<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION NO. 333-72133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 16-1491253
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
</TABLE>
40 CUTTER MILL ROAD, SUITE 405
GREAT NECK, NEW YORK 11021
(516) 466-8422
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID A. BUCKEL
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
40 CUTTER MILL ROAD, SUITE 405
GREAT NECK, NEW YORK 11021
(516) 466-8422
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FRANK E. MORGAN II, ESQ. WILLIAM F. SCHWITTER, ESQ.
DEWEY BALLANTINE LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
1301 AVENUE OF THE AMERICAS 399 PARK AVENUE, 31ST FLOOR
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022-4697
(212) 259-8000 (212) 318-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
PROSPECTUS
4,500,000 SHARES
[APPLIEDTHEORY COMPANY LOGO]
COMMON STOCK
------------------------
This is an initial public offering of 4,500,000 shares of common stock of
AppliedTheory Corporation. We are selling all of the shares of common stock
offered under this prospectus.
There is currently no public market for our shares. It is currently estimated
that the initial public offering price will be between $12.00 and $15.00 per
share. Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "ATHY."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
------------------------
The underwriters may purchase up to an additional 675,000 shares of common stock
from us at the initial public offering price less the underwriting discount to
cover over-allotments.
------------------------
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
LEHMAN BROTHERS
WIT CAPITAL CORPORATION
as e-Manager(TM)
The date of this prospectus is , 1999
<PAGE> 3
[INSIDE FRONT COVER -- GRAPHIC OF ARROW WITH NOTES. TEXT:]
[ENTERPRISE SOLUTIONS]
[GRAPHIC: APPLIEDTHEORY LOGO. TEXT:
APPLIEDTHEORY -- PRACTICAL SOLUTIONS FOR E-VISIONARIES]
[APPLIEDTHEORY DELIVERS SOLUTIONS TO OUR CUSTOMERS THAT CREATE ENTERPRISE
PORTALS LINKING INTERNAL SYSTEMS AND DATABASES, WEBSITE PRESENCE, AND INTERNET
ACCESS.]
[VPNS & SECURITY]
[- SECURE OUTSOURCED WANS FOR INTRANET AND EXTRANET APPLICATIONS]
[- END TO END MANAGEMENT SERVICES]
[- FIREWALL INSTALLATION, CONFIGURATION AND MANAGEMENT]
[- NETWORK AND SECURITY CONSULTING]
[WEB HOSTING]
[- HOSTING AND SUPPORT FOR MISSION CRITICAL APPLICATIONS]
[- GUARANTEED BANDWIDTH AVAILABILITY]
[- PERFORMANCE AND QUALITY OF SERVICE GUARANTEES]
[- VIRTUALLY LINKED, DISTRIBUTED DATA CENTERS]
[- FEATURING SECURITY, GEOGRAPHIC DIVERSITY, ENHANCED CONTENT CACHING,
MIRRORING AND LOAD BALANCING]
[ENTERPRISE PORTAL DEVELOPMENT]
[- LINKING EXISTING DATABASES AND LEGACY SYSTEMS WITH THE WEB]
[- DEVELOPING NEW DATA DRIVEN APPLICATIONS]
[- CREATING OPEN, UNIVERSAL INTERFACES TO BUSINESS-CRITICAL INFORMATION]
[- DELIVERING APPLICATIONS THAT ARE INTEROPERABLE, SCALABLE, SUPPORT
E-COMMERCE]
[- STANDARDS-BASED SOFTWARE TO LINK WITH SUPPLIERS', PARTNERS' AND
CUSTOMERS' SYSTEMS]
[INTERNET INTEGRATION]
[- ANALYSIS, PROTO-TYPING AND IMPLEMENTATION]
[- THIRD-PARTY SOFTWARE EXPERTISE INCLUDING DATABASES, OPERATING SYSTEMS
AND FIREWALLS]
[- TRAINED AND CERTIFIED STAFF]
[INTERNET ACCESS]
[- THE GEMINI2000 NETWORK, A NEW HIGH SPEED INTERNET BACKBONE]
[- DEDICATED CONNECTIONS TO PROVIDE CUSTOMERS WITH RELIABLE, CONTINUOUS
ACCESS TO THE INTERNET]
[- VPN TECHNOLOGIES]
[- NETWORK AND SECURITY CONSULTING]
[- SECURE DIAL-UP INTERNET ACCESS
[- HARDWARE AND SOFTWARE IMPLEMENTATION]
<PAGE> 4
PROSPECTUS SUMMARY
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters' over-allotment option will not be exercised. All information
in this prospectus, unless otherwise indicated, gives effect to our
reorganization as a Delaware corporation and a 1.5-for-1 stock split to occur
prior to this offering and to a 5-for-1 stock split in the form of a stock
dividend effected by us in October 1998. This summary highlights some of the
information in this prospectus. It may not contain all of the information that
is important to you. To fully understand this offering, you should read the
entire prospectus carefully, including the risk factors and the financial
statements.
APPLIEDTHEORY CORPORATION
OUR COMPANY
We are a leading provider of one-stop Internet solutions to mid-sized
businesses, mid-size departments of larger businesses and public sector
institutions. We offer an extensive array of high performance, reliable and
scalable Internet technology products and services that 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 systems and databases designed before the emergence of the
Internet, commonly known as legacy systems;
- Web hosting, consisting of custom hosting solutions and outsourcing,
shared server, dedicated server and co-location hosting services; and
- Internet connectivity, including virtual private network solutions,
network and security consulting and dedicated Internet access.
As of December 31, 1998, we had over 600 customers in a wide range of
industries. Most of our revenues are currently derived from customers located in
New York State. Historically, a substantial portion of our revenues has been
derived from two customers through which we provide services to public sector
institutions -- 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.
We integrate our products and services to offer customized applications and
services utilizing Internet-based protocols or standards that enable our
commercial customers to extend their businesses, leverage existing legacy
databases and systems and take advantage of Internet-based marketing
opportunities. Public sector customers similarly benefit by making greater use
of the Internet to serve their constituencies more cost-effectively and
conveniently, as well as to comply with numerous federal and state mandates.
Superior customer service is a cornerstone of our operational strategy. Our
97% customer satisfaction rate in the second half of 1998, based on completed
surveys, demonstrates our exceptional performance. In addition, our monthly
revenue churn has averaged approximately 0.15% over the last two years. Revenue
churn is the amount of revenue, stated as a percentage of total revenue for the
period, generated by customers who terminated their service during the period.
Our existing network consists primarily of a robust, regional backbone in
New York State. Together with IXC Communications, Inc., a significant equity
holder in our company, we are deploying the Gemini2000 Network, the first
coast-to-coast, next generation Internet backbone network, to carry both
research and commercial traffic. The Gemini2000 Network is a fully redundant,
high performance, national network that will enable us to offer Internet access
and backbone transport services at speeds that are 100 to 1,000 times greater
than those generally available to end users today. The first phase of
Gemini2000's deployment started in January 1999, and the network is scheduled to
be completed by September 30, 1999. We also intend to build three new
geographically dispersed, or distributed, data centers. These data centers will
be owned and managed by us but housed, or co-located, at Gemini2000 Network hubs
or
<PAGE> 5
interconnection points. We call these hubs or interconnection points super-core
sites. The new data centers will be located in New York City, Austin, Texas and
Hayward, California and are expected to be completed by March 31, 2000. The new
data centers will be interconnected, together with our existing data centers, by
a full mesh of high speed data lines to form what we call a virtual gigacenter.
A virtual gigacenter is a collection of distributed data centers that offer the
user the operating characteristics of a single high-speed data center located in
a single physical location. Our network and distributed data centers will enable
us to offer our customers:
- greater network reliability;
- lower downtime;
- simpler configurations for connecting multiple site locations;
- specialized virtual private network solutions;
- faster downloading of data;
- reduced load on Web servers accessed by network users to run
applications; and
- better disaster recovery.
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 30 metropolitan areas throughout the United States
with high concentrations of businesses and intend to grow our direct sales force
by more than 100 over the next two years. These targeted markets coincide with
IXC's points of presence or POPs, where we plan to have a physical local
presence. POPs are the locations that house network equipment, such as routers
and switches, to service telecommunications customers in a regional area and
which serve as the local Internet connection point.
We were incorporated in November 1995, and spun-off in October 1996 from
NYSERNet.org, a not-for-profit corporation that was one of the founding
institutions of the Internet, to pursue commercial opportunities that are
Internet protocol or IP-based. The sole member of NYSERNet.org is NYSERNet.net,
Inc., one of our major stockholders. In August 1998, IXC and Grumman Hill
Investments III, LP, a private equity fund advised by Grumman Hill Group LLC,
invested $12.9 million and $6.5 million to acquire approximately 4.4 million and
2.2 million shares of our common stock. Of these 6.6 million shares, we issued
1.73 million new shares for net proceeds of approximately $5.0 million. The
balance of these shares was sold by NYSERNet.net. Our corporate headquarters are
located at 40 Cutter Mill Road, Suite 405, Great Neck, New York 11021, and our
telephone number at that location is (516) 466-8422.
OUR MARKET OPPORTUNITY
Expanded uses of the Internet and greater demands for existing
Internet-based applications are driving an evolution and expansion in Internet
services, as well as the networks over which they are delivered. To offer these
services and take full advantage of the communication and commerce opportunities
made available by the anticipated growth in the Internet, businesses and other
organizations will require more than a basic Internet connection. They will
need:
- fast and reliable connections to the Internet;
- sophisticated Web sites to attract and retain users and customers;
- access to organizational information for internal communication and for
their Web sites; and
- to procure and manage the services and operations to integrate all these
needs.
2
<PAGE> 6
We market our products and services to the business mid-market, which
consists of mid-sized businesses and mid-size departments of larger businesses,
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. Key advantages we offer our customers include:
- flexible and scalable Internet solutions;
- robust and reliable infrastructure;
- advanced data management; and
- superior customer support.
OUR STRATEGY
Our objective is to become the leading national provider of advanced
Internet technology solutions to our target markets. To achieve this objective,
our strategy is to:
- offer one-stop solutions to the business mid-market and public sector;
- rapidly expand our sales and marketing efforts;
- leverage our public sector experience and relationships;
- complete our national network buildout;
- minimize our capital expenditures;
- jointly market and sell with IXC; and
- acquire complementary assets, technologies or businesses.
3
<PAGE> 7
THE OFFERING
Common stock offered by us.... 4,500,000 shares(a)
Common stock outstanding after
the offering.................. 20,471,445 shares(a)(b)
Use of proceeds............... We intend to use the net proceeds from the
offering:
- for general corporate purposes and working
capital requirements, including expansion of
our sales and marketing efforts, expansion
of our customer support services and for
possible acquisitions;
- for building three new distributed data
centers;
- to repay outstanding borrowings; and
- to repurchase our outstanding preferred
stock.
Dividend policy............... We currently intend to retain any future
earnings for our business and do not anticipate
paying cash dividends on our common stock in
the foreseeable future.
Proposed Nasdaq National
Market symbol................. ATHY
- ---------------
(a) If the underwriters exercise the option granted to them in connection with
the offering to purchase additional shares of common stock to cover
over-allotments, the total number of shares to be offered would increase by
up to 675,000 shares.
(b) Based on the number of shares outstanding as of the date of this prospectus.
Excludes 3,111,005, shares of common stock reserved for issuance upon
exercise of outstanding options under our stock option plans at a weighted
average exercise price of $2.01 per share. Also excludes 55,500 shares of
common stock which we intend to reserve for issuance upon the exercise of
options which we intend to grant under our 1999 Stock Option Plan upon the
effectiveness of the offering. The exercise price for these options will be
the same as the per share price of this offering.
4
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
The financial data shown below has been derived from and should be read in
conjunction with our audited financial statements and the related notes,
included elsewhere in this prospectus. Our operating activities prior to October
1, 1996 were conducted as a nonincorporated "division" of NYSERNet.org and are
considered to constitute a predecessor business. The financial data presented
for the nine months ended September 30, 1996 reflect these activities on a
"carved-out" basis from the historical financial statements of NYSERNet.org. The
as adjusted balance sheet data gives effect to receipt of the estimated net
proceeds from this offering and the application of a portion of these proceeds
to repay indebtedness and repurchase our outstanding preferred stock as
described under "How We Intend to Use the Proceeds from the Offering." The
information set forth below should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Results of operations for the periods presented are not necessarily
indicative of results of operations for future periods.
<TABLE>
<CAPTION>
PREDECESSOR
------------- APPLIEDTHEORY
NINE -----------------------------------------
MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -------------------------
1996 1996 1997 1998
------------- ------------ ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity revenues............... $ 5,691 $ 2,508 $ 12,249 $ 15,077
Internet integration and enterprise portal
development revenues....................... 244 268 1,915 5,940
Web hosting revenues......................... 291 300 1,008 1,546
------- ---------- ---------- -----------
Total net revenues............................. 6,226 3,076 15,172 22,563
------- ---------- ---------- -----------
Total costs and expenses....................... 10,146 4,838 20,672 28,880
------- ---------- ---------- -----------
Loss from operations........................... (3,920) (1,762) (5,500) (6,317)
Interest expense, net.......................... 5 -- 347 566
------- ---------- ---------- -----------
Net loss....................................... (3,925) (1,762) (5,847) (6,883)
Preferred stock dividends...................... -- -- 210 210
------- ---------- ---------- -----------
Net loss attributable to common stockholders... $(3,925) $ (1,762) $ (6,057) $ (7,093)
======= ========== ========== ===========
Basic and diluted loss per common share........ $ (.18) $ (.62) $ (.56)
========== ========== ===========
Shares used in computing basic and diluted loss
per share.................................... 9,750,000 9,756,248 12,665,940
OTHER DATA:
EBITDA(a)...................................... $(3,762) $ (1,681) $ (4,405) $ (4,645)
Capital expenditures(b)........................ -- 506 1,270 2,480
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,786 $52,207
Working capital (deficiency).............................. (3,249) 47,592
Total assets.............................................. 10,518 60,939
Current portion of long-term debt and capital lease
obligations............................................. 551 551
Long-term debt and capital lease obligations, less current
portion................................................. 5,979 5,979
Borrowings from NYSERNet.net ............................. 2,957 --
Redeemable preferred stock................................ 1,500 --
Total stockholders' equity (deficit)...................... (9,007) 46,291
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
1997 1998
----------------------------------------------- -----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity
revenues............... $2,834 $ 3,121 $ 3,074 $ 3,220 $3,577 $ 3,518 $ 3,834 $ 4,148
Internet integration and
enterprise portal
development revenues... 527 553 434 401 1,361 943 1,981 1,655
Web hosting revenues..... 256 234 247 271 396 321 373 456
------ ------- ------- ------- ------ ------- ------- -------
Total net revenues......... 3,617 3,908 3,775 3,892 5,334 4,782 6,188 6,259
------ ------- ------- ------- ------ ------- ------- -------
Total costs and expenses... 4,301 5,099 5,295 5,977 5,929 6,032 7,250 9,669
------ ------- ------- ------- ------ ------- ------- -------
Loss from operations....... (684) (1,191) (1,540) (2,085) (595) (1,250) (1,062) (3,410)
------ ------- ------- ------- ------ ------- ------- -------
Net loss attributable to
common stockholders...... $ (762) $(1,316) $(1,710) $(2,269) $ (789) $(1,444) $(1,255) $(3,605)
====== ======= ======= ======= ====== ======= ======= =======
OTHER DATA:
EBITDA(a).................. $ (482) $ (961) $(1,306) $(1,656) $ (235) $ (850) $ (639) $(2,921)
Capital expenditures(b).... 451 501 223 95 597 243 345 1,295
</TABLE>
- ---------------
(a) EBITDA is loss from operations before interest, taxes, depreciation and
amortization. EBITDA is presented because management believes that investors
may find it to be a useful tool for measuring a company's ability to service
its debt. However, EBITDA does not represent cash flow from operations, as
defined by generally accepted accounting principles. EBITDA should not be
considered as a substitute for net loss or as an indicator of our operating
performance, cash flow or liquidity. EBITDA should be examined in
conjunction with our financial statements and related notes included
elsewhere in this prospectus.
(b) Capital expenditures include assets acquired with debt and exclude assets
acquired through capital lease financing.
------------------------
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found in
the sections "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements include statements regarding our, or our directors'
or officers', intent, belief or current expectations with respect to, among
other things, trends affecting our financial condition or results of operations
and our business and growth strategies. Actual events or results could differ
materially from those discussed in this prospectus. Factors that could cause or
contribute to differences include, but are not limited to, those discussed in
the sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and in the other
sections of this prospectus. These forward-looking statements speak only as of
the date of this prospectus, and we caution potential investors not to place
undue reliance on these statements. This prospectus contains forecasts of
estimated future growth in the Internet industry and in Internet usage as a
whole. These market forecasts are reliant upon assumptions, including
assumptions about the growing acceptance of the Internet as a tool for
commercial activity, about continuing advances in computing and
telecommunications technology and about increasing availability of technology.
There can be no assurance that these assumptions will prove to be correct or,
even if they do, that the forecasts will prove to be accurate.
AppliedTheory is a trademark of AppliedTheory Corporation. Gemini2000
Network is a trademark of IXC Communications, Inc. This prospectus also includes
trademarks, service marks and trade names of other companies.
6
<PAGE> 10
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider these risk factors and the other information in this
prospectus before purchasing shares of our common stock.
WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT 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;
- 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 our inception. At December
31, 1998, we had an accumulated deficit of approximately $15.7 million. We
experienced net losses of approximately $5.8 million and $6.9 million in the
years ended December 31, 1997 and 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 largely dependent upon the
successful completion of the Gemini2000 Network, over which we have no control,
and the successful implementation of our nationwide expansion strategy. We
cannot assure you that we will achieve or sustain revenue growth or
profitability on either a quarterly or an 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 the 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.
7
<PAGE> 11
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:
- 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.
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;
- our ability to increase bandwidth as necessary;
- fluctuations in bandwidth used by our 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 (approximately 75% in 1998) are
fixed in the short-term, particularly with respect to 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 will be
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
- our inability to maintain and strengthen our brand awareness.
OUR SUCCESS DEPENDS IN LARGE PART ON CONTINUED GROWTH IN THE USE OF THE
INTERNET.
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 the 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.
The market for Internet-based services is extremely competitive and there are no
substantial barriers to entry. We 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;
- devote greater resources to the marketing and sale of their products and
services; 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 our New York State market
and nationally are numerous. Our current and prospective competitors, both in
our New York State market 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 GlobalCenter, GTE
Internetworking, DIGEX, Inc., Verio Inc. and other national and regional
providers;
- telecommunications companies, including 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 these 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 competition or other competitive pressures
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, a not-for-profit corporation that is also affiliated
with one of our major shareholders, and the New York State Department of Labor.
The loss of either of these customers could significantly hurt our business. For
the years ended December 31, 1997 and 1998, revenue from NYSERNet.org
represented approximately 47% and 37% of our total revenue. For the years ended
December 31, 1997 and 1998, revenue from the New York State Department of Labor
represented approximately 16% and 28% of our total revenue.
Our current agreement to provide services through NYSERNet.org has an
initial term of three years, ending October 1, 2001. This agreement is
automatically renewable for successive one year terms unless either party
notifies the other of its intent not to renew at least 60 days before the end of
the term then in effect. It is possible that NYSERNet.org 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. Our agreement with the New York State Department of Labor is
subject to cancellation by the New York State Department of Labor upon 15 days
notice.
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 this 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 is 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. In addition, on February 4, 1999, IXC announced that it had hired an
investment bank to advise it on strategic alternatives. We are unable to predict
the result of this process or the impact it may have on us. Any failure by IXC
to complete construction of, or deploy and maintain, the Gemini2000 Network
could hurt
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our business. While IXC has 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 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 may 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. Further, additional network capacity may 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.
Interuptions 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 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
interuptions. 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.
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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
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 licensed 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.
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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.
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 45%
of our revenues in the year ended December 31, 1998. 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
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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 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.
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.
Although we do not currently have any agreements, arrangements or
understandings with respect to any acquisitions, 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 their products or
services to us 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.
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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.
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 marketplace 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 or 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 incurred 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 conducting a Year 2000 readiness review including
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. Therefore, we are
in the process of seeking 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 and non-information technology systems during 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
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preventive or corrective actions in a timely manner, the Year 2000 issue could
hurt our business in ways which are not now quantifiable.
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 are developing a comprehensive contingency plan to
address the issues which may result from the failure of our major customers or
providers 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 this 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 unanticipated 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 WILL CONTROL APPROXIMATELY 78%
OF OUR COMMON STOCK AFTER THIS OFFERING, AND THESE PARTIES MAY HAVE CONFLICTS OF
INTEREST.
Immediately following this offering, IXC, NYSERNet.net and Grumman Hill
will beneficially own approximately 27.6%, 23.8% and 13.8%, respectively, of our
outstanding common stock. In addition, our executive officers and directors may
be deemed to beneficially own in the aggregate approximately 78% 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, will be 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. This 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, and two of our executive officers are executive
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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 interests 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.
There has not been a prior public market for our common stock. 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
below the initial public offering price. Stock prices of technology companies,
especially Internet-related companies, have been highly volatile. The initial
public offering price 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.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR FUTURE SALE.
THE FUTURE SALE OF LARGE AMOUNTS OF OUR STOCK, OR THE PERCEPTION THAT THESE
SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering.
Assuming no exercise of the underwriters' over-allotment option, there will be
20,471,445 shares of common stock outstanding immediately after this offering.
The 4,500,000 shares of common stock sold in this offering will be freely
tradable without restriction or further registration under the Securities Act of
1933, unless such shares are held by our "affiliates," as that term is defined
in Rule 144 under the Securities Act.
The remaining 15,971,445 shares of our common stock not sold in this
offering are subject to restrictions under Rule 144 of the Securities Act.
Holders of 15,720,462 of these restricted shares have registration rights with
respect to these and any after-acquired shares. These shares are subject to
lock-up agreements under which the holders of these shares have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Bear, Stearns &
Co. Inc., subject to limited exceptions. However, under Rule 144 and as a result
of registration rights, these shares may become freely tradable and affect the
market for our stock, subject to the lock-up agreements.
17
<PAGE> 21
A substantial number of shares of common stock issuable upon exercise of
outstanding stock options will also become available for resale in the public
market at prescribed times. We intend to register under the Securities Act the
shares of our common stock reserved for issuance under our stock option plans.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER SHARE.
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $13.50 per share, if you purchase our common stock in
this offering, you will incur immediate dilution of approximately $11.14 in the
net tangible book value per share of common stock from the price you pay for our
common stock in this offering.
WE HAVE DISCRETIONARY AUTHORITY OVER THE USE OF NET PROCEEDS FROM THE OFFERING.
Approximately $45.9 million of the estimated net proceeds of this offering
have not been allocated for a specific purpose. Consequently, management will
retain significant discretion over the application of these proceeds, and there
can be no assurances that these applications will not vary substantially from
our current intentions.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AS WELL AS DELAWARE CORPORATE LAW,
CONTAIN PROVISIONS THAT MAY MAKE OUR ACQUISITION MORE DIFFICULT.
Upon consummation of this offering, our certificate of incorporation and
bylaws will contain, and the Delaware corporate law contains, provisions that
could have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from attempting to acquire, control of us. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. Some of these provisions allow us to
issue, without stockholder approval, preferred stock having voting rights senior
to those of the common stock. In addition, our board of directors will be
divided into three classes, each of which serves for a staggered three-year
term, which may make it more difficult for a third party to gain control of our
board of directors. Our certificate of incorporation and bylaws provide that
stockholders will not be able to remove directors without the approval of 75% of
the total voting power of all outstanding securities entitled to vote generally
in the election of directors. The provisions of our certificate of incorporation
and bylaws relating to the classified board and removal of directors by
stockholders provide that they may not be amended or repealed without the
approval of 75% of the total voting power of all outstanding securities entitled
to vote generally in the election of directors. As a Delaware corporation, we
will be subject to Section 203 of the Delaware General Corporation Law which, in
general, prevents an interested stockholder, which is defined generally in the
statute as a person owning 15% or more of the corporation's outstanding voting
stock, from engaging in a business combination for three years following the
date that person became an interested stockholder unless specified conditions
are satisfied.
18
<PAGE> 22
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that we will receive net proceeds from the sale of shares in
this offering of approximately $55.3 million, assuming an initial public
offering price of $13.50 per share and after deduction of underwriting discounts
and commissions and estimated expenses payable by us in connection with the
offering.
We intend to use $45.9 million of the net proceeds from this offering for
general corporate purposes and working capital requirements, including:
- to expand our sales and marketing efforts in 30 metropolitan areas and
increase our direct sales force by over 100 employees nationally;
- to expand our customer support services; and
- for working capital requirements and other general corporate purposes,
including possible acquisitions.
No portion of these proceeds has been allocated for any specific purpose
referred to above. See "Risk Factors -- We have discretionary authority over the
use of net proceeds from the offering."
In addition, we intend to use approximately $4.5 million of the net
proceeds from this offering to build three new distributed data centers in
conjunction with the Gemini2000 Network, approximately $3.0 million to repay
outstanding borrowings under our revolving line of credit with NYSERNet.net,
including accrued interest, and approximately $1.9 million of the proceeds to
repurchase our outstanding preferred stock, including accrued dividends, from
NYSERNet.net. Borrowings under the NYSERNet.net facility bear interest at the
prime rate.
Pending the above uses, we intend to invest the proceeds of this offering
in short-term, interest bearing securities of investment grade. We do not
currently have any agreements, arrangements or understandings with respect to
any acquisitions.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock. We
currently intend to retain any future earnings for our business and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Future dividends, if any, will depend on, among other things, our results of
operations, capital requirements, restrictions in loan agreements and on other
factors that our board of directors may, in its discretion, consider relevant.
19
<PAGE> 23
CAPITALIZATION
The following table sets forth as of December 31, 1998 our actual cash and
cash equivalents and capitalization and these amounts, as adjusted, to reflect
the issuance and sale of 4,500,000 shares of our common stock in this offering,
assuming an initial public offering price of $13.50 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses, and the use of a portion of the net proceeds from the offering to
repay indebtedness and repurchase our outstanding preferred stock as set forth
under "How We Intend to Use the Proceeds From the Offering." You should read
this table in conjunction with our financial statements and the related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,786 $ 52,207
======== ========
LIABILITIES:
Long-term debt and capital lease obligations (including
current portion)....................................... $ 6,531 $ 6,531
Borrowings from NYSERNet.net.............................. 2,957 --
-------- --------
Total long-term debt, borrowings from NYSERNet.net
and capital lease obligations....................... 9,488 6,531
Redeemable preferred stock; 75,000 shares authorized; 15,000
shares issued and outstanding (actual), cumulative 14%
dividend, $100 per share liquidation value................ 1,500 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 15,000 shares of redeemable preferred stock
issued and outstanding (actual); none issued and
outstanding, as adjusted............................... -- --
Common stock, $.01 par value; 25,000,000 shares
authorized, actual; 15,039,488 shares issued and
outstanding; 90,000,000 shares authorized, as adjusted;
19,594,336 shares issued and outstanding, as
adjusted(a)............................................ 150 195
Common stock -- nonvoting, $.01 par value; 5,000,000
shares authorized; 54,848 shares issued and
outstanding(b)......................................... * --
Additional paid-in capital................................ 6,582 61,835
Accumulated deficit....................................... (15,739) (15,739)
-------- --------
Total stockholders' equity (deficit)................. (9,007) 46,291
-------- --------
Total capitalization........................................ $ 1,981 $ 52,822
======== ========
</TABLE>
- ---------------
* Zero due to rounding.
(a) Excludes 3,998,333 shares of common stock issuable as of December 31, 1998
upon exercise of options outstanding under our 1996 Incentive Stock Option
Plan at a weighted average exercise price of $1.59 per share. See Note H to
the Financial Statements. Shares authorized, actual, does not give effect to
our reorganization as a Delaware corporation to occur prior to this
offering.
(b) In connection with our reorganization as a Delaware corporation prior to
this offering, our nonvoting common stock will be converted into voting
common stock.
20
<PAGE> 24
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of shares of common stock in the offering exceeds the net
tangible book value per share of common stock after the offering. The net
tangible book value per share of common stock is determined by subtracting our
total liabilities from the total book value of our tangible assets and dividing
the difference by the number of shares of common stock deemed to be outstanding
on the date as of which the book value is determined.
The net tangible book value of our common stock as of December 31, 1998 was
a deficit of approximately ($0.60) per share. After giving effect to the sale of
4,500,000 shares of common stock in this offering and the application of a
portion of the estimated net proceeds from the offering to repay indebtedness
and repurchase our outstanding preferred stock, assuming an initial public
offering price of $13.50 per share and after deducting underwriting discounts
and commissions and estimated offering expenses, the as adjusted net tangible
book value of AppliedTheory at December 31, 1998, would have been $46.3 million
or $2.36 per share. This represents an immediate increase in net tangible book
value of $2.96 per share to existing holders of common stock and an immediate
dilution of $11.14 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.50
------
Net tangible book value deficiency per share as of
December 31, 1998...................................... $(0.60)
Increase attributable to new investors.................... $ 2.96
------
As adjusted net tangible book value after the offering...... $ 2.36
------
Dilution to new investors................................... $11.14
======
</TABLE>
If the over-allotment option is exercised in full, the as adjusted net
tangible book value per share of common stock after giving effect to the
offering and the application of a portion of the estimated net proceeds from the
offering to repay indebtedness and repurchase our outstanding preferred stock
would be $2.73 per share, assuming an initial public offering price of $13.50
per share and after deducting underwriting discounts and commissions and
estimated offering expenses, the increase in the net tangible book value per
share would be $3.33, and the dilution to persons who purchase shares of common
stock in the offering would be $10.77 per share.
The following table summarizes, as of December 31, 1998, the number of
shares of common stock purchased from our company, the total consideration paid
and the average price per share paid by the existing stockholders and new
investors, adjusted to give effect of the sale of the shares of common stock in
this offering, assuming an initial public offering price of $13.50 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CASH CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.............. 15,094,336 77% $ 5,356,268 8% $ 0.35
New Investors...................... 4,500,000 23% 60,750,000 92% 13.50
---------- ----- ----------- ----- ------
Total.................... 19,594,336 100.0% $66,106,268 100.0%
========== ===== =========== =====
</TABLE>
None of the foregoing tables and calculations assume that any options
outstanding as of December 31, 1998 have been or will be exercised prior to the
offering. If all options outstanding as of that date were exercised on the date
of the closing of this offering, investors purchasing shares in this offering
would suffer total dilution of $11.27 per share.
21
<PAGE> 25
SELECTED FINANCIAL DATA
The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical financial statements of AppliedTheory and our
predecessor and the related notes included elsewhere in this prospectus.
The selected financial data as of December 31, 1997 and 1998 and for the
nine months ended September 30, 1996, the three months ended December 31, 1996
and the years ended December 31, 1997 and 1998 have been derived from audited
financial statements included elsewhere in this prospectus. The selected
financial data as of September 30, 1996 and December 31, 1996, and as of and for
the year ended December 31, 1995 are derived from audited financial statements
which are not included in this prospectus. Our audited financial statements and
those of our predecessor have been audited by Grant Thornton LLP, independent
certified public accountants. The selected financial data as of and for the year
ended December 31, 1994 are derived from unaudited financial statements, which,
in management's opinion, include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation.
Our operating activities prior to October 1, 1996 were conducted as a
nonincorporated "division" of NYSERNet.org and are considered to constitute a
predecessor business. The financial data presented as of and for the years ended
December 31, 1994 and 1995, and as of and for the nine months ended September
30, 1996, reflect these activities on a "carved-out" basis from the historical
financial statements of NYSERNet.org.
<TABLE>
<CAPTION>
PREDECESSOR APPLIEDTHEORY
------------------------------------- -------------------------------------
YEAR ENDED NINE MONTHS THREE MONTHS YEAR ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31,
--------------------- SEPTEMBER 30, DECEMBER 31, ----------------------
1994 1995 1996 1996 1997 1998
----------- ------- ------------- ------------ --------- ----------
(UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity revenues.................. $2,917 $ 4,607 $ 5,691 $ 2,508 $ 12,249 $ 15,077
Internet integration and enterprise portal
development revenues.......................... -- 13 244 268 1,915 5,940
Web hosting revenues............................ -- 322 291 300 1,008 1,546
------ ------- ------- --------- --------- ----------
Total net revenues................................ 2,917 4,942 6,226 3,076 15,172 22,563
------ ------- ------- --------- --------- ----------
Costs and expenses
Cost of revenues.............................. 2,815 5,163 5,742 2,331 10,796 13,316
Sales and marketing........................... 5 466 1,298 792 3,706 6,400
General and administrative.................... 496 1,185 2,819 1,591 4,283 6,349
Research and development...................... -- -- 129 43 680 243
Depreciation and amortization................. 106 126 158 81 1,095 1,672
Other expenses................................ 2 -- -- -- 112 900
------ ------- ------- --------- --------- ----------
Total costs and expenses.......................... 3,424 6,940 10,146 4,838 20,672 28,880
Loss from operations.............................. (507) (1,998) (3,920) (1,762) (5,500) (6,317)
Interest income................................... -- (26) -- -- -- (42)
Interest expense.................................. -- -- 5 -- 347 608
------ ------- ------- --------- --------- ----------
Net loss.......................................... (507) (1,972) (3,925) (1,762) (5,847) (6,883)
Preferred stock dividends......................... -- -- -- -- 210 210
------ ------- ------- --------- --------- ----------
Net loss attributable to common stockholders...... $(507) $(1,972) $(3,925) $ (1,762) $ (6,057) $ (7,093)
====== ======= ======= ========= ========= ==========
Basic and diluted loss per common share........... $ (0.18) $ (0.62) $ (0.56)
========= ========= ==========
Shares used in computing basic and diluted loss
per share....................................... 9,750,000 9,756,248 12,665,940
OTHER DATA:
EBITDA (a)...................................... $ (401) $(1,846) $(3,762) $ (1,681) $ (4,405) $ (4,645)
Capital expenditures (b)........................ 191 756 -- 506 1,270 2,480
Cash flow information:
Net cash provided by (used in) operating
activities.................................. 191 578 (2,098) (834) (5,185) (2,704)
Net cash provided by (used in) investing
activities.................................. (191) (756) 56 (506) (1,266) (2,779)
Net cash provided by financing activities..... -- 178 2,041 1,513 6,413 7,133
</TABLE>
22
<PAGE> 26
<TABLE>
<CAPTION>
PREDECESSOR APPLIEDTHEORY
------------------------------------- ---------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
--------------------- ------------- ---------------------------
1994 1995 1996 1996 1997 1998
----------- ------- ------------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ -- -- -- $ 173 $ 135 $ 1,786
Working capital (deficiency)......... $(693) $(2,982) $(6,775) (1,379) (3,579) (3,249)
Total assets......................... 1,571 2,690 3,161 3,365 5,444 10,518
Current portion of long-term debt and
capital lease obligations.......... -- -- -- -- 211 551
Long-term debt and capital lease
obligations, less current
portion............................ -- -- -- -- 4,361 5,979
Borrowings from NYSERNet.net......... -- -- -- 1,500 2,445 2,957
Redeemable preferred stock........... -- -- -- -- 1,500 1,500
Total stockholders' equity
(deficit).......................... (787) (2,759) (6,684) (2,576) (8,626) (9,007)
</TABLE>
- ---------------
(a) EBITDA is loss from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
investors may find it to be a useful tool for measuring a company's ability
to service its debt. However, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles. EBITDA
should not be considered as a substitute for net loss or as an indicator of
our operating performance, cash flow or liquidity. EBITDA should be examined
in conjunction with our financial statements and related notes included
elsewhere in this prospectus.
(b) Capital expenditures include assets acquired with debt and exclude assets
acquired through capital lease financing.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 services; 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 30 metropolitan areas throughout the United States
with high concentrations of businesses and intend to grow our direct sales force
by more than 100 over the next two years. These targeted markets coincide with
IXC's POPs, where we plan to have a physical local presence.
We were incorporated in November 1995 and spun-off in October 1996 from
NYSERNet.org, a not-for-profit corporation that was one of the founding
institutions of the Internet, to pursue commercial IP-based opportunities. In
August 1998, IXC and Grumman Hill invested $12.9 million and $6.5 million to
acquire approximately 4.4 million and 2.2 million shares of our common stock. Of
these 6.6 million shares, we issued 1.73 million new shares for net proceeds of
approximately $5.0 million. The balance of these shares was sold by
NYSERNet.net.
REVENUE. We derive our revenue from three principal services:
- Internet integration and enterprise portal development;
- Web hosting; and
- Internet connectivity.
We generally sell our services under contracts with terms ranging from one
to five years.
From the three months ended December 31, 1996 to the year ended December
31, 1998, revenue from Internet integration and enterprise portal development
increased from approximately 9% to approximately 26% of our total revenue. In
future periods, we expect revenue from these services to continue to increase as
a percentage of total revenue as we further emphasize them in our sales mix.
Revenue from Internet integration and enterprise portal development
services represents professional service fees that are recognized principally on
a time and material basis as services are performed. Revenue from Web hosting
services is typically derived from flat rates for co-location based on space, as
well as from usage-sensitive storage and throughput fees, and additional fees
from value-added services such as data mirroring and load balancing
re-direction. Revenue from Internet connectivity services is typically derived
from fixed price and usage based fees.
24
<PAGE> 28
COST OF REVENUE. Cost of revenue consists primarily of:
- backbone and Internet access costs;
- personnel costs to operate our network and data centers;
- personnel costs to provide Internet integration and enterprise portal
development services; and
- access charges from local exchange carriers.
We expect our cost of revenue to continue to increase in dollar amount but
decline as a percentage of revenue as we expand our customer base and product
suite.
SALES AND MARKETING EXPENSE. Sales and marketing expense consists
primarily of advertising and marketing programs and personnel expenses,
including salary and commissions. We expect to make a substantial investment in
our sales and marketing groups to achieve and properly support the intended
expansion in our customer base. We expect sales and marketing expenditures to
continue to increase in dollar amount and as a percentage of revenue in 1999,
and then to decline as a percentage of revenue in subsequent years.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists primarily of costs relating to personnel, including customer support,
occupancy, general operating costs, professional fee expenses and research and
development. We expect to make the necessary investments in the organization to
properly manage the financial, legal and administrative aspects of the business.
We expect general and administrative expense to increase in dollar amount in the
future, reflecting growth in our operations and the costs associated with being
a publicly held company, but to decline as a percentage of revenue.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists primarily of depreciation of computer equipment, office furniture and
leasehold improvements.
