
broadcasting from the Master Premises on or about September 1, 1999, and that
any construction during broadcasting would be highly disruptive and damaging to
Sublandlord. Subtenant therefore agrees to use commercially reasonable efforts
to substantially complete construction of the Alterations at the Premises and
furnishing of the Premises on or before September 1, 1999. Subtenant agrees that
under no circumstances shall Subtenant conduct any construction activities after
August 30, 1999 without first submitting a written daily construction schedule
to Sublandlord and receiving Sublandlord's written consent to such construction
schedule. Subtenant further agrees to strictly abide by such approved
construction schedules. The parties agree that time is of the essence with
respect to this Section 7(c).
8. INSURANCE. Throughout the Sublease Term, Subtenant agrees to obtain and
maintain insurance meeting the requirements of Article 9 of the Master Lease, as
modified by this Sublease. Subtenant shall name both Master Landlord and
Sublandlord as additional insureds under the insurance policies. Subtenant shall
provide certificates evidencing the required insurance to Sublandlord and Master
Landlord prior to and as a condition of occupancy of the Premises. Sublandlord'
s insurance obligations shall be those of Tenant under the Master Lease.
9. ACCESS; BUILDING SECURITY. Subtenant shall be entitled to have access to the
Premises 24 hours a day/7 days a week without notice to Sublandlord of Master
Landlord and without the presence of a Master Landlord or Sublandlord
representative. Subtenant agrees to comply with all reasonable security
regulations of Sublandlord and Master Landlord of which Subtenant has been
provided written notice. Subtenant acknowledges and agrees that, except as
specifically provided in the Master Lease (as incorporated herein), Sublandlord
shall have no obligation to provide security or security services to Subtenant.
10. UTILITIES AND SERVICES. Sublandlord agrees to arrange with Master Landlord
for electricity, water, and other services necessary for the operation of
Subtenant's business from the Premises ("NECESSARY SERVICES") to be provided to
Subtenant on the terms set forth in the Master Lease. Except as specifically
provided in Section 5(b) and 5(c) above, Sublandlord makes no representation
about the availability or adequacy of such services, and Sublandlord shall not
be responsible for Master
12
<PAGE> 13
Landlord's failure to provide the same. Anything contained in the foregoing to
the contrary notwithstanding, Sublandlord hereby covenants and warrants that if
the Necessary Services are not available to the Premises at any time during the
term of this Sublease, and provided that there shall be no Event of Default
hereunder, Sublandlord shall use commercially reasonable efforts (which shall
not be deemed to require litigation) in seeking to obtain the same from the
Master Landlord to the extent that Master Landlord is obligated to provide such
services to Sublandlord under the Master Lease.
11. THE MASTER LEASE.
(a) Subtenant covenants and agrees that all obligations of "Tenant"
under the terms of the Master Lease (as herein incorporated) shall be done or
performed by Subtenant with respect to the Premises, except as otherwise
provided by this Sublease, and Subtenant's obligations shall run to Sublandlord
or Master Landlord as Sublandlord may reasonably determine to be appropriate or
required by the respective interests of Sublandlord and Master Landlord. In any
case where Subtenant has rights under the Master Lease which would ordinarily
run to "Tenant" under the Master Lease and which require the consent of Master
Landlord, Subtenant agrees to direct any request regarding that right to
Sublandlord, who will then communicate directly to Master Landlord regarding the
request. Sublandlord agrees to forward any such request to Master Landlord
immediately upon Sublandlord's receipt thereof, but in any case within three (3)
Business Days of Sublandlord's receipt of any such request. Sublandlord agrees
to promptly communicate any response from Master Landlord to Subtenant in
writing no more than three (3) Business Days after receipt; provided, however,
that in no event shall the foregoing be deemed to extend the time period within
which Sublandlord is required to respond to Subtenant's request hereunder.
Subtenant agrees to indemnify Sublandlord and hold it harmless from and against
any and all claims, damages, losses, expenses and liabilities (including
reasonable attorneys' fees) incurred by Sublandlord as a result of the
non-performance or non-observance of any Sublandlord's obligations under the
Master Lease which are the result of a default by Subtenant under this Sublease.