NET LOSSES. We have incurred net losses and have experienced negative cash
flow from operations in each quarterly and annual period since our inception in
October 1996. Currently, we anticipate making significant investments in sales
and marketing, in new distributed data centers, in customer support and for the
hiring of personnel. We anticipate that the nature of these expenditures,
principally personnel, marketing and advertising programs, network and occupancy
costs, will remain relatively unchanged compared to expenditures made in prior
periods. Due to our expansion plans, however, we expect our net losses and
negative cash flows from operations on a quarterly and annual basis to increase
significantly for the foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Total net revenues increased approximately $7.4 million from
$15.2 million in the year ended December 31, 1997 to $22.6 million in the year
ended December 31, 1998. Approximately $2.8 million of this growth was from
Internet connectivity revenue, which resulted primarily from the addition of
over 70 new customers from December 31, 1997 to December 31, 1998, including
customers added through our agreement with Sprint. Web hosting revenue increased
by approximately $0.6 million. Approximately $0.3 million of the increase
resulted from an increase in Web monitoring, management and hosting services for
the New York State Department of Labor in connection with America's Job Bank and
the remaining $0.3 million as a result of our leveraged marketing arrangements
with Sprint. The remaining increase in total net revenues of approximately $4.0
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.
$3.6 million of the $4.0 million increase in Internet integration and
enterprise portal development was derived from the expansion of these services
to the New York State Department of Labor in connection
25
<PAGE> 29
with America's Job Bank and the remaining $0.4 million from new customers. For
the year ended December 31, 1998, as a percentage of total net revenues,
Internet connectivity represented 67%, Internet integration and enterprise
portal development represented 26% and Web hosting represented 7%. For the year
ended December 31, 1997, as a percentage of total net revenues, Internet
connectivity represented 81%, Internet integration and enterprise portal
development represented 13% and Web hosting represented 6%.
COST OF REVENUE. Cost of revenue for the year ended December 31, 1998
totaled approximately $13.3 million compared with approximately $10.8 million
for the year ended December 31, 1997. This increase is attributable to the
overall growth in the size of our network. As a percentage of revenue, cost of
revenue declined to 59% of revenue in the year ended December 31, 1998 from 71%
of revenue in the year ended December 31, 1997. This decrease was due to
increased network utilization associated with our revenue growth and an increase
in revenues relative to costs from higher margin Web hosting and Internet
integration and enterprise portal development services.
SALES AND MARKETING. For the years ended December 31, 1998 and 1997, sales
and marketing expense was approximately $6.4 million and $3.7 million. The $2.7
million increase in 1998 reflects a substantial investment in the sales and
marketing organizations necessary to support our expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to both
increased direct marketing efforts as well as commissions paid to distribution
partners. Additionally, the increase reflects increased marketing efforts. Sales
and marketing expense as a percentage of revenue increased to 28% for the year
ended December 31, 1998 from 24% for the year ended December 31, 1997 as a
result of our commitment to building our sales and marketing program.
GENERAL AND ADMINISTRATIVE. For the years ended December 31, 1998 and
1997, general and administrative expenses were approximately $6.6 million and
$5.0 million. An increase in general and administrative expenses of
approximately $1.6 million was primarily attributable to:
- compensation expense relating to stock appreciation rights;
- costs related to recruiting new personnel; and
- increases necessary to manage the financial, legal and administrative
aspects of our business.
These increases were offset by a decrease in research and development from $0.7
million to $0.2 million. For the year ended December 31, 1998, general and
administrative expense, including research and development, declined as a
percent of revenue to 29% from 33% for the year ended December 31, 1997 as a
result of our increased revenue.
DEPRECIATION AND AMORTIZATION. For the years ended December 31, 1998 and
1997, depreciation and amortization expense was approximately $1.7 million and
$1.1 million. The increase in depreciation and amortization of approximately
$0.6 million is principally attributable to the acquisition of computer
equipment used in support of our Web hosting and Internet integration and
enterprise portal development customers.
INTEREST EXPENSE. Interest expense was approximately $0.6 million and $0.3
million for the years ended December 31, 1998 and 1997. The increase in interest
expense of $0.3 million is attributable to the increase in outstanding
borrowings under financing agreements. During the year ended December 31, 1998,
cash payments of approximately $0.2 million in interest expense were deferred
until December 2001.
OTHER EXPENSE. On December 21, 1998, we adopted a plan which was approved
by our board of directors to close a leased facility principally used as a Web
hosting data center. The facility has experienced operational difficulties,
including:
- a lack of multiple high speed connections from the data center to our
Internet backbone;
- a lack of 24 hour on-site operations staff;
- a limited uninterruptible power supply system; and
26
<PAGE> 30
- a lack of local area network redundancy.
These operational difficulties dramatically limit the facility's usability as a
Web hosting site and its ability to generate sufficient revenues to justify its
continued operation.
In connection with the plan of abandonment, we have recorded a $0.9 million
charge to operations for the year ended December 31, 1998, consisting of:
- a $0.5 million write-down of equipment and leasehold improvements to our
management's estimate of their fair value of approximately $0.1 million
(based on estimated discounted net cash flows) 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
- a $0.4 million accrued liability relating to equipment leases and
facility operating leases, net of anticipated sub-rental income, in
accordance with the provisions of EITF 94-3, "Liability Recognized for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity."
The plan calls for the Web hosting customer base served from this facility,
located in New York City, and the related revenues, which are not significant,
to be transitioned to another facility by September 1999.
NET LOSS. For the year ended December 31, 1998, our net loss attributable
to common stockholders totaled $7.1 million as compared to $6.1 million for the
year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND THREE MONTHS ENDED DECEMBER 31, 1996
REVENUE. Our total net revenues were $15.2 million for the year ended
December 31, 1997 compared to $6.2 million for the nine months ended September
30, 1996, and $3.1 million for the three months ended December 31, 1996. This
growth was largely the result of two factors. One cause of the increase was the
cumulative revenue impact of $4.1 million derived from increases in the number
of Internet connectivity customers from January 1, 1996 to September 30, 1996,
and from September 30, 1996 to December 31, 1997. An additional cause of the
growth was the approximately $1.6 million increase in revenue, from $0.3 million
for the three months ended December 31, 1996 to $1.9 million for the year ended
December 31, 1997, from expanded Internet integration and enterprise portal
development services provided to the New York State Department of Labor in
connection with America's Job Bank.
COST OF REVENUES. Our cost of revenues was $10.7 million for the year
ended December 31, 1997, compared to $5.7 million for the nine months ended
September 30, 1996 and $2.3 million for the three months ended December 31,
1996. These increases are primarily due to the growth of our Internet
connectivity network, including required additional bandwidth, as well as
support of our increasing customer base. As a percentage of revenue, cost of
revenue declined to 71% of revenue in the year ended December 31, 1997 from 76%
for the three months ended December 31, 1996 and 92% for the nine months ended
September 30, 1996. This decrease was due to increased network utilization
associated with our revenue growth and an increase, as a percentage of revenue,
in higher margin Web hosting and Internet integration and enterprise portal
development services revenue.
SALES AND MARKETING. Our sales and marketing expenses were $3.7 million
for the year ended December 31, 1997 compared to $1.3 million for the nine
months ended September 30, 1996 and $0.8 million for the three months ended
December 31, 1996. These increases relate to increased marketing and advertising
along with the build up of our direct sales force due to our focused growth into
the commercial market. Sales and marketing expenses as a percentage of revenue
represented approximately 24% for the year ended December 31, 1997 as compared
to 26% for the three months ended December 31, 1996 and 21% for the nine months
ended September 30, 1996.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses were
$5.0 million for the year ended December 31, 1997 compared to $2.9 million for
the nine months ended September 30, 1996 and $1.6 million for the three months
ended December 31, 1996. This higher level of expenses in 1997 is principally
related to an increase in research and development of approximately $0.5 million
in the area of
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<PAGE> 31
enterprise portal development and web hosting. For the year ended December 31,
1997, general and administrative expenses as a percent of revenues declined to
33% from 53% for the three months ended December 31, 1996 and 47% for the nine
months ended September 30, 1996 as a result of our increased revenue and a cost
containment program.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses
were $1.1 million for the year ended December 31, 1997 compared to $0.16 million
for the nine months ended September 30, 1996 and $0.08 million for the three
months ended December 31, 1996. The increase in depreciation and amortization is
directly attributable to the high level of property and equipment acquired for
use in our business.
INTEREST EXPENSE. Net interest expense was approximately $0.3 million in
the year ended December 31, 1997. Net interest expense from the nine months
ended September 30, 1996 and three months ended December 31, 1996 was
negligible. The increased interest expense is attributed to increased borrowings
under financing agreements.
OTHER EXPENSE. During the year ended December 31, 1997, we recorded
approximately $0.1 million of expense related to a loss from the disposal of
equipment.
NET LOSS. For the year ended December 31, 1997, the net loss attributable
to common shareholders totaled $6.1 million as compared to $1.8 million for the
three months ended December 31, 1996 and $3.9 million for the nine months ended
September 30, 1996.
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<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited statements of operations data for
the eight quarters ended December 31, 1998, as well as the percentage of our
revenues represented by each item. This data has been derived from unaudited
interim financial statements prepared on the same basis as the audited financial
statements contained in this prospectus and, in the opinion of management,
includes all adjustments consisting only of normal recurring adjustments, that
are considered necessary for a fair presentation of this information when read
in conjunction with the financial statements and related notes appearing
elsewhere in this prospectus. The operating results for any quarter should not
be considered indicative of results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
1997 1998
----------------------------------------------- ------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31(A) JUNE 30(A)
-------- ------- ------------ ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity
revenues..................... $2,834 $ 3,121 $ 3,074 $ 3,220 $3,577 $ 3,518
Internet integration and
enterprise portal development
revenues..................... 527 553 434 401 1,361 943
Web hosting revenues........... 256 234 247 271 396 321
------ ------- ------- ------- ------ -------
Total net revenues............... $3,617 $ 3,908 $ 3,755 $ 3,892 $5,334 $ 4,782
====== ======= ======= ======= ====== =======
Costs and expenses:
Cost of revenues............... $2,366 $ 2,807 $ 2,746 $ 2,877 $2,940 $ 2,864
Sales and marketing............ 505 833 992 1,376 1,438 1,536
General and administrative..... 1,229 1,228 1,286 1,220 1,189 1,233
Depreciation and
amortization................. 201 230 233 431 360 399
Other expenses................. -- 1 38 73 2 --
------ ------- ------- ------- ------ -------
Total costs and expenses......... $4,301 $ 5,099 $ 5,295 $ 5,977 $5,929 $ 6,032
====== ======= ======= ======= ====== =======
Loss from operations............. $ (684) $(1,191) $(1,540) $(2,085) $ (595) $(1,250)
Net interest expense............. 26 71 118 132 142 141
------ ------- ------- ------- ------ -------
Net loss......................... $ (710) $(1,262) $(1,658) $(2,217) $ (737) $(1,391)
====== ======= ======= ======= ====== =======
(AS A PERCENTAGE OF TOTAL REVENUES)
Net revenues:
Internet connectivity
revenues..................... 78% 80% 82% 83% 67% 74%
Internet integration and
enterprise portal development
revenues..................... 15 14 12 10 26 20
Web hosting revenues........... 7 6 6 7 7 6
------ ------- ------- ------- ------ -------
Total net revenues............... 100% 100% 100% 100% 100% 100%
====== ======= ======= ======= ====== =======
Costs and expenses:
Cost of revenues............... 65 72 73 74 55 60
Sales and marketing............ 14 21 26 35 27 32
General and administrative..... 34 31 34 31 22 26
Depreciation and
amortization................. 6 6 7 12 7 8
Other expenses................. 0 0 1 2 0 0
------ ------- ------- ------- ------ -------
Loss from operations............. (19) (30) (41) (54) (11) (26)
------ ------- ------- ------- ------ -------
Net interest expense............. 1 2 3 3 3 3
------ ------- ------- ------- ------ -------
Net loss......................... (20)% (32)% (44)% (57)% (14)% (29)%
====== ======= ======= ======= ====== =======
<CAPTION>
QUARTER ENDED
------------------------------------
1998
------------------------------------
SEPTEMBER 30(A) DECEMBER 31(A)(B)
--------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity
revenues..................... $ 3,834 $ 4,148
Internet integration and
enterprise portal development
revenues..................... 1,981 1,655
Web hosting revenues........... 373 456
------- -------
Total net revenues............... $ 6,188 $ 6,259
======= =======
Costs and expenses:
Cost of revenues............... $ 3,433 $ 4,079
Sales and marketing............ 1,771 1,655
General and administrative..... 1,626 2,544
Depreciation and
amortization................. 422 491
Other expenses................. (2) 900
------- -------
Total costs and expenses......... $ 7,250 $ 9,669
======= =======
Loss from operations............. $(1,062) $(3,410)
Net interest expense............. 141 142
------- -------
Net loss......................... $(1,203) $(3,552)
======= =======
Net revenues:
Internet connectivity
revenues..................... 62% 67%
Internet integration and
enterprise portal development
revenues..................... 32 26
Web hosting revenues........... 6 7
------- -------
Total net revenues............... 100% 100%
======= =======
Costs and expenses:
Cost of revenues............... 56 65
Sales and marketing............ 29 26
General and administrative..... 26 41
Depreciation and
amortization................. 6 9
Other expenses................. (0) 14
------- -------
Loss from operations............. (17) (55)
------- -------
Net interest expense............. 2 2
------- -------
Net loss......................... (19)% (57)%
======= =======
</TABLE>
- ---------------
(a) Includes compensation expense included in general and administrative
expenses of approximately $0.1 million for each of the quarters ended March
31, 1998, June 30, 1998 and September 30, 1998 and $1.16 million for the
quarter ended December 31, 1998, relating to stock appreciation rights and
stock options. See Note H of our audited financial statements.
(b) Other expenses represent a charge for the writedown of equipment and
leasehold improvements and an accrued liability for costs relating to the
closing of a leased facility aggregating $900,000. See Note C of our audited
financial statements.
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<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
We had an accumulated deficit of $15.7 million at December 31, 1998, and
have used $8.7 million in cash in the aggregate to fund operations since our
inception on October 1, 1996 through December 31, 1998. To date, 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, working capital
requirements and capital expenditures. At December 31, 1998, we had $1.8 million
in cash and cash equivalents and a $3.2 million working capital deficit. Net
cash used in operating activities for the years ended December 31, 1998 and 1997
was approximately $2.7 million and $5.2 million. Net cash used in investing
activities for the years ended December 31, 1998 and 1997 was approximately $2.8
million and $1.3 million. For the years ended December 31, 1998 and 1997, cash
of approximately $7.1 million and $6.4 million was provided by financing
activities. Cash provided by financing activities in the year ended December 31,
1998 included approximately $5.0 million in net proceeds from the sale of
1,725,000 shares of common stock to IXC and Grumman Hill.
Net cash used in operating activities was $2.1 million and $0.8 million for
the nine months ended September 30, 1996 and the three months ended December 31,
1996. Net cash provided by investing activities was $0.05 million for the nine
months ended September 30, 1996 and net cash used in investing activities was
$0.5 million for the three months ended December 31, 1996. Net cash provided by
financing activities was $2.0 million and $1.5 million for the nine months ended
September 30, 1996 and the three months ended December 31, 1996.
As of December 31, 1998, our operating lease obligations will be $0.9
million, $0.9 million and $0.8 million for 1999, 2000 and 2001.
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. At December
31, 1998, borrowings under this line amounted to $5.4 million. We refinanced our
short-term lines of credit on a long-term basis under the Fleet line of credit
as of December 31, 1997. Accordingly, the $4.1 million line of credit balance as
of December 31, 1997 was classified on the terms of the refinancing agreement.
The credit 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 us either at LIBOR plus 50 basis points or at the
prime rate less 200 basis points. As of December 31, 1998, as a result of
restrictions under the line of credit, only $70,000 of additional credit was
available under this agreement. 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 (8.5% and 7.75% at December 31,
1997 and 1998) and payments are deferred until December 31, 2001. As of December
31, 1998, $2.0 million was available under this borrowing facility. Upon the
closing of this offering, we intend to repurchase our outstanding preferred
stock held by NYSERNet.net.
We have made capital investments in our network operations center, data
center and other capital assets totaling $0.5 million, $1.3 million and $2.5
million in the three months ended December 31, 1996, and the years ended
December 31, 1997 and 1998.
We believe that proceeds from the offering will be sufficient to meet our
anticipated cash needs for expanding our sales and marketing efforts, expanding
our customer support services, building three new distributed data centers and
for other working capital requirements and general corporate purposes. However,
there can be no assurance as to the period of time through which our financial
resources will be adequate to support our operations. We may be required 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
30
<PAGE> 34
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.
Testing has not yet been completed, and we plan to continue testing throughout
the rest of the year. As of March 1, 1999, we have identified all of the
components of our business that need to be tested for Year 2000 readiness, and
we expect to complete upgrades and testing in the second quarter of 1999. We
have also sent requests for Year 2000 readiness statements to each of our third
party vendors. Responses received from these parties are currently being
analyzed, and follow-up requests have been sent to those who did not respond to
our initial request.
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.
YEAR 2000 AND OUR INTERNAL APPLICATIONS
Our State of Readiness. All of our internally developed systems, upgrades
and applications are Year 2000 ready or are scheduled to be updated in the near
future. 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.
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<PAGE> 35
Contingency Plans. If during our testing in 1999 we find results that
warrant concern, we will dedicate programming staff to procure readiness and to
do re-testing.
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 Internet access customers from our own
non-Year 2000 ready dial-up network to a dial-up access service provided by an
affiliate of IXC that has been represented to us as Year 2000 ready.
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 has 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 upgrade to all of 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 have requested Year
2000 readiness plans from all 40 of our third party vendors for our Web hosting
services, and have received responses from 15 of them. Six vendors have provided
positive assurance of Year 2000 readiness and have provided software upgrades
which we will install during the second quarter of 1999. We intend to test
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 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 programmers who have helped to ensure
that Year 2000 standards as well as other programming standards were adhered to.
We have planned full testing of these systems for April/May 1999. The tests
will simulate the Internet access services and Web hosting services for the two
calendar weeks before and after January 1, 2000. The goal of these tests is to
identify any problematic operations and create a plan for rectifying problems
during June and July 1999, when the second phase of testing will commence.
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
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<PAGE> 36
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 will be adding multiple data
centers over the course of 1999 and will be in a position to provide additional
redundancy for our customers' Web sites if they desire.
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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<PAGE> 37
BUSINESS
OUR COMPANY
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 believe we
are a leader in technical expertise and Internet integration capabilities. In
addition, we believe that few, if any, of our competitors with respect to the
business mid-market or public sector offer the comprehensive range of services
offered by us or have significant market share. 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 services; and
- Internet connectivity, including virtual private network solutions,
network and security consulting and dedicated Internet access.
We market these 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.
Superior customer service is a cornerstone of our operational strategy. Our
97% customer satisfaction rate in the second half of 1998, based on completed
surveys, demonstrates our exceptional performance. In addition, our monthly
revenue churn has averaged approximately 0.15% over the last two years. As of
December 31, 1998, we had over 600 customers in a wide range of industries.
These customers include:
- Bank of New York Company, Inc., General Electric Corporation,
theglobe.com, Inc., NEC Corporation, Road Runner Computer Systems, Inc.
(a joint venture of Time Warner Inc., MediaOne Group, Inc., Microsoft
Corporation, Compaq Computer Corporation and Advance/Newhouse
Partnership), Eastman Kodak Company, KPMG LLP, Northrop Grumman
Corporation and Bell Atlantic Corp.;
- through NYSERNet.org -- Cornell University, Columbia University, New York
University, the New York Public Library and the New York City Board of
Education; and
- through the New York State Department of Labor -- the U.S. Department of
Labor and a consortium of 46 states and territories.
Our existing network consists primarily of a robust, regional backbone in
New York State. Together with IXC, a significant equity holder in our company,
we are deploying the Gemini2000 Network, the first coast-to-coast, next
generation Internet backbone network, to carry both research and commercial
traffic. The Gemini2000 Network is a fully redundant, high performance national
network that will enable us to offer Internet access and backbone transport
services at speeds that are 100 to 1,000 times greater than those generally
available to end users today. We also intend to build three new distributed data
centers, co-located at Gemini2000 Network super-core sites, that will be linked
together with our existing data centers to form a virtual gigacenter. Our
network and distributed data centers will enable us to offer our customers:
- greater network reliability;
- lower downtime;
- simpler configurations for connecting multiple site locations;
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<PAGE> 38
- specialized virtual private network solutions;
- faster downloading of data;
- reduced Web server load; and
- better disaster recovery.
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 30 metropolitan areas throughout the United States
with high concentrations of businesses and intend to grow our direct sales force
by more than 100 over the next two years. These targeted markets coincide with
IXC's POPs, where we plan to have a physical local presence.
We were incorporated in November 1995 and spun-off in October 1996 from
NYSERNet.org, a not-for-profit corporation that was one of the founding
institutions of the Internet, to pursue commercial IP-based opportunities. In
August 1998, IXC and Grumman Hill invested $12.9 million and $6.5 million to
acquire approximately 4.4 million and 2.2 million shares of our common stock. Of
these 6.6 million shares, we issued 1.73 million new shares for net proceeds of
approximately $5.0 million. The balance of these shares was sold by
NYSERNet.net.
OUR INDUSTRY
The Internet has grown rapidly in the 1990s and has emerged as a global
medium for communications and commerce. The Internet's growth is driven by a
number of factors, including:
- the large and increasing number of cheaper, faster and more powerful
multimedia home and office computers;
- advances in network designs;
- greater availability of Internet-based software and applications;
- the emergence of useful content and e-commerce technologies; and
- convenient, fast and inexpensive Internet access.
Based on industry research, we believe the total number of Internet users
worldwide reached 69 million in 1997 and will increase to approximately 320
million by 2002.
The Internet presents a compelling profit opportunity for businesses, as it
enables them to reduce operating costs, access valuable information and reach
new markets. Likewise, the Internet presents a compelling opportunity for public
sector institutions, as it helps them serve their constituencies more cost-
effectively and conveniently, and comply with federal and state mandates. To
take advantage of these opportunities, organizations must have:
- an open universal interface (a doorway or enterprise portal to the
Internet);
- Web site presence; and/or
- Internet access.
An enterprise portal links an organization's internal systems and databases
to the Internet, facilitating internal information sharing and external
interaction. Creation of an enterprise portal requires customized software
development and integration to coordinate legacy systems with newer
Internet-based client/server architecture. We believe, based on industry
research, that the market for network integration and consulting services will
grow from approximately $29.6 billion in 1997 to approximately $52.0 billion in
2001.
A Web site on the Internet provides a company with a tangible identity and
interactive presence. Businesses initially established Web sites as a means of
improving internal and external corporate communications. Today, they are
increasingly utilizing the Internet for mission-critical applications, such
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<PAGE> 39
as sales and marketing, customer communication and service and project
coordination, as well as in many cases expanding their businesses through newly
developed e-commerce applications. We believe, based on industry research, that
Web hosting revenues will grow from $0.9 billion in 1998 to $14.7 billion in
2003.
Internet access provides a basic gateway to the Internet, allowing a
business to transfer e-mail, access information and connect with employees,
customers and suppliers. Today, Internet access is the primary component of the
Internet services market. Access services include high-speed dedicated access
primarily for larger organizations and dial-up access for individuals and small
enterprises. Based on industry research, we believe that revenues from business
Internet access services in the United States will grow from $2.8 billion in
1998 to $41.9 billion in 2003.
OUR MARKET OPPORTUNITY
OVERVIEW
Expanded uses of the Internet and greater demands for existing
Internet-based applications are driving an evolution and expansion in Internet
services, as well as the networks over which they are delivered. Examples of
existing and next generation uses of the Internet include the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
EXISTING USES NEXT GENERATION ENHANCEMENTS NEXT GENERATION NEW SERVICES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E-mail Distance learning Telemedicine
Basic e-commerce Graphics-intensive e-commerce Full-motion video downloading
Web site presence High-capacity interactive Web sites Multi-media interactive
virtual reality sites
Low-quality video High-quality, real-time video
conferencing conferencing
Order entry Inventory control
- --------------------------------------------------------------------------------------------------------
</TABLE>
This growth and evolution in Internet applications is driving the need for:
- integration of internal systems and databases with Internet applications
(enterprise portal development);
- more complex, data intensive and interactive Web sites (Web hosting
services); and
- more network bandwidth with faster, more reliable Internet access
(Internet connectivity).
THE INTERNET ENTERPRISE PORTAL -- INTEGRATING LEGACY SYSTEMS WITH THE INTERNET
To facilitate e-commerce and extend communications reach and information
sharing, databases and systems must be accessible to the Internet and Web sites
need to be integrated with underlying resident enterprise data and systems in an
open universal interface, which is a doorway or enterprise portal to the
Internet. Systems and databases designed before the emergence of the Internet,
referred to as legacy systems, must often be modified and augmented in order to
inter-operate with newer Internet-based client/server architectures.
WEB SITE MANAGEMENT AND E-COMMERCE
E-commerce and other next generation applications, essential to realizing
the rapid growth in Internet services, are complex and require guaranteed
bandwidth availability and minimal latency, thus necessitating a network which
incorporates performance and quality of service guarantees and committed access
rates. Bandwidth is the capacity of a telecommunications network to carry voice,
data and video information. Latency is the measurement of time between the
initiation of a request for data and the beginning of actual data transfer.
State-of-the-art network infrastructure is also required for these
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<PAGE> 40
applications, as are the most advanced distributed data centers and
collaborative outsourcing arrangements. To enable virtual linking of data
centers for greater effectiveness, next generation data centers will require:
- a secure physical environment;
- geographic diversity, which involves the establishment of data centers in
various geographic locations in order to provide greater security and
reliability than would be available with one single data center;
- enhanced content caching, which involves temporarily storing or
replicating Web server content at one or more locations throughout a
network to allow for faster response to applications requests;
- leading edge network caching, which facilitates efficient updating of Web
sites containing rapidly changing information by allowing for storage of
less frequently changing information on the Web site and requiring
updating only of the frequently changing content;
- data mirroring, which involves establishing and maintaining current
copies of system data in two or more locations in a network so as to
provide greater data security and further ensure round-the-clock
functioning of the system, application or network; and
- load balancing re-direction, which is the ability to re-direct network
traffic and functions so that, at any time, usage demands are more evenly
spread throughout a given network or system.
These features allow for faster downloading, reduced Web server load,
greater network reliability and performance and better disaster recovery.
INTERNET ACCESS
Demand for higher speed and more reliable access will continue to escalate
as new users access the Internet, existing users increase their usage and demand
increases for new and higher performance. We believe that as more companies
begin to implement mission-critical business applications on the Internet, the
reliability and security of their Internet communications will be a key concern.
NEED FOR ONE-STOP INTERNET SOLUTION
To take full advantage of the communication and commerce opportunities made
available by the Internet, businesses and other organizations will require more
than a basic Internet connection. They will need:
- fast and reliable connections to the Internet;
- sophisticated Web sites to attract and retain users and customers;
- access to enterprise information for internal communication and for their
Web sites; and
- to procure and manage the services and operations to integrate all these
needs.
While all organizations face challenges in meeting these needs, we believe
that the business mid-market and government agencies, in particular, have an
acute problem. Generally, they maintain small information technology departments
and do not have the resources or capabilities to internally develop and manage
all the components of their Internet strategies.
Traditionally, businesses and other organizations have sought solutions
from a variety of service providers, including system integrators, internet
service providers, or ISPs, hardware and software vendors and telecommunication
companies, each of which satisfies one or two elements of the total Internet
problem. We believe these organizations will demand a single provider that
offers all elements of Internet solutions -- design, integration,
implementation, Internet connection and operational management.
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OUR SOLUTION
We believe that the business mid-market and public sector 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 data communication opportunities
made possible by the Internet.
We offer an extensive array of high performance, reliable and scalable
Internet products and services, including Internet integration and enterprise
portal development, Web hosting services and Internet connectivity. We integrate
these services to offer customized, IP-based applications and services that
enable our commercial customers to extend their enterprises, leverage existing
legacy databases and systems and take advantage of Internet-based marketing
opportunities. Public sector customers similarly benefit by making greater use
of the Internet to serve their constituencies more cost-effectively and
conveniently, as well as to comply with federal and state mandates.
Key advantages we offer our customers include:
- FLEXIBLE AND SCALABLE INTERNET SOLUTIONS. Our Internet integration and
enterprise portal development solutions are customized to meet our
customers' needs. These solutions make use of our customers' existing
legacy databases and systems and provide them with highly integrated
IP-based capabilities that deliver high performance. Our solutions are
designed to easily accommodate a large and rapidly growing number of
users, as well as to facilitate distribution of the application over
geographically dispersed servers.
Our custom billing software for burstable service and our ability to
access incremental bandwidth through our strategic relationship with IXC
allow us to quickly scale solutions to meet a customer's needs. For
example, upon completion of the Gemini2000 Network, we will offer dynamic
bandwidth management, empowering our customers to monitor, regulate and
allocate bandwidth usage within their organizations, all from their
desktops. Burstable service allows for our customers to be billed based
on their measured usage rates rather than paying for excess capacity.
- ROBUST AND RELIABLE INFRASTRUCTURE. Our existing network consists
principally of a robust, regional backbone. A backbone is a centralized
high-speed network that interconnects smaller independent networks. Our
existing network has had customer uptime performance of over 99.9% over
the last three years. Together with IXC, we are in the process of
deploying the Gemini2000 Network, the first coast-to-coast, next
generation Internet backbone network, to carry both research and
commercial traffic. The Gemini2000 Network is a high performance,
national network that will enable us to offer Internet access and
backbone transport services at speeds which are 100 to 1,000 times
greater than those generally available to end users today. In addition,
the Gemini2000 Network is fully redundant, meaning that it has safety
measures built in so that no single failure of hardware or
telecommunications fiber should cause any other part of the network to
fail. The Gemini2000 Network will enable us to offer our customers
greater network reliability, lower downtime, simpler configurations for
connecting multiple site locations and remote access virtual private
networks.
- ADVANCED DATA MANAGEMENT. Our distributed data centers, which are
geographically dispersed buildings having high-speed Internet connections
and that house computers holding large amounts of data, will enable our
customers to provide their customers and end-users with the fastest,
clearest and most reliable Web access available today. This will allow
for data mirroring, load balancing re-direction, redundancy and content
caching. These features will benefit our customers through faster
downloading, reduced Web server load, greater network reliability and
performance and better disaster recovery. Distributed data centers
typically present a challenge to information technology administrators
because they result in less efficient use of resources, require
synchronization of data in almost real time and are more complex in their
operation. However, the advanced architecture of the Gemini2000 Network
will enable us to tie our distributed data centers together to form a
single
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virtual gigacenter, thereby allowing us to deliver to our customers all
the advantages of distributed data centers without the corresponding
difficulties.
- SUPERIOR CUSTOMER SUPPORT. Our mission is to provide the best customer
support in the Internet business. We invest heavily in systems and
training, understand the technical requirements of our customers and work
with them to optimize business objectives through the Internet. Our high
customer satisfaction rate and low average monthly revenue churn
demonstrate our success in this area.
OUR STRATEGY
Our objective is to become the leading national provider of advanced
Internet technology solutions to the business mid-market and selected public
sector organizations. To achieve this objective, our strategy is to:
- OFFER ONE-STOP SOLUTIONS TO THE BUSINESS MID-MARKET AND PUBLIC
SECTORS. We will target our one-stop solutions at the business
mid-market and public sector organizations, initially focusing on
sophisticated users of the Internet within these markets. We believe
these markets are seeking single vendors who can provide a full set of
Internet technology solutions. We believe the Gemini2000 Network, our new
data centers and our expertise in providing Internet enterprise portal
development, Web hosting and Internet connectivity position us well to
serve these markets.
- RAPIDLY EXPAND SALES AND MARKETING EFFORTS. 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 30 metropolitan areas throughout the United
States with high concentrations of businesses and intend to grow our
direct sales force by more than 100 over the next two years. These
targeted markets coincide with IXC's POPs, where we plan to have a
physical local presence.
- LEVERAGE PUBLIC SECTOR EXPERIENCE AND RELATIONSHIPS. We have extensive
experience working with clients in the academic and government sectors,
which we believe are underserved markets. We designed, continually
develop and maintain America's Job Bank, or AJB, an enterprise-wide Web
site developed for the United States Employment Service. AJB is one of
the largest and most visited employment sites in the United States,
averaging over 1.5 million visits per day. We have leveraged the
experience gained from this project to become a leader in providing
custom applications development and outsourcing to federal and state
governments. Working with NYSERNet.org and other non-profit institutions
allows us to benefit from the research and development activities of
those early adopters of leading edge technologies and applications. We
have been chosen to operate the NYSERNet2000 Network, one of the first
examples of next generation gigabit networks in the United States. We
intend to further leverage our relationships in targeting new university,
government and business customers.
- COMPLETE NATIONAL NETWORK BUILDOUT. Currently, we offer Internet
enterprise portal development services and limited Web hosting services
on a national scale, while our Internet access and virtual private
network offerings are limited primarily to New York State. Our current
customers are primarily located in New York State. We also have customers
located in California, Connecticut, Florida, Georgia, Kansas,
Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey and
Pennsylvania. Much of the physical infrastructure required for the
Gemini2000 Network is already in place, and it is intended that the
network will be fully operational by September 30, 1999. When complete,
the Gemini2000 Network will total over 70,000 miles of OC48 (2.5 gigabits
per second) data transmission capacity, eight super-core sites and over
100 POPs. We intend to build three new data centers, which will be
co-located at Gemini2000 Network super-core sites. These data centers
will be linked together with our existing data centers to form a virtual
gigacenter, benefiting customers through faster downloading, reduced Web
server load, greater network reliability and performance and better
disaster recovery.
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- MINIMIZE CAPITAL EXPENDITURES. We intend to focus on the delivery of
value-added Internet technology solutions, rather than the direct
ownership and management of physical infrastructure. IXC has publicly
announced its intention to complete construction of, and maintain, the
Gemini2000 Network physical infrastructure, including all connectivity
electronics. We expect that we will be responsible for designing and
implementing integration systems to connect customers to the Gemini2000
Network, as well as all the first line customer service functions, which
are much less capital intensive.
- JOINTLY MARKET AND SELL WITH IXC. We intend to work closely with IXC to
jointly market and sell Gemini2000 Network products and services through
Web and print media advertising, trade shows and other lead generation
activities and by making presentations to clients of both companies.
Because the Gemini2000 Network is a joint offering, sales generated by
either IXC or us will yield a revenue stream for both companies.
- ACQUIRE COMPLEMENTARY ASSETS, TECHNOLOGIES OR BUSINESSES. We intend to
opportunistically consider acquisitions of complementary assets,
technologies and businesses that offer the potential to expand the speed
of our sales and marketing efforts, increase our customer base and
enhance the breadth, depth and variety of our product offerings.
MANAGEMENT
Our management has extensive expertise in IP-based applications and
services. In 1996, we were spun-off from NYSERNet.org, a not-for-profit
corporation that was one of the founding institutions of the Internet, to pursue
commercial IP-based opportunities. Dr. Richard Mandelbaum, our Chairman of the
Board and Chief Executive Officer, is a recognized architect of the Internet and
one of the four founders of NYSERNet.org. Our senior managers have on average
over 10 years of experience in IP-based applications and services.
PRODUCTS AND SERVICES
We currently offer our customers a full array of high performance, reliable
and scalable Internet products and services. These include:
- Internet integration and enterprise portal development, including custom
software application development, Web site design and development and
upgrading of legacy systems to enable interaction with the Internet;
- Web hosting, consisting of custom hosting solutions and outsourcing,
shared server, dedicated server and co-location hosting services; and
- Internet connectivity, including virtual private network solutions,
network and security consulting and dedicated Internet access.
We integrate these services to offer customers highly tailored, IP-based
applications that enable them to capitalize on the wide variety of data
communication opportunities made possible by the Internet. These services can be
layered to allow customers to outsource an increasing portion of the management
of their Internet operations. All of our products and services are fully
supported by our customer support center 24 hours a day, 7 days a week, 365 days
a year (24x7).
INTERNET INTEGRATION AND ENTERPRISE PORTAL DEVELOPMENT
Most software applications have been designed for mainframes or
client/server environments. Few applications have been designed to optimize IP
use. Those that have been are referred to as "network-centric,"
"Internet-centric" or "IP-centric" applications. While most applications
developers are unskilled in this area, one of our key strengths is our ability
to develop Internet-centric applications and a unique methodology for the
adaptation of existing legacy and client/server systems for the Web environment.
Our methodology is based on a series of software programs and development
processes, developed and owned
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by us. These programs and processes have been constructed to provide us with a
toolkit to build applications that are targeted for use on our network and the
Web. We use the individual toolkit components in combination to assemble
applications that meet the needs of our customers. Third party software packages
can be added to complement the toolkit if necessary to meet a customers' needs.
This component-based approach tends to save customers money since the
alternative approach is to re-write an entire information system for the Web.
Our Internet-centric approach for new applications maximizes the efficiency of
the applications and minimizes network and other resources used, thus
potentially offering significant cost savings to customers.
Our Internet integration and enterprise portal development services include
custom software application development, Web enabling and integration of legacy
systems and Web site design and development. In this regard, we have developed
technology for creating new applications that operate by accessing multiple,
concurrent databases residing on several platforms. This technology consists of
proprietary software programs, commonly referred to as "middleware," that can be
added by placing them between existing systems and databases and the new Web
applications. The use of middleware allows us to build applications quickly and
efficiently to connect to a wide variety of existing systems without having to
custom build each application for use with a particular platform and/or
operating system. This approach results in new applications that have all the
advantages of older legacy systems plus the tremendous reach of the Web.
A key adjunct to our custom software application development is Web site
design and development. In addition to our in-house Web site design and graphics
experts, we also collaborate with experienced Web design firms. Since Web site
design and development is a critical part of the completed project, this process
is managed as an integral part of the application development process. Web
developers are a significant source of new business for us, as they are often
approached to develop e-commerce Web sites for which we provide custom
application development, custom hosting and network services.
An example of an Internet enterprise portal application consists of
replacing a multiple step, fax-based workflow system with an Internet-based data
collection system. For instance, any geographically dispersed organization that
needs to process product applications could use an Internet-based data
collection system. Remote personnel could use their personal computers to
transmit data via the Internet and to interface with a central mainframe system.
This Web-enabled process saves time and expense and avoids inaccuracies which
frequently occur with faxing and manually inputting applications and other
information.
We work closely with our customers throughout the design, development and
deployment process to ensure effective identification and fulfillment of
critical success factors, rapidly delivering the highest possible quality
applications while containing costs. We employ a combination of our own
technologies and "best-of-breed" third party tools.
WEB HOSTING SOLUTIONS
Our Web hosting services are designed to provide customers with the high
performance, scalability and flexibility they need to create, maintain and/or
expand the functionality of a Web presence. We maintain a primary Internet data
center in Syracuse, New York and a secondary one in New York City and plan to
add three Internet data centers by March 31, 2000. Each new data center will be
co-located with a Gemini2000 Network super-core site. Our advanced load
balancing re-direction, data mirroring, redundancy and content caching
capabilities will enable us to link these multiple data centers together with
our existing data centers to form a single virtual gigacenter. This will provide
our customers with the advantages of distributed, or geographically dispersed,
data centers and the simplicity and economies of a single center.
To meet the differing demands of our customers, we offer Web hosting
solutions with varying degrees of customization and value-added content,
including:
- custom Web hosting;
- shared server hosting;
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- dedicated server hosting; and
- co-location.