Sublandlord agrees to indemnify Subtenant and hold it harmless from and against
any and all claims, damages, losses, expenses and liabilities (including
reasonable attorneys' fees) incurred by Subtenant as a result of the
non-observance by Sublandlord of any of Sublandlord's obligations as "Tenant"
under the Master Lease. Neither Subtenant nor Sublandlord shall do, nor permit
to be done, any act or thing which is, or with notice or the passage of time
would be, a default under this Sublease, and/or the Master Lease.
(b) Sublandlord agrees that Subtenant shall be entitled to receive all
services and repairs to be provided by Master Landlord to Sublandlord under the
Master Lease with respect to the Premises, except as otherwise provided by this
Sublease or by the Master Lease (as incorporated herein), and Sublandlord hereby
agrees to use commercially reasonable efforts (which shall not be deemed to
require litigation) in seeking to enforce said rights of Subtenant against
Master Landlord. Subtenant acknowledges that Sublandlord is not the owner of the
Building and Subtenant shall not, under any circumstances, seek nor require
Sublandlord to perform any of such services, nor shall Subtenant make any claim
upon Sublandlord for any damages which may arise
13
<PAGE> 14
by reason of Master Landlord's default under the Master Lease so long as
Sublandlord is complying with its obligations under Sections 10 and 11 of this
Sublease to seek enforcement of the Master Lease against Master Landlord. Any
condition resulting from a default by Master Landlord shall not constitute an
eviction, actual or constructive, of Subtenant and no such default shall excuse
Subtenant from the performance or observance of any of its obligations to be
performed or observed under this Sublease, or entitle Subtenant to receive any
reduction in or abatement of the rent provided for in this Sublease so long as
Sublandlord is complying with its obligations under Sections 10 and 11 of this
Sublease. In furtherance of the foregoing, Subtenant does hereby waive any cause
of action and any right to bring any action against Sublandlord by reason of any
act or omission of Master Landlord under the Master Lease. Sublandlord covenants
and agrees with Subtenant that Sublandlord will pay all fixed rent and
additional rent payable by Sublandlord pursuant to the Master Lease to the
extent that failure to perform the same would adversely affect Subtenant's use
or occupancy of the Premises.
(c) In the event Subtenant shall be in default of any covenant of, or
shall fail to honor any obligation under, this Sublease, Sublandlord shall have
available to it against Subtenant all of the remedies available to Master
Landlord under the Master Lease in the event of a similar default on the part of
Sublandlord as "Tenant" thereunder, as if Sublandlord were Master Landlord and
Subtenant were Tenant.
(d) In the event Sublandlord shall be in default of any covenant of, or
shall fail to honor any obligation under, this Sublease, Subtenant shall have
available to it against Sublandlord all of the remedies available to Sublandlord
as "Tenant" under the Master Lease in the event of a similar default on the part
of the Master Landlord thereunder, as if Sublandlord were Master Landlord and
Subtenant were Tenant. In addition, subject to any Unavoidable Delays, if
Sublandlord fails to perform any of Sublandlord's obligations pursuant to this
Sublease which materially affect Subtenant's reasonable access to the Premises
and/or Subtenant's ability to conduct its business in the Premises, or if Master
Landlord fails to perform any of its obligations under the Master Lease with
respect to the Premises which materially affect Subtenant's reasonable access to
the Premises and/or Subtenant's ability to conduct its business in the Premises,
Subtenant may provide written notice of such failure (the "FIRST NOTICE") to
Sublandlord specifying in detail the nature and manner of such failure (any such
failure referred to herein as a "SUBLANDLORD DEFAULT"), specifying in what
respects the Sublandlord Default materially affects Subtenant's ability to
conduct its business in the Premises, and stating Subtenant's intent to exercise
its rights under this Section 11(d). If either (i) the Sublandlord Default shall
not have been cured by either Sublandlord or Master Landlord within thirty (30)
days following Sublandlord's receipt of the First Notice or (ii) the Sublandlord
Default is not capable of cure within thirty (30) days and Sublandlord or Master
Landlord has not commenced cure of the Sublandlord Default within such 30-day
period and diligently prosecuted the cure to completion within a reasonable
time, then Subtenant may provide a second written notice (the "SECOND NOTICE")
of such Sublandlord Default to Sublandlord specifying in detail the nature and
manner of the continuing Sublandlord Default, specifying in what respects the
Sublandlord Default materially affects Subtenant's reasonable access to the
Premises and/or Subtenant's ability to conduct its business in the Premises,
stating Subtenant's intent to exercise its rights
14
<PAGE> 15
under this Section 11(d) and stating that it is the second and final notice. If
either (i) the Sublandlord Default shall not have been cured by either
Sublandlord or Master Landlord within thirty (30) days following Sublandlord's
receipt of the Second Notice or (ii) the Sublandlord Default is not capable of
cure within thirty (30) days and Sublandlord or Master Landlord has not
commenced cure of the Sublandlord Default within such 30-day period and
diligently prosecuted the cure to completion within a reasonable time, then
Subtenant may cure such Sublandlord Default if such cure may be effected within
the Premises without affecting any Building Systems, the structure of the
Building, or any area outside of the Premises. Nothing contained herein shall
give Subtenant the right to cure a Sublandlord Default which originates or
requires work outside the Premises. If Subtenant is prohibited from exercising
its right to cure a Sublandlord Default under this Section 11(d) due to the fact
that the cure by Subtenant would affect a Building System, the structure of the
Building or any area outside the Premises, and if the Sublandlord Default shall
continue for more than thirty (30) days (subject to extension as provided above)
following Sublandlord's receipt of the Second Notice, then Subtenant's Rent
shall be abated from the date that Sublandlord's cure rights hereunder expire
until the date that the Sublandlord's Default shall have been cured by the
Sublandlord or Master Landlord. Anything contained in the foregoing or elsewhere
in this Sublease to the contrary notwithstanding, if the Sublandlord Default
shall be of such a nature that its continuation without repair would create an
immediate danger to the health or safety of individuals and/or would create an
immediate danger of substantial or material damage to or waste of the Premises
or Subtenant's property located in the Premises, Subtenant shall immediately
give written notice thereof to Sublandlord and, so long as Subtenant gives
written notice of the emergency, Subtenant shall have the right to immediately
take whatever actions within the Premises as are reasonably necessary to
alleviate such danger, the notice requirements of this Section notwithstanding.
Any exercise by Subtenant of its rights under this Section 11(d) shall be at
Subtenant's sole risk. Subtenant hereby indemnifies and holds the Indemnitees
harmless from any and all losses, costs, damages, liability and/or claims made
by any Persons (including, without limitation, other tenants) in connection with
Subtenant's exercise of its rights under this Section 11(d). If Subtenant cures
the Sublandlord Default as permitted under this Section 11(d) Sublandlord shall
reimburse Subtenant for the reasonable, out-of-pocket expenses incurred by
Subtenant in completing such cure within thirty (30) days following
Sublandlord's receipt of Subtenant's invoice, including reasonable supporting
documentation of all amounts. If Sublandlord fails to timely pay Subtenant the
invoiced amounts, the unpaid amount shall accrue interest at the Sublease Rate
from and after the expiration of the thirty (30) day period until paid in full.
If Sublandlord disputes any matter under this Section 11(d), such dispute shall
be resolved in accordance with the Dispute Resolution Procedure set forth in
Section 41.1 of the Master Lease, but pending the resolution of such dispute,
Sublandlord's judgment shall control.
(e) Subtenant agrees that the consent of Subtenant shall not be
required for any amendment or modification of the Master Lease as long as such
change does not materially or unreasonably increase Subtenant's obligations
hereunder or Subtenant's Share, nor shorten the term of the Sublease or
otherwise materially affect any of the economic or operating terms of this
Sublease or Subtenant's ability to conduct business in the Premises.
15
<PAGE> 16
12. BROKERS; NO THIRD PARTY BENEFICIARIES. Each party warrants that it has had
no dealings with any real estate broker or agent other than Jones Lang LaSalle
Partners, or The Widewaters Group, Inc. (collectively, "BROKER") in connection
with the negotiation of this Sublease, except that Subtenant has been
represented in part by Equis. Each party agrees to indemnify and hold the other
party harmless from any cost, expense or liability, including reasonable
attorney's fees, for any compensation, commissions or charges claimed by any
other real estate broker or agent (including Equis) other than Broker employed
or claiming to represent or to have been employed by each party in connection
with the negotiation of this Sublease. Sublandlord will be responsible for the
payment of all brokerage commissions due to Broker in connection with this
Sublease (the "BROKERAGE Commission") in accordance with one or more separate
broker's agreements. Nothing in this Section 12 or in any other provision of
this Sublease is intended or shall be deemed to confer any rights or benefits
upon any entity or person other than the parties hereto or to make or render any
such other entity or person a third-party beneficiary of this Sublease.