CUSTOM WEB HOSTING. We provide highly customized Web hosting solutions
which accommodate our custom software applications. We customize applications on
our hosting platforms, which allows for testing of the applications. The fully
tested applications are then moved into operation in our production hosting
environment. We provide the appropriate hardware environment and database
technology to best serve the needs of the application, and the custom hosting
environment is specifically designed for scalability.
SHARED SERVER WEB HOSTING. Our shared server Web hosting services enable
customers to efficiently, reliably and cost-effectively establish a
sophisticated Web presence and distribute information over the Internet without
purchasing, configuring, maintaining or administering the necessary Internet
hardware and software. A server is a computer in a network that can be utilized
to run applications which can be accessed by the network's users. A shared
server is a server owned, managed and housed by us and accessed by multiple
customers. Customers can choose between UNIX and Windows NT platforms, with
three levels of performance and service available within each platform line.
Each offering within the UNIX and Windows NT platform lines is scalable upwards
to the next level of performance. At the request of a customer, we may
incorporate software applications that are not part of our standard product
offerings.
DEDICATED SERVER WEB HOSTING. We also offer dedicated server Web hosting
solutions for larger customers that require substantially more server and
network capacity than that provided under the shared hosting plans. A dedicated
server is a server owned, managed and housed by us for a single customer to run
that customer's applications. The dedicated Web hosting service offerings
provide customers with a UNIX or Windows NT-based dedicated server. Unlike some
companies providing dedicated Web hosting services, we also support the
operating system and Web server and select applications. Dedicated server Web
hosting enables a customer to host complex Web sites and applications without
the need to incur significant infrastructure and overhead costs.
CO-LOCATION. Co-location services are offered for customers who prefer to
own and have physical access to their servers, but require the high performance,
reliability and security of an Internet data center. We offer co-location
services on two levels: standard and managed. Under standard co-location, we
provide secure space for a customer-owned server in our Internet data center,
redundant power, network connections and 24x7 management, monitoring and support
by our customer support center. The customer performs management and maintenance
of the server and all applications loaded onto the server. Under managed
co-location, we offer the customer additional options if the customer does not
want to perform all of the tasks associated with the operation and maintenance
of the server(s).
INTERNET CONNECTIVITY SOLUTIONS
We provide a variety of Internet connectivity solutions, including:
- virtual private network technologies;
- network and security consulting;
- dedicated access to the Internet;
- dial-up Internet access; and
- hardware and software implementation.
VIRTUAL PRIVATE NETWORK TECHNOLOGIES. Our specialized virtual private
network solutions allow businesses to take advantage of the Internet for
mission-critical applications. Virtual private networks are software defined
networks that run over public data lines, including the Internet. Virtual
private networks are designed to securely transport voice, video and data and
utilize access control and data encryption methods to ensure privacy. Our
virtual private network customers can achieve high levels of security previously
available solely through the use of wide area networks that are typically
affordable only by the
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largest businesses. Customers can tailor the type of access, services and
information that users of the virtual private network are afforded. Our virtual
private network solution is the functional equivalent of a wide area network,
run over the public Internet, generally at a lower total cost than a wide area
network and made possible by the availability of security, reliability and high
performance. A wide area network is a data communications network designed to
interconnect personal computers, workstations, minicomputers, file servers and
other communications and computing devices across multiple locations. We target
our virtual private network solutions mainly to customers seeking to create a
secure, outsourced wide area network for internal and external applications.
NETWORK AND SECURITY CONSULTING. The nature of commercial Internet traffic
demands protection from unauthorized access. To minimize this risk, while
maximizing the benefit of implementing distributed business applications on the
Internet, we help organizations to develop and implement a comprehensive network
security plan. Firewalls are key components of such a plan. We support
"best-of-breed" firewall technology, including software and hardware
procurement, installation, configuration and testing, product training and
technical support. Additionally, we provide the installation, configuration and
support of firewall-to-firewall virtual private network solutions, including
encryption. These services are being expanded to include additional virtual
private network configurations and additional services, including virus
protection and URL filtering software, external network vulnerability scans,
penetration testing, internal network audits and customized security training
and consulting. Together, these services add a significant measure of security
to our custom application development projects.
CURRENT AND NEXT GENERATION INTERNET ACCESS. The Gemini2000 Network,
scheduled to be completed by September 30, 1999, will be a national backbone
network supporting dedicated Internet access at data transmission speeds between
128 kbps and OC12 (622.08 Mbps). In addition, burstable T-3 (44.736 Mbps), OC3
(155 Mbps) and OC12 services will be available. With burstable service,
customers can use up to T-3, OC3 or OC12 of data transmission capacity when they
require it but do not need to continuously pay for constant capacity. Instead,
these customers are billed based upon their measured usage rates during the
month. Customers will be able to access the Gemini2000 Network using a variety
of different data transmission standards for relaying and routing traffic over
the Internet. Examples of these data transmission standards include frame relay,
asynchronous transfer mode (ATM) and switched multimegabit data service (SMDS).
The Gemini2000 Network will supplement our current backbone network on which we
offer dedicated Internet access at speeds between 56 kbps and T-3, as well as
dial-up Internet access. We will also continue to offer a selection of mail and
news services to complement and complete a customer's Internet access
requirements. All of our dedicated Internet access customers will continue to
receive:
- direct connectivity to the Internet via a high-speed backbone network;
- 24x7 access to our customer support center;
- implementation management services;
- domain name services;
- name registration services;
- training services;
- network utilization statistics;
- e-mail network status updates, if requested by the customer; and
- a choice of customer premise equipment services.
To complement these expanded services, we will enhance our dial-up Internet
access services, deliver customer premise equipment management services via
internal resources and expand our offering of firewall security services.
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CUSTOMER SOLUTIONS
The following examples illustrate the challenges faced by our market and
the solutions we have offered to some of our current customers.
FEDERAL EMPLOYMENT AGENCY
Since 1979, a federal employment agency has made job listings available for
job seekers and employers at 1,800 state employment services across the country.
When we began this project, the various states used mainframes and client/server
systems that were not compatible.
Challenge: Managing the job listing database information was cumbersome,
fragmented, time-consuming and expensive. Both employers and prospective
employees experienced difficulty using it. The database job bank listing was
hampered by:
- the difficulty, costs and delay involved in posting jobs on individual
mainframes;
- the cost and limited availability of mainframe terminals to access job
postings;
- the complexities of a user-interface that discouraged many users;
- connections between state and national systems that were problematic; and
- systems that were complex and varied, making data conversion and
processing costly and difficult.
Solution: We implemented a workflow transformation in staged increments.
First, we developed a public Web site to make the database available to anyone
with a Web browser. We then added enhanced features for job classification and
geography searches. We subsequently expanded the job listing database to enable
states and employers to easily list jobs electronically.
FINANCIAL SERVICES COMPANY
Challenge: A multinational financial services firm processed international
applications for its products through a multiple step, labor intensive fax-based
system. The company needed a streamlined, simplified Internet solution.
Solution: We transformed the existing business processes by exploiting
Internet technologies and building on those systems already in place. We
developed a custom application to enable direct transmission of applications
over the Internet, complete with images of signatures, from field agent personal
computers to a system in the United States. The new system eliminated faxing and
saved thousands of dollars per month in long-distance charges. It also allowed
new product purchases to be entered onto the customer's existing legacy systems
without the risk of re-keying errors, which are unavoidable with manual data
entry.
DIVERSIFIED MULTINATIONAL COMPANY
Challenge: A diversified multinational company that manages university
student telephone accounts sought to replace its manual processes for
registering, validating, and administering these accounts in order to improve
the cost and service efficiencies of the system.
Solution: We developed an Internet solution that built on the customer's
existing systems. Features include:
- a Web-based student self-registration system customized for each school;
- the elimination of significant data-collection and entry costs;
- the reduction of delays in providing revenue-generating services; and
- the introduction of a simple Web interface for students to register and
for administrators to verify these registrations.
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FINANCIAL INFORMATION PROVIDER
Challenge: An organization providing the financial community with
information collection, analysis and distribution services wished to create a
premier, data-driven Web site. The group's management stipulated that the
successful vendor would be required to provide reliable Internet connectivity
and 24-hour expert support for:
- the custom Web site application;
- the underlying hardware;
- the operating system software; and
- any third-party database software support and administration.
Solution: In order to provide the capabilities the customer required, we
are working with a company providing strategy, design and consulting services
for electronic commerce and transactional Web sites. We provide all of the
system architecture and software development for the client's site, while our
collaborator develops the user interface, graphics and the on-going promotion of
the site. In addition, we host the service in our secure Web hosting facility.
The customer selected us because of the comprehensiveness of our technical
solution, the scalability of our software framework and technology and our
ability to flexibly integrate the future systems needed to support their
evolving product offering.
UNIVERSITY CONSORTIUM
Challenge: A university consortium sought to create an advanced network to
pioneer the development of a gigabit network and the next generation Internet,
which will cover a large geographic area and serve as a parallel Internet
connecting various entities wishing to enhance the flow of information between
them. The consortium sought assistance with the design, implementation,
operation and support of the project.
Solution: In cooperation with a traditional telecommunications network
operator, an operator of an advanced communications network and a leading
communications equipment manufacturer, we are leading the development of this
project. We are providing:
- engineering support;
- network architecture and design;
- project implementation; and
- on-going network management, including application and customer support.
With our support, this network will initially operate at OC12 speeds. The
network is intended to serve as a premiere platform for advanced research
applications.
STATE EMPLOYMENT AGENCY
Challenge: One of the members of a national consortium that contracts with
us for the development of a national job listing database required a solution
for replacing a series of outmoded mainframe-based systems that did not offer
the same level of performance and ease-of-use as the system employed by the job
listing database.
Solution: We recommended and implemented a distributed hardware/software
architecture, as well as certain enhancements to the network, including linking
the system via a virtual private network to a system hosted in our Syracuse
facility. The agency was able to eliminate difficult to learn, command based
mainframe interfaces, enhance the overall performance of the data sharing system
to near real time and eliminate system duplication through a seamless connection
to the national job listing database system.
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SALES AND MARKETING
Our sales and marketing strategy is to achieve broad market penetration by
targeting mid-sized businesses, mid-size departments of larger businesses and
public sector institutions that depend upon the Internet for mission-critical
operations. We feel that these markets are particularly attractive to us because
they will demand a complete one-stop Internet solution, which is not offered by
traditional Internet service providers.
- DIRECT SALES FORCE. The focus on multiple, leading edge product
offerings necessitates a sophisticated, consultative sales organization,
capable of understanding client requirements. As a result, we principally
utilize a direct sales approach to offer products and services to our
customers. We are in the process of expanding our direct sales
organization and will have six to eight person teams of regional sales
representatives, located across 30 metropolitan areas throughout the
United States. We intend to grow our direct sales force by more than 100
nationally over the next two years. Each sales representative will be
supported in the pre-sales process by specialists in each product line,
as well as a multi-layer sales management infrastructure. To further
leverage our strengths in particular industry segments, we expect to
service the country with a series of one to three person national market
management teams. At present, in addition to our general focus on the
business mid-market, we have chosen higher education and government as
two national market segments. We expect to add national market segments
over the next two years as our business evolves.
- VALUE-ADDED RESELLER AND STRATEGIC AFFILIATION PROGRAM. We intend to
expand our sales channels through a national value-added reseller
program. Value-added resellers incorporate our products and/or services
in their own products or service offerings. By incorporating our products
and/or services in their offerings, value-added resellers can provide
more comprehensive solutions to their customers while affording us the
benefit of the value-added resellers' sales forces without incurring the
costs of maintaining a larger sales force of our own. We expect to build
up a large network of value-added resellers that are capable of providing
commodity type access services on their own but who individually require
a partner like us to offer next generation products and services in all
Internet and IP areas for their clients.
In addition, we expect to set up a series of affiliations with network
and systems integrators and business process re-engineering consulting
firms. These affiliations will enable us to combine our specialized
Internet application development skills with their expertise in areas
like e-commerce. In addition, we have developed, and will continue to
develop, relationships with several Web developers who need technical and
operational skills to compliment their design expertise.
We maintain relationships with several value-added resellers, network and
system integrators and Web developers. Currently, these relationships are
not material to us. Many of our existing arrangements with these entities
are based on joint referral arrangements under which we recommend each
other's services but for which we do not earn a fee. We intend to enter
into additional relationships in the future, some of which may be
significant. We have not yet determined any additional strategic
affiliations that may be significant to us. It is possible that
arrangements that we enter into in the future may grant exclusive sales
territories to, or impose minimum purchase requirements on, value-added
resellers, network and system integrators and Web developers. However,
none of our existing arrangements include these types of provisions.
- IXC JOINT MARKETING AND SALES. IXC has a large national sales force that
focuses primarily on wholesale network services. We intend to jointly
market and sell with IXC Gemini2000 Network products and services,
combining their national sales presence and our expertise in value-added
applications. Our joint sales and marketing agreement with IXC enables
each of us to purchase a range of products and services from the other at
pre-set prices for resale to the other's customers. Neither we nor IXC is
obligated to make any purchases from the other under the agreement.
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- MARKETING. Our marketing program is intended to build national and local
strength and awareness of the AppliedTheory brand name. We intend to
employ a variety of classical marketing techniques for brand awareness
and lead generation. Branding efforts are expected to focus on
establishing an image for AppliedTheory as a full service provider of
next generation Internet technical services. We will use a combination of
Web and print media advertising, public relations and presentations by
senior officers, clients and partners at industry conferences to enhance
awareness and acquire leads for our sales team. We also intend to promote
the Gemini2000 Network joint AppliedTheory/ IXC product set for access,
virtual private network and Web hosting products.
CUSTOMER SUPPORT
High quality customer service and support are critical to our objective of
retaining our existing customers and developing new customers. We offer superior
customer service by understanding the technical requirements and business
objectives of our customers and fulfilling their needs proactively on an
individual basis.
Located at our network operations center in Syracuse, New York, our
customer support center is comprised of a customer support team, which is
responsible for all customer technical support, and a customer implementation
team, which is responsible for managing implementation of all customer projects.
The customer support process begins when a customer calls us and is assigned an
account manager and a sales engineer. That team remains responsible for the
customer throughout the life of the account. For those customers requiring
custom applications, the account team is supplemented by a project manager, who
guides the design and installation of the project and works with the customer to
continuously adjust or scale the application as required. Support options for
applications customers are extensive, ranging from maintenance, upgrades and
remote monitoring and management to full outsourcing of the application and
hosting at our data center.
Upon installation of a customer's system, we offer continuous technical
support through the customer support center. Customer support staff is trained
internally on our products and after six months of service is trained on
Internetworking, UNIX, monitoring and testing tools and techniques, technology
transfer and new technologies. In addition, specialized training is provided by
Cisco Systems, Inc., Microsoft Corporation, Network Associates, Inc. and Oracle.
The network operations and customer support center teams use specialized
software, Intermapper and Cisco Works, to identify and diagnose potential and
incipient hot spots. The network operations team remotely services customer's
connections to our network, and field service personnel are dispatched when
problems cannot be solved remotely. In 1998, our customer support center
succeeded in proactively alerting customers of potential and actual problems in
85% of cases, correcting minor difficulties before they became aggravated
problems. At the same time, the customer support center and network operations
teams had a mean time of repair below the industry average of four hours. We use
an advanced network monitoring package, Network Health, to monitor and measure
customer and company network usage. Customers can review their usage patterns
online and plan upgrades and services changes based on actual data with the
customer support center and their account manager.
The customer support center maintains what it believes are industry leading
standards, with its time-to-pick-up a trouble call being significantly below the
cross-industry national average and five times faster than the ISP industry
average. In addition, the customer support center requests feedback on every
problem through a weekly survey of customers served by the center.
OUR NETWORK
THE GEMINI2000 NETWORK
Together with IXC, we are in the process of deploying the Gemini2000
Network, the first coast-to-coast, next generation Internet backbone, to carry
both research and commercial traffic. The Gemini2000 Network is a fully
redundant, high performance national network that will enable us to offer
Internet
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access and backbone transport services to speeds that are 100 to 1,000 times
greater than those generally available to end users today. It is expected that
IXC will provide the telecommunications physical infrastructure, and that we
will provide customer installation and provisioning systems, including
installation of the connection between the customer and a POP, commonly known as
"last mile" access procurement, network monitoring, customer premise equipment
monitoring and management and "first line" trouble shooting. The Gemini2000
Network is expected to be completed by September 30, 1999.
The network architecture of the Gemini2000 Network is designed to establish
distinct geographical regions around the country and to contain data traffic
within these regions whenever possible so as to not make customer traffic travel
unnecessarily. There are three levels in the network -- access, edge and super-
core. The access level consists of the routers that connect a customer's
external lines to POPs. The access routers in a POP are connected to an edge
router. The edge router handles communication between the POP and the super-core
site. There is one super-core site per region, and each super-core consists of a
set of Cisco gigaswitch routers that are interconnected at data transmission
speeds of up to OC48 (2.5 gigabits per second) by a fully meshed network. In a
fully meshed network, super-core sites are connected to one another by more than
one pathway. Every super-core site will be connected to every other super-core
site, allowing traffic between these sites to flow in a single "hop." The
architectural structure of the Gemini2000 Network will allow traffic to be more
quickly and efficiently directed to its destination.
The Gemini2000 Network is engineered to provide the following
characteristics:
- SCALABILITY. The Gemini2000 Network incorporates the newest fiber and
electronics, providing significant capacity to allow customers to
provision incremental bandwidth as their needs grow. The hierarchical
infrastructure allows customers to quickly and easily increase bandwidth
by a factor of 100 or 1,000 without necessitating any architectural
changes to the network.
- FLEXIBILITY. The Gemini2000 Network employs high speed packet over
synchronous optical network (SONET), or POS, routing at the super-core
level through which information packets are digitally transmitted over a
high speed fiber optic transmission system. A combination of switching
and routing is employed at the edge level, allowing for access at speeds
from 56 kbps through OC12 (622.08 Mbps). This results in reliable,
high-speed connections and will provide our customers with the ability to
manage bandwidth by type of application and to accommodate applications
that are delay sensitive. Tag switching is used to combine the benefits
of routing and virtual circuit switching. This supports inter-operability
of the network with a full range of data transmission protocols,
including SMDS, frame relay and ATM connections. The Gemini2000 Network
architecture also allows it to support real-time voice and video
applications.
- HIGH AVAILABILITY. The Gemini2000 Network incorporates full mesh
topology. By connecting super-core sites to one another by more than one
pathway, performance bottlenecks and circuit failures that might
otherwise interrupt the flow of customer traffic are eliminated. Key
switching and router elements have been redundantly configured to further
reduce the impact of individual component failures. All backbone
locations are housed in facilities providing an uninterruptible power
supply at each POP. The immediate availability of additional fiber
capacity from IXC will give our customers the ability to quickly add
network capacity as their businesses grow.
- HIGH PERFORMANCE. The Gemini2000 Network employs full OC48 transmission
speeds (2.5 gigabits per second) in the super-core level and OC12 at the
edge level. The use of POS technology and tag switching leads to higher
throughput, more efficient resource utilization and greater simplicity,
with less points of failure. The network employs the best fiber currently
commercially available, which can support speeds in excess of OC192 (10
gigabits per second). As a result, the Gemini2000 Network can provide
connectivity that is 100 to 1,000 times faster than typical Internet
business connections available today and can be migrated to higher speeds
as newer technology is developed.
- ACCESSIBILITY. High speed connectivity to the Internet will be provided
through both public and private peering relationships with other
providers. Four public peering locations are either installed
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or on order, and ten regional private peering centers are under
development. Peering locations are public or private exchange points where
ISPs exchange each other's traffic.
- MANAGEABILITY. All network management traffic runs over a separate
network, known as out of band. As a result, management activities do not
interfere with increased network usage. Support staff are on site or on
call for all POP locations 24x7.
Until completion of the roll-out of the Gemini2000 Network, we will
continue to provide services for our customers on our existing network, which is
scheduled to be phased out over the next twelve months with all of our customers
expected to transition to the Gemini2000 Network infrastructure by June 30,
2000.
OUR EXISTING NETWORK
Throughout New York State, we currently operate a network having data
transmission speeds of DS3 (45 Mbps). There are sixteen POPs in the network. The
POP locations are Albany, Syracuse, Potsdam, Utica, Ithaca, Buffalo, Olean,
Binghamton, Oneonta, New York City (2), Poughkeepsie, Garden City, White Plains,
Rochester and Deer Park. Connectivity to the Internet is provided by eight DS3
lines connected to Sprint transit and peering locations. The entire network uses
Cisco routing equipment. Multiple routers at major nodes, or POPs designed to
handle larger volumes of traffic, are interconnected. Co-location facilities and
field service for the equipment are provided under contract by Bell Atlantic.
Network management and engineering support are provided by Sprint under
contract. Sprint monitors the network 24x7, as does our customer support center.
We gather performance statistics and share them with each customer.
OUR DATA CENTERS
Existing Data Centers
Our existing primary data center in Syracuse has the following
characteristics:
- a 2,350 sq. ft. secured and environmentally controlled space over a
raised floor;
- power cables isolated from the network cabling to prevent interference
and a new ground grid to prevent harmonic effects;
- two T-3 connections to the network, which are to ensure redundancy, and
two independent Cisco 7000 series routers which back each other up;
- continuous monitoring of the local area network; and
- a fully uninterruptible power system (equipment includes a 300/75
kilovolt-ampere power system and a diesel powered 300 kilowatt/375
kilovolt-ampere generator).
We also have a much smaller, secondary data center in New York City.
New Distributed Data Centers
We intend to build three new geographically distributed data centers in
addition to our existing primary data center in Syracuse, New York and our
secondary data center in New York City. The three new data centers will be
located in New York City, Austin, Texas and Hayward, California. The New York
City data center will be our primary data center in that region. We anticipate
that each data center will require an investment by us of approximately $1.5
million. We currently expect that all three data centers will be operational by
March 31, 2000.
At this time, plans are to construct 5,000 to 10,000 square foot facilities
incorporating the following:
- a raised floor;
- fully uninterruptible power (equipment will include a 225 kilovolt-ampere
back-up power system, appropriate power distribution wiring and a 400
kilowatt generator);
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- multiple high speed, above and below ground connections from the data
center to our Internet backbone at OC3 or above;
- constant temperature and humidity using three industry standard Liebert
25 ton heating, ventilation and air conditioning units;
- a mix of open shelving and 19" racks to give flexibility to address
varying server sizes, shapes and weights;
- intelligent fire detection and suppression system with dry fire
suppression;
- secure card key access systems;
- 24 hour on-site operations staff; and
- automated server and network monitoring tools.
The new data centers will incorporate the following features:
Full geographic load balancing between multiple data centers. Server
content will be mirrored between data centers and at the same time traffic load
balancing will be managed both locally (within the data center) and
geographically (between the data centers).
Back channel for monitoring. All data centers will be monitored remotely
from a central location via dedicated high speed connections.
Back channel for disk replication. Each data center will have multiple
servers, and content within one data center will be mirrored instantaneously.
The servers will synchronize with each other. Replication between data centers
will take place across a dedicated high speed connection. Content being mirrored
will be checked extensively for data integrity.
RELATIONSHIPS WITH TELECOMMUNICATIONS PROVIDERS
IXC
For a description of our contractual and business relationship with IXC,
see "Certain Transactions."
BELL ATLANTIC
We are a party to a contract with Bell Atlantic under which Bell Atlantic
provides local loop telecommunications services to us in New York State. The
services provided by Bell Atlantic include equipment for and maintenance of
local loop service, through which Bell Atlantic is responsible for aggregating,
routing and transporting the communications data of our customers. For the
territory covered by the agreement, Bell Atlantic provides routers which are
accessible to our customers through dialup, private line and other access
methods. Under the contract, we pay Bell Atlantic a fixed fee per month for its
services. We are subject to a termination charge if we terminate the contract
before its termination date. The contract terminates by its terms on June 11,
2002.
SPRINT
We are party to an agreement with Sprint under which Sprint provides us
with:
- a DS3 area network throughout the New York State area;
- DS3 access to the Sprint backbone;
- private DS3 lines from Ithaca, New York to Pennsauken, New Jersey and
from New York City to Washington D.C.;
- equipment, including routers and other equipment for sale by us to our
customers for installation on the customers' premises; and
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- value added services such as providing domain name services to customers
and customer premise equipment maintenance and management services.
Under this agreement, we pay Sprint a pre-determined monthly recurring
charge as well as variable charges according to the use which we and our
customers make of the services provided by Sprint. We also agreed to work with
Sprint under a co-marketing plan to promote the services we provide as a result
of this agreement.
Under the agreement, we are committed to Sprint for a minimum cumulative
purchase for various products and services through December 31, 2000. The
aggregate minimum cumulative purchase commitment over the term of the agreement
is $20.0 million. As of December 31, 1998, our aggregate purchases totaled $18.0
million. We anticipate meeting the minimum cumulative purchase commitment over
the remaining term. However, there can be no assurance that this minimum will be
met.
Either party may terminate the agreement in the event of a default by the
other party which is not cured within 30 days. We may also terminate the
agreement if the services provided by Sprint do not satisfy pre-determined
performance criteria. We will incur a termination charge if we terminate this
agreement before February 2000, or during the course of any renewal period, for
any reason other than because of a default by Sprint or because of Sprint's
failure to satisfy the performance criteria. The agreement terminates February
10, 2000, and automatically renews for three one-year terms unless terminated by
us. The agreement terminates in September 2000 with respect to the private DS3
lines.
COMPETITION
The markets in which we compete are highly competitive, and this
competition is increasing. There are few substantial barriers to entry, and we
expect that we will face additional competition from existing competitors and
new market entrants in the future. We believe that the primary competitive
factors in our markets are:
- technical expertise in developing applications focused on Web integration
and IP-centric solutions;
- a reliable and robust network infrastructure;
- network security;
- price;
- flexibility and willingness to consult and work with customers about how
to deploy their Internet solutions in meaningful ways;
- quality customer care;
- experienced and knowledgeable salesforce and engineers;
- customization;
- breadth of service offerings;
- brand recognition;
- broad geographic presence; and
- financial resources.
Our competitors vary in size, network scope, by product offering and by
geographic region, and include:
- ISPs;
- global, regional, and local telecommunications companies; and
- network and system integrators.
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We are not aware of any companies focused primarily on providing Internet
integration and portal development, Web hosting and Internet connectivity to the
business mid-market and public sector.
INTERNET SERVICE PROVIDERS
Our competitors nationally and in our New York State market include:
- Specialized ISPs such as Concentric Network, Exodus Communications,
Globix and AboveNet Communications;
- ISPs that cluster in major markets and regional ISPs that have facilities
in key metropolitan areas, including Frontier GlobalCenter, GTE
Internetworking, DIGEX and Verio;
- ISPs with a national or global presence which focus on business
customers, such as PSINet and UUNET; and
- Smaller ISPs with whom we compete primarily on price. These ISPs
generally have limited product offerings, low end hosting environments
and lower quality backbone infrastructure.
Within our New York State market, ISPs with which we principally compete
include Globix, Verio and I-2000 Inc.
While we believe that our next generation coast-to-coast network and
distributed data center infrastructure, quality customer service and proactive
support teams and target market distinguish us from other ISPs, many of our
competitors have greater financial, technical, and marketing resources, larger
customer bases, greater name recognition and more established relationships in
the industry.
TELECOMMUNICATIONS CARRIERS
We compete with telecommunications companies both nationally and in our New
York State market. Many long distance companies, including AT&T, Cable &
Wireless, Sprint, MCI WorldCom and Qwest offer Internet access services and Web
hosting services. Recent reforms in federal regulation of the telecommunications
industry have created greater opportunities for local exchange
telecommunications carriers to enter the Internet connectivity market. We
believe that there is a move toward horizontal integration by these carriers
through acquisitions of, joint ventures with, or the wholesale purchase of
connectivity from ISPs, in order to meet the Internet connectivity requirements
of their business customers.
We expect that we will experience increased competition from the
traditional telecommunications carriers. In addition to their greater network
coverage, market presence and financial, technical and personnel resources, many
of these telecommunications carriers also have large existing commercial
customer bases. We believe that our strong regional sales team and technical
support experience in IP solutions and pre- and post- sales consultation
distinguish us from the centralized, generalist sales approaches that typify the
connectivity and hosting services currently offered by the telecommunications
carriers.
NETWORK AND SYSTEM INTEGRATORS
We compete both nationally and in our New York State market with network
and system integrators. These firms include IBM, Oracle, the Big 5 accounting
firms, EDS and similar firms. These firms tend to focus on large customers who
outsource entire IT functions or re-engineer their IT infrastructure. We believe
that our ability to offer specialized IP-based integration for the mid-size
business market and government agencies distinguishes us from this segment of
the competition. In addition, our ability to offer somewhat lower pricing than
the large integrators is another distinguishing factor. We also compete with
smaller network and systems integrators. However, we believe that our expertise
with large and complex systems and our ability to offer one-stop solutions for
integration, data center services and purchasing network access set us apart
from this segment of the competition.
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GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation by the FCC or any other regulatory agency, other than regulations
that apply to businesses generally. Only a small body of laws and regulations
currently applies specifically to access to, or commerce on, the Internet. Due
to the increasing popularity and use of the Internet, however, it is possible
that laws and regulations with respect to the Internet may be adopted at
federal, state and local levels, covering issues such as:
- user privacy;
- freedom of expression;
- pricing;
- characteristics and quality of products and services;
- taxation;
- advertising;
- intellectual property rights;
- information security; and
- the convergence of traditional telecommunications services with Internet
communications.
Currently, the FCC is reviewing its regulatory position and could impose
regulations, similar to or different than that of a telecommunications carrier,
on value-added service providers like us. Also, the FCC could conclude that
notwithstanding our value-added services, we are not eligible to be classified
as an enhanced or information service provider and then could regulate all or
part of our activities as basic telecommunications services. In addition, while
state public utility commissions generally have declined to regulate enhanced or
information services, some other states do regulate some aspects of enhanced
services. Therefore, we cannot assure you that we will continue to be exempt
from regulation by either or both federal or state agencies. Our business could
suffer depending upon the extent to which our activities are regulated or are
proposed to be regulated.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the FCC in the same manner as
other telecommunications services. The growing use of the Internet has burdened
the existing telecommunications infrastructure in many areas, and some local
telephone carriers have petitioned the FCC to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies.
Although sections of the Communication Decency Act of 1996 (CDA) that,
among other things, proposed to impose criminal penalties on anyone distributing
indecent material to minors over the Internet were held to be unconstitutional
by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The
nature of future legislation and the manner in which it may be interpreted and
enforced cannot be fully determined and, therefore, legislation similar to the
CDA could subject us and/or our customers to potential liability, which in turn
could have a material adverse effect on our business. The adoption of any of
these types of laws or regulations might decrease the growth of the Internet,
which in turn could decrease the demand for our services or increase our cost of
doing business or in some other manner have a material adverse effect on our
business.
In addition, with respect to issues such as property ownership, copyright
and other intellectual property, taxation, libel, obscenity and personal
privacy, the applicability of existing laws to the Internet is uncertain. The
vast majority of laws governing these issues were adopted prior to the advent of
the Internet and the emergence of related technologies. As a result, these laws
do not contemplate or address the unique issues raised by the Internet and by
related technologies. Any changes to these laws which are intended to address
these issues could create uncertainty in the marketplace and could reduce demand
for services or increase our cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
hurt our business.
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Finally, because our services are available over the Internet virtually
worldwide, and because we facilitate sales by our customers to end users located
in multiple states and foreign countries, various jurisdictions may claim that
we are required to qualify to do business as a foreign corporation in each state
where we conduct business and in each foreign jurisdiction where we have a
permanent establishment. Any new legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
our business, could have a material adverse effect on our business.
EMPLOYEES
As of March 31, 1999, we had 190 employees, of which:
- 49 were employed in sales, distribution and marketing;
- 83 were assigned to engineering and service development;
- 34 were employed in customer service and technical support; and
- 24 were in finance and administration.
We believe that our future success will depend in part upon our continued
ability to attract, hire and retain qualified personnel. The competition for
qualified personnel is intense, and we may not be able to identify, attract and
retain qualified personnel in the future. None of our employees is represented
by a labor union, and we believe that our employee relations are good.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our products and services. We have no patented technology
that would preclude or inhibit competitors from entering our market, although
the foregoing laws provide protection in important respects. We have entered
into confidentiality and invention assignment agreements with our employees, and
nondisclosure agreements with our suppliers, distributors and appropriate
customers in order to limit access to, and disclosure of, our proprietary
information. There can be no assurance that these contractual arrangements, or
the other steps we have taken to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. The laws of some foreign
countries may not protect our products, services or intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that any necessary third-party technology licenses will be available
to us on commercially reasonable terms. The unavailability of any required
technology could force us to obtain substitute technology of lower quality or
performance standards or at greater cost, which could materially adversely
affect our business.
To date, we have not been notified that our services or products infringe
upon the proprietary rights of third parties. However, there can be no assurance
that third parties will not claim infringement with respect to our current or
future products. We expect that participants in our markets will be increasingly
subject to infringement claims as the number of products and competitors in our
industry segment grows and as certain technologies are patented giving rise to
possible infringement claims without any copying on the part of the alleged
infringer. Any infringement claim, whether meritorious or not, could be time
consuming, divert the attention of management and employees from their regular
duties, result in costly litigation, cause product installation delays or
require us to enter into royalty or licensing agreements. As a result, any
infringement claim could hurt our business. Also, royalty or licensing
agreements might not be available on terms acceptable to us, if at all.
FACILITIES
Our executive offices are located in Great Neck, NY and consist of
approximately 5,633 square feet that are leased pursuant to an agreement that
expires in July 2006. Our main operational center is in Syracuse, NY, with
approximately 21,246 square feet under a lease agreement that expires in
November 2008. In addition, we lease approximately 5,789 square feet in
Syracuse, NY under an
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agreement that expires in November 2008. We also lease approximately 5,250
square feet in New York, NY for a Web hosting facility and office space under a
lease that expires in September 2006. We intend to relocate our Web hosting
facility in New York, NY to another facility by September 1999. In addition, we
are considering relocating our corporate headquarters from Great Neck, NY to New
York, NY.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of AppliedTheory:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Richard Mandelbaum........................ 52 Chairman of the Board and Chief Executive Officer
Lawrence B. Helft......................... 53 President and Chief Operating Officer
James D. Luckett.......................... 45 Senior Vice President
Denis J. Martin........................... 40 Vice President and Chief Software Engineer
Mark A. Oros.............................. 41 Vice President and Chief Technology Officer
David A. Buckel........................... 37 Vice President and Chief Financial Officer
John A. Wingert........................... 55 Vice President, Operations
James Guthrie............................. 54 Director
Shelley A. Harrison....................... 56 Director
James T. Kelsey........................... 47 Director
John J. Pendray........................... 59 Director
George Sadowsky........................... 62 Director
</TABLE>
RICHARD MANDELBAUM, Chairman of the Board and Chief Executive Officer, has
been with us since the start of our operations in 1996. He is a non-voting
member of both the compensation committee and the audit and finance committee.
Dr. Mandelbaum is one of the four computing and communications experts who
founded NYSERNet.org in 1985 and is presently a member of the boards of
directors of NYSERNet.net and NYSERNet.org. He served as Director of the Center
for Advanced Technology in Telecommunications, CATT, and Professor of Computer
Science at Polytechnic University from 1992 to 1996. Prior to that, he served at
the University of Rochester as Vice Provost for Computing and Telecommunications
and as a Professor of Mathematics and a Professor of Electrical Engineering. Dr.
Mandelbaum helped to oversee research and development work in, among other
things, network management, network security, broadband networking and wireless
communications, and he initiated many CATT partnerships with industry,
especially with the banking community. He was also a member of the 1987 advisory
committee to the Federal Coordinating Council on Science and Engineering
Technology panel of the President's Office of Science and Technology Policy,
which generated the Federal National Information Infrastructure initiative as
well as the National Science Foundation's Network Program Advisory Committee
which was responsible for the creation and oversight of NSFNet, the immediate
precursor of today's Internet. Dr. Mandelbaum was also a co-founder and first
president of FARNet and was an active member of the National Telecommunications
Task Force. Dr. Mandelbaum holds both a Ph.D. and an M.A. in Mathematics from
Princeton University, a B.S. in Mathematics from the Rensselaer Polytechnic
Institute and was a Member of the Princeton Institute of Advanced Studies in
1976 and 1977.
LAWRENCE B. HELFT, President and Chief Operating Officer, joined us in
December of 1998. He is responsible for our Internet operations and support
services and sales and marketing activities. From November 1994 to November
1998, Mr. Helft was Chief Executive Officer and President of Systems Union Inc.,
an enterprise resource planning vendor, and from September 1993 to November
1994, he held executive positions at EDS. Prior to that, he launched and ran his
own consulting firm, managed several technology subsidiaries of the Chase
Manhattan Bank, N.A., was the Department Head of the National Banking Group at
Citicorp, N.A. and served as Project Leader and Consultant for Unisys, Inc. Mr.
Helft holds both M.S. and M.B.A. (Management Science) degrees from New York
University and a B.S. degree in Electrical Engineering from City University of
New York.
JAMES D. LUCKETT, Senior Vice President, is one of the co-founders of
AppliedTheory and has been with us since 1996. Mr. Luckett oversees business
development efforts at AppliedTheory, including product management, product
development and research and development and the direction of corporate
strategic
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alliances. Mr. Luckett joined NYSERNet.org in 1989, was President of
NYSERNet.org from 1996 to 1997 and is currently a member of the boards of
directors of NYSERNet.net and NYSERNet.org. He was a founder of the Teaching and
Learning Working Group of the Coalition for Networked Information, a founding
board member of the Consortium for School Networking and a past board member and
treasurer of FARNet. Mr. Luckett also serves as an expert advisor and panelist
of the National Science Foundation. Mr. Luckett holds an M.S. in Education from
SUNY College at Brockport and a B.A. in History from SUNY College at
Plattsburgh.
DENIS J. MARTIN, Vice President and Chief Software Engineer, has been with
us since the start of our operations in 1996. Mr. Martin joined NYSERNet.org in
1993, where he served as director of Government Services and Director of
Info-Services. At AppliedTheory, he currently directs a team of developers in
building on-line applications, making innovative use of the Web for standard
business functions, information systems and legacy database integration. He has
extensive experience in the software development and systems integration field.
From 1986 to 1993, Mr. Martin worked in the technology division of the New York
State Department of Education. He also served as a consultant to state and
federal agencies to develop network and application programs. Mr. Martin
received an M.S. in Information Systems Engineering from Polytechnic University
and a B.A. from Clark University.
MARK A. OROS, Vice President and Chief Technology Officer, has been with us
since the start of our operations in 1996. Mr. Oros joined NYSERNet.org in 1993
and currently serves as Chief Operating Officer of NYSERNet.org. In conjunction
with Richard Mandelbaum, Mr. Oros engineered our network. Mr. Oros is currently
responsible for technology development at AppliedTheory. Prior to joining us,
Mr. Oros was Network Manager at Brookhaven National Labs which he joined in
1993. He was also part of the operational team that built NSFNet. He played
important roles in the construction of the computer network that supported the
Cornell Theory Center -- one of the nation's major supercomputer facilities --
in the development of Sprintlink, now Sprint IP Global Network, and in the
design and implementation of Sprint's International Connection Management
Network and Sprint's Network Operations Center for a Cornell University
technology transfer. Mr. Oros holds an Associate of Arts in Data Processing
degree from Catonsville Community College.