13. NOTICES. All notices and other communications authorized or required
hereunder shall be deemed adequate if in writing and delivered by a nationally
recognized courier service (against a signed receipt) or if sent by registered
or certified mail, postage prepaid, return receipt requested, to the parties at
the following addresses:
If to Sublandlord: Times Square Studios Ltd
c/o Walt Disney Imagineering -
Corporate Real Estate
1401 Flower Street
P.O. Box 25020
Glendale, CA 91201
Attn: Lease Administration
With a copy to: The Walt Disney Company
500 South Buena Vista Street
Burbank, CA 91521-6371
Attn: Corporate Legal Real Estate
If to Subtenant: Applied Theory Corporation
125 Elwood David Road
Liverpool, NY 13088
Attn: Terri Kennett
With a copy to: Applied Theory Corporation
1500 Broadway
Suite 300
New York, NY 10036
Attn: Diane Barker
The name or address for notice may be changed by giving notice in accordance
with this section. Notice shall be deemed given upon receipt or refusal of same.
16
<PAGE> 17
14. ASSIGNMENT AND SUBLETTING.
(a) Subject to the provisions of the Master Lease, including, without
limitation, the obligation to obtain Master Landlord's and Sublandlord's (as if
Sublandlord were Master Landlord) prior written consent under Article 12 of the
Master Lease, Subtenant may assign this Sublease or sublet all of the Premises;
provided, however, that if any prospective assignee or subtenant of Subtenant,
or any affiliate or subsidiary of such prospective assignee or subtenant
(whether or not such entity is a Related Entity of Subtenant), is engaged in any
line of business in which ABC, Inc. or any of its affiliates or subsidiaries is
engaged (a "SIMILAR ENTITY"), Sublandlord may grant or withhold its consent in
its sole and absolute discretion. Notwithstanding anything to the contrary
herein or in the Master Lease, Subtenant may not assign this Sublease or sublet
the Premises to more than one Person. Any assignment of this Sublease or any
sublease of the Premises shall not relieve Subtenant of any of its obligations
under this Sublease. Notwithstanding anything to the contrary contained herein,
except as otherwise provided above or in the Master Lease (as incorporated
herein), this Sublease shall not be assigned, encumbered or otherwise
transferred or the Premises further sublet in whole or in part, or any part
thereof suffered or permitted by Subtenant to be used or occupied by others,
without the prior written consent of Master Landlord in each instance, which
consent shall be granted or withheld in accordance with the provisions of
Article 12 of the Master Lease, to the extent Master Landlord's consent is
required by Article 12 of the Master Lease. Sublandlord hereby convenants and
warrants that it shall cooperate with Subtenant in obtaining the consent of
Master Landlord in such cases as such consent may be required.
(b) Sublandlord shall be entitled to receive fifty percent (50%) of any
Assignment Profit and/or Sublease Profit derived from an assignment or further
sublease of the Premises in accordance with the provisions of Section 12.7 of
the Master Lease.
15. FORCE MAJEURE. The period of time during which the either party is prevented
from performing any act required to be performed pursuant to this Sublease by
events beyond the reasonable control of such party shall be added to the time
for performance of such acts.
16. FURTHER ASSURANCES. Each party to this Sublease will at its own cost and
expense, execute and deliver such further documents and instruments and will
take such other actions as may be reasonably required to evidence or carry out
the intent and purposes of this Sublease.
17. SUCCESSORS AND ASSIGNS. This Sublease is binding on and shall inure to the
benefit of the parties hereto and their respective representatives, successors
and assigns.
18. GOVERNING LAW. This Sublease will be governed by, and construed in
accordance with, New York law.