DAVID A. BUCKEL, Vice President and Chief Financial Officer, has been with
us since the start of our operations in 1996. Mr. Buckel joined each of
NYSERNet.net and NYSERNet.org in 1995 and currently serves as Chief Financial
Officer with respect to each of them. Mr. Buckel presently manages all treasury,
finance and accounting aspects for AppliedTheory. His background includes
accounting, financing and operations management. From 1987 to 1995 he was a
Corporate Controller at Suit-Kote Corp. A Certified Management Accountant, Mr.
Buckel received an M.B.A. with concentrations in Operations Management and
Finance from Syracuse University and a B.S. in Accounting from Canisius College.
JOHN A. WINGERT, Vice President, Operations, has been with us since 1996.
Mr. Wingert is responsible for our network services department (including
network engineering and systems engineering), access product development,
software engineering department and support services department (including
oversight of the customer service center and support implementation). He also
oversees our knowledge services department, which houses our employee training
programs. Prior to joining us, Mr. Wingert was manager of the global
telecommunications department of United Technologies Carrier Corporation, a
manufacturer of heating, ventilation and air conditioning equipment. He has also
held senior management positions with Westinghouse Electronic Systems, a
business unit of the Westinghouse Corporation, and spent several years in
software consulting with Computer Task Group, Incorporated and EDS in various
assignments. He was formerly a Parish Priest with the Episcopal Diocese of
Maryland. He received his A.B. from Hamilton College and his M.Div. from the
General Theological Seminary.
JAMES GUTHRIE has been a director of AppliedTheory since September 1998. He
chairs our audit and finance committee and is a member of the compensation
committee. Mr. Guthrie has served as Chief Financial Officer of IXC since July
1997 and as its Executive Vice President since March 1996. He joined IXC in
January 1995. Prior to joining IXC, Mr. Guthrie served as Vice President and
Chief Financial Officer of The Times Mirror Company from 1993 to 1995 and as the
Chief Financial Officer of Times
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Mirror Cable Television from 1982 to 1993. Mr. Guthrie holds a B.A. from the
University of Redlands and an M.B.A. from the University of Southern California.
Mr. Guthrie is a Certified Public Accountant.
SHELLEY A. HARRISON has been a director of AppliedTheory since August 1998
and is a member of the compensation committee. Dr. Harrison has served as Chief
Executive Officer of Spacehab Incorporated since April 1996 and as Chairman of
its Board since August 1993. He co-founded and served as Chairman and Chief
Executive Officer of Symbol Technologies, Inc. from 1973 to 1982. Symbol
Technologies, Inc. is a world leader in laser bar code scanners and wireless
data communications. In addition, Dr. Harrison is a founder and Managing General
Partner of PolyVentures I and II, both of which are high tech venture capital
funds. He is also a technology advisor to governments, an author of books and
technical publications and a holder of numerous patents, and he runs his own
consulting firm. He is a member of the boards of directors of Globecomm Systems,
Inc., Asymetrix Learning Systems, Inc. and NetManage, Inc. Dr. Harrison holds a
Ph.D. and an M.S. in Electrophysics from Polytechnic University and a Bachelor's
Degree in Electrical Engineering from NYU.
JAMES T. KELSEY has been a director of AppliedTheory since August 1998. He
chairs the compensation committee and is a member of the audit and finance
committee. Mr. Kelsey is a managing partner of Grumman Hill Group LLC. Grumman
Hill Group LLC is the general partner to Grumman Hill Investments III, L.P., one
of our largest stockholders. Mr. Kelsey is also a managing partner of Grumman
Hill Associates, Inc., an affiliate of Grumman Hill Group LLC. Grumman Hill
Associates, Inc. is the general partner of Grumman Hill Investments LP, a
significant shareholder in IXC. Mr. Kelsey has been with Grumman Hill Group
since its inception in 1985, dealing with private equity investments and mergers
and acquisitions. From 1993 to 1996, Mr. Kelsey served as Managing Director of
the Corporate Finance practice at PricewaterhouseCoopers LLP (f/k/a/ Price
Waterhouse), where he provided sales, acquisition, financing and other corporate
finance advice to many large multinational and middle market U.S. companies. Mr.
Kelsey holds an M.S. in Accounting from the Stern School of Business at NYU and
a B.A. in Economics from Princeton University.
JOHN J. PENDRAY has been a director of AppliedTheory since October 1996 and
is a member of the Audit and Finance Committee. Mr. Pendray is currently a
Visiting Fellow at The Graduate School of Management of The University of
Western Australia, Perth, Australia. From 1996 to 1998, he was Executive in
Residence and Visiting Professor of Management at the Graduate Business School
of the George Mason University, Fairfax, Virginia, which he joined in 1996. From
May 1993 to August 1996, he was President and Chief Executive Officer of the
International Group of Cincinnati Bell Information Systems, Inc. He was a
founding partner of Vanguard Atlantic Ltd., a merchant banking firm investing in
software and telecommunications companies, and worked with Vanguard Atlantic for
eight years ending in 1993. From 1986 until November 1998, he was a Director of
TSI Software International Inc. He received his B.S. in Engineering Sciences
from the University of Florida and his M.S. in Computer Science from Stanford
University.
GEORGE SADOWSKY has been a director of AppliedTheory since September of
1996 and is a member of the audit and finance committee. Dr. Sadowsky is the
Director of the Academic Computing Facility at New York University, which he
joined in 1990. Dr. Sadowsky is currently a director of NYSERNet.net and
NYSERNet.org. Since 1998 he has been the Vice President for Education of the
Internet Society, from 1995 to 1998 he was its Vice President for Conferences
and since 1996 he has been a member of its Board of Trustees. From 1996 to the
present, Dr. Sadowsky has been a member of the Technical Advisory Panel, InfoDev
Program of the World Bank and served as consultant to various institutions,
including the Inter-American Development Bank and the International Science
Foundation. He spent 12 years at the United Nations as a technical adviser
engaged in, among other things, the transfer of information technology to
developing countries. Dr. Sadowsky holds a Ph.D. and an M.A. in Economics from
Yale University and a B.A. in Mathematics from Harvard University.
Messrs. Guthrie and Kelsey and Dr. Sadowsky serve on the board of directors
as representatives of IXC, Grumman Hill and NYSERNet.net, respectively, under
the stockholders' agreement we entered into in August 1998. See "-- Certain
Transactions." Drs. Mandelbaum and Harrison and Mr. Pendray also
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<PAGE> 62
serve on the board of directors under the stockholders' agreement. The
stockholders' agreement will terminate upon completion of this offering and IXC,
Grumman Hill and NYSERNet.net will no longer be entitled to guaranteed
representation on, and none of our current directors will be assured of election
to, our board of directors.
Our certificate of incorporation will provide for our board of directors to
be divided into three classes, with only one class standing for election each
year. At each annual meeting, directors will be chosen to succeed those in the
class whose term expires at that meeting and to serve a term of three years.
Under this provision, Mr. Pendray and Dr. Sadowsky will initially serve as Class
I directors, Mr. Guthrie and Dr. Harrison will initially serve as Class II
directors and Mr. Kelsey and Dr. Mandelbaum will initially serve as Class III
directors, with terms of office scheduled to expire at AppliedTheory's annual
meetings of stockholders in 2000, 2001 and 2002. Our certificate of
incorporation and bylaws will provide that stockholders will not be able to
remove directors without the approval of 75% of the total voting power of all
outstanding securities entitled to vote generally in the election of directors.
The provisions of our certificate of incorporation and bylaws relating to the
classified board and removal of directors by stockholders will provide that they
may not be amended or repealed without the approval of 75% of the total voting
power of all outstanding securities entitled to vote generally in the election
of directors.
Officers are elected annually by the board of directors and may be removed
at any time by the board. Our officers hold their respective offices until their
successors are duly elected and qualified.
COMPENSATION OF DIRECTORS
Non-employee directors currently receive annual compensation of 22,500
options to acquire our common stock for their service on the board of directors
and any committee of the board. These options are granted with an exercise price
equal to the fair market value of our common stock on the date of grant.
Directors are eligible to receive options under our stock option plans.
LIMITATIONS ON DIRECTORS' LIABILITY
LIABILITY LIMITATION. Our certificate of incorporation provides that, to
the fullest extent permitted by the Delaware General Corporation Law, none of
our directors will be personally liable to us or our stockholders for monetary
damages. Section 102(b)(7) of the Delaware General Corporation Law currently
provides that a director's liability for breach of fiduciary duty to a
corporation may be eliminated, except for liability:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, for unlawful
dividends or unlawful stock repurchases or redemptions; and
- for any transaction from which the director derives an improper personal
benefit.
Any amendment to these provisions of the Delaware General Corporation Law
will automatically be incorporated by reference into our certificate of
incorporation without any vote on the part of its stockholders unless otherwise
required.
INDEMNIFICATION AGREEMENTS. Prior to completion of this offering, we
intend to enter into indemnification agreements with each of our directors. The
indemnification agreements will provide that we will indemnify the directors
against liabilities, including settlements and expenses actually and reasonably
incurred by them in connection with any threatened, pending or completed legal
action, proceeding or investigation, other than actions brought by or in right
of us, to which any of them was, is or
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<PAGE> 63
is threatened to be made a party by reason of his status as our director,
officer or agent or his serving at our request in any other capacity for or on
our behalf, provided that:
- the director acted in good faith and in a manner not opposed to our best
interests;
- with respect to any criminal proceedings, the director had no reasonable
cause to believe his conduct was unlawful;
- the director is not finally adjudged to be liable for gross negligence or
wilful misconduct in the performance of his duty towards us, unless the
court views that, in light of the relevant circumstances, the director is
nevertheless entitled to indemnification; and
- the indemnification does not relate to any liability arising under
Section 16(b) of the Securities Exchange Act of 1934, as amended, or the
rules or regulations promulgated thereunder.
With respect to any action brought by or in right of us, directors may also
be indemnified, to the extent not prohibited by applicable laws or as determined
by a court of competent jurisdiction, against reasonable costs and expenses
incurred by them in connection with the action if they acted in good faith and
in a manner they reasonably believed to be in, or not opposed to, our best
interests.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has standing audit and finance and compensation
committees. The audit and finance committee consists of Messrs. Guthrie, Pendray
and Kelsey and Drs. Mandelbaum (non-voting) and Sadowsky. Among other functions,
the audit and finance committee:
- makes recommendations to the board of directors regarding the selection
of independent auditors;
- reviews the results and scope of the audit and other services provided by
our independent auditors;
- reviews our financial statements; and
- reviews and evaluates our internal control functions.
The compensation committee consists of Messrs. Guthrie and Kelsey and Drs.
Mandelbaum (non-voting) and Harrison. The compensation committee makes
recommendations to the board of directors regarding the administration of our
stock option and stock purchase plans and with regard to executive compensation
and salaries and incentive compensation for our employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Guthrie and Kelsey and Drs. Mandelbaum and Harrison served as
members of our compensation committee during fiscal year 1998. Other than Dr.
Mandelbaum, who served as our Chairman and Chief Executive Officer during 1998,
no committee member is or has been one of our officers or employees. Dr.
Mandelbaum serves only as a non-voting member of the compensation committee. No
executive officer of AppliedTheory serves as a member of the board of directors
or compensation committee of any other entity that has one or more executive
officers serving on our board or on our compensation committee. Set forth below
are transactions involving AppliedTheory and members of the compensation
committee or entities with which members of the compensation committee have
relationships.
STOCK PURCHASE AGREEMENT. On August 4, 1998, we entered into a stock
purchase agreement with IXC, of which Mr. Guthrie is an executive officer,
Grumman Hill, of which Mr. Kelsey is a managing partner of the general partner,
NYSERNet.net, Richard Mandelbaum, and other of our executive officers. Under
this agreement:
- IXC purchased 4,400,000 shares and Grumman Hill purchased 2,200,000
shares of our common stock for $12.9 million and $6.5 million from
NYSERNet.net and us. In connection with this transaction, we issued
1,725,000 new shares for $5.0 million of net proceeds. The balance of the
shares involved in this transaction was sold by NYSERNet.net;
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- IXC has a right of first refusal to provide us with broadband or
private-line Internet services at market prices; and
- NYSERNet.net granted to IXC and Grumman Hill an irrevocable proxy with
respect to a portion of the shares of our common stock owned by them.
REGISTRATION RIGHTS AGREEMENT. In connection with the stock purchase
agreement, we entered into a registration rights agreement dated August 4, 1998
with IXC, Grumman Hill, NYSERNet.net, Richard Mandelbaum, James D. Luckett,
Denis J. Martin, Mark A. Oros, David A. Buckel and Shelley A. Harrison. The
registration rights agreement grants the parties to the agreement the right to
require us to register shares of our common stock owned by these parties under
the Securities Act under various circumstances. However, these registration
rights may not be exercised in connection with this offering. For a more
complete description of these rights, see "Description of Capital Stock."
STOCKHOLDERS' AGREEMENT. The parties to the stock purchase agreement and
Dr. Harrison entered into a stockholders' agreement dated August 4, 1998 which
will terminate upon the completion of this offering. The stockholders' agreement
provides for, among other things, the appointment of Dr. Mandelbaum and a
representative of each of NYSERNet.net, Grumman Hill and IXC to our board of
directors.
OPTION AGREEMENTS. In connection with the stock purchase agreement, some
of our major shareholders, including Drs. Mandelbaum and Harrison, have entered
into option agreements dated August 4, 1998 and August 28, 1998 with IXC,
Grumman Hill and NYSERNet.net. Under these option agreements, IXC and Grumman
Hill granted to some of our stockholders, including Drs. Mandelbaum and
Harrison, put options to sell to IXC and Grumman Hill an aggregate of 2,280,938
shares of our common stock at a purchase price of $2.93 per share beginning on
September 4, 1999 and September 28, 1999. Under the same agreement, the
optionees granted IXC and Grumman Hill call options to buy the same stock at the
same purchase price as for the put options. The call options are exercisable
upon the expiration of the put options on October 4, 2000 and October 28, 2000
through August 4, 2001 and August 28, 2001.
JOINT MARKETING AND SERVICES AGREEMENT WITH IXC. In January 1999, in
accordance with our obligations under the stock purchase agreement, we entered
into a Joint Marketing and Services Agreement with IXC under which:
- subject to some exceptions, each of us agreed to provide the other with
any of the services or products that we offer or will offer to our
customers;
- each of us may use these services for our own account or for the account
of our customers or for distribution to and eventual resale by others;
- each party granted the other a right of first refusal with respect to
specified purchases from third parties; and
- we agreed to provide access to each other's network for the purpose of
facilitating the provision of the various services covered by the
agreement.
HARRISON CONSULTING AGREEMENT. In October 1996, we entered into a
consulting agreement with Shelley A. Harrison. Under the terms of the agreement,
Dr. Harrison is to render advisory and consulting services with respect to our
operations, financing and business planning, particularly in relation to any
sales of securities, mergers or similar transactions. Dr. Harrison receives
$5,000 per month under the agreement, in addition to having received at the
commencement of the agreement an option to purchase 750,000 shares of our common
stock at $0.13 per share.
GRUMMAN HILL CONSULTING ARRANGEMENT. We currently have an arrangement
through which Grumman Hill serves in a consulting and advisory capacity to our
management. In accordance with this arrangement, Grumman Hill, including James
T. Kelsey, renders consulting services and management advice to us particularly
as regards corporate financing activities, which includes advice pertaining to
this offering. We pay a consulting fee of $60,000 per year to Grumman Hill under
this arrangement.
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MANDELBAUM LINE OF CREDIT AGREEMENT. Effective January 1, 1999, we have
made available to Dr. Mandelbaum a credit line of $2,500,000 to be used
exclusively by Dr. Mandelbaum for the purchase of our stock in any future
private equity placement in which IXC and Grumman Hill participate. In the event
any borrowings are drawn against this credit line, payment terms, interest rates
and collateral provisions will be established by the board of directors. As of
the date of this prospectus, no borrowings are outstanding on the line of
credit. The line of credit agreement will terminate upon consummation of this
offering.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the total
compensation for 1998 of our Chief Executive Officer, each of our other four
most highly compensated executive officers whose total salary and bonus for 1998
exceeded $100,000 and one additional individual who served as an executive
officer for part of 1998 (each a named executive officer, and collectively, the
named executive officers):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES ALL
------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS/SARS COMPENSATION
- ------------------------------ -------- ------- ------------- ------------
<S> <C> <C> <C> <C>
Richard Mandelbaum...................... $247,823 $80,000 395,835 $12,163(2)
Chairman of the Board of Directors and
Chief Executive Officer
James D. Luckett........................ 126,538 23,000(3) 123,938 4,876(4)
Senior Vice President
Mark A. Oros............................ 136,769 28,000(5) 229,313 8,765(6)
Vice President and Chief Technology
Officer
Denis J. Martin......................... 123,077 81,100(7) 232,688 7,242(8)
Vice President and Chief Software
Engineer
David A. Buckel......................... 114,486 38,000(9) 150,000 7,000(10)
Vice President and Chief Financial
Officer
Michael D. Greenbaum(11)................ 25,516 0 0 40,000(12)
Vice President, Sales and Marketing
</TABLE>
- ---------------
(1) Each of the named executive officers other than Mr. Greenbaum is party to
an employment agreement with AppliedTheory. See "-- Employment Agreements."
(2) Represents matching contributions under the AppliedTheory 401(k) Matched
Savings Plan of $9,600 and $2,563 imputed income for group term life
insurance.
(3) Includes a bonus of $5,000 earned in 1998 that was paid in January 1999.
(4) Represents matching contributions under the AppliedTheory 401(k) Matched
Savings Plan of $4,000 and $876 in imputed income for group term life
insurance.
(5) Includes a bonus of $4,000 earned in 1998 that was paid in January 1999.
(6) Represents matching contributions under the AppliedTheory 401(k) Matched
Savings Plan of $8,206 and $559 in imputed income for group term life
insurance.
(7) Includes a bonus of $47,100 earned in 1998 that was paid in January 1999.
(8) Represents matching contributions under the AppliedTheory 401(k) Matched
Savings Plan of $6,740 and $502 in imputed income for group term life
insurance.
(9) Includes a bonus of $4,000 earned in 1998 that was paid in January 1999.
(10) Represents matching contributions under the AppliedTheory 401(k) Matched
Savings Plan of $6,699 and $301 in imputed income for group term life
insurance.
(11) Mr. Greenbaum's employment was terminated effective March 13, 1998. He
received total severance pay in the amount of $91,039.
(12) Represents the portion of a moving expense allowance ($100,000 in the
aggregate) in connection with the commencement of Mr. Greenbaum's
employment in 1997 that was paid in 1998.
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OPTION GRANTS IN LAST FISCAL YEAR. The following table summarizes
information with respect to options to purchase our common stock granted to the
named executive officers during 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS(1) APPRECIATION FOR OPTION TERM(2)
------------------------------------------------------------------ ------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED TO OR BASE MARKET PRICE
UNDERLYING EMPLOYEES IN PRICE ON DATE OF EXPIRATION
NAME OPTIONS FISCAL YEAR ($/SHARE) GRANT DATE 0% 5% 10%
- ---- ---------- ------------- --------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Mandelbaum...... 191,670 8.7% $2.93 $ 2.93 08/03/08 $2,025,313 $3,652,606 $6,149,193
12,503 0.6 2.93 2.93 09/01/08 132,110 238,257 401,108
114,998 5.2 2.93 3.47 11/09/08 1,215,140 2,191,478 3,689,372
56,662 2.6 2.93 10.50 12/20/08 598,734 1,079,803 1,817,857
6,562 0.3 2.93 10.50 11/30/07* 69,334 125,060 210,539
13,440 0.6 2.93 10.50 12/30/07 142,016 256,123 431,185
James D. Luckett........ 90,000 4.1 2.93 3.47 11/09/08 951,000 1,715,107 2,887,397
22,500 1.0 0.13 10.50 12/31/06* 300,750 491,777 784,849
3,938 0.2 0.40 10.50 11/30/07* 51,581 85,011 136,299
7,500 0.3 0.40 10.50 12/30/07* 98,250 161,926 259,616
Mark A. Oros............ 187,500 8.5 2.93 3.47 11/09/08 1,981,250 3,573,140 6,015,411
22,500 1.0 0.13 10.50 12/31/06* 300,750 491,777 784,849
15,000 0.7 0.40 10.50 12/30/07* 196,500 323,851 519,233
4,313 0.2 0.40 10.50 11/30/07* 56,494 93,107 149,279
Denis J. Martin......... 187,500 8.5 2.93 3.47 11/09/08 1,981,250 3,573,140 6,015,411
3,938 0.2 0.40 10.50 11/30/07* 51,581 85,011 136,299
22,500 1.0 0.13 10.50 12/31/06* 300,750 491,777 784,849
18,750 0.8 0.40 10.50 12/30/07* 245,625 404,814 649,041
David A. Buckel......... 150,000 6.8 2.93 3.47 11/09/08 1,585,000 2,858,512 4,812,328
Michael D. Greenbaum.... 0 0 0 0 -- 0 0 0
</TABLE>
- ---------------
(1) All stock options reported in this table were granted under the 1996
Incentive Stock Option Plan. The options vest ratably over a period not to
exceed 5 years and have a ten-year term.
(2) This column shows the hypothetical gains on the options granted based on
assumed annual compound stock appreciation rates of 0%, 5% and 10% over the
full ten-year term of the options, based on the assumed initial public
offering price of $13.50 less the exercise price. The assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent an estimate or projection of future common
stock prices by AppliedTheory.
* These figures represent stock appreciation rights which were granted in 1997
and were converted by the board of directors in 1998 to nonstatutory options
to purchase common stock.
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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. The following table shows the aggregate number of shares acquired upon
exercise of stock options during the last fiscal year, the aggregate value
realized from those exercises, the number of shares covered by both exercisable
and unexercisable stock options as of fiscal year-end and the value of
unexercised options as of fiscal year-end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
SHARES 1998(1) AT DECEMBER 31, 1998(1)(3)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard Mandelbaum............... 1,630,433 $21,910,839 906,240 184,163 $11,561,959 $1,945,984
James D. Luckett................. 600,000 8,066,400 33,938 90,000 450,581 951,000
Mark A. Oros..................... 375,000 5,041,500 41,813 187,500 553,744 1,981,250
Denis J. Martin.................. 375,000 5,041,500 45,188 187,500 597,956 1,981,250
David A. Buckel.................. 180,000 2,409,600 2,813 150,000 36,843 1,585,000
Michael Greenbaum................ -0- -0- -0- -0- -0- -0-
</TABLE>
- ---------------
(1) Subsequent to December 31, 1998, Dr. Mandelbaum, and Messrs. Martin and Oros
exercised options with respect to 701,130, 45,188 and 41,813 shares of
common stock. This table does not reflect these exercises.
(2) The value realized has been calculated as the difference between $13.50, the
assumed initial public offering price, and the exercise price of each
option.
(3) Based on the difference between $13.50, the assumed initial public offering
price, and the option exercise price for each option. The above valuation
may not reflect the actual value of unexercised options, as the value of
unexercised options will fluctuate with market activity.
EMPLOYMENT AGREEMENTS
On August 4, 1998, we entered into employment agreements with Dr. Richard
Mandelbaum and Messrs. James D. Luckett, Denis J. Martin, Mark A. Oros and David
A. Buckel. The employment agreements provide for base salaries of $250,000,
$130,000, $125,000, $143,000 and $125,000. These salaries may be increased at
the discretion of our board of directors. Each of the employment agreements
provides for payment of an annual bonus in accordance with our annual bonus
program for senior executives, contingent upon the achievement of performance
goals established by the board of directors in its discretion.
Dr. Mandelbaum's employment agreement is for an initial five-year term. The
employment agreements with Messrs. Luckett, Martin, Oros and Buckel have initial
terms of three years. All these employment agreements automatically renew for
consecutive one-year periods unless either we or the applicable employee deliver
a notice of non-renewal at least one year before termination of the initial
term.
For all of these employment agreements, if the executive's employment is
terminated by us other than for "cause," by the executive for "good reason" or
due to "death or disability" (each as defined in the employment agreements), the
executive will generally be entitled to the following severance:
- his then-current salary payable for the non-compete period (as described
below);
- a pro rata portion of any goal-based bonus that, in the opinion of the
Chief Executive Officer (or with respect to Dr. Mandelbaum, the board of
directors), the executive would have been likely to earn;
- any earned but unpaid salary and bonus amounts; and
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- continued coverage under all health, life, disability and similar
employee benefit plans for the non-compete period and on the same basis
as the executive was entitled to participate immediately prior to
termination.
In connection with their employment agreements, these executives are also
eligible to receive additional awards under our stock option plans and under all
our other employee benefit plans and programs. In addition, the employment
agreements provide for an automobile allowance for each of the named executives.
Each of these employment agreements includes a covenant restricting the
named executives' ability to compete with us for a pre-determined non-compete
period. Dr. Mandelbaum has agreed not to compete with us following termination
of his employment for 24 months after the termination of his employment with us.
Messrs. Luckett, Martin, Oros and Buckel have each agreed not to compete with us
following termination of their respective employments for 12 months. Each
executive has also agreed not to disclose any of our confidential information
during the period of time for which his non-compete restriction operates. These
restrictions do not apply if we terminate the executive's employment without
cause, if the executive had good reason to terminate his employment or if the
executive's employment is terminated at the end of the term of his employment
agreement.
Under these employment agreements, the executives are entitled to
pre-determined severance and other benefits if we undergo a "change in control."
A change in control occurs if we sell all of our assets, complete a liquidation
or dissolution, merge with another entity or undertake any similar
reorganization transaction so that our stockholders own less than half of the
resulting entity, if one hundred percent of our capital stock is acquired or if
a majority of the members of our board of directors are removed by our
stockholders. Upon a change in control, all unvested options held by the various
executives will vest and become exercisable and these options will continue to
be exercisable for their natural term. Also, with respect to any executive, if
he is terminated within one year of a change in control for any reason except
for "cause" by us, the executive will be entitled to salary for twice as long as
would occur after a termination not involving a change in control. In addition,
while the applicable non-compete period will also double, the executive will not
be required to mitigate his damages by trying to secure alternate employment.
On December 7, 1998, we entered into an employment agreement with Lawrence
B. Helft. The employment agreement provides Mr. Helft with a base salary of
$220,000. This salary may be increased at the discretion of our board of
directors, provided that Mr. Helft is entitled to a minimum salary increase of
10% on January 1, 2000. The employment agreement provides for payment of an
annual bonus in accordance with our annual bonus program for senior executives,
contingent upon the achievement of performance goals established by the board of
directors. During the first year of his contract, Mr. Helft will receive a bonus
of 50% of his salary and will have an opportunity to receive an additional bonus
of up to 50% of his annual salary if he meets established performance goals. For
the second and third years of his contract, Mr. Helft will receive a bonus of
50% of his salary upon achieving pre-determined performance goals, and he will
be able to earn up to an additional 50% bonus if he meets defined over-
achievement goals.
Upon accepting employment, Mr. Helft was granted a bonus of $50,000 payable
in two equal installments in 1999 and options to acquire 510,000 shares of our
common stock at $2.93 per share. After one year of employment, if Mr. Helft
satisfies pre-determined performance goals, he will receive an additional grant
of options to acquire 180,000 shares of our common stock. Mr. Helft is also
eligible to receive additional awards under our stock option plans and under any
other employee benefit plans and programs. His employment agreement also
provides him with an automobile allowance.
Mr. Helft's employment agreement has a 3-year term, expiring December 7,
2001 and is renewable in the same manner as the employment agreements of our
other executives. If Mr. Helft's employment is terminated by us other than for
"cause," by Mr. Helft for "good reason," or due to "death or disability" (each
as defined in the employment agreement), he is entitled to the same severance as
our other executives. Mr. Helft's employment agreement also includes a covenant
restricting his ability to compete
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with us. Mr. Helft agreed that he will not compete with us for 6 months after
termination of his employment, or 12 months if his employment agreement has been
in effect for at least 6 months. Mr. Helft has agreed not to disclose any of our
confidential information during the non-compete period. The provisions of Mr.
Helft's agreement which govern in the event of a change in control are the same
as for our other executives.
STOCK OPTION PLANS
1996 INCENTIVE STOCK OPTION PLAN
Under our 1996 Incentive Stock Option Plan, we can issue stock options to
our employees, consultants and non-employee directors. Our 1996 option plan
permits the grant of stock options that qualify as incentive stock options under
Section 422 of the Internal Revenue Code, and nonqualified stock options, which
do not so qualify. We have authorized and reserved up to 12,000,000 shares of
our common stock for issuance under our 1996 option plan. As of the date of this
prospectus, under our 1996 option plan we had options outstanding for the
purchase of approximately 3,111,005 shares of our common stock. These shares may
be unissued shares or treasury shares. We do not intend to issue options under
our 1996 option plan after the completion of this offering.
Our 1996 option plan is administered by our board of directors. The board
of directors may appoint a committee of not less than three members to
administer the plan and exercise the board's authority as the plan
administrator. In the event the board does delegate its authority, any reference
in this disclosure to the board of directors is also a reference to our board's
delegatee. Within the limitations described in our 1996 option plan, our board
has the authority to determine:
- who will receive options;
- the time at which options will be granted;
- the number of shares subject to each option;
- the exercise price of each option;
- the time or times at which options will become exercisable; and
- the duration of the exercise period.
The board may accelerate the vesting of an unvested option issued under our
1996 option plan at any time prior to its termination or upon the occurrence of
specified events, subject to limitations set forth in our 1996 option plan. In
the case of the merger, consolidation, dissolution, liquidation, or change in
ownership of us, our board of directors may accelerate the vesting of any
option, provided that this acceleration will be effective only upon the
consummation of that transaction.
All of our employees and, in the case of option grants other than incentive
stock options, any officer, director, consultant or advisor providing us with
service is eligible to receive options under our 1996 option plan. The exercise
price of incentive stock options granted under our 1996 option plan may not be
less than the fair market value of the underlying common stock on the date of
grant. Options granted under our 1996 option plan have a maximum term of 10
years from the date of grant. Incentive stock options granted to any employee
who owns 10 percent or more of our shares have special limitations relating to
the exercise price and term of the options.
All options granted under our 1996 option plan are nontransferable, except
by will or under applicable law upon the optionee's death. In the event of an
optionee's death, options that have vested will remain exercisable for the
lesser of one year or the balance of the term of the option. Upon any other
termination of employment, an employee's outstanding vested incentive stock
options remain exercisable for 3 months. Non-statutory stock options granted
under the plan will terminate:
- immediately upon the resignation of the optionee from his or her position
as an officer, director, employee, advisor or consultant;
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- immediately upon termination of the optionee from his or her position for
cause; or
- thirty days after our termination of the optionee from his or her
position without cause.
Under our 1996 option plan, the exercise price of an option is payable in
cash or certified or bank check.
Our 1996 option plan has a term of 10 years, subject to earlier termination
or amendment by the board of directors. All options granted under our 1996
option plan prior to its termination remain outstanding until they have been
exercised or are terminated in accordance with their terms. The board may amend
our 1996 option plan at any time, subject to shareholder approval, where
applicable.
1999 STOCK OPTION PLAN
We have also adopted our 1999 Stock Option Plan and, after completion of
this offering, intend to grant options under this plan. In this regard,
effective upon the offering, we intend to grant options for a total of 55,500
shares of common stock under this plan, each option having an exercise price
equal to the per share price of this offering. Our 1999 option plan allows for
the grant of incentive stock options qualified under section 422 of the Internal
Revenue Code and nonqualified stock options, which do not so qualify.
No more than 2,400,000 shares of our common stock may be issued under our
1999 option plan. The shares subject to options under our 1999 option plan will
be authorized but unissued shares of our common stock or treasury shares.
Our 1999 option plan will be administered by our board of directors or,
except in the case of awards to members of the board, by any committee
authorized by the board, including a committee that conforms to the requirements
of Rule 162(m) of the Internal Revenue Code. Except in the case of awards to
members of the board or to officers determined to be subject to Rule 16b-3 of
the Securities Exchange Act of 1934 or section 162(m) of the Internal Revenue
Code, the board can delegate to the officers of AppliedTheory the authority to
grant and determine the terms and conditions of option grants, subject to any
limitations arising under our 1999 option plan or in the context of the
delegation of the board's authority. If the board does delegate its authority to
a committee or an officer, any reference to the board in this disclosure is also
a reference to the board's delegatee. Subject to the limitations in our 1999
option plan, the board has the authority to determine:
- who will receive options;
- the time at which options will be granted;
- the number of shares subject to an option;
- the exercise price of an option;
- the time or times at which the options will become vested and
exercisable; and
- the duration of the option.
All of our current and prospective employees, officers, directors,
consultants and advisors are eligible to receive options under our 1999 option
plan. However, only our employees are eligible for grants of incentive stock
options.
The exercise price of an option may be determined by the board. However,
the exercise price of an incentive stock option cannot be less than 100% of the
fair market value of a share of common stock on the date of grant. No more than
one hundred thousand dollars worth of our common stock, determined at the time
of grant, may be subject to incentive stock options which become exercisable by
any one employee in any one year. Options for no more than 525,000 shares of our
common stock may be granted to any optionee during any one calendar year. This
maximum can be adjusted in the event of certain
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corporate reorganizations, recapitalizations or other specified corporate
transactions. Options granted under our 1999 option plan have a maximum term of
ten years from the date of grant.
Options granted under our 1999 option plan will become vested and
exercisable in the manner and subject to the conditions which are approved by
the board. However, the vesting and exercisability of any option may be
accelerated at any time by the board. Unless otherwise provided by the board, in
the event of an employee's death or disability, his or her outstanding vested
options will remain exercisable for a period of one year. If an employee is
terminated for any other reason, unless otherwise provided by the Board, his or
her outstanding vested options will remain exercisable for a period of 90 days,
except in the case of a termination of employment for "cause" (as defined in our
1999 option plan), and the violation by the optionee of confidentiality,
non-disclosure and non-competition obligations, in which case all unexercised
options will be immediately forfeited. If we:
- sell all of our assets;
- complete a liquidation or dissolution; or
- if one hundred percent of our common stock is acquired by another party,
unless the applicable option agreement or an employment agreement between us and
the applicable optionee provides otherwise, all options which are then
outstanding under our 1999 option plan and remain unvested will automatically
vest.
If we merge with another entity, undertake a similar transaction or if a
majority of the members of our board of directors are removed by our
stockholders, unless the applicable option agreement or any employment agreement
between us and the applicable optionee provides otherwise, the board will have
the authority to determine whether to vest all unvested options which are then
outstanding under our 1999 option plan.
When exercising options, payment can be made in cash or, at the board's
discretion, in common stock or in another form of payment permitted under our
1999 option plan. All options granted under our 1999 option plan are
nontransferable except by the optionee's will or under the laws of descent and
distribution and, in the case of non-qualified stock options only, to family
members of the optionee, as may be approved by the board in accordance with our
1999 option plan.
Our 1999 option plan has a term of ten years but may be terminated by the
board before this time. This plan may be amended or modified at any time by our
board. Our board may seek stockholder approval of any amendment or modification
to our 1999 option plan for any reason, including to comply with sections 422 or
162(m) of the Internal Revenue Code.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan permits eligible employees to
purchase shares of our common stock at prices below the current market price.
The stock purchase plan will be administered by our board or by any
committee of directors which is designated by our board for this purpose. In the
event the board does delegate its authority, any reference to our board in this
disclosure is also a reference to the board's delegatee. The board has the
discretionary authority to:
- interpret the plan;
- prescribe, amend and rescind rules and regulations relating to the plan;
and
- make any other appropriate determinations.
No more than 2,250,000 shares of our common stock may be purchased under
our stock purchase plan.
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Each of our employees whose customary employment is at least twenty hours a
week and more than five months in a calendar year will be eligible to
participate in the stock purchase plan. No employee will have the right to
purchase stock under our stock purchase plan if:
(a) by purchasing stock under the plan, the employee would own five
percent or more of the total voting power or value of all classes of our
stock or the stock of any subsidiary; or
(b) the fair market value of stock which could be purchased by the
employee under our stock purchase plan and any related stock purchase plans
would exceed $25,000.
In addition, an employee participating in our stock purchase plan may not
purchase more than 10,000 shares under this plan in any six month period.
Every six months, eligible employees will have the opportunity to elect to
participate in a 24 month offering period under our stock purchase plan. Each
eligible employee may elect to participate in our stock purchase plan by
authorizing payroll deductions of between 1% and 10% of the employee's
applicable compensation for each payroll period. Payroll deductions will be held
in an account under our stock purchase plan during the applicable six month
period and will not bear interest. On the last day of each six month purchase
period within the 24 month offering period, each participant's accumulated
contributions will be used to purchase shares of our common stock. The purchase
price per share at the time will be the lesser of:
(a) 85% of the fair market value of a share of our common stock on the
first day of the 24 month offering period; and
(b) 85% of the fair market value of a share of our common stock on the day
of the purchase.
Our board may terminate, amend or modify our stock purchase plan at any
time, and will seek stockholder approval if the board deems it necessary,
including if approval is required to comply with the Internal Revenue Code.
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CERTAIN TRANSACTIONS
STOCK PURCHASE AGREEMENT
On August 4, 1998, we entered into a stock purchase agreement with IXC,
Grumman Hill, NYSERNet.net, Richard Mandelbaum, James D. Luckett, Denis J.
Martin, Mark A. Oros and David A. Buckel. The stock purchase agreement provided
for IXC to purchase 4,400,000 shares of our common stock for a purchase price of
$12.9 million, and Grumman Hill to purchase 2,200,000 shares of our common stock
for a purchase price of $6.5 million. We received $5.0 million for 1,725,000
newly issued shares of common stock. The balance of the stock purchased by IXC
and Grumman Hill in this transaction was sold by NYSERNet.net. The stock
purchase agreement granted IXC and Grumman Hill each a right of first offer with
respect to any proposed sale or other transfer of our common stock by us,
subject to various exceptions. These rights do not apply to this offering and
will terminate upon consummation of the offering. Under the stock purchase
agreement, IXC has a right of first refusal to provide us with broadband or
private-line Internet services if the price charged by IXC is competitive with
the prices of similar services from third parties. The stock purchase agreement
also provided for us to work with IXC in good faith to negotiate a joint
marketing agreement to cover the resale by each company of the other's products
and services. We entered into a joint marketing and services agreement with IXC
in January 1999. This agreement is described below under "-- Joint Marketing and
Services Agreement with IXC."
Under the stock purchase agreement, NYSERNet.net granted to IXC and Grumman
Hill an irrevocable proxy in respect of 1,890,000 shares of common stock held by
NYSERNet.net. The number of shares covered by this proxy will be reduced from
time to time by that number of shares of our common stock which IXC and Grumman
Hill acquire from us or from our stockholders during the period between
September 4, 1999 and October 28, 2000. This period coincides with the
applicable period under the option agreements described below under "-- Option
Agreements" and during which IXC and Grumman Hill could be required to purchase
shares from our stockholders. When the stock purchase agreement was concluded,
this proxy was granted to allow IXC and Grumman Hill to have voting power over a
majority of the shares which, at that time, were generally entitled to vote at
stockholders' meetings. The granting of the proxy was a condition to IXC's and
Grumman Hill's agreement to purchase shares from NYSERNet.net and us.