17
<PAGE> 18
19. CONFIDENTIALITY. Except as expressly directed by the other party, or as
required by law, Subtenant, Sublandlord and their respective officers,
directors, employees, agents and contractors shall keep in strict confidence and
shall not use, publish or divulge any Confidential Information (defined below)
whatsoever relating to the terms of this Sublease or the business or finances of
the other party to any third party. Except as expressly directed or permitted by
Sublandlord, Subtenant shall not make or issue any public statement referencing
Sublandlord or any of its subsidiaries or affiliates (including, without
limitation, Disney, ABC and ESPN) to the press or to other media. Sublandlord
and Subtenant agree that they shall be responsible for any disclosure of
Confidential Information by their respective directors, officers, employees, and
agents that would constitute a breach of this Sublease. In the event of any
breach of this Section, the non-breaching party will be entitled, in addition to
any other remedies that it may have at law or in equity, to injunctive relief or
an order of specific performance. The provisions of this Section shall survive
the expiration or sooner termination of this Sublease for a period of two (2)
years. For purposes of this Sublease, "CONFIDENTIAL INFORMATION" means all
non-public, confidential or proprietary information that one party or any of its
affiliates make available to the other party any of its affiliates make
available to the other party any of its affiliates, in connection with this
Sublease, Confidential Information shall include, but not be limited to, the
specific terms and conditions of this Sublease as well as information related to
the past, present and future plans, ideas, business strategies, marketing
programs, activities, customers and suppliers of Sublandlord, Sublandlord's
affiliates, Subtenant and/or Subtenant's affiliates. Confidential Information
shall not include information that is or becomes generally available to the
public other than as a result of a breach of this Sublease by the receiving
party.
20. SEVERABILITY. If any term or provision of this Sublease is held to be
invalid or unenforceable to any extent, the remainder of this Sublease will not
be affected, and each term or provision of this Sublease will be valid and will
be enforced to the fullest extent permitted by law. If the application of any
term or provision of this Sublease to any person or circumstance is held to be
invalid or unenforceable, the application of that term or provision to persons
or circumstances other than those as to which it is held invalid or
unenforceable will not be affected, and such term or provision will be valid and
will be enforced to the fullest extent permitted by law.
21. AUTHORITY. The individuals signing this Sublease on behalf of a corporate
party or other legal entity represent and warrant that each of them is duly
authorized to execute and deliver this Sublease on behalf of the corporation or
entity, as the case may be, and that this Sublease is binding on such party in
accordance with its terms. Concurrently with the execution of this Sublease,
each party to this Sublease shall deliver to the other party a duly certified
copy of a resolution of the corporation's board of directors or governing body,
as appropriate, authorizing execution of this Sublease. Sublandlord hereby
represents and warrants that it has full power and authority to enter into this
Sublease and to perform its obligations hereunder.
22. EFFECTIVENESS OF SUBLEASE. This Sublease is conditioned upon and shall only
be effective upon receipt of the approval of Master Landlord, Credit Lyonnais
18
<PAGE> 19
New York Branch and Starwood Financial Trust. In connection with the approval by
the Master Landlord, such approval shall include the delivery of an estoppel
certificate in accordance with Section 7.4 of the Master Lease. If such consents
shall not be obtained within (60) sixty days following the date hereof, then
either Sublandlord or Subtenant shall have the right to terminate this Sublease
upon notice delivered to the other party, any upon the deliver of such notice
(unless such consents shall have been obtained), this Sublease shall terminate
and be of no further force or effect and neither party shall have any further
rights against the other by reason thereof, except pursuant to Sections 4,
11(a), 12 and 19 hereof. Sublandlord hereby convenants to use commercially
reasonable efforts to obtain the approvals required under this Section 22 within
the time permitted. Provided Subtenant and Sublandlord execute this Sublease and
Master Landlord grants its consent to this Sublease, Sublandlord agrees to
reimburse Subtenant for all out-of-pocket costs and expenses incurred by
Subtenant in connection with this Sublease in the event that the approvals of
Credit Lyonnais New York Branch and Starwood Financial Trust are not received
within 90 days following the date hereof and this Sublease is terminated
pursuant to this Section 22.