REGISTRATION RIGHTS AGREEMENT
In connection with the stock purchase agreement, we entered into a
registration rights agreement dated August 4, 1998 with IXC, Grumman Hill,
NYSERNet.net, Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A.
Oros, David A. Buckel and Shelley A. Harrison. This agreement is described below
under "Description of Capital Stock -- Registration Rights."
STOCKHOLDERS' AGREEMENT
The parties to the stock purchase agreement described under "-- Stock
Purchase Agreement" above and Dr. Harrison have entered into a stockholders'
agreement dated August 4, 1998. This stockholders' agreement provides
NYSERNet.net and Messrs. Buckel, Luckett, Martin, Oros and Drs. Mandelbaum and
Harrison with the right to sell common stock to IXC in the event that IXC
purchases some or all of Grumman Hill's holdings of our common stock. It also
requires IXC to offer to buy the holdings of our capital stock of any of the
other parties in the event that IXC obtains ownership of over 50% of our
outstanding capital stock. The stockholders' agreement also provides for the
election to our board of directors of:
- our Chief Executive Officer;
- a financial advisor designated by us;
- another director designated by us;
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- a representative of NYSERNet.net;
- a designee of Grumman Hill; and
- a designee of IXC.
The stockholders' agreement will terminate upon completion of this offering.
OPTION AGREEMENTS
In connection with the stock purchase agreement, some of our stockholders,
including Messrs. Luckett, Martin, Oros, Buckel and Pendray and Drs. Sadowsky,
Mandelbaum and Harrison, have entered into option agreements dated August 4,
1998 and August 28, 1998 with IXC, Grumman Hill and NYSERNet.net. These option
agreements provide the optionee stockholders with a put option to sell their
stock, 2,280,938 shares in the aggregate, to IXC and Grumman Hill at a purchase
price of $2.93 per share. The number of shares of common stock held by Messrs.
Luckett, Martin, Oros, Buckel and Pendray and Drs. Sadowsky, Mandelbaum and
Harrison that are subject to the option agreements is 2,127,000. The put rights
begin September 4, 1999, with respect to 2,265,278 shares, and September 28,
1999, with respect to 15,660 shares, and end October 4, 2000 and October 28,
2000. The option agreements also provide IXC and Grumman Hill with a call option
to buy the stock held by the option stockholders from them at the same purchase
price as in the put option. The call option rights begin October 5, 2000, with
respect to 2,265,278 shares, and October 29, 2000, with respect to 15,660
shares, and end August 4, 2001 and August 28, 2001. The options may be exercised
in whole or part on one or more occasions at any time during the relevant option
period.
JOINT MARKETING AND SERVICES AGREEMENT WITH IXC
In January 1999, we entered into a joint marketing and services agreement
with IXC under which:
- each of us agreed to provide the other with any of the services or
products that we offer or will offer to our customers, so long as the
relevant service is not covered by an exclusive marketing relationship
with another party;
- each of us will offer the other services such as connectivity services
for the provision of dial-up and dedicated access to the Internet,
Internet security services, Internet integration and enterprise portal
development services, software development, voice and data communication
services and any services and technical support required for those
services;
- each of us may use these services for our own account or for the account
of our own customers or for distribution to and eventual resale by
others;
- we granted IXC a right of first refusal on any purchases from third
parties we make of equipment, facilities and services necessary for the
transmission of data;
- IXC granted us a right of first refusal with respect to purchases from
third parties by IXC of the support and product components necessary for
the delivery of the various services covered by the agreement, including
Internet access services;
- we agreed to provide access to each other's network for the purpose of
facilitating the provision of the various services covered by the
agreement;
- we have agreed, in consideration for delivering the agreed services, to
pay each other prices which will enable each of us to maintain normal
margins as compared to those of our competitors, provided that in no
event will the price charged by either party drop below the cost of the
relevant service or product; and
- we have agreed to protect each other's confidential information.
The joint marketing and services agreement automatically terminates upon
IXC's disposition of all of its equity holdings in us or when terminated by one
of the parties. Either of us may terminate the joint
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marketing and services agreement if the other fails to cure a breach of a
material provision within 30 days after being provided with notice of the
breach.
HARRISON CONSULTING AGREEMENT
In October 1996, we entered into a consulting agreement with Shelley A.
Harrison. Under the agreement, Dr. Harrison renders advisory and consulting
services with respect to our operations, financing and business planning,
particularly in relation to any sales of securities, mergers or similar
transactions. Dr. Harrison receives $5,000 per month under the agreement in
addition to the grant by us upon the commencement of the agreement of an option
to purchase 750,000 shares of our common stock at $0.13 per share. The option
vested with respect to 187,500 shares on October 1, 1997 and with respect to the
remaining 562,500 shares on August 4, 1998 in connection with the consummation
of our sale of common stock to IXC and Grumman Hill under the stock purchase
agreement. The consulting agreement has an initial term that runs from October
5, 1996 through October 5, 2000, and will automatically renew for successive one
year terms unless either party notifies the other of its intent not to renew at
least 90 days before the end of the term then in effect.
GRUMMAN HILL CONSULTING ARRANGEMENT
We currently have an arrangement through which Grumman Hill serves in a
consulting and advisory capacity to our management. In accordance with this
arrangement, Grumman Hill, including Mr. Kelsey, renders consulting services and
management advice to us particularly regarding raising corporate financing,
which includes advice pertaining to this offering. We pay a consulting fee of
$60,000 per year to Grumman Hill under this arrangement.
MANDELBAUM LINE OF CREDIT AGREEMENT
Effective January 1, 1999, we have made available to Dr. Mandelbaum a
credit line of $2,500,000 to be used exclusively by Dr. Mandelbaum for the
purchase of our stock in any future private equity placement in which IXC and
Grumman Hill participate. As of December 31, 1998, no borrowings were
outstanding on the line of credit. In the event any borrowings are drawn against
the credit line, repayment terms, interest rates and collateral provisions will
be established by our board of directors. The line of credit agreement will
terminate upon consummation of this offering. Absent a private equity placement,
under the terms of this agreement Dr. Mandelbaum may not access this line of
credit.
RESALE AGREEMENT WITH NYSERNet.org
In October 1996, we entered into a resale agreement with NYSERNet.org to
provide it with Internet access products and services which it resells to
governmental, educational, scientific and other not-for-profit organizations
within the State of New York. We sell products and services to NYSERNet.org
which are priced using our standard price list less appropriate discounts, and
are sold by us on terms and conditions, similar to those granted to third party
customers. The resale agreement also calls for us to form a joint marketing plan
with NYSERNet.org for the products and services covered by the agreement and for
us to provide NYSERNet.org with sales support and assistance and training for
its sales force. Products and services sold to NYSERNet.org for the period from
October 1, 1996 to December 31, 1996 and the years ended December 31, 1997 and
1998 amounted to $1.6 million, $7.1 million and $8.3 million, representing 52%,
47% and 37% of our revenue for these periods. The resale agreement has an
initial term that runs from October 1, 1996 through September 30, 2001, and will
automatically renew for successive one year terms unless either party notifies
the other of its intent not to renew at least 60 days before the end of the term
then in effect. The agreement is terminable upon the insolvency of a party, an
attempted unauthorized assignment by a party, a failure to make any payment due
under the agreement not remedied within 30 days or a failure to remedy any
breach of the terms of the agreement within 30 days of receiving notice of the
breach.
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RESOURCE SHARING AGREEMENT WITH NYSERNet.org
In October 1996, we entered into a resource sharing agreement with
NYSERNet.org. Under the agreement, we provide NYSERNet.org with office space,
use of equipment and use of our employees to the extent they are available. We
share our premises with NYSERNet.org, and NYSERNet.org is required to pay a pro
rata share of the rent for the space it occupies. The agreement also provides
for NYSERNet.org's use of computer equipment, furniture and supplies in the
operation of its business and payment to us of a pro rata share of the fair
rental value of the equipment plus the cost of maintaining the equipment. A
number of our employees are also subject to the agreement, with some employees
on the shared premises at various times providing services to NYSERNet.org.
NYSERNet.org pays a pro rata share of the employees' salary and benefits.
Resources we provided to NYSERNet.org under the resource sharing agreement for
the period from October 1, 1996 to December 31, 1996 and the years ended
December 31, 1997 and 1998 amounted to $63,000, $210,000 and $300,000. The
agreement has a term that runs from October 1, 1996 through December 31, 1999.
The agreement is terminable by us only upon the failure of NYSERNet.org to make
the payments required of it under the agreement.
ASSIGNMENT, SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT WITH NYSERNet.org
On October 1, 1996, we entered into an assignment, software development and
license agreement with NYSERNet.org. This assigns to us an agreement to develop
for commercial use software authored and developed by NYSERNet.org. The software
was originally designed by NYSERNet.org to create a Web-based version of the
America's Job Bank system for the New York State Department of Labor. Under this
agreement, we are to pay NYSERNet.org two percent of all revenues derived from
the software and any software developed from it for two years from December 15,
1997, the date on which we first licensed the original software to a commercial
customer. We are also to develop and provide software to NYSERNet.org for its
contract with the New York State Department of Labor. The development and
license agreement provides a perpetual, royalty-free license to NYSERNet.org for
any new software developed from the original software assigned to us.
NYSERNet.org may use and further develop the new software in its non-profit
operations or sublicense it to any U.S. federal, state or local government
agency. Payments to NYSERNet.org under the agreement for the year ended December
31, 1998 were $4,975. No payments were made under this agreement prior to 1998.
The software development agreement and the license are perpetual, unless the
agreement is terminated by either party. The agreement is terminable if either
party becomes insolvent or if either party fails to cure a default in a material
provision to the agreement within 10 days after notice of the default is given.
If the agreement is terminated by NYSERNet.org, the technology subject to the
agreement will revert back to NYSERNet.org, but any license granted by us to
NYSERNet.org prior to termination would remain in effect.
BORROWINGS WITH NYSERNet.net AND REDEEMABLE PREFERRED STOCK
Under an unsecured revolving borrowing facility with NYSERNet.net, we can
borrow up to $6.2 million, less any preferred stock outstanding, at the prime
rate. The prime rate was 7.75% as of December 31, 1998. Interest payments on
borrowings under the facility are deferred until December 31, 2001. All
principal borrowings under the facility are due and payable on December 31,
2001. As of December 31, 1998, we had an outstanding amount of $3.0 million,
including accrued interest, borrowed under the facility.
In addition, in January 1997, NYSERNet.net acquired 15,000 shares of our
redeemable preferred stock having a liquidation value of $100 per share and
providing for dividends to accrue at an annual rate of 14.0% of the liquidation
value. We intend to use a portion of the proceeds from this offering to
repurchase the outstanding preferred stock from NYSERNet.net.
JAMES LUCKETT NOTE
On July 30, 1998, we made a loan to Mr. Luckett in the amount of $30,000.
This loan is evidenced by a note, payable to us upon the earlier of July 30,
2001 or the date described in any security agreement
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we enter into with Mr. Luckett in the future with regard to the loan. The note
accrues interest at an annual rate of 5.56%. Upon demand by us, Mr. Luckett will
be required to pledge as security for the loan 10,500 shares of our common stock
subject to Mr. Luckett's option agreement with IXC and Grumman Hill.
DAVID BUCKEL NOTE
On July 30, 1998, we made a loan to Mr. Buckel in the amount of $264,000.
This loan is evidenced by a note, payable to us upon the earlier of July 30,
2001 or the date described in any security agreement we enter into with Mr.
Buckel in the future with regard to the loan. The note accrues interest at
5.56%. Upon demand by us, Mr. Buckel will be required to pledge as security for
the loan 90,000 shares of our common stock subject to Mr. Buckel's option
agreement with IXC and Grumman Hill.
EMPLOYMENT AGREEMENTS
See "Management -- Employment Agreements" for a description of the
employment agreements that we have entered into with our executive officers.
RELATED PARTY TRANSACTIONS
As of the date of this prospectus, NYSERNet.net and IXC are holders of
approximately 31% and 28% of our common shares. We also maintain a significant
commercial relationship with IXC, and approximately 37% of our revenues in 1998
were generated from sales to NYSERNet.org. In addition to the transactions
described above, we may from time to time enter into other transactions with
NYSERNet.net, NYSERNet.org or IXC, including transactions on a vendor/vendee
basis. We also provide accounting, financial and other services to NYSERNet.net
and NYSERNet.org. Furthermore, three of our executive officers or directors,
Richard Mandelbaum, James D. Luckett and George Sadowsky, are directors of
NYSERNet.net. and NYSERNet.org. Mr. Buckel is an executive officer of
NYSERNet.net and NYSERNet.org, and Mr. Oros is an executive officer of
NYSERNet.org. One of our directors, James Guthrie, is an executive officer of
IXC. As a result of these relationships, conflicts of interest may arise among
some of our directors, executive officers and stockholders. We have independent
directors, auditors and counsel separate from IXC, NYSERNet.net and NYSERNet.org
and believe that we maintain adequate procedures to protect ourself in related
party transactions.
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<PAGE> 78
PRINCIPAL STOCKHOLDERS
The following table describes information regarding the beneficial
ownership of our common stock as of the date of this prospectus by:
- each person or entity which to our knowledge owns beneficially more than
5% of the outstanding shares of our common stock;
- each of our directors and five most highly compensated executive officers
during 1998; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, to our knowledge all persons listed below have sole
voting and investment power with respect to their shares of common stock, except
to the extent the applicable law gives spouses shared authority.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
SHARES ---------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------- --------------------- --------------- --------------
<S> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
IXC Communications, Inc.(2)
1122 Capital of Texas Highway South
Austin, TX 78746-6426....................... 5,659,995 35.4% 27.6%
NYSERNet.net, Inc.(3)
125 Elwood Davis Road
Syracuse, NY 13212.......................... 4,875,000 30.5 23.8
Grumman Hill Investments III, LP(4)
60 East 42nd Street, Suite 2915
New York, NY 10165.......................... 2,830,005 17.7 13.8
EXECUTIVE OFFICERS AND DIRECTORS:
Richard Mandelbaum(5)......................... 7,411,673 45.8 35.8
James D. Luckett(6)........................... 633,938 4.0 3.1
Denis J. Martin(7)............................ 420,188 2.6 2.1
Mark A. Oros(8)............................... 416,813 2.6 2.0
David A. Buckel(9)............................ 182,813 1.1 0.9
Shelley A. Harrison(10)....................... 750,000 4.5 3.6
George Sadowsky(11)........................... 4,926,090 30.8 24.1
James Guthrie(12)............................. 5,659,995 35.4 27.6
John J. Pendray(13)........................... 48,278 * *
James T. Kelsey(14)........................... 2,830,005 17.7 13.8
All Directors and Executive Officers as a
Group (12 persons)(15)...................... 16,524,822 98.5 77.7
</TABLE>
- ---------------
* indicates less than 1%
(1) Calculated according to Rule 13d-3(d) of the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by the holder of the options, warrants, rights or conversion privileges,
but not deemed outstanding for the purpose of calculating the percentage
owned by any other person listed. As of the date of this prospectus and
without giving effect to the offering, we had 15,971,445 shares of common
stock outstanding.
(2) These shares are held through IXC Internet Services, Inc., a subsidiary of
IXC Communications, Inc. Includes 1,260,000 shares as to which IXC has
voting power under an irrevocable proxy granted
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<PAGE> 79
by NYSERNet.net as described under "Certain Transactions -- Stock Purchase
Agreement." Does not include 1,520,625 shares subject to the option
agreements described under "Certain Transactions -- Option Agreements."
(3) Includes an aggregate of 1,890,000 shares as to which NYSERNet.net has
granted irrevocable proxies to IXC and Grumman Hill Investments III, LP as
described under "Certain Transactions -- Stock Purchase Agreement."
(4) Grumman Hill Investments III, LP is a private equity fund advised by
Grumman Hill Group LLC. Grumman Hill Group LLC is the general partner of
Grumman Hill Investments III, LP. Includes 630,000 shares as to which
Grumman Hill has voting power under an irrevocable proxy granted by
NYSERNet.net as described under "Certain Transactions -- Stock Purchase
Agreement." Does not include 760,313 shares subject to the option
agreements described under "Certain Transactions -- Option Agreements."
(5) Includes 4,875,000 shares of common stock owned by NYSERNet.net. Dr.
Mandelbaum is a director of NYSERNet.net. Dr. Mandelbaum disclaims
beneficial ownership of all shares owned by NYSERNet.net. Also includes
750,000 shares of common stock held by Ms. Paulette Mandelbaum as trustee
for the "Mandelbaum Descendants' Trust" and as to which Dr. Mandelbaum
disclaims beneficial ownership. Includes exercisable options to purchase
205,110 shares of common stock. Includes 1,125,000 shares subject to the
option agreements described under "Certain Transactions -- Option
Agreements."
(6) Includes exercisable options to purchase 33,938 shares of common stock.
Includes 300,000 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(7) Includes 187,500 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(8) Includes 187,500 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(9) Includes exercisable options to purchase 2,813 shares of common stock.
Includes 90,000 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(10) Includes 187,500 shares of common stock held by Harrison Enterprises Inc.
and owned by Susanne Harrison and Shelley A. Harrison. These shares are
also subject to the option agreements described under "Certain
Transactions -- Option Agreements." Also includes exercisable options to
purchase 562,500 shares of common stock.
(11) Includes 4,875,000 shares of common stock owned by NYSERNet.net. Dr.
Sadowsky is a director of NYSERNet.net. Dr. Sadowsky disclaims beneficial
ownership of all shares owned by NYSERNet.net. Includes 25,500 shares
subject to the option agreements described under "Certain
Transactions -- Option Agreements."
(12) Includes 4,399,995 shares of common stock owned by IXC and 1,260,000 shares
of common stock owned by NYSERNet.net whose voting power NYSERNet.net has
irrevocably granted to IXC under an irrevocable proxy as described under
"Certain Transactions -- Stock Purchase Agreement." Mr. Guthrie is an
executive officer of IXC. Mr. Guthrie disclaims beneficial ownership of all
shares owned by IXC.
(13) Includes 24,000 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(14) Includes 2,200,000 shares of common stock owned by Grumman Hill Investments
III, LP and 630,000 shares of common stock owned by NYSERNet.net whose
voting power NYSERNet.net has
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<PAGE> 80
been granted to Grumman Hill Investments III, LP under an irrevocable proxy
as described under "Certain Transactions -- Stock Purchase Agreement." Mr.
Kelsey is a managing partner of the general partner of Grumman Hill
Investments III, LP. Mr. Kelsey disclaims beneficial ownership of all
shares owned by Grumman Hill Investments III, LP.
(15) Of these shares, 15,720,461 represent outstanding shares and 804,361
represent options exercisable within 60 days. Also includes 11,474,995
shares of our common stock owned by IXC, NYSERNet.net and Grumman Hill
Investments III, LP that are deemed to be beneficially owned by our
officers and directors by virtue of their relationships with these
entities.
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<PAGE> 81
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED STOCK; ISSUED AND OUTSTANDING SHARES
Upon the closing of this offering, our authorized capital stock will
consist of 90,000,000 shares of common stock and 1,000,000 shares of preferred
stock.
COMMON STOCK
Following this offering 20,471,445 shares of common stock will be
outstanding. All of the issued and outstanding shares of common stock are and,
upon the completion of this offering, the shares of common stock offered in this
offering will be, fully paid, validly issued and non-assessable.
The following summarizes the rights of holders of our common stock:
- each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
- there are no cumulative voting rights;
- the holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;
- upon our liquidation, dissolution or winding up, the holders of shares of
common stock will be entitled to share ratably in the distribution of all
of our assets remaining available for distribution after satisfaction of
all our liabilities and the payment of the liquidation preference of any
outstanding preferred stock; and
- upon completion of this offering, the holders of common stock have no
preemptive or other subscription rights to purchase shares of our stock,
nor will holders be entitled to the benefits of any redemption or sinking
fund provisions.
As of the date of this prospectus, there were approximately 45 record
owners of common stock.
PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors to
create and issue one or more series of preferred stock and determine the rights
and preferences of each series within the limits set forth in our certificate of
incorporation and applicable law. Among other rights, the board of directors may
determine, without further vote or action by our stockholders:
- the number of shares constituting the series and the distinctive
designation of the series;
- the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
- whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
- whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
- whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;
- whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
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<PAGE> 82
- the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
REGISTRATION RIGHTS
In connection with the stock purchase agreement under which IXC and Grumman
Hill invested in our company, we entered into a registration rights agreement
with IXC, Grumman Hill, NYSERNet.net, Richard Mandelbaum, James D. Luckett,
Denis J. Martin, Mark A. Oros, David A. Buckel and Shelley A. Harrison. Under
the registration rights agreement, IXC, Grumman Hill, NYSERNet.net and Messrs.
Luckett, Martin, Oros and Buckel and Drs. Mandelbaum and Harrison have the right
at any time after this offering to cause us to register their holdings of common
stock under the Securities Act. These rights, known as demand registration
rights, will be exercisable by any party with registration rights only once in
any six month period. We will not be required to register shares under the
demand registration rights more than once on registration forms other than a
short form registration statement known as a Form S-3. In addition, the
registration rights arising under this agreement may not be exercised in
connection with this offering.
In addition, under the registration rights agreement, each of IXC, Grumman
Hill, NYSERNet.net and Dr. Mandelbaum have registration rights, called piggyback
registration rights, if we determine to file a registration statement covering
any of our securities under the Securities Act and our board of directors
approves the piggyback registration. Therefore, if we file a registration
statement in relation to our equity securities and our board of directors
approves the piggyback registration, we will be required to use our best efforts
to include the shares of common stock as to which piggyback rights have been
requested in our registered offering. The number of shares required to be
registered are subject to reduction if the managing underwriter for the offering
determines that the inclusion of those shares would interfere with the
successful marketing of our offering. These piggyback registration rights do not
apply to the registration of securities in connection with our employee benefit
plans or securities issuable in a merger, exchange offer or similar transaction.
We are required to bear all registration expenses other than underwriting
discounts and commissions and fees related to any exercise of either demand or
piggyback registration rights. In addition, we have agreed to indemnify the
registration rights holders against, and provide contribution with respect to,
liabilities under the Securities Act in connection with demand and piggyback
registrations.
The effect of these registration rights will be to allow the parties to the
registration rights agreement to sell shares of our common stock at times and in
quantities that otherwise might not be permissable.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Under Section 203, business combinations between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an interested stockholder are generally prohibited
for a three-year period following the date that such a stockholder became an
interested stockholder, unless:
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<PAGE> 83
- the corporation has elected in its original certificate of incorporation
not to be governed by Section 203. We did not make this election;
- the business combination was approved by the board of directors of the
corporation before the other party to the business combination became an
interested stockholder;
- upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the commencement of the
transaction, excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not
have a confidential right to tender or vote stock held by the plan; or
- the business combination was approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock not owned by
the interested stockholder.
The three-year prohibition also does not apply to some business
combinations proposed by an interested stockholder following the announcement or
notification of an extraordinary transaction involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of the majority
of the corporation's directors.
The term "business combination" is defined generally under Section 203 to
include mergers or consolidations between a Delaware corporation and an
interested stockholder, transactions with an interested stockholder involving
the assets or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested stockholder's percentage ownership of
stock. The term "interested stockholder" is defined generally under Section 203
as a stockholder who, together with affiliates and associates, owns or within
three years prior did own 15% or more of a Delaware corporation's voting stock.
Section 203 could prohibit or delay a merger, takeover or other change in
control of AppliedTheory and therefore could discourage attempts to acquire us.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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<PAGE> 84
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, there will be 20,471,445 shares of our
common stock issued and outstanding. Of these shares, the 4,500,000 shares of
common stock to be sold in this offering will be immediately eligible for sale
in the public market, except for shares owned at any time by our affiliates
within the meaning of Rule 144 under the Securities Act. The remaining
15,971,445 issued and outstanding shares are restricted securities within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144.
RULE 144
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including a person who may be deemed affiliate, is entitled to sell within
any three month period a number of our shares of common stock that does not
exceed the greater of:
- 1% of the then-outstanding shares of our common stock; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person who
is not our affiliate at any time during the 90 days preceding a sale and who has
beneficially owned shares for at least two years would be entitled to sell
shares following this offering under Rule 144(k) without regard to the volume
limitations, manner of sale provisions or notice requirements of Rule 144.
RULE 701
Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144. Affiliates
may sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions. In each of these cases Rule 701 allows the shareholders to
sell 90 days after the date of this prospectus.
LOCK-UP AGREEMENTS
Our directors and executive officers, IXC, Grumman Hill and NYSERNet.net,
who collectively hold 15,720,462 of the outstanding shares of our common stock,
have agreed, subject to limited exceptions, not to offer to sell, sell, contract
to sell, grant any option to sell, encumber, pledge or otherwise dispose of our
common stock or securities convertible into or exercisable or exchangeable for
our common stock for a period of 180 days after the date of this prospectus
without the prior written consent of Bear, Stearns & Co. Inc.
REGISTRATION RIGHTS AND OTHER MATTERS
Some of our stockholders subject to lock-up agreements are entitled to
registration rights with respect to 15,720,462 shares of our common stock
currently outstanding, plus any additional shares they may acquire in the
future. After the expiration of the 180-day lock-up period, these holders may
choose to exercise their registration rights, which could result in a large
number of shares being sold in the public market. For a description of these
registration rights, see "Description of Capital Stock -- Registration Rights."
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<PAGE> 85
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register the shares of common stock reserved for
issuance under our employee benefit plans. The stock registered under that
registration statement will thereafter be available for sale in the public
market, subject to the resale limitations of Rule 144 applicable to our
affiliates.
Prior to the date of this prospectus, no public market has existed for our
common stock. We expect that trading of our common stock on the Nasdaq National
Market will commence on the date of this prospectus. We do not make any
prediction regarding the effect, if any, that future sales of shares, or the
availability of our shares for future sale, will have on the market price of our
common stock. The market price of our common stock can be adversely affected by
sales of substantial amounts of common stock or by the perception that these
sales could occur.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between the underwriters and us, each of the underwriters named below, for whom
Bear, Stearns & Co. Inc., CIBC Oppenheimer Corp., Lehman Brothers Inc. and Wit
Capital Corporation, as e-Manager(TM), are acting as representatives, has
severally agreed to purchase from us the aggregate number of shares of common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
CIBC Oppenheimer Corp. .....................................
Lehman Brothers Inc. .......................................
Wit Capital Corporation.....................................
----------
Total............................................. 4,500,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of legal matters by their counsel and to
various other conditions. Under the underwriting agreement, the underwriters are
obligated to purchase and pay for all of the above shares of common stock if any
are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the offering price set forth on the cover page of this prospectus
and at this price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of Securities
Dealers, Inc. The underwriters may allow, and dealers may reallow, concessions
not in excess of $ per share of common stock to other dealers. After the
offering, the offering price, concessions and other selling terms may be changed
by the underwriters. Our common stock is offered subject to receipt and
acceptance by the underwriters and subject to other customary conditions,
including the right to reject orders in whole or in part. The underwriters have
informed us that they do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
We have granted a 30 day over-allotment option to the underwriters to
purchase an amount, up to an aggregate of fifteen percent of the aggregate
number of shares appearing above, of additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part then each of the
underwriters will become obligated, subject to customary conditions, to purchase
approximately the same percentage of these additional shares as is approximately
the percentage of shares of common stock that it is obligated to purchase of the
total number of shares under the underwriting agreement as shown in the table
set forth above.
The underwriting agreement provides that we indemnify the underwriters
against liabilities under the Securities Act or will contribute to payments that
the underwriters may be required to make in respect thereof.
Our directors and executive officers and IXC, Grumman Hill and
NYSERNet.net, who collectively hold a total of 15,720,462 shares of common
stock, have agreed pursuant to lock-up agreements not to sell
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<PAGE> 87
or offer to sell or otherwise dispose of any shares of common stock, subject to
limited exceptions, for a period of 180 days after the date of this prospectus
without the prior written consent of Bear, Stearns & Co. Inc.
Prior to the offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in these negotiations will be
our results of operations in recent periods, estimates of our prospects and the
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of the offering and the prices of similar
securities of generally comparable companies. Our common stock has been approved
for listing on the Nasdaq National Market under the symbol "ATHY". We cannot
assure you, however, that an active or orderly trading market will develop for
the common stock or that our common stock will trade in the public markets
subsequent to the offering at or above the initial offering price.
In order to facilitate the offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after the offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
actually sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in the offering are reclaimed if shares of common
stock previously distributed in the offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales
thereof. No representation is made as to the magnitude or effect of these
activities.
The underwriters have reserved for sale, at the initial public offering
price, up to 225,000 shares of common stock for employees, directors and other
persons associated with us who express an interest in purchasing these shares of
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase reserved shares. Any reserved shares not purchased by these persons
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit Capital Corporation. In addition, all dealers
purchasing shares from Wit Capital Corporation in this offering have agreed to
make a prospectus in electronic format available on Web sites maintained by each
of them. Other than the prospectus in electronic format, the information on the
Web site and any information contained on any other Web site maintained by Wit
Capital Corporation or any dealer purchasing shares from it is not part of this
prospectus or the registration statement of which this prospectus forms a part,
has not been approved and/or endorsed by AppliedTheory or any underwriter in its
capacity as underwriter and should not be relied on by prospective investors.
We estimate that our expenses in connection with this offering, excluding
underwriting discounts and commissions, will be approximately $1,200,000.
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LEGAL MATTERS
The validity of the shares of our common stock being offered by this
prospectus will be passed upon for us by Dewey Ballantine LLP, New York, New
York and for the underwriters by Paul, Hastings, Janofsky & Walker LLP, New
York, New York.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for the nine
months ended September 30, 1996, the three months ended December 31, 1996 and
the years ended December 31, 1997 and 1998 included in this prospectus have been
included in reliance on the report of Grant Thornton LLP, independent certified
public accountants, given on the authority of Grant Thornton LLP as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits, schedules and amendments) under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in our
registration statement. For further information with respect to us and the
shares of common stock to be sold in this offering, we refer you to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance we refer you to the copy of the
relevant contract, agreement or other document filed as an exhibit to the
registration statement. Each of these statements is qualified in all respects by
reference to the relevant exhibit.
You may read and copy all or any portion of the registration statement or
any other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
room. Our SEC filings, including the registration statement, are also available
to you on the SEC's Web site (http://www.sec.gov). As a result of this offering,
we will become subject to the information and reporting requirements of the
Securities Exchange Act of 1934 and will file periodic reports, proxy statements
and other information with the SEC. Upon approval of the common stock for
quotation on the Nasdaq National Market, these reports, proxy and information
statements and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish
our stock holders with annual reports containing audited financial statements
and with quarterly reports for the first three quarters of each year containing
unaudited interim financial information.
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INDEX TO FINANCIAL STATEMENTS
APPLIEDTHEORY CORPORATION AND PREDECESSOR
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Financial Statements
Balance Sheets -- December 31, 1997 and 1998.............. F-3
Statements of Operations for the Nine Months Ended
September 30, 1996, the Three Months Ended December 31,
1996 and the Years Ended December 31, 1997 and 1998.... F-4
Statement of Stockholders' Equity (Deficit) for the Nine
Months Ended September 30, 1996, the Three Months Ended
December 31, 1996 and the Years Ended December 31, 1997
and 1998............................................... F-5
Statements of Cash Flows for the Nine Months Ended
September 30, 1996, the Three Months Ended December 31,
1996 and the Years Ended December 31, 1997 and 1998.... F-6
Notes to Financial Statements for the Nine Months Ended
September 30, 1996, the Three Months Ended December 31,
1996 and the Years Ended December 31, 1997 and 1998.... F-7 - F-22
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
APPLIEDTHEORY CORPORATION
We have audited the balance sheets of AppliedTheory Corporation as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended and for
the three months ended December 31, 1996. We have also audited the statements of
operations, stockholders' equity (deficit) and cash flows of the Predecessor
(Note A) for the nine months ended September 30, 1996 . These financial
statements are the responsibility of AppliedTheory Corporation's management and
the Predecessor's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AppliedTheory Corporation as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended and for the three months ended December 31, 1996,
and the results of operations and cash flows of the Predecessor for the nine
months ended September 30, 1996 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
January 29, 1999
(except for Note L as to which the date is April 12, 1999)
F-2
<PAGE> 91
APPLIEDTHEORY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 135,179 $ 1,785,682
Accounts receivable, net of allowance of $122,000 and
$157,000 in 1997 and 1998, respectively................ 1,211,323 3,584,391
Prepaid expenses and other assets......................... 187,182 255,058
---------- -----------
Total current assets.............................. 1,533,684 5,625,131
Property and equipment, net................................. 3,910,406 4,203,171
Other assets................................................ 689,333
---------- -----------
Total assets...................................... $5,444,090 $10,517,635
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $2,006,834 $ 2,148,603
Accrued payroll........................................... 368,113 582,038
Accrued expenses.......................................... 1,010,029 2,472,967
Deferred revenue.......................................... 907,446 1,848,629
Current portion of long-term debt and capital lease
obligations............................................ 210,548 551,359
Preferred stock dividends payable......................... 210,000 420,000
Due to related parties.................................... 400,277 850,101
---------- -----------
Total current liabilities......................... 5,113,247 8,873,697
Long-term debt and capital lease obligations................ 4,360,529 5,979,238
Borrowings from NYSERNet.net, Inc........................... 2,444,636 2,957,238
Other liabilities........................................... 651,461 214,499
Redeemable preferred stock -- 75,000 shares authorized;
15,000 issued and outstanding; cumulative 14% dividend;
$100 per share liquidation value.......................... 1,500,000 1,500,000
Stockholders' equity (deficit):
Common stock, $.01 par value; 25,000,000 shares
authorized; issued and outstanding 9,810,000 shares in
1997 and 15,039,488 shares in 1998..................... 13,080 150,395
Common stock -- nonvoting, $.01 par value, 5,000,000
shares authorized; 54,848 shares issued and outstanding
in 1998................................................ 548
Additional paid-in capital................................ 7,920 6,581,374
Accumulated deficit....................................... (8,646,783) (15,739,354)
---------- -----------
Total stockholders' equity (deficit).............. (8,625,783) (9,007,037)
---------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $5,444,090 $10,517,635
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 92
APPLIEDTHEORY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------ ---------------------------------------------
NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED -------------------------
SEPTEMBER 30, 1996 DECEMBER 31, 1996 1997 1998
------------------ ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues
Third-party customers.............. $ 6,226,306 $ 1,489,302 $ 8,023,380 $14,235,872
NYSERNet.org, Inc. customers and
services........................ 1,587,009 7,148,334 8,327,118
----------- ----------- ----------- -----------
Total net revenues......... 6,226,306 3,076,311 15,171,714 22,562,990
----------- ----------- ----------- -----------
Costs and expenses
Cost of revenues................... 5,741,604 2,331,050 10,796,095 13,315,568
Sales and marketing................ 1,298,369 791,743 3,706,205 6,400,025
General and administrative......... 2,818,835 1,590,754 4,283,339 6,349,512
Research and development........... 129,550 43,745 679,895 242,905
Depreciation and amortization...... 157,670 81,456 1,094,681 1,671,951
Other expenses..................... 112,153 900,000
----------- ----------- ----------- -----------
Total costs and expenses... 10,146,028 4,838,748 20,672,368 28,879,961
----------- ----------- ----------- -----------
Loss from operations....... (3,919,722) (1,762,437) (5,500,654) (6,316,971)
Interest income...................... (42,468)
Interest expense..................... 4,870 346,713 608,068
----------- ----------- ----------- -----------
NET LOSS................... (3,924,592) (1,762,437) (5,847,367) (6,882,571)
Preferred stock dividends............ 210,000 210,000
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders....................... $(3,924,592) $(1,762,437) $(6,057,367) $(7,092,571)
=========== =========== =========== ===========
Basic and diluted loss per common
share.............................. $ (.18) $ (.62) $ (.56)
=========== =========== ===========
Shares used in computing basic and
diluted loss per share............. 9,750,000 9,756,248 12,665,940
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 93
APPLIEDTHEORY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NONVOTING COMMON
COMMON STOCK STOCK ADDITIONAL
--------------------- ----------------- PAID-IN ACCUMULATED DIVISIONAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- -------- ------ -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Divisional deficit, January 1,
1996............................ $(2,759,201)
Net loss for the nine months ended
September 30, 1996.............. (3,924,592)
-----------
Balance, September 30, 1996....... $(6,683,793)
===========
Issuance of common stock to
NYSERNet.net.................... 9,750,000 $ 13,000
Acquisition of net assets from
NYSERNet.org, Inc. as of October
1, 1996......................... $ (826,979)
Net loss for the three months..... (1,762,437)
---------- -------- ------------
Balance, December 31, 1996........ 9,750,000 13,000 (2,589,416)
Issuance of common stock pursuant
to exercise of stock options.... 60,000 80 $ 7,920
Preferred stock dividends......... (210,000)
Net loss for the year............. (5,847,367)
---------- -------- ---------- ------------
Balance, December 31, 1997........ 9,810,000 13,080 7,920 (8,646,783)
Issuance of common stock, net of
issuance costs of $80,951....... 1,725,000 2,300 4,983,419
Issuance of common stock pursuant
to exercise of stock options.... 3,504,488 4,673 54,848 $ 73 263,852
Stock compensation expense........ 117,000
Conversion of stock appreciation
rights to nonstatutory stock
options......................... 1,340,000
Effect of stock splits............ 130,342 475 (130,817)
Preferred stock dividends......... (210,000)
Net loss for the year............. (6,882,571)
---------- -------- ------ -------- ---------- ------------
Balance, December 31, 1998........ 15,039,488 $150,395 54,848 $ 548 $6,581,374 $(15,739,354)
========== ======== ====== ======== ========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 94
APPLIEDTHEORY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------ ---------------------------------------------
NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED -------------------------
SEPTEMBER 30, 1996 DECEMBER 31, 1996 1997 1998
------------------ ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss........................................ $(3,924,592) $(1,762,437) $(5,847,367) $(6,882,571)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization................ 157,670 81,456 1,094,681 1,671,951
Deferred payment of interest expense to
NYSERNet.net, Inc. ........................ 58,915 211,323
(Gain) loss on sale of property and
equipment.................................. (7,828) 111,389 20,988
Loss from assets not usable in operations.... 900,000
Conversion of stock appreciation rights to
nonstatutory stock options................. 1,340,000
Stock compensation expense................... 117,000
Changes in assets and liabilities
Accounts receivable, net................... (812,765) (1,396,501) 185,178 (2,373,068)
Other receivables.......................... 85,527
Due to (from) related parties.............. (529,728) (1,229,384) 449,824
Prepaid expenses and other assets.......... (70,916) (9,300) (60,905) (67,876)
Accounts payable........................... 1,761,465 1,430,312 576,522 141,769
Accrued payroll............................ 116,177 8,071 229,373 213,925
Accrued expenses and other liabilities..... (135,851) 1,107,572 (373,037) 611,976
Deferred revenue........................... 733,476 236,620 69,309 941,183
----------- ----------- ----------- -----------
Net cash used in operating activities...... (2,097,637) (833,935) (5,185,326) (2,703,576)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment............. (506,483) (1,270,383) (2,479,880)
Issuance of notes receivable.................... (309,000)
Payments received on notes receivable........... 1,667
Proceeds from sale of property and equipment.... 56,344 4,842 8,176
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 56,344 (506,483) (1,265,541) (2,779,037)
----------- ----------- ----------- -----------
Cash flows from financing activities
Issuance of common stock, net of issuance
costs........................................ 13,000 8,000 5,254,317
Borrowings from NYSERNet.net, Inc............... 2,041,293 2,385,721 301,279
Proceeds from line of credit borrowings, net.... 4,144,005 1,285,995
Principal payments on capital leases............ (124,262) (350,199)
Proceeds from long-term debt.................... 1,023,724
Security deposit on equipment financing......... (382,000)
Advances from NYSERNet.net, Inc................. 1,500,000
----------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. 2,041,293 1,513,000 6,413,464 7,133,116
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 172,582 (37,403) 1,650,503
Cash and cash equivalents, beginning of period.... 172,582 135,179
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period.......... $ -- $ 172,582 $ 135,179 $ 1,785,682
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 95
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
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 3,559,335 stock options, the
private placement of 1,725,000 shares and NET's direct sale of 4,875,000 shares
it owned in AppliedTheory), NET's ownership percentage in AppliedTheory declined
to approximately 32% as of December 31, 1998 (Note H).
The operating activities prior to October 1, 1996 were conducted as a
nonincorporated "division" of ORG and are considered to constitute a predecessor
business (the "Predecessor"). The financial statements presented for the nine
months ended September 30, 1996 reflect these activities on a "carved-out" basis
from the historical financial statements of ORG as if the Predecessor had been
organized as of January 1, 1996. The operating results of the Predecessor and,
subsequently, as a subsidiary of Net are (i) separately identifiable from the
accounting records which required no expense allocations and (ii) comprehensive
as if it operated as an unaffiliated entity from inception.
In conjunction with the proposed initial public offering, AppliedTheory
Communications, Inc. intends to reorganize as a Delaware corporation. On January
28, 1999, the Company established its wholly-owned subsidiary, AppliedTheory
Corporation. The Company intends to merge into AppliedTheory Corporation, which
would be the surviving entity. For purposes of these financial statements and
notes thereto, AppliedTheory Corporation and AppliedTheory Communications, Inc.
are used interchangeably and referred to as "the Company." On January 29, 1999,
the Company's Board of Directors authorized the filing of a registration
statement relating to an initial public offering (IPO) of shares of common stock
should market conditions permit and an increase in the number of common stock
and preferred stock authorized to 60,000,000 and 1,000,000, respectively. All
non-voting common shares are converted into voting common shares.
The Company is a provider of Internet solutions for businesses with
critical Internet operations. The Company's solutions include: (i) Internet
connectivity, (ii) Internet integration and enterprise portal development and
(iii) Web hosting.
The Company's operations are subject to certain risks and uncertainties,
including actual and potential competition by entities with greater financial
resources, experience and market presence, risks associated with the development
of the Internet market, risks associated with consolidation in the industry, the
need to manage growth and expansion, certain technology and regulatory risks and
dependence upon sole and limited source suppliers. In addition, the Company has
to date relied upon NET for a significant portion of the funding of its
operations.
The Company has a history of losses, negative cash flow from operations and
at December 31, 1998 has a working capital deficiency and stockholders' deficit
of $3,248,566 and $9,007,037, respectively. Management has formulated plans that
it believes will provide the Company with sufficient liquidity for the next
twelve months in the event the IPO is delayed or unsuccessful. Management's
plans include the deferral of discretionary expenses, utilization of existing
cash, available credit from existing borrowing agreements and from additional
financings, strategic relationships or other arrangements. There can be no
assurance that these plans will be successful.
F-7
<PAGE> 96
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting
policies.
1. Revenue Recognition
Revenue from Internet connectivity and Web hosting services is recognized
ratably over the period of the agreement as services are provided. Internet
connectivity agreements range from one to five years and contain automatic
renewal clauses unless either party cancels the agreement. Web hosting
agreements are typically for periods of one year and automatically renew unless
either party cancels the agreement.
Revenue from Internet integration and enterprise portal development
represents professional services that are recognized principally on a
time-and-materials basis as the services are performed.
2. Deferred Revenue
Deferred revenue consists principally of billings in advance of services
not yet provided.
3. Research and Development
The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense.
4. Advertising
Advertising costs, charged to operations when incurred, were approximately
$12,000, $400, $435,000 and $1,363,000 for the nine months ended September 30,
1996, the three months ended December 31, 1996 and the years ended December 31,
1997 and 1998, respectively.
5. Income Taxes
The Company records income taxes using the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
reporting basis and tax basis of assets and liabilities. A valuation allowance
is recognized to the extent a portion or all of a deferred tax asset may not be
realizable.
6. 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, 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 stock 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 each of the periods presented. Potential common
shares that were excluded from the computation of diluted loss per share
consisted of stock options and stock appreciation rights outstanding of
4,907,250, 5,837,708 and 3,998,333 for the three months ended December 31, 1996
and the years ended December 31, 1997 and 1998, respectively. Loss per share has
not been presented for the Predecessor because the Predecessor was not an
incorporated entity.
F-8
<PAGE> 97
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
7. Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
8. Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the assets, which range
from three to ten years.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability. Depreciation of
capitalized leased assets is recorded on the straight-line method over the
shorter of the term of the lease or the estimated useful life.
9. Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
10. Lease and Contractual Commitments
The Company recognizes expense under operating leases and contractual
agreements on a straight-line basis over the terms of the lease or agreement.
The difference between the amounts computed on a straight-line basis and the
amounts paid or payable is included in accrued expenses and other liabilities.
11. Stock Split
On October 14, 1998, the Board of Directors approved a five-for-one stock
split. All share and per share amounts in the accompanying financial statements
have been retroactively restated to give effect to the stock split. The par
value was maintained at $.01 per share.
12. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base. However, these customers are concentrated in New York State. The Company's
revenues from ORG customers and services to ORG accounted for approximately 52%,
47% and 37% of total net revenues for the three months ended December 31, 1996
and the years ended December 31, 1997 and 1998, respectively (Note I). One
third-party customer accounted for 14%, 16% and 28% of total net revenues for
the three months ended December 31, 1996 and for the years ended December 31,
1997 and 1998, respectively.
F-9
<PAGE> 98
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
13. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, long-term debt and capital lease obligations
approximate fair value because of the short maturity of these items.
The fair value of the Company's redeemable preferred stock, which was
issued to NET, is not practical to estimate as such stock is not traded in the
open market and a market price is not readily available.
The carrying amount of the debt issued pursuant to the Company's bank
credit agreement, as of December 31, 1998, approximates fair value because the
interest rates change with market interest rates.
14. Supplemental Noncash Investing and Financing Activities
During the years ended December 31, 1997 and 1998, the following noncash
transactions occurred: (1) in October 1996, incurred approximately $38,975 in
advances to purchase certain assets and assume certain liabilities from ORG
(Note I), (2) in 1997, the Company (i) purchased approximately $551,000 of fixed
assets under capital lease obligations (Note D), (ii) incurred approximately
$2,129,000 in advances to purchase fixed assets from ORG (Notes F and I) and
(iii) issued 15,000 shares of $100 per share liquidation value preferred stock
in settlement of the advances due to NET as of December 31, 1996 (Notes G and
I), (3) the Company recorded $210,000 in dividends payable on the preferred
stock in 1997 and 1998 and (4) in 1998, the Company recorded $1,340,000 to
additional paid-in-capital from the conversion of 127,500 stock appreciation
rights to nonstatutory stock options (Note H).
15. Segment and Related Information
The Company operates as one business segment, as a provider of Internet
solutions, and follows the requirements of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information."
The Company had revenues from its major service offerings as follows:
<TABLE>
<CAPTION>
NINE THREE YEAR ENDED
MONTHS ENDED MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, --------------------------
1996 1996 1997 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues
Internet connectivity...... $5,690,811 $2,508,180 $12,249,040 $15,076,914
Internet integration and
enterprise portal
development............. 244,439 268,325 1,914,726 5,940,366
Web hosting................ 291,056 299,806 1,007,948 1,545,710
---------- ---------- ----------- -----------
Total net revenues........... $6,226,306 $3,076,311 $15,171,714 $22,562,990
========== ========== =========== ===========
</TABLE>
Due to the way the Company manages its operations, it does not account for
or report operating expenses by product/service offering.
16. Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and
F-10
<PAGE> 99
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
17. Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year presentation.
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment.......................................... $3,098,084 $5,467,772
Office furniture and equipment.............................. 409,809 440,019
Equipment under capital leases.............................. 551,334 551,334
Leasehold improvements...................................... 983,821 353,210
---------- ----------
5,043,048 6,812,335
Less accumulated depreciation and amortization.............. (1,132,642) (2,609,164)
---------- ----------
$3,910,406 $4,203,171
========== ==========
</TABLE>
On December 21, 1998, the Company adopted a plan which was approved by the
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 the ability to generate
sufficient revenues. In connection with the plan of abandonment, the Company has
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 -- Other in
1998, relating to equipment leases and a facility operating lease (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" (Note E). 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 facility and
the related revenues, which are not significant, to be transitioned to another
facility.
F-11
<PAGE> 100
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE D -- LONG-TERM DEBT, BORROWINGS FROM NET AND CAPITAL LEASE OBLIGATIONS
Long-term debt, borrowings from NET and capital lease obligations consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Line of credit.............................................. $4,144,005 $5,430,000
Borrowings from NYSERNet.net, Inc........................... 2,444,636 2,957,238
Equipment financing......................................... 897,764
Capital lease obligations................................... 427,072 202,833
---------- ----------
7,015,713 9,487,835
Less current portion........................................ (210,548) (551,359)
---------- ----------
$6,805,165 $8,936,476
========== ==========
</TABLE>
Line of Credit
On January 20, 1998, the Company entered into a credit agreement with Fleet
Bank for the 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.
Pursuant to the credit agreement, the Company refinanced its existing
short-term lines of credit on a long-term basis. Accordingly, the $4,144,000
outstanding under this line of credit balance as of December 31, 1997 was
classified based on the terms of the refinancing.
At December 31, 1998, the Company had $5,430,000 outstanding under the line
of credit and, as a result of certain restrictions, had $70,000 in additional
availability. The average interest rate on outstanding borrowings was 10.0% and
6.1% at December 31, 1997 and 1998, respectively.
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 (Note G), for working capital requirements. Interest on the loans accrues at
the prime rate (8.5% and 7.75% at December 31, 1997 and 1998, respectively) 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. The Company had principal borrowings under
this facility of $2,385,721 and $2,687,000 at December 31, 1997 and 1998,
respectively. The Company had $2,000,000 available for additional principal
borrowings at December 31, 1998. In addition, the Company has interest payable
under this agreement of $58,915 and $270,238 at December 31, 1997 and 1998,
respectively. Amounts charged to interest expense on the borrowings under this
related party debt facility amounted to $58,915 and $211,323 for the years ended
December 31, 1997 and 1998, respectively.
F-12
<PAGE> 101
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Equipment Financing
During 1998, the Company entered into an equipment financing agreement with
a secured lender. Borrowings under the agreement are repayable in thirty-six
(36) varying monthly installments. Interest is payable monthly at a fixed rate
of 10.3%. Principal payments under this financing are $417,168 in 1999, $302,699
in 2000 and $177,897 in 2001. In connection with the equipment financing, the
Company was required to place on deposit $382,000 as additional collateral. The
security deposit, which is included in Other Assets in 1998, earns interest at a
rate of 5.0% per annum and is refundable in equal installments on April 1, 2000
and 2001.
Capital Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. The obligations for the equipment require the Company to make
monthly payments through September 2000, with implicit interest rates ranging
from 10.0% to 16.6%.
The following is a summary of the aggregate annual maturities of long-term
debt, borrowings from NET and capital lease obligations as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................... $ 551,359
2000........................................... 371,342
2001........................................... 5,607,896
2002........................................... 2,957,238
----------
Total................................ $9,487,835
==========
</TABLE>
Interest paid for the nine months ended September 30, 1996 and the years
ended December 31, 1997 and 1998 was $4,870, $287,798 and $396,745,
respectively.
NOTE E -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Network costs............................................... $ 301,847 $1,020,413
Lease and contractual commitments........................... 184,780 184,780
Other....................................................... 523,402 1,267,774
---------- ----------
$1,010,029 $2,472,967
========== ==========
</TABLE>
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Lease and contractual commitments........................... $367,461 $214,499
Accrued compensation........................................ 284,000
-------- --------
$651,461 $214,499
======== ========
</TABLE>
F-13
<PAGE> 102
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
NOTE F -- COMMITMENTS AND CONTINGENCIES
1. Telecommunications
The Company is committed to a minimum cumulative purchase commitment to a
telecommunication vendor for various products and services through December 31,
2000. The aggregate minimum cumulative purchase commitment over the term of the
agreement is $20 million. As of December 31, 1998, the Company's aggregate
purchases totaled $18.0 million. The Company anticipates meeting the minimum
cumulative purchase commitment over the remaining term; however, there can be no
assurance that such minimum will be met.
The Company has also entered into contracts expiring at various times
through the year 2002 with various communication vendors to provide services
consisting of aggregating, routing and transporting data communications over the
Company's network.
2. Facilities and Equipment Leases
The Company leases its office facilities and certain equipment with
expiration dates through November 2008. 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 base rent is being charged to expense on the
straight-line method over the terms of the lease.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999........................................... $ 894,000
2000........................................... 900,000
2001........................................... 809,000
2002........................................... 699,000
2003........................................... 743,000
Thereafter..................................... 2,898,000
----------
Total................................ $6,943,000
==========
</TABLE>
Total rent expense for operating leases amounted to $253,000, $292,000
(including $89,000 to ORG), $862,000 and $898,000 for the nine months ended
September 30, 1996, the three months ended December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively.
Effective January 1, 1997, the Company purchased all assets previously
leased from ORG for $2,129,000. The assets were purchased at book value, which
approximated fair value at the effective date.
3. Employment Agreements
The Board of Directors has provided for severance payments upon termination
of employment or change in control, as defined, for certain executive officers
of the Company. Under this provision, the maximum aggregate commitment at
December 31, 1998, excluding benefits, was approximately $1,265,000.
F-14
<PAGE> 103
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
4. Litigation Matters
The Company is involved in various litigation which arise through the
normal course of business. Management believes that the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
NOTE G -- REDEEMABLE PREFERRED STOCK
Effective January 1, 1997, the Company issued 15,000 shares of redeemable
preferred stock at $100 per share liquidation value to NET in satisfaction of
the $1,500,000 advance. Holders of shares of the redeemable preferred stock are
entitled to receive payment for cumulative dividends at the annual rate of
$14.00 per share (14%) beginning January 1, 1999, based upon a liquidation value
of $100 per share, payable quarterly. At December 31, 1998, the amount of
dividends payable on the 14% redeemable preferred stock was $420,000. All or any
part of the preferred stock may be redeemed by the Company at any time on or
after December 31, 2001, by resolution of the Company's Board of Directors. At
any time on or after December 31, 2001, any holder of preferred stock may
request that the Company redeem some or all of the holder's preferred stock
within sixty days of such request.
NOTE H -- STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS
The Company had authorized 25,000,000 shares of voting common stock and
5,000,000 shares of nonvoting common stock. In addition, the Company had
authorized 75,000 shares of preferred stock.
The Company's nonvoting common stock is identical in all respects to the
voting common stock, except that the holders of the nonvoting common stock do
not have the right to vote on any matter coming before the stockholders of the
Company, except to the extent required by law. At the option of the Company's
Board of Directors, all shares of nonvoting common stock can be converted into
shares of voting common stock.
On October 1, 1996, the Company was capitalized through the issuance of
9,750,000 shares of $0.01 par value common stock to NET for $13,000 in cash.
On August 4, 1998, the Company completed a private placement of 1,725,000
shares of its voting common stock for proceeds of $4,985,719, net of issuance
costs of $80,951. In connection with the private placement, NET sold a portion
of its holdings in the Company. The stock purchase agreement also gives the
investors the right of first refusal to purchase any equity securities of the
Company at the same price, and on the same terms and conditions offered until
such time that any class of the Company's equity securities are registered under
the Securities and Exchange Act. In addition, NET granted an irrevocable proxy
to vote and to execute and deliver written consents or otherwise act with
respect to 1,890,000 shares of its current holdings of 4,875,000 shares to the
investors of the private placement. The proxy was granted to allow the investors
to have voting power over a majority of the shares then outstanding which were
entitled to vote at stockholders' meetings. The granting of the proxy was a
condition to IXC's and Grumman Hill's agreement to purchase shares from NET and
the Company. The number of shares covered by the proxy will reduce by that
number of shares of the Company's common stock which the investors acquire from
the Company or from stockholders under option agreements between such
stockholders and the investors during the period between September 4, 1999 and
October 28, 2000.
The Company's 1996 Incentive Stock Option Plan has authorized the grant of
options to key employees, directors, advisors and consultants for up to
12,000,000 shares of the Company's common stock with an exercise price of not
less then the fair market value of the shares at the date of grant. All options
F-15
<PAGE> 104
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
granted have ten-year terms and vest over one to five years following the date
of grant. The Board of Directors may exercise the right to accelerate the
vesting provisions of the option grants upon the occurrences or certain
conditions, as defined.
As permitted by SFAS No. 123, the Company has elected to follow the
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," method of determining compensation cost. Under APB 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
THREE MONTHS ENDED ------------------
DECEMBER 31, 1996 1997 1998
------------------ ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................ 6.21% 5.40% 4.80%
Volatility factor.............................. .001 .001 .001
Expected life of options....................... 5 years 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the option valuation model requires the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing methods do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Had the Company determined compensation cost for this plan in accordance
with SFAS No. 123, the Company's pro forma net loss attributable to common
stockholders and pro forma basic and diluted loss per common share would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ---------------------------
DECEMBER 31, 1996 1997 1998
------------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net loss attributable to
common stockholders................. $(1,765,450) $ (6,069,920) $(7,287,616)
Pro forma basic and diluted loss per
common share........................ $ (.12) $ (.41) $ (.58)
</TABLE>
F-16
<PAGE> 105
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
A summary of the Company's stock option activity and related information
for the period October 1, 1996 through December 31, 1998, follows:
<TABLE>
<CAPTION>
WEIGHTED
PRICE AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Balance, October 1, 1996
Granted....................................... 4,944,750 $.056-$.133 $ .072
Forfeited..................................... (37,500) .263 .056
---------- ----------- --------------
Balance, December 31, 1996.................... 4,907,250 .056-.133 .072
Granted....................................... 879,833 .40 .40
Exercised..................................... (60,000) .133 .133
Forfeited..................................... (16,875) .263 .263
---------- ----------- --------------
Balance, December 31, 1997.................... 5,710,208 .056-.40 .121
Granted....................................... 2,211,773 .133-2.93 2.736
Exercised..................................... (3,559,335) .056-.40 .076
Forfeited..................................... (364,313) .056-.40 .292
---------- ----------- --------------
Balance, December 31, 1998.................... 3,998,333 $.056-$2.93 $ 1.59
========== =========== ==============
Exercisable, December 31, 1996................ 120,000 $.133 $ .133
========== =========== ==============
Exercisable, December 31, 1997................ 1,378,470 $.056-$.40 $ .103
========== =========== ==============
</TABLE>
The weighted average fair values of options granted were $.02, $.00 and
$3.02 for the three months ended December 31, 1996 and the years ended December
31, 1997 and 1998, respectively.
Certain options were granted in November and December 1998 at exercise
prices below the fair market value of the Company's stock, determined to be
$3.47 and $10.50 per share, respectively, resulting in aggregate total
compensation of $5,016,000 of which a non-cash compensation of $117,000 was
recorded for the year ended December 31, 1998 with the remaining charge of
$4,899,000 to be recognized over the remaining vesting period of approximately
four years.
The following table summarizes information about the shares outstanding and
exercisable for options at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.056-$.061 725,318 1.17 $ .061 660,818 $.061
.133-.40 1,226,243 7.89 .264 894,930 .213
2.93 2,046,772 9.84 2.93 205,110 2.93
--------- ---------
3,998,333 8.75 $ 1.59 1,760,858 $.473
========= =========
</TABLE>
During 1997, the Board of Directors authorized the issuance of 127,500
Stock Appreciation Rights (SARS) to certain executives at an exercise price
varying from $.133 to $.40. The SARS vest ratably over a four-year period or
upon occurrence of certain events. At the option of the Company, the SARS can be
F-17
<PAGE> 106
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
converted into nonstatutory stock options at their exercise price. As the
Company determined that the exercise price exceeded the fair value of the
underlying stock as of December 31, 1997 no compensation expense was recorded
for the year then ended. The Company recognized $1,340,000 of compensation
expense relating to SARs for the year ended December 31, 1998. In December 1998,
pursuant to the original terms of the SARs, the Company converted the SARS into
nonstatutory stock options, with the same terms and conditions as the SARs.
NOTE I -- RELATED PARTY TRANSACTIONS
1. Transactions With NET and ORG
Effective October 1, 1996, the Company purchased certain assets and assumed
certain liabilities of ORG. The following is a summary of this transaction:
<TABLE>
<CAPTION>
BOOK
VALUE
--------
<S> <C>
Assets purchased
Prepaid expense and other assets.......................... $116,927
Property and equipment.................................... 704,860
Liabilities assumed
Accrued compensation...................................... 130,669
Deferred revenue.......................................... 601,507
Other accrued liabilities................................. 877,615
Purchase price consideration.............................. 38,975
--------
Excess of purchase price and liabilities assumed over the
book value of assets acquired............................. $826,979
========
</TABLE>
Since ORG and the Company were entities under common control, the excess of
the purchase price and liabilities assumed over the book value of assets
acquired have been recorded as a charge to retained earnings.
The Company has entered into a resale agreement with ORG to serve as ORG's
sole source provider for Internet system and network management 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. In addition, the Company provides services to ORG
principally related to network development. The Company's revenues from ORG's
customer base and services to ORG for the following periods are:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1996 1997 1998
------------ ---------- ----------
<S> <C> <C> <C>
Unrelated customers........................... $ 916,773 $3,705,546 $3,051,837
Member institutions........................... 529,179 2,890,786 4,477,004
Services to ORG............................... 141,057 552,002 798,277
---------- ---------- ----------
$1,587,009 $7,148,334 $8,327,118
========== ========== ==========
</TABLE>
F-18
<PAGE> 107
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
The excess of the Company's revenues over amounts charged by ORG to its
member institutions was approximately $243,000, $1,490,000 and $2,814,000 for
the three months ended December 31, 1996 and for the years ended December 31,
1997 and 1998, respectively. Such revenues recognized by the Company from ORG
are based on standard pricing terms for similar services offered to unrelated
parties.
The Company has also entered into a resource sharing agreement with both
NET and ORG. During the three months ended December 31, 1996 and the years ended
December 31, 1997 and 1998, the Company charged NET approximately $25,000,
$91,500 and $100,000 and ORG $63,000, $210,000 and $300,000, respectively, in
management fees.
During the year ended December 31, 1997, the Company purchased from ORG
fixed assets previously leased from ORG with a book value of $2,129,000. In
addition, the Company issued 15,000 shares of $100 per share liquidation value
preferred stock in settlement of the advances due to NET (Note G).
Transactions among the Company, ORG and NET throughout the period are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------
DECEMBER 31, 1996 1997 1998
----------------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period............. $ (39,016) $ 490,712 $ (400,277)
Revenue from ORG......................... 1,587,009 7,148,334 8,327,118
Payments made to the Company............. (6,123,558) (8,033,630)
Management fees.......................... 88,083 301,297 399,780
Expenses paid on behalf of the Company by
ORG.................................... (1,393,613) (10,997) (45,441)
Expenses paid by the Company on behalf of
ORG and Net............................ 323,824 96,756 136,733
Purchase of assets from ORG.............. (2,129,105)
Equipment lease.......................... (89,335) 46,267
Company receipts deposited by ORG and
NET.................................... 13,760 170,017
ORG and NET receipts deposited by the
Company................................ (219,983) (1,404,401)
----------- ----------- -----------
Balance, end of period................... $ 490,712 $ (400,277) $ (850,101)
=========== =========== ===========
</TABLE>
For the nine-month period ended September 30, 1996, the average balance due to
NET, relating to advances was approximately $1,020,000.
2. Other
In 1998, two officers/stockholders of the Company borrowed a total of
$294,000 under term note agreements. The total principal amount plus accrued
interest is due in 2001. Interest is being accrued at a rate of 5.56%. Upon
demand by the Company the officers/stockholders will be required to pledge
common stock of the Company as collateral on these borrowings.
In December 1998, the Board authorized the Company to make available a $2.5
million credit line, effective January 1, 1999, to its Chairman/CEO to be used
exclusively for purchasing the Company's common stock, under certain
circumstances. In the event any borrowings are drawn against this credit line,
F-19
<PAGE> 108
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
payment terms, interest rates and collateral provisions will be established by
the Board of Directors. This line of credit agreement will terminate upon
consummation of the initial public offering transaction described in Note A.
In October 1996, the Company entered into a consulting agreement with a
director/stockholder, which agreement expires in October 2000. The agreement,
which is automatically renewable annually after the initial term, is cancellable
by either party with notice, as defined. Under this agreement, the director/
stockholder receives $5,000 per-month in consulting fees. In addition, the
director/stockholder received 750,000 stock options in October 1996 with an
exercise price of $.13 per-share of which 187,500 options vested on October 1,
1997 with the balance vesting upon occurrence of certain events. The
compensation charge pertaining to the stock options was nominal based on the
fair value of the common stock at the date of grant. These stock options became
fully exercisable in 1998 as a result of the August 4, 1998 private placement
transaction described in Note H. The Company incurred consulting fees of
$15,000, $60,000 and $60,000 during the three months ended December 31, 1996 and
the years ended December 31, 1997 and 1998, respectively.
During the year ended December 31, 1998, the Company incurred $25,000 in
consulting fees to one of its principal stockholders.
NOTE J -- INCOME TAXES
The Company generated taxable losses of approximately $1,285,000,
$5,526,000 and $4,916,000 for the three months ended December 31, 1996 and the
years ended December 31, 1997 and 1998, respectively.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforwards........... $ 501,000 $ 2,771,000 $ 4,607,000
Accruals not currently deductible for Tax
purposes................................. 462,000 391,000 618,000
Acquisition of intangible assets from
ORG...................................... 298,000 298,000 276,000
Other...................................... 12,000 130,000 343,000
----------- ----------- -----------
Gross deferred tax assets.................. 1,273,000 3,590,000 5,844,000
Valuation allowance........................ (1,273,000) (3,590,000) (5,844,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-20
<PAGE> 109
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
A reconciliation between the Company's effective tax rate and the Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS DECEMBER 31,
ENDED --------------
DECEMBER 31, 1996 1997 1998
----------------- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate................. (34)% (34)% (34)%
Valuation allowance on net operating Loss......... 33 32 32
Valuation allowance on temporary Differences...... 1 1
Expenses not deductible for income tax purposes... 1 1 1
----- ----- -----
Effective income tax rate......................... 0% 0% 0%
===== ===== =====
</TABLE>
The Company has provided a net deferred tax asset valuation allowance for
net deferred tax assets since realization of these benefits cannot be reasonably
assured.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $11,727,000 for income tax purposes. These net operating losses
begin to expire in the year 2012. Utilization of the net operating loss arising
prior to August 4, 1998 will be subject to an annual limitation due to the
change in ownership on such date. Further limitations may occur in the event of
significant changes in the Company's ownership. In addition, their use is
limited to future earnings of the Company.
NOTE K -- RETIREMENT SAVINGS PLANS
During the nine months ended September 30, 1996, the Company participated
in a 403(b) defined contribution plan through Teachers Insurance Annuity (TIAA)
and College Retirement Equities Fund (CREF). This plan was available to eligible
employees. The Company contributed a percentage of each eligible employee's
regular salary. Total expense charged to operations relating to this plan for
the nine months ended September 30, 1996 was $296,000. As of January 1, 1997,
all employees were transferred to the AppliedTheory Communications, Inc. 401(k)
and Money Purchase Pension Plans, and the 403(b) plan with TIAA and CREF was
terminated and all participants were fully vested in their account balances.
The AppliedTheory Communications, Inc. Money Purchase Pension Plan and the
AppliedTheory Communications, Inc. 401(k) Profit Sharing Plan cover
substantially all employees. In addition to employee contributions, the Company
matched a percentage of the employee's elective salary deferral into the Profit
Sharing Plan and contributed a percentage of each eligible employee's salary to
the Money Purchase Plan. Effective October 1, 1997, the Company terminated the
AppliedTheory Communications, Inc. Money Purchase Pension Plan. All employees in
the Plan were vested, and all assets of the Plan were transferred into the
401(k) Profit Sharing Plan. The total contributions made by the Company under
both Plans totaled approximately $30,000 for the three months ended December 31,
1996, and $587,000 and $373,000 for the years ended December 31, 1997 and 1998,
respectively.
NOTE L -- SUBSEQUENT EVENTS
1. Agreement with IXC Internet Services, Inc.
On January 26, 1999, the Company and IXC Internet Services, Inc., (a
principal stockholder) signed a Joint Marketing and Services Agreement. Under
the agreement each party can resell the services of the other party.
F-21
<PAGE> 110
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
2. Employee Stock Purchase Plan
In March, 1999 the Board of Directors approved the 1999 Employee Stock
Purchase Plan, which permits eligible employees to purchase shares of the
Company's common stock at prices below the current market price. The Plan
conforms with Section 423 of the Internal Revenue Code of 1986 and is considered
to be non-compensatory for financial reporting purposes.
3. Stock Split
On April 12, 1999 the Board approved a 1.5 for 1 stock split to be
completed upon the completion of the proposed Initial Public Offering. All per
share amounts have been adjusted retroactively.
4. 1999 Stock Option Plan
On March 12, 1999 the Board approved its 1999 Stock Option Plan. This plan
allows for the granting of incentive stock options qualified under Section 422
of the Internal Revenue Code and also non-qualified options. The plan provides
for a maximum of 2.4 million shares to be issued.
F-22
<PAGE> 111
[INSIDE BACK COVER --]
[GRAPHIC: GEMINI2000 LOGO, INCORPORATING LOGOS OF APPLIEDTHEORY CORPORATION
AND IXC COMMUNICATIONS, INC.]
[GRAPHIC: MAP OF THE UNITED STATES ILLUSTRATING THE GEMINI2000 NETWORK
GEOGRAPHICAL SCOPE. GEMINI2000 DATA CENTERS ARE ILLUSTRATED IN DALLAS, NEWARK
AND SAN FRANCISCO. CORE POP (POINT OF PRESENCE) SITES ARE INDICATED IN SEATTLE,
SAN FRANCISCO, SALT LAKE CITY, DALLAS, CHICAGO, ATLANTA, BALTIMORE/WASHINGTON
D.C. AND NEWARK. THE CORE POP SITES ARE INTERCONNECTED BY OC 48 LINES.
APPLIEDTHEORY EXPANSION CITIES ARE INDICATED IN LOS ANGELES, SAN DIEGO, PHOENIX,
MINNEAPOLIS, DETROIT, ST. LOUIS, HOUSTON, TAMPA, PHILADELPHIA, STAMFORD,
PROVIDENCE AND BOSTON. THE APPLIEDTHEORY EXPANSION CITIES ARE CONNECTED TO CORE
POP SITES BY OC 3 LINES.]
[GRAPHIC: THE GEMINI2000 REGIONAL HIERARCHY ILLUSTRATED WITH CORE POP SITES
CONNECTED BY OC 48 LINES. THE CORE POP SITES ARE CONNECTED TO PACKET OVER SONET
(POS) SITES AND ASYNCHRONOUS TRANSFER MODE (ATM) SITES WHICH ARE IN TURN
CONNECTED TO APPLIEDTHEORY EXPANSION CITY SITES, ALL BY OC 3 LINES.]
[TEXT: THE GEMINI2000 NETWORK IS BEING DEPLOYED WITH IXC COMMUNICATIONS,
INC. IXC IS PROVIDING THE PHYSICAL INFRASTRUCTURE FOR THE NETWORK AND
APPLIEDTHEORY WILL PROVIDE CUSTOMER INSTALLATION AND PROVISIONING SYSTEMS,
INCLUDING "LAST MILE" ACCESS PROCUREMENT, NETWORK MONITORING, CUSTOMER PREMISE
EQUIPMENT MONITORING AND MANAGEMENT AND "FIRST LINE" TROUBLESHOOTING.
[GRAPHIC: APPLIEDTHEORY LOGO. TEXT: THE NEXT GENERATION INTERNET COMPANY.]
<PAGE> 112
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither AppliedTheory Corporation nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy the securities in any jurisdiction where such offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 7
How We Intend to Use the Proceeds From
the Offering........................... 19
Dividend Policy.......................... 19
Capitalization........................... 20
Dilution................................. 21
Selected Financial Data.................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................. 34
Management............................... 56
Certain Transactions..................... 70
Principal Stockholders................... 75
Description of Capital Stock............. 78
Shares Eligible for Future Sale.......... 81
Underwriting............................. 83
Legal Matters............................ 85
Experts.................................. 85
Where You Can Find More Information...... 85
Index to Financial Statements............ F-1
</TABLE>
-------------------------
Until , 1999 all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
[APPLIED THEORY COMPANY LOGO]
4,500,000 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
LEHMAN BROTHERS
WIT CAPITAL CORPORATION
AS E-MANAGER(TM)
, 1999
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<PAGE> 113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission......... $ 21,580
NASDAQ National Market Listing Fee.......................... 95,000
NASD Filing Fee............................................. 6,250
Blue Sky fees and expenses.................................. 5,000
Accountants' fees and expenses.............................. 300,000
Legal fees and expenses..................................... 320,000
Printing and engraving expenses............................. 350,000
Transfer agent and registrar fees........................... 5,000
Miscellaneous............................................... 97,170
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware (the
DGCL) provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or business, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to be
indemnified for such expenses which the court shall deem proper.
Section 145 of the DGCL further provides: (i) that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) or in the defense of
any claim, issue, or matter therein, he shall be indemnified against any
expenses actually and reasonably incurred by him in connection therewith; (ii)
that indemnification provided for by Section 145 shall not be deemed exclusive
of any rights to which the indemnified party may be entitled; (iii) and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
II-1
<PAGE> 114
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend or
approving a stock repurchase which was illegal, or obtaining an improper
personal benefit. A provision of this type has no effect on the availability of
equitable remedies, such as injunction or rescission, for breach of fiduciary
duty. AppliedTheory's certificate of incorporation contains such a provision.
AppliedTheory's certificate of incorporation and bylaws provide that
AppliedTheory shall indemnify officers and directors and, to the extent
permitted by the board of directors, employees and agents of AppliedTheory, to
the full extent permitted by and in the manner permissible under the laws of the
State of Delaware. In addition, the bylaws permit the board of directors to
authorize AppliedTheory to purchase and maintain insurance against any liability
asserted against any director, officer, employee or agent of AppliedTheory
arising out of his capacity as such.
Prior to completion of this offering, AppliedTheory and each of its
directors will enter into an indemnification agreement. The indemnification
agreements will provide that AppliedTheory will indemnify the directors to the
full extent permitted by, and in the manner permissible under, the laws of the
State of Delaware and by the certificate of incorporation and the bylaws.
The employment agreements of AppliedTheory's executive officers (which are
included as exhibits to this registration statement) provide that AppliedTheory
shall indemnify the officers to the fullest extent permitted by law and by the
certificate of incorporation and bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement,
AppliedTheory has issued securities that were not registered under the
Securities Act of 1933 to a limited number of persons, as described below.
AppliedTheory believes that the transactions described below were exempt
from registration under the Securities Act pursuant to (i) Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as transactions by an
issuer not involving public offering, (ii) Rule 701 promulgated under Section
3(b) of the Securities Act, as transactions pursuant to compensatory benefit
plans and contracts relating to compensation or (iii) Section 3(a)(9), as an
issuance of a security exchanged by the issuer with an existing security holder
exclusively where no commission or other remuneration was paid or given directly
or indirectly for soliciting such exchange.
(A) ISSUANCES OF CAPITAL STOCK
NYSERNet.net capitalized AppliedTheory on October 1, 1996, through the
issuance of 9,750,000 shares of $.01 par value common stock, which at the time
represented all of its outstanding stock. NYSERNet.net paid $13,000 in cash in
consideration for the common stock issued.
On March 12, 1997, AppliedTheory issued to NYSERNet.net 15,000 shares of
preferred stock in connection with the cancellation of outstanding indebtedness
under a revolving borrowing facility with NYSERNet.net. The preferred stock has
a liquidation value of $100 per share and provides for dividends accruing at an
annual rate of 14% of the liquidation value. AppliedTheory may redeem the
preferred stock after December 31, 2001 at a price equal to the liquidation
value plus any accrued but unpaid dividends. AppliedTheory intends to repurchase
this preferred stock upon completion of this offering.
In August 1998, AppliedTheory issued 1,725,000 shares of common stock to
IXC Internet Service, Inc. and Grumman Hill Investments III, L.P., for an
aggregate offering price of $5,066,670, resulting in net proceeds of $4,985,719.
II-2
<PAGE> 115
AppliedTheory has issued 4,496,445 shares of common stock in connection
with the exercise of stock options.
(B) GRANTS OF STOCK OPTIONS
Pursuant to a non-statutory stock option contract dated October 5, 1996,
AppliedTheory issued to Shelley Harrison an option to purchase 750,000 shares of
AppliedTheory voting common stock at a price of $0.133 per share. The option
vested with regards to 187,500 shares on October 1, 1997 and with respect to the
remaining 562,500 shares on August 4, 1998.
The 1996 Incentive Stock Option Plan was adopted, as amended, by
AppliedTheory's board of directors on September 2, 1998 and by the stockholders
of AppliedTheory on October 14, 1998. Options to purchase up to an aggregate of
8,036,355 shares of common stock have been granted to employees of AppliedTheory
under the 1996 Incentive Stock Option Plan, of which options to purchase up to
an aggregate of 3,111,005 shares of common stock remain outstanding at a
weighted average exercise price of $ per share.
The 1999 Stock Option Plan was adopted by AppliedTheory's board of
directors on March 8, 1999 and by the stockholders of AppliedTheory on April 15,
1999. AppliedTheory intends to issue options to purchase up to 55,500 shares of
common stock effective at the offering at an exercise price per share equal to
the per share price of this offering.
In December 1998, the board of directors converted 127,500 outstanding
stock appreciation rights held by Messrs. Mandelbaum, Luckett, Martin and Oros
into non-qualified options to purchase up to 127,500 shares of common stock of
AppliedTheory. The options vested immediately upon issuance.