23. NO USE OF TRADEMARK. Subtenant does not acquire any right under this
Sublease to use, and shall not use, Sublandlord's name "Disney" (either alone or
in conjunction with or as part of any other word or name) or any registered
trademarks or service market or any fanciful characters or designs of
Sublandlord or Sublandlord's affiliates: (a) in any advertising, publicity or
promotion; (b) to express or imply any endorsement by Sublandlord of any
services of Subtenant or any other person or entity; or (c) in any other manner
whatsoever whatsoever (whether or not similar to the uses hereinabove
specifically prohibited). The provisions of this Section shall survive the
expiration or earlier termination of this Sublease).
24. SIGNAGE. Subtenant hereby acknowledges and agrees that all windows of the
Premises (a) facing Broadway and (b) along 43rd Street (starting from the corner
of Broadway) between the first two column bays, on the exterior of the Building
may be blocked by the signage of Sublandlord or others, and that Subtenant shall
have no ability or right to object to such signage in any manner whatsoever.
25. ENTIRETY OF AGREEMENT. This Sublease, together with all Exhibits and the
portions of the Master Lease incorporated herein, constitutes the entire
Sublease and supersedes all previous agreements, promises, representations,
understandings and negotiations between the parties has been induced to enter
into this Sublease, nor is any party relying on any representation or warranty
outside those expressly set forth in this Sublease. Any agreement made after the
date of this Sublease is ineffective to modify, waiver or terminate this
assignment, in whole or in part, unless that agreement is in writing, is signed
by the parties to this Sublease, and specifically refers to this Sublease.
26. COUNTERPARTS. This Sublease may be executed in one or more separate
counterparts, each of which, when so executed, shall be deemed to be an original
and which, together, shall constitute and be one and the same instrument.
19
<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Sublease
Agreement as of the day and year first above written.
SUBLANDLORD
TIMES SQUARE STUDIOS LTD,
a New York corporation
By: /s/ Tony Basalari
-----------------------
Name: Tony Basalari
---------------------
Its: Vice President
----------------------
SUBTENANT:
APPLIED THEORY CORPORATION,
a Delaware corporation
By: /s/ David A. Buckel
-----------------------
Name: David A. Buckel
---------------------
Its: V.P./CFO
----------------------
20
<PAGE> 1
EXHIBIT 11.1
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1999
-------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 15,970,181
Weighted average shares issued during three months
ended June 30, 1999 (5,177,721 shares) 3,470,418
------------
19,440,599
============
Net loss $(2,315,000)
============
Loss per share attributable to common stockholders $ (0.12)
============
</TABLE>
(1) For a discussion of loss per share, see Note B of the Notes to the
Financial Statements provided in Part I, Item 1 of our Form 10-Q for the
period ending June 30, 1999.
<PAGE> 1
EXHIBIT 11.2
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1998
-------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 11,032,876
Weighted average shares issued during three months
ended June 30, 1998 (7,875 shares) 5,332
-------------
11,038,208
=============
Net loss $( 1,444,000)
=============
Loss per share attributable to common stockholders $ (0.13)
=============
</TABLE>
(1) For a discussion of loss per share, see Note B of the Notes to the
Financial Statements provided in Part I, Item 1 of our Form 10-Q for the
period ended June 30, 1999.
<PAGE> 1
EXHIBIT 11.3
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
-------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 15,094,336
Weighted average shares issued during six months
ended June 30, 1999 (6,053,566 shares) 2,600,745
------------
17,695,081
============
Net loss $(4,025,000)
============
Loss per share attributable to common stockholders $ (0.23)
============
</TABLE>
(1) For a discussion of loss per share, see Note B of the Notes to the
Financial Statements provided in Part I, Item 1 of our Form 10-Q for the
period ended June 30, 1999.
<PAGE> 1
EXHIBIT 11.4
APPLIEDTHEORY CORPORATION
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
-------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 9,810,000
Weighted average shares issued during three months
ended June 30, 1998 (1,230,751 shares) 1,162,642
-------------
10,972,642
=============
Net loss $( 2,233,000)
=============
Loss per share attributable to common stockholders $ (0.20)
=============
</TABLE>
(1) For a discussion of loss per share, see Note B of the Notes to the
Financial Statements provided in Part I, Item 1 of our Form 10-Q for the
period ended June 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
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