------------------------
Prior to consummation of the offering contemplated hereby, AppliedTheory
Communications, Inc., a New York corporation ("New York Predecessor"), will
reorganize as AppliedTheory Corporation ("AppliedTheory"), a Delaware
corporation, through a merger with and into AppliedTheory, its wholly-owned
subsidiary. As a result, each outstanding share of capital stock of New York
Predecessor will be converted into 1.5 shares of capital stock of AppliedTheory.
The discussion above relates to issuances of capital stock and grants of stock
options by New York Predecessor and gives effect to the reorganization. The
discussion above also gives effect to a 5-for-1 stock split effected by the New
York Predecessor in the form of a stock dividend in October 1998.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.
2.01 -- Form of Agreement and Plan of Merger between AppliedTheory
Corporation and AppliedTheory Communications, Inc.+
3.01 -- Certificate of Incorporation of the Registrant.+
3.02 -- Bylaws of the Registrant.
4.01 -- Specimen of Certificate for Common Stock of the Registrant.+
4.02 -- Registration Rights Agreement by and among IXC Internet
Services, Inc., Grumman Hill Investments III, L.P.,
AppliedTheory Communications, Inc., NYSERNet.net, Inc.,
Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark
A. Oros, David A. Buckel and Shelley A. Harrison, dated July
10, 1998.+
5.01 -- Opinion of Dewey Ballantine LLP.+
</TABLE>
II-3
<PAGE> 116
<TABLE>
<C> <C> <S>
10.01 -- Stock Purchase Agreement by and among IXC Internet Services,
Inc., Grumman Hill Investments III, L.P., AppliedTheory
Communications, Inc., NYSERNet.net, Inc., Richard
Mandelbaum, David Buckel, James Luckett, Denis Martin and
Mark Oros, dated August 4, 1998.+
10.02 -- 1996 Incentive Stock Option Plan.+
10.03 -- Form of Option Agreements among the Registrant, IXC Internet
Services, Inc. and Grumman Hill Investments III, L.P. and
John Pendray, Robert Riley, Bill Owens, Jacqueline A. Owens,
Patrick McManus, Stephen Kankus, Barbara J. DeMong, David
Buckel, Charles Brauch, Marc Bortniker, Shelley Harrison,
James Luckett, Richard Mandelbaum, Denis Martin, Mark Oros,
George Sadowsky and Yechiam Yemini, each dated August 4,
1998.+
10.04 -- Non-Statutory Stock Option Contract with Shelley Harrison.+
10.05 -- Agreement of Lease between 55 Broad Street Company and
AppliedTheory Communications, Inc. (as successor to
NYSERNet, Inc.), dated May 1, 1996.+
10.06 -- Agreement of Lease between Cuttermill Realty Co. and
AppliedTheory Communications, Inc. and NYSERNet.org, Inc.
(together as successors to NYSERNet, Inc.), dated May,
1996.+
10.07 -- Lease Agreement between Elwood Davis Road Company and
AppliedTheory Communications, Inc. (as successor to
NYSERNet, Inc.), dated November 1995.+
10.08 -- Form of Employment and Non-Competition Agreement between
AppliedTheory Communications, Inc. and Richard Mandelbaum,
Lawrence B. Helft, James Luckett, Mark Oros, Denis Martin
and David Buckel.+
10.09 -- Agreement between AppliedTheory Communications, Inc. (as
successor to NYSERNet, Inc.) and Sprint Communications Co.,
L.P., dated August 11, 1994.+
10.10 -- Consulting Agreement between AppliedTheory Communications,
Inc. and Shelley A. Harrison, dated October 5, 1996.+
10.11 -- Form of Indemnification Agreement between AppliedTheory
Corporation and certain directors.+
10.12 -- Note with David A. Buckel, dated July 30, 1998.+
10.13 -- Note with James D. Luckett, dated July 30, 1998.+
10.14 -- Assignment, Software Development and License Agreement
between NYSERNet.org, Inc. and AppliedTheory Communications,
Inc., dated October 1, 1996.+
10.15 -- Joint Marketing and Services Agreement between AppliedTheory
Communications, Inc. and IXC Internet Services, Inc., dated
January 26, 1999.+
10.16 -- Resale Agreement between AppliedTheory Communications, Inc.
(as successor to NYSERNet.com, Inc.), and NYSERNet.org,
Inc., dated October 1, 1996.+
10.17 -- Resource Sharing Agreement between AppliedTheory
Communications, Inc. (as successor to NYSERNet.com, Inc.)
and NYSERNet.org, Inc., dated October 1, 1996.+
10.18 -- Agreement between AppliedTheory Communications, Inc. (as
successor to NYSERNet, Inc.) and the New York State
Department of Labor, dated September 27, 1994.+
10.19 -- Promissory Note between AppliedTheory Communications, Inc.
and NYSERNet.net, Inc., dated January 27, 1999.+
10.20 -- Revolving Note Agreement between Fleet National Bank and
AppliedTheory Communications, Inc., dated January 20, 1998.+
10.21 -- 1999 Employee Stock Purchase Plan.+
10.22 -- 1999 Stock Option Plan.+
10.23 -- Form of Preferred Stock Purchase Agreement by and between
AppliedTheory Corporation and NYSERNet.net, Inc.+
</TABLE>
II-4
<PAGE> 117
<TABLE>
<C> <C> <S>
10.24 -- Request for Service between Applied Theory Communications,
Inc. (as successor to NYSERNet, Inc.) and Bell Atlantic
Corp. (as successor to New York Telephone Company).
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of Dewey Ballantine LLP (contained in Exhibit
5.01).+
24.1 -- Power of Attorney.+
27.1 -- Financial Data Schedules.+
</TABLE>
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
- ---------------
+ Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Great Neck, New
York, on April 28, 1999.
APPLIEDTHEORY CORPORATION
By: /s/ DAVID A. BUCKEL
------------------------------------
David A. Buckel
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to its Registration Statement has been signed by the
following persons on April 28, 1999 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, Chief April 28, 1999
- --------------------------------------------------- Executive Officer and Director
Richard Mandelbaum (Principal Executive Officer)
/s/ DAVID A. BUCKEL Vice President and Chief April 28, 1999
- --------------------------------------------------- Financial Officer (Principal
David A. Buckel Financial and Accounting Officer)
* Director April 28, 1999
- ---------------------------------------------------
James Guthrie
* Director April 28, 1999
- ---------------------------------------------------
Shelley A. Harrison
* Director April 28, 1999
- ---------------------------------------------------
James T. Kelsey
* Director April 28, 1999
- ---------------------------------------------------
John J. Pendray
* Director April 28, 1999
- ---------------------------------------------------
George Sadowsky
*By: /s/ DAVID A. BUCKEL
---------------------------------------------
David A. Buckel
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 119
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
APPLIEDTHEORY CORPORATION
In connection with our audit of the financial statements of AppliedTheory
Corporation and its Predecessor referred to in our report dated January 29, 1999
(except as to Note L as to which the date is April 12, 1999), we have also
audited Schedule II for the nine months ended September 30, 1996, the three
months ended December 31, 1996, and the years ended December 31, 1997 and 1998
of AppliedTheory Corporation and the Predecessor. In our opinion, this schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
New York, New York
January 29, 1999
S-1
<PAGE> 120
APPLIEDTHEORY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS --
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Predecessor:
Nine months ended September 30, 1996
Allowance for doubtful accounts............ $ 30 $12 $ 18
AppliedTheory Corporation:
Three months ended December 31, 1996
Allowance for doubtful accounts............ 25 2 23
Deferred tax valuation allowance........... 1,273 1,273
Year ended December 31, 1997
Allowance for doubtful accounts............ $ 23 120 21 122
Deferred tax valuation allowance........... 1,273 2,317 3,590
Year ended December 31, 1998
Allowance for doubtful accounts............ 122 60 25 157
Deferred tax valuation allowance........... 3,590 2,254 5,844
</TABLE>
S-2
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.
2.01 -- Form of Agreement and Plan of Merger between AppliedTheory
Corporation and AppliedTheory Communications, Inc.+
3.01 -- Certificate of Incorporation of the Registrant.+
3.02 -- Bylaws of the Registrant.
4.01 -- Specimen of Certificate for Common Stock of the Registrant.+
4.02 -- Registration Rights Agreement by and among IXC Internet
Services, Inc., Grumman Hill Investments III, L.P.,
AppliedTheory Communications, Inc., NYSERNet.net, Inc.,
Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark
A. Oros, David A. Buckel and Shelley A. Harrison, dated July
10, 1998.+
5.01 -- Opinion of Dewey Ballantine LLP.+
10.01 -- Stock Purchase Agreement by and among IXC Internet Services,
Inc., Grumman Hill Investments III, L.P., AppliedTheory
Communications, Inc., NYSERNet.net, Inc., Richard
Mandelbaum, David Buckel, James Luckett, Denis Martin and
Mark Oros, dated August 4, 1998.+
10.02 -- 1996 Incentive Stock Option Plan.+
10.03 -- Form of Option Agreements among the Registrant, IXC Internet
Services, Inc. and Grumman Hill Investments III, L.P. and
John Pendray, Robert Riley, Bill Owens, Jacqueline A. Owens,
Patrick McManus, Stephen Kankus, Barbara J. DeMong, David
Buckel, Charles Brauch, Marc Bortniker, Shelley Harrison,
James Luckett, Richard Mandelbaum, Denis Martin, Mark Oros,
George Sadowsky and Yechiam Yemini, each dated August 4,
1998.+
10.04 -- Non-Statutory Stock Option Contract with Shelley Harrison.+
10.05 -- Agreement of Lease between 55 Broad Street Company and
AppliedTheory Communications, Inc. (as successor to
NYSERNet, Inc.), dated May 1, 1996.+
10.06 -- Agreement of Lease between Cuttermill Realty Co. and
AppliedTheory Communications, Inc. and NYSERNet.org, Inc.
(together as successors to NYSERNet, Inc.), dated May,
1996.+
10.07 -- Lease Agreement between Elwood Davis Road Company and
AppliedTheory Communications, Inc. (as successor to
NYSERNet, Inc.), dated November 1995.+
10.08 -- Form of Employment and Non-Competition Agreement between
AppliedTheory Communications, Inc. and Richard Mandelbaum,
Lawrence B. Helft, James Luckett, Mark Oros, Denis Martin
and David Buckel.+
10.09 -- Agreement between AppliedTheory Communications, Inc. (as
successor to NYSERNet, Inc.) and Sprint Communications Co.,
L.P., dated August 11, 1994.+
10.10 -- Consulting Agreement between AppliedTheory Communications,
Inc. and Shelley A. Harrison, dated October 5, 1996.+
10.11 -- Form of Indemnification Agreement between AppliedTheory
Corporation and certain directors.+
10.12 -- Note with David A. Buckel, dated July 30, 1998.+
10.13 -- Note with James D. Luckett, dated July 30, 1998.+
10.14 -- Assignment, Software Development and License Agreement
between NYSERNet.org, Inc. and AppliedTheory Communications,
Inc., dated October 1, 1996.+
10.15 -- Joint Marketing and Services Agreement between AppliedTheory
Communications, Inc. and IXC Internet Services, Inc., dated
January 26, 1999.+
10.16 -- Resale Agreement between AppliedTheory Communications, Inc.
(as successor to NYSERNet.com, Inc.), and NYSERNet.org,
Inc., dated October 1, 1996.+
</TABLE>
<PAGE> 122
<TABLE>
<C> <C> <S>
10.17 -- Resource Sharing Agreement between AppliedTheory
Communications, Inc. (as successor to NYSERNet.com, Inc.)
and NYSERNet.org, Inc., dated October 1, 1996.+
10.18 -- Agreement between AppliedTheory Communications, Inc. (as
successor to NYSERNet, Inc.) and the New York State
Department of Labor, dated September 27, 1994.+
10.19 -- Promissory Note between AppliedTheory Communications, Inc.
and NYSERNet.net, Inc., dated January 27, 1999.+
10.20 -- Revolving Note Agreement between Fleet National Bank and
AppliedTheory Communications, Inc., dated January 20, 1998.+
10.21 -- 1999 Employee Stock Purchase Plan.+
10.22 -- 1999 Stock Option Plan.+
10.23 -- Form of Preferred Stock Purchase Agreement by and between
AppliedTheory Corporation and NYSERNet.net, Inc.+
10.24 -- Request for Service between AppliedTheory Communications,
Inc. (as successor to NYSERNet, Inc.) and Bell Atlantic
Corp. (as successor to New York Telephone Company).
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of Dewey Ballantine LLP (contained in Exhibit
5.01).+
24.1 -- Power of Attorney.+
27.1 -- Financial Data Schedules.+
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
Exhibit 1.01
4,500,000 Shares of Common Stock
(675,000 Additional Shares)
APPLIEDTHEORY CORPORATION
UNDERWRITING AGREEMENT
April 29, 1999
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER CORP.
LEHMAN BROTHERS INC.
WIT CAPITAL CORPORATION
As Representatives (the "Representatives") of the
several Underwriters named in
Schedule I attached hereto
c/o BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
AppliedTheory Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Company"), proposes, subject to the terms
and conditions stated herein, to issue and sell to the several underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of 4,500,000 shares
(the "Firm Shares") of its common stock, par value $0.01 per share (the "Common
Stock") and, for the sole purpose of covering over-allotments in connection with
the sale of the Firm Shares, at the option of the Underwriters, up to an
additional 675,000 shares (the "Additional Shares") of Common Stock. The Firm
Shares and any Additional Shares purchased by the Underwriters are referred to
herein as the "Shares." The Shares are more fully described in the Registration
Statement referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, the Underwriters that:
<PAGE> 2
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-72133), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, or incorporated therein by reference, as amended, at the time of
effectiveness of the registration statement, including any information deemed to
be a part thereof as of the time of effectiveness pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations of the Commission under the Act (the
"Regulations"), is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule 424(b)
of the Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) filing is required, is herein called the
"Prospectus." The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations.
(b) At the time the Registration Statement is first filed with the
Commission, at the time any amendment to the Registration Statement is filed
with the Commission, at the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, at the time the Prospectus is first filed with the
Commission pursuant to Rule 424(b) of the Regulations, at the time any
supplement to or amendment of the Prospectus is filed with the Commission and at
the Closing Date and the Additional Closing Date, if any (as hereinafter
defined), the Registration Statement and the Prospectus and any amendments
thereof and supplements thereto complied or will comply in all material respects
with the applicable provisions of the Act and the Regulations and did not, do
not and will not contain an untrue statement of a material fact and did not, do
not and will not omit to state any material fact required to be stated therein
or necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in light of the circumstances under which they were made, not misleading. When
any related preliminary prospectus was first filed with the Commission (whether
filed as part of the registration statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied when so filed in all material respects with the applicable provisions
of the Act and the Regulations and did not contain an untrue statement of a
material fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment thereof or
supplement thereto in reliance upon and in conformity with information furnished
in
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<PAGE> 3
writing to the Company by or on behalf of any Underwriter through the
Representatives expressly for use in connection with the preparation thereof.
(c) Neither the Commission nor the "Blue Sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order") suspending
the effectiveness of the Registration Statement, preventing or suspending the
use of any preliminary prospectus, the Prospectus, the Registration Statement or
any amendment or supplement thereto, refusing to permit the effectiveness of the
Registration Statement, or suspending the registration or qualification of the
Firm Shares or the Additional Shares, nor, to the knowledge of the Company, has
any of such authorities instituted or threatened to institute any proceedings
with respect to a Stop Order.
(d) To the knowledge of the Company, Grant Thornton LLP, who have
certified the financial statements and supporting schedules included in the
Registration Statement and whose reports are filed with the Commission as part
of the Registration Statement, are independent public accountants with regard to
the Company as required by the Act and the Regulations.
(e) Subsequent to the respective dates as of which information is
given in the Registration Statement and in the Prospectus, except as set forth
in the Registration Statement and in the Prospectus, there has been no material
adverse change in the business, prospects, properties (whether or not insured),
operations, condition (financial or other) or results of operations of the
Company, whether or not arising in the ordinary course of business (a "Material
Adverse Change") nor, except as set forth in the Registration Statement and as
shall be set forth in the Prospectus, does the Company have knowledge of the
existence of any fact, development or event that could reasonably be expected to
result in a Material Adverse Change or in a material adverse effect on the
ability of the Company to consummate the transactions contemplated hereby (any
such result, a "Material Adverse Effect"). Since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, except as
expressly disclosed in the Registration Statement and the Prospectus, the
Company has not (i) incurred or undertaken any liabilities or obligations,
direct or contingent, not in the ordinary course of business that are material
to the Company, (ii) entered into any material transaction not in the ordinary
course of business and consistent with past practice, (iii) entered into any
agreement or made any commitment binding on the Company to acquire any company,
business or assets that is material to the Company taken as a whole or (iv)
declared or paid any dividend or made any distribution on any shares of its
capital stock or redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its capital stock (it being
understood that the Company intends to repurchase its outstanding preferred
stock as disclosed in the Registration Statement and the Prospectus).
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<PAGE> 4
(f) The Company has the requisite corporate power and the authority
to enter into this Agreement, perform each of its obligations hereunder and
issue, sell and deliver the Shares to be sold by it hereunder. This Agreement
and the transactions contemplated herein have been duly and validly authorized
by the Company, and this Agreement has been duly and validly executed and
delivered by the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except (i) as the
enforceability hereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar laws affecting the
enforcement of creditors rights generally and by general equitable principles
and (ii) to the extent that rights to indemnity and contribution hereunder may
be limited by federal or state securities laws or the public policy underlying
such laws.
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby (including the issuance, sale and delivery of the Shares by the Company)
do not and will not (i) conflict with or result in a breach of any of the terms
and provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default) under, give rise to any
right to accelerate the maturity or require the prepayment of any obligation of
the Company or require any consent (other than any consent that has been
obtained), or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, pursuant to the terms of
any agreement, instrument, franchise, license or permit to which the Company is
a party or by which its properties or assets may be bound, or (ii) violate or
conflict with any provision of the certificate of incorporation or by-laws of
the Company or any judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets.
(h) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its properties or assets is required for the valid execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the Shares to
be issued, sold and delivered by the Company hereunder, except (i) the
registration under the Act and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), of the Shares, (ii) such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or "Blue Sky" laws in
connection with the purchase and distribution of the Shares by the Underwriters,
(iii) the approval of the Shares for quotation on the Nasdaq National Market,
and (iv) the approval of the Corporate Financing Department of NASD Regulation,
Inc.
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<PAGE> 5
(i) All of the outstanding shares of capital stock of the Company
are duly authorized, validly issued, fully paid and non-assessable, were issued
in compliance with all applicable United States federal and state securities
laws and were not issued in violation of, and upon completion of the offering
contemplated hereby such shares will not be subject to, any preemptive or
similar rights. The Shares have been duly authorized and, when issued, delivered
and sold in accordance with this Agreement, will be validly issued and
outstanding, fully paid and non-assessable, and will not have been issued in
violation of or be subject to any preemptive or similar rights, and will be free
and clear of any pledges, liens, security interests, charges, claims or
encumbrances of any kind (other than those created by the Underwriters). The
Company has a duly authorized and outstanding capitalization as of December 31,
1998 as set forth under the caption "Capitalization" in the Registration
Statement and as shall be set forth in the Prospectus. The Common Stock, the
Firm Shares and the Additional Shares conform in all material respects to the
descriptions thereof contained in the Registration Statement and shall be as set
forth in the Prospectus. There is no commitment, plan or arrangement to issue,
and no outstanding option, warrant, security or other right or instrument issued
by the Company or to which the Company is a party which requires, permits or
provides for the issuance, subscription or purchase of, any share of capital
stock of the Company or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for capital stock of the
Company, except as described in the Registration Statement. Except as described
in the Registration Statement, none of the Company's certificate of
incorporation, by-laws or any agreement to which the Company is a party imposes
any restrictions on the voting or transfer of any shares of capital stock of the
Company.
(j) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. The Company has no subsidiaries. The Company is duly qualified
and in good standing as a foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which could not,
individually or in the aggregate, have a Material Adverse Effect, and the
Company has not received any claim or notice from any official in any
jurisdiction that it is required to be qualified or licensed to do business in
any jurisdiction in which it is not so qualified or licensed. Except as would
not, individually or in the aggregate, have a Material Adverse Effect, the
Company has all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and as shall be
described in the Prospectus, and the Company has not received any notice of any
proceedings relating to the revocation or modification of any thereof, nor is
the Company aware of any basis therefor, and no such consent, approval,
authorization, order, registration, qualification,
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<PAGE> 6
franchise license or permit contains a materially burdensome restriction that is
not accurately disclosed in the Registration Statement and the Prospectus.
(k) Except as described in the Registration Statement and as shall
be described in the Prospectus, there is no action, suit, investigation or
proceeding, governmental or otherwise, to which the Company is a party or to
which any property of the Company is subject or which is pending or, to the best
knowledge of the Company, threatened against the Company which (i) if adversely
decided or concluded, could reasonably be expected to have a Material Adverse
Effect, (ii) is required to be disclosed in the Registration Statement or (iii)
seeks to restrain, enjoin, prevent the consummation of, or otherwise challenge
the issuance of, the Shares or the execution and delivery of this Agreement or
any of the other transactions contemplated hereby, or questions the legality or
validity of any such transactions or that seeks to recover damages or obtain
other relief in connection with any of such transactions.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares or otherwise.
(m) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and as will be set
forth in the Prospectus present fairly the financial condition, results of
operations, stockholders' equity and cash flows and other information purported
to be shown therein of the Company at the dates and for the periods indicated
and present fairly the information required to be stated therein. Such financial
statements and supporting schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, and are in accordance with the books and records of the
Company, respectively, in all material respects. No other financial statements
or supporting schedules are required by Form S-1 to be included in the
Registration Statement or the Prospectus. The financial data set forth in the
Registration Statement and as will be set forth in the Prospectus under the
captions "Prospectus Summary -- Summary Financial Information",
"Capitalization", "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly present, on
the basis stated in the Registration Statement and as will be stated in the
Prospectus, the information set forth therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement and as will be set forth in the Prospectus. The "as
adjusted" financial information included in the Registration Statement and as
will be included in the Prospectus that gives effect to the issuance of the
Shares, the application of the net proceeds therefrom and the other transactions
and events specified therein presents fairly the information contained therein,
has been properly compiled on the basis of the assumptions set forth with
respect thereto, and the assumptions used in the preparation
6
<PAGE> 7
thereof are reasonable and the adjustments to the historical figures have been
properly applied to such figures. All other financial information and
statistical data set forth in the Registration Statement and as will be set
forth in the Prospectus are, in all material respects, accurately presented and,
in the case of such financial information, has been prepared on an accounting
basis consistent with the financial statements included in the Registration
Statement and as will be included in the Prospectus.
(n) The Company has good and marketable title to all the properties
and assets reflected as owned in the financial statements (or elsewhere) in the
Registration Statement and as will be set forth in the Prospectus, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in the financial statements or elsewhere in the Registration
Statement or the Prospectus, or (ii) those which are not material in amount and
do not adversely affect the use made and proposed to be made of such property by
the Company. The Company holds its leased properties under valid, subsisting and
enforceable leases, with such exceptions as are not, individually or in the
aggregate, material and do not, individually or in the aggregate, interfere with
the use made or proposed to be made of such properties by the Company. Except as
disclosed in the Registration Statement and as will be disclosed in the
Prospectus, the Company owns or leases all such properties as are necessary to
conduct its operations as now conducted.
(o) The Company has (i) filed all federal, state and local and
foreign tax returns which are required to be filed through the date hereof, and
all such tax returns are true, complete and accurate in all material respects,
or (ii) received valid extensions thereof and have paid all taxes shown on such
returns and all assessments received by it, except (a) for such taxes, if any,
as are being contested in good faith and as to which adequate reserves have been
provided, or (b) in the case of state and local and foreign tax returns, the
failure to file, extend the due date of or pay the same, in the aggregate, could
not reasonably be expected to have a Material Adverse Effect; the Company has no
knowledge of any tax deficiency which has been or might be asserted against the
Company which could materially and adversely affect the business or properties
of the Company; to the Company's best knowledge, all tax liabilities are
adequately provided for on the books of the Company.
(p) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" or an entity "controlled by" an "investment company" within the meaning
of Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
(q) The Company owns or possesses adequate licenses or other rights
to use all patents, trademarks, service marks, trade names, copyrights,
technology and know-how necessary to conduct its business as now conducted by
the Company as
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<PAGE> 8
described in the Registration Statement and as will be described in the
Prospectus, except for those patents, trademarks, service marks, trade names,
copyrights, technology and know-how the failure to own or have the right to use
which would not have a Material Adverse Effect, and, except as disclosed in the
Registration Statement and as will be disclosed in the Prospectus, the Company
has not received any notice of infringement of or conflict with (or knows of
such infringement of or conflict with) rights of others with respect to any
patents, trademarks, service marks, trade names, copyrights or know-how; and to
the best knowledge of the Company, the Company does not, in the conduct of its
business as now conducted, infringe or conflict with any such rights of any
third party, except as described in the Registration Statement and will be
disclosed in the Prospectus.
(r) There are no contracts, indentures, mortgages, loan agreements,
notes, leases or other agreements or instruments or other documents
(collectively, the "Documents") required to be described or referred to in, or
filed with, the Registration Statement and the Prospectus, other than those
described or referred to therein or filed as exhibits thereto; all such
descriptions are accurate in all material respects and present fairly the
information required to be described therein.
(s) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business), or guarantees of
indebtedness by the Company to or for the benefit of any of the executive
officers or directors of the Company or any of the members of the families of
any of them, and there are no business relationships or related-party
transactions involving the Company or any other person required to be described
in the Registration Statement and the Prospectus, except in all cases as
disclosed in the Registration Statement and as will be disclosed in the
Prospectus; all such descriptions are accurate in all material respects and
present fairly the information required to be described in the Registration
Statement and as will be described in the Prospectus.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) The Company is not in violation or breach of, or in default (nor
has any event occurred which with notice, or lapse of time, or both, would
constitute a default) under, any contract, agreement, indenture, loan or other
agreement, instrument, mortgage, note, permit, lease, license, arrangement or
understanding to which the
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<PAGE> 9
Company is a party or by which the Company or any of its properties may be bound
where such default, either individually or together with all such other
defaults, could reasonably be expected to have a Material Adverse Effect or a
material adverse effect on the ability of the Company to perform its obligations
hereunder. Each such contract, agreement, indenture, loan or other agreement,
instrument, mortgage, note, permit, lease, license, arrangement and
understanding to which the Company is a party or by which the Company or any of
its properties may be bound is in full force and effect and is the legal, valid,
and binding obligation of the Company, and, to the knowledge of the Company, the
other parties thereto and is enforceable against the Company, as the case may
be, and, to the knowledge of the Company, against the other parties thereto in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws affecting the enforcement of creditors rights generally and
by general equity principles. The Company enjoys peaceful and undisturbed
possession under all material leases and material licenses under which the
Company is operating. The Company is not in violation or breach of, or in
default with respect to, any term of its certificate of incorporation or bylaws.
The Company is not in violation of, or in default with respect to, any law,
rule, regulation, order, judgment or decree, except such as are described in the
Registration Statement and as will be described in the Prospectus or such as,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
(v) The Company has obtained from each of the Company's executive
officers, directors and security holders set forth on Schedule II hereto a
written agreement, in a form or forms approved by the Representatives and their
counsel (a "Lock-Up Agreement"), that for a period of 180 days from the date of
the Prospectus each such holder will not, without the prior written consent of
Bear, Stearns & Co. Inc. directly or indirectly, (i) offer, pledge, sell, agree
to sell, sell any option or contract to purchase, grant any option, right or
warrant for the sale of, lend or otherwise dispose of or establish a "put
equivalent position" (within the meaning of Rule 16a-1(h) under the Exchange
Act), with respect to any shares of capital stock, or any security convertible
into, exercisable for or exchangeable for capital stock of the Company, now or
hereafter acquired by such holder, or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of capital stock of the Company or any such other
security, whether any such transaction is to be settled by delivery of capital
stock of the Company or such other securities, in cash or otherwise, except
pursuant to the option agreements as described in the Prospectus under the
caption "Certain Transactions--Option Agreements" and, in the case of
NYSERNet.net, Inc., the sale of preferred stock to the Company as contemplated
in the Prospectus under the caption "Certain Transactions--Borrowings with
NYSERNet.net and Redeemable Preferred Stock." Notwithstanding anything to the
contrary in the foregoing, no consent shall be required for any transfer of
Common Stock by such holder (x) in the case of individuals, to a member of said
holders' immediate family and (y) in the case of other holders, to any person at
the time directly or indirectly controlling,
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<PAGE> 10
controlled by or under direct or indirect common control with such holder,
provided, however, that, in the case of each of (x) and (y), such transferee
shall agree in a letter agreement addressed to Bear, Stearns & Co. Inc., prior
to or contemporaneously with such transfer, to be bound by the provisions of the
lock-up agreement to the same extent as such holder and shall promptly deliver
to Bear, Stearns & Co. Inc. a copy of such lockup agreement.
(w) The Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(x) Except as described in the Registration Statement and as will be
described in the Prospectus, (i) no labor dispute with the employees of the
Company exists or, to the best knowledge of the Company, is threatened and (ii)
the Company is not aware of any labor disturbance by the employees of any of its
significant manufacturers, suppliers, customers or contractors, that could
reasonably be expected in the case of both (i) and (ii) to have a Material
Adverse Effect.
(y) Except as described in the Registration Statement and as will be
described in the Prospectus, (i) the Company is not a party to or bound by any
stockholders' agreements or voting trusts with respect to any securities of the
Company and (ii) there are no contracts, agreements or understandings between
the Company and any person or entity granting such person or entity the right to
require the Company to file a registration statement under the Act with respect
to any securities of the Company owned or to be owned by such person or entity
or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement.
(z) Except as disclosed in the Registration Statement and as will be
disclosed in the Prospectus or as would not otherwise, individually or in the
aggregate, have a Material Adverse Effect (i) the Company is not in violation of
any federal, state or local law or regulation relating to occupational safety
and health or to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including without limitation, laws,
codes and regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous materials or substances, solid or hazardous wastes, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use,
generation, treatment, storage, disposal, transport or handling of Materials of
Environment Concern, underground or above ground storage tanks and related
piping, and emissions, discharges, releases or threatened releases therefrom and
damages to natural resources (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation of the business of
the Company under applicable Environmental Laws, or noncompliance with the terms
and
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<PAGE> 11
conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company is in violation of any Environmental Law; (ii)
there is no claim, action or cause of action filed with a court or governmental
authority, no governmental investigation with respect to which the Company has
received written notice, and no written notice by any person or entity alleging
potential liability for investigatory costs, clean-up costs, governmental
responses costs, natural resources damages, property damages, personal injuries,
attorneys' fees or penalties arising out of, based on or resulting from the
presence, or release into the environment, of any Material of Environmental
Concern at any location owned, leased, controlled or operated by the Company,
now or in the past (collectively, "Environmental Claims"), pending or, to the
best knowledge of the Company, threatened against the Company or any person or
entity whose liability for any Environmental Claim the Company has retained or
assumed either contractually or by operation of law; (iii) to the knowledge of
the Company, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Material of Environmental
Concern, that reasonably could result in a violation of any Environmental Law or
form the basis of a potential Environmental Claim against the Company or against
any person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law; (iv) the
Company has received all permits, licenses or other approvals required under
applicable federal, state and local occupational safety and health and
Environmental Laws and regulations to conduct their respective businesses; and
(v) the Company is in compliance with all terms and conditions of any such
permits, licenses or approvals, except any such violation of law or regulation,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
which could not, individually or together with all such other violations or
failures, have a Material Adverse Effect.
(aa) Except as described in the Registration Statement and as will
be described in the Prospectus, the Company has not incurred any liability for
the finder's fees or similar payments in connection with the transactions
contemplated hereby.
(bb) The Company and any "employee benefit plan" (as defined under
the Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder (collectively, "ERISA"))
established or maintained by the Company or its "ERISA Affiliates" (as defined
below) are in compliance with ERISA to the extent it could not be expected to
have a Material Adverse Effect. "ERISA Affiliate" means, with respect to the
Company, any member of any group of organizations described in Sections
414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which the
Company is a member. No "reportable event" (as defined under ERISA) has occurred
or is reasonably expected to occur with respect to any
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<PAGE> 12
"employee benefit plan" established or maintained by the Company or any of its
ERISA Affiliates. No "employee benefit plan" established or maintained by the
Company or any of its ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as defined
under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred
or reasonably expects to incur any material liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "employee benefit
plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee
benefit plan" established or maintained by the Company or any of its ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(cc) The Company has in effect, with insurers of recognized
financial responsibility, insurance with respect to its business and properties
against loss or damage of the kind customarily insured against by corporations
engaged in the same or similar businesses and similarly situated, of such type
and in such amounts as are customarily carried under similar circumstances by
such other corporations.
(dd) The disclosures in the Registration Statement and the
Prospectus related to Year 2000 compliance comply in all material respects with
the requirements of SEC Release 33-7558.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Company agrees to sell to the respective Underwriters and,
on the basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, each of the
Underwriters agrees, severally and not jointly, to purchase from the Company the
number of Firm Shares set forth opposite its name in Schedule I hereto at a
price per share of [________] with respect to an aggregate of 4,500,000 shares,
plus any additional number of Shares which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 9 hereof at a price per share
of [_________].
(b) Delivery of certificates for the Firm Shares and payment of the
purchase price shall be made at the office of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, or at such other place or places as shall be
agreed upon by the Representatives and the Company, at 10:00 A.M. New York City
time, on the third or fourth business day (as permitted under Rule 15c6-1 under
the Exchange Act) (unless postponed in accordance with the provisions of Section
9 hereof) following the date of the effectiveness of the Registration Statement
(or, if the Company elects to rely on Rule 430A of the Regulations, the third or
fourth day (as permitted under Rule 15c6-1 under the Exchange Act) after the
determination of the initial public offering price of the Shares), or such other
time not later than ten business days after such date as shall be
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agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called the "Closing Date"). Payment shall be
made to the Company by wire transfer, against delivery to the Representatives
for the respective accounts of the Underwriters of certificates for the Firm
Shares to be purchased by them. Certificates for the Firm Shares shall be
registered in such name or names and in such authorized denominations as the
Representatives may request in writing at least two full business days prior to
the Closing Date; provided that, if so specified by the Representatives, the
Firm Shares may be represented by a global certificate registered in the name of
Cede & Co., as nominee of The Depositary Trust Company ("Cede"). The Company
will permit the Representatives to examine and package such certificates for
delivery at least one full business day prior to the Closing Date at the office
of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
(c) In addition, the Company hereby grants to the several
Underwriters the option (the "Option") to purchase all or any portion of the
Additional Shares at the same purchase price per share to be paid by the several
Underwriters to the Company for the Firm Shares as set forth in Section 2(a),
for the sole purpose of covering over-allotments in the sale of Firm Shares by
the several Underwriters. The number of Additional Shares to be purchased from
the Company by each Underwriter (as adjusted by the Representatives to eliminate
fractions) shall be determined by multiplying the number of Additional Shares to
be sold by the Company by a fraction, the numerator of which is the number of
Firm Shares purchased by such Underwriter and the denominator of which is the
aggregate number of Firm Shares purchased by all the Underwriters from the
Company hereunder, plus any additional number of Shares which the Underwriters
may become obligated to purchase pursuant to the provisions of Section 9 hereof.
The Option may be exercised at any time, in whole or in part, on or before the
thirtieth (30) day following the date of this Agreement, by written notice by
the Representatives to the Company in the manner specified in Section 12 hereof.
Such notice shall set forth the aggregate number of Additional Shares as to
which the Option is being exercised and the date and time, as reasonably
determined by the Representatives, when the Additional Shares are to be
delivered (such date and time being herein sometimes referred to as the
"Additional Closing Date"); provided, however, that the Additional Closing Date
shall not be earlier than the Closing Date or earlier than the second full
business day after the date on which the Option shall have been exercised nor
later than the tenth (10) full business day after the date on which the Option
shall have been exercised (unless such time and date are postponed in accordance
with the provisions of Section 9 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized denominations
as the Representatives may request in writing at least two full business days
prior to the Additional Closing Date; provided, that, if so specified by the
Representatives, the Additional Shares may be represented by a global
certificate registered in the name of Cede. The Company will permit the
Representatives to examine and package such certificates for delivery at least
one full business day prior to the
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<PAGE> 14
Additional Closing Date at the office of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167.
Delivery of the certificates for the Additional Shares shall be made
to the Representatives, for the respective accounts of the Underwriters, against
payment by the Representatives, on behalf of the respective Underwriters, for
the Additional Shares by wire transfer at the office of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167, or such other location as may
be mutually acceptable.
(d) The Underwriters shall not be obligated to purchase any Firm
Shares from the Company except upon tender to the Underwriters by the Company of
all of the Firm Shares. The Company shall not be obligated to sell or deliver
Firm Shares except upon tender of payment by the Underwriters for all the Firm
Shares agreed to be purchased by them hereunder.
3. OFFERING. As soon after the Registration Statement becomes effective as
the Representatives deem it advisable to do so, the Underwriters propose to
offer the Shares for sale to the public upon the terms set forth in the
Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriters that:
(a) If the Registration Statement or any post-effective amendment
thereto, has not yet been declared effective, the Company will use its best
efforts to cause the Registration Statement and any amendments thereto to become
effective as promptly as possible. If the Registration Statement has become or
becomes effective pursuant to Rule 430A or the filing of the Prospectus is
otherwise required under Rule 424(b), the Company will file with the Commission
the Prospectus (properly completed) pursuant to Rule 424(b) within the
prescribed time period and will provide evidence satisfactory to the
Representatives of such timely filing.
The Company will notify the Representatives immediately (and, if
requested by you, will confirm such notice in writing), (i) when the
Registration Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for any additional information, (iii) of the
mailing or the delivery to the Commission for filing of any amendment of or
supplement to the Registration Statement or the Prospectus, (iv) of the issuance
by the Commission of any Stop Order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (v) of the receipt
of any comments or other communication from the Commission and (vi) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for
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<PAGE> 15
that purpose. If the Commission shall propose or enter a Stop Order at any time,
the Company will make every reasonable effort to prevent the issuance of any
such Stop Order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b)) that differs from the prospectus
on file at the time of the effectiveness of the Registration Statement before or
after the effective date of the Registration Statement to which the
Representatives shall reasonably object in writing after being timely furnished
in advance a copy thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in the
judgment of the Representatives or the Company, include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend the Registration Statement or supplement the Prospectus to comply
with the Act or the Regulations, the Company will notify the Representatives
promptly and prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to the Representatives) that will
correct such statement or omission and which will effect such compliance and
will use its best efforts to have any such amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to the Representatives two
conformed copies of the Registration Statement, including exhibits and all
documents incorporated by reference therein and all amendments thereto, and the
Company will promptly deliver to the Underwriters such number of copies of any
preliminary prospectus, the Prospectus, the Registration Statement, and all
amendments of and supplements to such documents, if any, as the Representatives
may reasonably request. The Company consents to the respective use of any
preliminary prospectus or the Prospectus or any amendment or supplement thereto
by the Representatives, the Underwriters and by all dealers to whom the Shares
may be sold, in connection with the offering or sale of the Shares, as
appropriate, and as to the Prospectus or any amendment or supplement thereto
during such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith.
(d) The Company will take such action as the Representatives may
reasonably request at or prior to the time of effectiveness of the Registration
Statement, in connection with the qualification or registration of the Shares
for offering and sale under the securities or "Blue Sky" laws relating to the
offering or sale of the Shares of such jurisdictions as the Representatives may
designate and to maintain such qualifications and registrations in effect for so
long as required for the distribution thereof; except that in no
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<PAGE> 16
event shall the Company be obligated in connection therewith to qualify as a
foreign corporation in any jurisdiction where it is not now qualified or to
execute a general consent to service of process in any action other than one
arising out of the offering or sale of the Shares in such jurisdiction.
(e) The Company will make generally available (within the meaning of
Section 11 (a) of the Act) to its security holders and to the Representatives
(in such numbers as the Representatives may reasonably request for distribution
to the Underwriters) as soon as practicable, but not later than 45 days after
the end of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement occurs, an earnings statement of
the Company (in form complying with the provisions of Rule 158 of the
Regulations and in such numbers as the Representatives shall reasonably request)
covering a period of at least twelve consecutive months beginning after the
effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus,
the Company will not, without the prior written consent of Bear, Stearns & Co.
Inc., issue, sell, offer or agree to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common Stock)
except (i) pursuant to this Agreement, (ii) grants of options pursuant to the
Company's existing stock option plans, (iii) issuances and/or sales of Common
Stock pursuant to the Company's existing stock option plans, employee stock
purchase plan and other options granted by the Company and outstanding on the
date of this Agreement and (iv) issuances of Common Stock in connection with
acquisitions by the Company, provided in the case of this clause (iv), the
recipients of such Common Stock execute a lock-up agreement in the form
contemplated by Section 1(v) of this Agreement, and the Company will obtain and
deliver to the Representatives concurrently with the execution of this Agreement
the lock-up agreements specified in Section 1(v). The foregoing notwithstanding,
prior to the expiration of such 180-day period, the Company may file one or more
registration statements with the Commission on Form S-8 relating to the
Company's existing stock option plans and stock purchase plan as disclosed in
the Registration Statement and as will be disclosed in the Prospectus.
(g) During a period of five years from the effective date of the
Registration Statement, the Company will furnish to the Representatives copies
of all reports or other communications (financial or other) furnished to
stockholders, copies of any reports and financial statements furnished to or
filed with the Commission or any national securities exchange on which any class
of securities of the Company is listed; provided, however, that the Company
shall not be obligated to deliver any report or communication available through
EDGAR.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
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<PAGE> 17
(i) The Company will use its best efforts to obtain the quotation of
the Shares on the Nasdaq Stock Market and will take all necessary steps to cause
the Shares to be included on the Nasdaq National Market.
(j) The Company will file with the Commission such information as
may be required pursuant to Rule 463 of the Regulations.
(k) The Company will comply with all provisions of all undertakings
pursuant to Item 512 of Regulation S-K under the Act contained in the
Registration Statement.
(l) After the date of this Agreement and prior to the date on which
the Offering will be completed, the Company will not issue any press release or
other communication directly or indirectly and will not hold any press
conference with respect to the Company, or its business, prospects, properties,
assets, earnings, condition (financial or other), results of operations or this
offering without the prior written consent of the Representatives, which consent
will not be unreasonably withheld or delayed.
5. PAYMENT OF EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
thereof or supplements thereto (including, without limitation, fees,
disbursements and expenses of the Company's accountants and counsel), the
underwriting documents (including this Agreement, the Agreement Among
Underwriters and the Selling Agreement) and all other documents related to the
public offering of the Shares (including those supplied to the Underwriters in
quantities as hereinabove stated), (ii) the issuance, transfer and delivery of
the Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iii) the qualification of the Shares under state or foreign securities
or Blue Sky laws, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the reasonable fees and disbursements of counsel to
the Underwriters in relation thereto, (iv) the quotation of the Shares on the
Nasdaq National Market, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc. ("NASD"), (vi) all costs and expenses
incident to any review by the NASD of the terms of the sale of the Shares
(including, without limitation, reasonable fees and expenses of Underwriters'
counsel in relation thereto), (vii) printing certificates representing the
Shares and (viii) the cost and charges of any transfer agent or registrar.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as
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<PAGE> 18
provided herein, shall be subject, in the Representatives' discretion, to the
condition that all the representations and warranties of the Company herein
contained are true and correct, as of the date hereof and as of the Closing Date
(for purposes of this Section 6 "Closing Date" shall refer to the Closing Date
for the Firm Shares and any Additional Closing Date, if any, for the Additional
Shares), to the absence from any certificates, opinions, written statements or
letters furnished to the Representatives or to Paul, Hastings, Janofsky & Walker
LLP ("Underwriters' Counsel") pursuant to this Section 6 of any qualification or
limitation not previously approved by the Representatives, to the performance by
the Company in all material respects of its obligations hereunder, and to the
following additional conditions:
(a) (i) The Registration Statement shall have become effective not
later than 5:30 p.m., New York City time on the date of this Agreement, or at
such later time and date as shall have been consented to in writing by the
Representatives; if the Company shall have elected to rely upon Rule 430A of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion pursuant to Rule 424(b) under the Act within the applicable time
period prescribed in the Regulations for such filing in accordance with Section
4(a) hereof, and, at or prior to the Closing Date no Stop Order shall have been
issued and no proceedings therefor shall, to the knowledge of the Company, have
been initiated or threatened by the Commission or the authorities of any such
jurisdiction; (ii) all requests for additional information on the part of the
Commission shall have been complied with to the Commission's reasonable
satisfaction, and (iii) after the date hereof, no amendment or supplement to the
Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Underwriters and the Underwriters did not
reasonably object thereto.
(b) At the Closing Date, the Representatives shall have received the
opinion of Dewey Ballantine LLP, counsel for the Company, dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the
character or location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification necessary,
except for those failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a Material Adverse
Effect. The Company has all requisite corporate power and authority to
own, lease and operate its properties and conduct its business as now
being conducted and as described in the Registration Statement and the
Prospectus. To such counsel's knowledge there are no subsidiaries of the
Company.
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(ii) The Company has authorized capital stock as set forth in
the Registration Statement and the Prospectus under the caption
"Capitalization." To the knowledge of such counsel, all of the outstanding
shares of capital stock of the Company are duly authorized and validly
issued, are fully paid and non-assessable, were issued in accordance with
all applicable United States federal and state securities laws and, except
as disclosed in the Prospectus, were not issued and are not now in
violation of, and upon completion of the offering contemplated by this
Agreement will not be subject to, any preemptive or other similar rights.
The Shares have been duly authorized and when issued, delivered and sold
by the Company against payment therefor in accordance with this Agreement
will be duly authorized, validly issued and outstanding, fully paid and
non-assessable and will not be subject to any preemptive rights, or to the
knowledge of such counsel, or any similar rights. Upon delivery of
certificates evidencing the Shares and payment therefor as contemplated
hereby, the Underwriters will acquire good, valid and marketable title to
the Firm Shares (and the Additional Shares, if any) free of any adverse
claim, assuming the Underwriters are acting in good faith and without
notice of any adverse claim. The Common Stock, the Firm Shares and the
Additional Shares conform in all material respects as to legal matters to
the descriptions thereof contained in the Registration Statement and the
Prospectus under the caption "Description of Capital Stock," and such
descriptions fairly present in all material respects the information
required to be presented therein pursuant to Item 202 of Regulation S-K
under the Act with respect to such legal matters. The form of certificate
evidencing the Shares to be delivered hereunder complies in all material
respects with the requirements of the Delaware General Corporation Law.
(iii) Except as disclosed in or described in the Registration
Statement and the Prospectus, to such counsel's knowledge there is no
commitment, plan, or arrangement for the Company to issue and no
outstanding options, warrants, securities, instruments or other rights
requiring, permitting or providing for the issuance of, and no written
commitments entered into by the Company to issue, subscribe or purchase
any shares of capital stock of the Company or any security or other
instrument convertible into exercisable for or exchangeable for capital
stock of the Company. Except as described in the Prospectus and the
Registration Statement and as may be required by applicable securities
laws, to such counsel's knowledge, none of the Company's certificate of
incorporation, by-laws or, any other agreement to which the Company is a
party imposes restrictions on the voting or transfer of shares of capital
stock of the Company.
(iv) Except as described in the Registration Statement, to
such counsel's knowledge (a) the Company is not a party to or bound by any
stockholders' agreements or voting trusts with respect to any securities
of the
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Company and (b) there are no contracts, written agreements or written
understandings between the Company and any person or entity granting such
person or entity the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person or entity or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement in the Registration Statement.
(v) The Company has the requisite corporate power and
authority to enter into this Agreement, perform its obligations hereunder,
and to issue, sell and deliver the Shares to the Underwriters. This
Agreement and the transactions contemplated herein have been duly and
validly authorized, executed and delivered by the Company.
(vi) To such counsel's knowledge, there is no action, suit,
investigation or proceeding, governmental or otherwise, before any court
or before or by any public, regulatory or governmental agency or body
pending or threatened against or involving any of the properties or
business of, the Company which is of a character required to be disclosed
in the Registration Statement and the Prospectus which has not been
disclosed therein as required.
(vii) The execution, delivery, and performance by the Company
of this Agreement and the consummation of the transactions contemplated
hereby (including the issuance, sale and delivery of the Shares by the
Company) and the reorganization of the Company as a Delaware corporation
do not and will not (a) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a
default) under, give rise to any right to accelerate the maturity, or
require the prepayment of any obligation of the Company or require any
consent (other than any consents that have been obtained), or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to any indenture, mortgage,
deed of trust, loan agreement or other agreement filed as an exhibit to
the Registration Statement, (b) violate or conflict with any provision of
the certificate of incorporation or by-laws of the Company, (c) violate or
conflict with any judgment, decree or order of any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets, and which is specifically
applicable to the Company and is known to such counsel or (d) violate
applicable provisions of any statute or regulation of the State of New
York or of the United States or the General Corporation Law of the State
of Delaware, and which, in such counsel's experience, are ordinarily
applicable to transactions of the type contemplated hereby.
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<PAGE> 21
(viii) No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets is
required for the valid execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby,
except for (a) such as may be required under state securities or Blue Sky
laws or from the Corporate Financing Department of NASD Regulation, Inc.
in connection with the purchase and distribution of the Shares by the
Underwriters (as to all of which such counsel need express no opinion),
(b) such as have been made or obtained under the Act and the Exchange Act,
and (c) the approval of the Shares for quotation on the Nasdaq National
Market, subject to official notice of issuance.
(ix) The Registration Statement and the Prospectus (other than
the financial statements and schedules and other financial or statistical
data included therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Act and the Regulations.
(x) Such counsel has been advised by the Commission that the
Registration Statement has been declared effective under the Act, and, to
the knowledge of such counsel, no Stop Order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof has
been issued, no proceedings therefor have been initiated or threatened by
the Commission or any state securities or "Blue Sky" authority and all
filings required by Rule 424(b) under the Act have been made.
(xi) To such counsel's knowledge, the Company is not in
violation or breach of, or in default (nor, to such counsel's knowledge,
has any event occurred which with notice, or lapse of time, or both, would
constitute a default) under any term of its certificate of incorporation
or bylaws or under any contract or agreement filed as an exhibit to the
Registration Statement, except for any such violations, breaches or
defaults as could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(xii) To such counsel's knowledge, the Company has such
consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits as may be required of it under any
statute or regulation of the State of New York or of the United States or
under the General Corporation Law of the State of Delaware to own, lease
and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus, except for any such consents,
approvals, authorizations, orders, registrations, qualifications, licenses
and permits the failure of which to have could not reasonably be expected
to have a Material Adverse Effect. To such counsel's knowledge, the
Company is
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in compliance with all terms and conditions of any such consent, approval,
authorization, order, registration, qualification, license or permit,
except for such non-compliance as would not, individually or in the
aggregate, have a Material Adverse Effect.
(xiii) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as
an "investment company" or an entity "controlled by an investment company"
within the meaning of the Investment Company Act of 1940, as amended, and
the rules and regulations promulgated thereunder.
(xiv) Such counsel does not know of any contracts or other
documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required.
(xv) The reorganization of the Company as a Delaware
corporation has been validly consummated in accordance with the General
Corporation Law of the State of Delaware and each outstanding share of
common stock and preferred stock of the Company has been converted as
provided in the Agreement of Merger between the constituent parties.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of Grant Thornton LLP and representatives of the
Underwriters and their counsel at which the contents of the Registration
Statement, the Prospectus, any amendment thereof or supplement thereto and
related matters were discussed. On the basis of the foregoing, and without
assuming any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, no facts
have come to the attention of such counsel which lead such counsel to believe
that either the Registration Statement at the time it became effective, or any
amendment thereof subsequent to the date hereof made prior to the Closing Date
as of the date of such amendment, contained an untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
as of its date and as of the date of such opinion contained or contains an
untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief, view or opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or the Prospectus).
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In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of governmental officials, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, the Representatives and they are justified in
relying thereon.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and to Underwriters'
Counsel, and the Underwriters shall have received from said Underwriters'
Counsel a favorable opinion, dated as of the Closing Date with respect to the
issuance and sale of the Shares, the Registration Statement and the Prospectus
and such other related matters as the Representatives may reasonably require,
and the Company shall have furnished to Underwriters' Counsel such documents as
they reasonably request for the purpose of enabling them to pass upon such
matters.
(d) At the Closing Date, the Representatives shall have received a
certificate of the Company, executed on behalf of the Company by the Chief
Executive Officer or President and the Chief Financial Officer of the Company,
dated the Closing Date to the effect that (i) the conditions set forth in
subsection (a) of this Section 6 have been satisfied, (ii) as of the date hereof
and as of the Closing Date, the representations and warranties of the Company
set forth in Section 1 hereof are true and accurate, (iii) at the time of the
Closing on the Closing Date, the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed and (iv) subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any Material Adverse Effect, or
any development involving a prospective Material Adverse Change, on the Company,
except in each case as described in the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date,
the Representatives shall have received a letter from Grant Thornton LLP,
independent public accountants for the Company, dated as of the date of this
Agreement and as of the Closing Date, as appropriate, addressed to the
Underwriters and in form and substance satisfactory to the Representatives, to
the effect that: (i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Regulations; (ii)
in their opinion, the financial statements and schedule of the Company
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included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the minutes of meetings and consents of the
stockholders and boards of directors of the Company through the date of such
letter, inquiries of officers and other employees of the Company who have
responsibility for financial and accounting matters of the Company with respect
to transactions and events through a date not more than three days prior to the
date of such letter and other specified procedures and inquiries to a date not
more than three days prior to the date of such letter, nothing has come to their
attention (except as noted therein) that would cause them to believe that: (A)
as of the date not more than three days prior to the date of such letter, there
was any change in the capital stock or paid-in capital, increase in long-term
debt, or decrease in net current assets or net assets and changes in
stockholders' equity (deficit) of the Company as compared with amounts shown in
the December 31, 1998 audited balance sheet included in the Registration
Statement, (B) for the period from January 1, 1999 to a date not more than three
days prior to the date of such letter, there were any decreases as compared to
the corresponding period in the preceding year, in revenues or increases in the
total or per share amount of net loss, and (C) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Registration Statement and the Prospectus, which have been specified by the
Representatives prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived from the general
accounting and financial records of the Company or from schedules furnished by
the Company, with the results obtained from the application of specified
readings, inquiries, and other appropriate procedures specified by the
Representatives set forth in such letter, and found them to be in agreement.
(f) Prior to the Closing Date the Company shall have furnished to
the Representatives such further information, certificates and documents as the
Representatives may reasonably request.
(g) The Representatives shall have received from each person who is
a director or officer of the Company or such security holder as has been
heretofore designated by you and listed on Schedule II hereto the agreements
required by Section 1(v).
(h) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market under the symbol disclosed in the
Prospectus.
(i) The Company shall not have sustained, (i) since the date of the
latest financial statements included in the Prospectus, any loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by
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<PAGE> 25
insurance, or from any labor dispute or court or governmental action, order or
decree otherwise than as set forth or expressly contemplated in the Prospectus
which loss or interference is not immaterial to the Company, and (ii) since the
respective dates as of which information is given in the Prospectus, there shall
not have been any Material Adverse Change, or any development involving a
prospective Material Adverse Change, otherwise than as set forth or expressly
contemplated in the Prospectus, the effect of which, in any such case described
in clause (i) or (ii) of this Section 6(i), in the Representatives' reasonable
judgment, makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares being delivered on the Closing Date on
the terms and in the manner contemplated in the Prospectus.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Representatives or to Underwriters' Counsel pursuant to this Section 6 shall not
be in all material respects reasonably satisfactory in form and substance to the
Representatives and to Underwriters' Counsel, all obligations of the
Underwriters hereunder may be cancelled by the Representatives at, or at any
time prior to, the Closing Date and the obligations of the Underwriters to
purchase the Additional Shares may be cancelled by the Representatives at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telex or telegraph,
confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, its officers, directors, partners, employees, agents and counsel
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act,
any state securities or Blue Sky law or otherwise, insofar as such losses,
liabilities, claims, damages, obligations, penalties, judgments, awards, costs,
disbursements or expenses (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related preliminary prospectus
or the Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state in any
preliminary prospectus, the Registration Statement for the registration of the
Shares or the Prospectus, or in any amendment thereof or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
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<PAGE> 26
provided, however, that (A) the Company will not be liable in any such case to
the extent but only to the extent that any such loss, liability, claim, damage,
obligation, penalty, judgment, award, cost, disbursement or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through the Representatives expressly for use therein and (B) the
indemnity agreement contained in this Section 7(a) with respect to any
preliminary prospectus (or the Prospectus) shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) from
whom the person asserting any such losses, liabilities, claims, damages or
expenses purchased the Shares which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
preliminary prospectus (or the Prospectus) was corrected in the Prospectus (or
the Prospectus as amended or supplemented) and delivery of such Prospectus (or
the Prospectus as amended or supplemented) would have eliminated any such loss,
liability, claim, damage or expense unless the failure is the result of
non-compliance by the Company with Section 4(c) hereof.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the Shares,
as originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives expressly for use therein, provided, however, that in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting
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<PAGE> 27
discount applicable to the Shares purchased by such Underwriter hereunder. This
indemnity will be in addition to any liability which any Underwriter may
otherwise have including under this Agreement. The Company acknowledges that the
statements set forth in the table listing Underwriters under the caption
"Underwriting" in the Prospectus and in the third, eighth, ninth and tenth
paragraphs under the caption "Underwriting" in the Prospectus constitute the
only information furnished in writing by or on behalf of any Underwriter
expressly for use in any registration statement relating to the Shares as
originally filed, in the Registration Statement or in any amendment thereof, any
related preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 unless and to the extent the
indemnifying party did not otherwise learn of such action and such failure to
notify results in the forfeiture by the indemnifying party of substantial rights
and defenses). In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
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<PAGE> 28
8. CONTRIBUTION. In order to provide for contribution in circumstances in
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, then each indemnifying party shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including without
limitation any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company, any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, from the offering of the Shares or, if such allocation is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company,
on the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same proportion as
(x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company, and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Shares. The
relative fault of the Company, on the one hand, and of the Underwriters, on the
other hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any portion of the contribution obligation imposed on all Underwriters in
excess of its pro rata share of the total underwriting discount set forth in the
table on the cover page of the Prospectus based on the number of shares
underwritten by it as compared to the number of shares underwritten by all
Underwriters who do not default on their obligations under this Section 8 less
all amounts paid or payable by such Underwriter pursuant to Section 7; and (ii)
no person
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<PAGE> 29
guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Notwithstanding the provisions of this
Section 8 and the preceding sentence, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public exceeds the amount
of any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of the immediately preceding sentence. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise unless and to the extent the party from whom contribution
is sought did not otherwise learn of such action and such failure to notify
results in the forfeiture by the party from whom contribution is sought of
substantial rights and defenses. No party shall be liable for contribution with
respect to any action or claim settled without its consent; provided, however,
that such consent was not unreasonably withheld.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by the Representatives
pursuant to subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, as the case may be, which all Underwriters
have agreed to purchase hereunder, then such Firm Shares or Additional Shares to
which the default relates shall be purchased by the non-defaulting Underwriters
in proportion to the respective proportions which the numbers of Firm Shares set
forth opposite their respective names in Schedule I hereto bear to the aggregate
number of Firm Shares set forth opposite the names of the non-defaulting
Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, the Representatives may in
their discretion arrange for themselves or for another party or parties
(including any
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<PAGE> 30
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. If within five calendar days after such a default
the Representatives do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares, shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Sections 5, 7 and 8 hereof) or the several non-defaulting
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters (except as provided in Sections 5, 7 and 8 hereof)
of its or their liability, if any, to the other Underwriters and the Company for
damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, the
Representatives or the Company shall have the right to postpone the Closing Date
or Additional Closing Date, as the case may be, for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
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<PAGE> 31
(a) This Agreement shall become effective (i) if Rule 430A under the
Act is not used, when the Representatives shall have received notification of
the effectiveness of the Registration Statement or (ii) if Rule 430A under the
Act is used, when the parties hereto have executed and delivered this Agreement.
If either the initial public offering price or the purchase price per Share has
not been agreed upon prior to 5:00 P.M., New York City time, on the fourteenth
(14) full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Company or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying the Representatives or by the Representatives notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7 and 8 hereof shall at all times be in full force and effect.
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date (and, with respect to the
Additional Shares, the Additional Closing Date) by notice to the Company from
the Representatives, without liability (other than with respect to Sections 7
and 8 hereof) on the part of any Underwriter to the Company, if, on or prior to
such date, (i) the Company shall have failed, refused or been unable to perform
in any material respect any agreement on its, his or her part to be performed
hereunder, (ii) any other condition to the Underwriters' obligations hereunder
set forth in Section 6 is not fulfilled when and as required in any material
respect, (iii) trading in securities on the New York or American Stock
Exchanges, or Nasdaq National Market shall have been suspended or materially
limited, or minimum or maximum prices shall have been established or maximum
price ranges for prices for securities shall have been required, on the New York
or American Stock Exchanges or Nasdaq National Market by the Commission or by
such exchange or other regulatory body or governmental authority having
jurisdiction, (iv) a general banking moratorium shall have been declared by a
federal or state authority or any new restriction materially and adversely
affecting the distribution of the Firm Shares or the Additional Shares, as the
case may be, (v) there shall have occurred an outbreak or escalation of armed
hostilities involving the United States on or after the date hereof, or if there
has been a declaration by the United States of a national emergency or war, the
effect of which shall be, in the Representatives' judgment, to make it
inadvisable or impracticable to proceed with the sale and delivery of the Shares
on the terms and in the manner contemplated in the Prospectus, (vi) since the
respective dates as of which information is given in the Prospectus, there shall
have occurred a Material Adverse Change, or any development involving a
prospective Material Adverse Change, otherwise than as set forth and expressly
contemplated by the Prospectus, the effect of which in the Representatives'
reasonable judgment, makes it impracticable or inadvisable to proceed with the
public offering and delivery of the Firm Shares or the Additional Shares, as the
case may be, on the terms and in the manner contemplated hereby and by the
Prospectus, or (vii) there shall have occurred such a material adverse change in
general economic, political or financial conditions or if the effect of
international conditions on the financial
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<PAGE> 32
markets in the United States shall be such as, in the judgment of the
Representatives, makes it inadvisable or impracticable to proceed with the sale
and delivery of the Firm Shares or the Additional Shares, as the case may be, on
the terms contemplated hereby and by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by the
Representatives as provided in Section 11(a) hereof or (ii) Section 9(b) or
11(b) hereof (except clauses (i) and (ii) thereof)), or if the sale of the
Shares provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth herein required to be satisfied by the
Company is not satisfied or because of any refusal, inability or failure on the
part of the Company to perform any agreement herein or comply with any provision
hereof, the Company will, subject to demand by the Representatives, reimburse
the Underwriters for all out-of-pocket expenses (including the reasonable fees
and expenses of their counsel), incurred by the Underwriters in connection
herewith.
12. NOTICES. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167, Attention: Corporate Finance Department; if sent to
the Company, shall be mailed, delivered, or telegraphed and confirmed in writing
to Applied Theory Corporation, 40 Cutter Mill Road, Suite 405, Great Neck, NY
11021, Attention: Richard Mandelbaum, Chairman and Chief Executive Officer.
In all dealings hereunder, the Representatives shall act on behalf
of each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by the Representatives jointly or by Bear, Stearns &
Co. Inc. on behalf of the Representatives.
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Sections 7 and
8 hereof, and their respective successors and assigns, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision herein
contained. The term "successors and assigns" shall not include a purchaser, in
its capacity as such, of Shares from any of the Underwriters.
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<PAGE> 33
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
15. COUNTERPARTS. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same agreement.
16. PARTIAL INVALIDITY. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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<PAGE> 34
If the foregoing correctly sets forth your understanding, please so
indicate in the space provided below for that purpose, and upon acceptance
hereof by the Representatives, on behalf of each of the Underwriters, this
letter and such acceptance hereof shall constitute a binding agreement among
each of the Underwriters and the Company. It is understood that the acceptance
by the Representatives of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement Among Underwriters,
the form of which shall be submitted to the Company for examination, upon
request.
Very truly yours,
APPLIEDTHEORY CORPORATION
By:______________________________________
Name:
Title:
Accepted as of the date first above written at New York, New York, on behalf of
themselves severally and the other several Underwriters named in Schedule I
hereto.
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER CORP.
LEHMAN BROTHERS INC.
WIT CAPITAL CORPORATION
By: BEAR, STEARNS & CO. INC.
By: ______________________________
Name:
Title:
<PAGE> 1
Exhibit 3.02
BYLAWS
OF
APPLIEDTHEORY CORPORATION
Article I
OFFICES
Section 1.01. Registered Office. Unless and until otherwise determined
by the Board of Directors of AppliedTheory Corporation (the "Corporation"), the
registered office of the Corporation in the State of Delaware shall be at the
office of The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801 and the registered agent in charge thereof shall be The
Corporation Trust Company.
Section 1.02. Other Offices. The Corporation may also have an office or
offices at any other place or places within or without the State of Delaware as
the Board of Directors of the Corporation (the "Board") may from time to time
determine or the business of the Corporation may from time to time require.
Article II
MEETING OF STOCKHOLDERS
Section 2.01. Annual Meetings. The annual meeting of Stockholders (as
hereinafter defined) of the Corporation for the election of directors of the
Corporation ("Directors") and for the transaction of such other business as may
properly come before such meeting, shall be held at such place, date and time as
shall be fixed by the Board and designated in the notice or waiver of notice of
such annual meeting; provided, however, that no annual meeting of Stockholders
need be held if all actions, including the election of Directors, required by
the General Corporation Law of the State of Delaware (the "General Corporation
Law") to be taken at such annual meeting are taken by written consent in lieu of
meeting pursuant to Section 2.09 hereof.
Section 2.02. Special Meetings. Special meetings of Stockholders for
any purpose or purposes may be called by the Board or the Chairman, the Chief
Executive Officer, the President or the Secretary of the Corporation or by the
record holders of at least a majority of the shares of capital stock of the
Corporation (the "Shares") issued and outstanding entitled to vote generally in
the election of Directors, to be held at such place, date and time as shall be
designated in the notice or waiver of notice thereof.
Section 2.03. Notice of Meetings. (a) Except as otherwise provided by
law, written notice of each annual or special meeting of Stockholders stating
the place, date and time of such meeting and, in the case of a special meeting,
the purpose or purposes for which such meeting is to be held, shall be given
personally or by first-class mail (airmail in the case of international
communications) to each record holder of Shares (a "Stockholder" and,
collectively, "Stockholders") entitled to vote thereat, not less than
<PAGE> 2
10 nor more than 60 days before the date of such meeting. If mailed, such notice
shall be deemed to be given when deposited in the United States mail, postage
prepaid, directed to the Stockholder at such Stockholder's address as it appears
on the records of the Corporation. If, prior to the time of mailing, the
Secretary shall have received from any Stockholder a written request that
notices intended for such Stockholder are to be mailed to some address other
than the address that appears on the records of the Corporation, notices
intended for such Stockholder shall be mailed to the address designated in such
request.
(b) Notice of a special meeting of Stockholders may be given by the
person or persons calling the meeting, or, upon the written request of such
person or persons, such notice shall be given by the Secretary on behalf of such
person or persons. If the person or persons calling a special meeting of
Stockholders give notice thereof, such person or persons shall deliver a copy of
such notice to the Secretary. Each request to the Secretary for the giving of
notice of a special meeting of Stockholders shall state the purpose or purposes
of such meeting.
Section 2.04. Waiver of Notice. Notice of any annual or special meeting
of Stockholders need not be given to any Stockholder who files a written waiver
of notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of Stockholders need be specified in any written waiver
of notice thereof. Attendance of a Stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was inadequate or improperly given.
Section 2.05. Adjournments. Whenever a meeting of Stockholders, annual
or special, is adjourned to another date, time or place, notice need not be
given of the adjourned meeting if the date, time and place thereof are announced
at the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder entitled to vote thereat. At the adjourned meeting, any business may
be transacted which might have been transacted at the original meeting.
Section 2.06. Quorum. Except as otherwise provided by law, in the
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") or in any Certificate of Designation (as defined herein) of the
Corporation which is filed with the Secretary of State of Delaware pursuant to
the Certificate of Incorporation, the record holders of a majority of the Shares
entitled to vote thereat, present in person or by proxy, shall constitute a
quorum for the transaction of business at all meetings of Stockholders, whether
annual or special. If, however, such quorum shall not be present in person or by
proxy at any meeting of Stockholders, the Stockholders entitled to vote thereat
may adjourn the meeting from time to time in accordance with Section 2.05 hereof
until a quorum shall be present in person or by proxy.
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Section 2.07. Voting. Except as otherwise provided by law or the
Certificate of Incorporation or in any Certificate of Designation, each
Stockholder shall be entitled to one vote for each Share held of record by such
Stockholder. Except as otherwise provided by law or the Certificate of
Incorporation, when a quorum is present at any meeting of Stockholders, the
vote of the record holders of a majority of the Shares constituting such quorum
shall decide any question brought before such meeting.
Section 2.08. Proxies. Each Stockholder entitled to vote at a meeting
of Stockholders or to express, in writing, consent to or dissent from any action
of Stockholders without a meeting may authorize another person or persons to act
for such Stockholder by proxy. Such proxy shall be filed with the Secretary
before such meeting of Stockholders or such action of Stockholders without a
meeting, at such time as the Board may require. No proxy shall be voted or acted
upon more than three years from its date, unless the proxy provides for a longer
period.
Section 2.09. Stockholders' Consent in Lieu of Meeting. Except as may
otherwise be provided by law or in the Certificate of Incorporation, any action
required by the General Corporation Law to be taken at any annual or special
meeting of Stockholders, and any action which may be taken at any annual or
special meeting of Stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the record holders of Shares having not less than the
minimum number of votes necessary to authorize or take such action at a meeting
at which the record holders of all Shares entitled to vote thereon were present
and voted.
Article III
BOARD OF DIRECTORS
Section 3.01. General Powers. Except as may otherwise be provided by
law or in the Certificate of Incorporation, the business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Certificate of Incorporation or these Bylaws directed or required to be
exercised or done by Stockholders.
Section 3.02. Number and Term of Office. The number of Directors (other
than Directors elected by one or more series of Preferred Stock) shall be such
number, not to exceed 13, as shall be fixed from time to time by resolution of
the Board. Directors need not be Stockholders. The Directors of the Corporation,
other than Directors elected by one or more series of Preferred Stock, shall be
elected as members of one of three classes, designated Class I, Class II and
Class III. Each class shall consist, as nearly as may be possible, of one-third
of the total number of Directors (other than Directors elected by one or more
series of Preferred Stock) constituting the entire Board of Directors. Each
Director (other than Directors elected by one or more series of Preferred Stock)
shall serve for a term ending on the date of the third annual meeting of
Stockholders next following the annual meeting at which such Director was
elected. Directors initially designated as Class I Directors shall serve for a
term ending on the date
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of the Corporation's 2000 annual meeting, Directors initially designated as
Class II Directors shall serve for a term ending on the date of the
Corporation's 2001 annual meeting, and Directors initially designated as Class
III Directors shall serve for a term ending on the date of the Corporation's
2002 annual meeting; provided, however, that each Director shall hold office
until his successor is elected and qualified, or until his earlier death or
resignation or removal in the manner hereinafter provided. In the event the
number of Directors is changed, any newly-created directorships or any decrease
in directorships shall be so apportioned among the classes by the Board as to
make all classes as nearly equal in number as possible.
Whenever the holders of one or more series of Preferred Stock shall
have the right, voting separately as a series, to elect directors, the
nomination, election, term of office, filling of vacancies, removal and other
features of such directorships shall not be governed by Sections 3.02, 3.04 and
3.05 of these Bylaws unless otherwise provided for in the certificate of
designation of such series which is filed with the Secretary of State of
Delaware pursuant to the Certificate of Incorporation (the "Certificate of
Designation").
Section 3.03. Resignation. Any Director may resign at any time by
giving written notice to the Board, the Chairman of the Board of the Corporation
or the Secretary. Such resignation shall take effect at the time specified in
such notice or, if the time be not specified, upon receipt thereof by the Board,
the Chairman or the Secretary, as the case may be. Unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective.
Section 3.04. Removal. Directors (other than Directors elected by one
or more series of Preferred Stock) may be removed from office by the
Stockholders, with or without cause; provided, that, in addition to any other
vote required by law, an affirmative vote (or written consent pursuant to
Section 2.09 hereof) of the holders of not less than 75% of the total voting
power of all outstanding securities of the Corporation then entitled to vote
generally in the election of Directors, voting together as a single class, shall
be required for such a removal.
Section 3.05. Vacancies. Vacancies occurring as a result of death,
resignation, removal, or otherwise, and the creation of new directorships that
increase the number of Directors, may be filled (other than Directors elected by
one or more series of Preferred Stock) by vote of the record holders of a
majority of the Shares then entitled to vote at an election of Directors, by
written consent of such record holders pursuant to Section 2.09 hereof, by vote
of the Board of Directors or by written consent of the Directors pursuant to
Section 3.10 hereof. If the number of Directors then in office is less than a
quorum, such other vacancies (other than Directors elected by one or more series
of Preferred Stock) may be filled by vote of a majority of the Directors then in
office or by written consent of all such Directors pursuant to Section 3.10
hereof. Each Director chosen in accordance with this Section 3.05 shall hold
office until his successor shall be elected and qualified or until his earlier
death or resignation or removal in the manner provided herein.
Section 3.06. Meetings. (a) Annual Meetings. As soon as practicable
after each annual election of Directors by the Stockholders, the Board shall
meet for the
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purpose of organization and the transaction of other business, unless it shall
have transacted all such business by written consent pursuant to Section 3.10
hereof.
(b) Other Meetings. Other meetings of the Board shall be held at such
times as the Chairman, the Chief Executive Officer, the President, the Secretary
or a majority of the Board shall from time to time determine.
(c) Notice of Meetings. The Secretary shall give written notice to each
Director of each meeting of the Board, which notice shall state the place, date,
time and purpose of such meeting. Notice of each such meeting shall be given to
each Director, if by mail, addressed to him at his residence or usual place of
business, at least five days before the day on which such meeting is to be held,
or shall be sent to him at such place by telecopy, telegraph, cable, or other
form of recorded communication, or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held. A written
waiver of notice, signed by the Director entitled to notice, whether before or
after the time of the meeting referred to in such waiver, shall be deemed
equivalent to notice. Neither the business to be transacted at, nor the purpose
of any meeting of the Board need be specified in any written waiver of notice
thereof. Attendance of a Director at a meeting of the Board shall constitute a
waiver of notice of such meeting, except as provided by law.
(d) Place of Meetings. The Board may hold its meetings at such place or
places within or without the State of Delaware as the Board may from time to
time determine, or as shall be designated in the respective notices or waivers
of notice of such meetings.
(e) Quorum and Manner of Acting. A majority of the total number of
Directors then in office (but in no event less than two if the total number of
directorships, including vacancies, is greater than one or in no event a number
less than one-third of the total number of directorships, including vacancies)
shall be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and the vote of a
majority of those Directors present at any such meeting at which a quorum is
present shall be necessary for the passage of any resolution or act of the
Board, except as otherwise expressly required by law, the Certificate of
Incorporation or these Bylaws. In the absence of a quorum for any such meeting,
a majority of the Directors present thereat may adjourn such meeting from time
to time until a quorum shall be present.
(f) Organization. At each meeting of the Board, one of the following
shall act as chairman of the meeting and preside, in the following order of
precedence:
(i) the Chairman;
(ii) the Chief Executive Officer;
(iii) the President; or
(iv) any Director chosen by a majority of the Directors present.
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The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
Section 3.07. Committees of the Board. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more Directors. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of any such absent or disqualified member. Any committee of
the Board, to the extent provided in the resolution of the Board designating
such committee or in these Bylaws, shall have and may exercise all the powers
and authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that no such committee shall
have such power of authority in reference to amending the Certificate of
Incorporation (except that such a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board as provided in Section 151(a) of the General Corporation Law, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes of stock of the Corporation or fix the number of
shares of any series of stock or authorize the increase or decrease of the
shares of any series), adopting an agreement of merger or consolidation under
Section 251 or 252 of the General Corporation Law, recommending to the
Stockholders the sale, lease or exchange of all or substantially all the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or the revocation of a dissolution, or amending
these Bylaws; provided further, however, that, unless expressly so provided in
the resolution of the Board designating such committee or in these Bylaws, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law. Each committee of
the Board shall keep regular minutes of its proceedings and report the same to
the Board when so requested by the Board.
Section 3.08. Audit Committee. The Board may, in its discretion and by
an affirmative vote of a majority of the entire Board, appoint an Audit
Committee to consist of three (3) or more Directors as the Board may from time
to time determine. The Audit Committee shall have the power to:
(a) recommend to the Board a firm of independent public
accountants to be nominated for election by the Board to act
as independent auditors for the Corporation and any of its
subsidiaries;
(b) confer with the Corporation's independent auditors for the
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Corporation and its subsidiaries;
(c) review the findings and recommendations of the independent
auditors during the course of and on completion of the audit
and to consider any problems encountered in conducting the
audit;
(d) report to the Board regarding all matters within the Audit
Committee's purview;
(e) review the Corporation's internal audit controls and to
provide a liaison with the Corporation's internal auditors;
(f) undertake any investigations on behalf of, and make such
reports to, the Board as and when the Board shall reasonably
request;
(g) report and recommend to the Board regarding the scope of the
audit and the fees to be paid to the auditors by the
Corporation with respect to the audit; and
(h) exercise any other powers as are lawfully delegated to the
Audit Committee, not in conflict with specific powers
conferred by the Board upon any other committee formed by it.
Section 3.09. Compensation Committee. The Board may, in its discretion
and by an affirmative vote of a majority of the entire Board, appoint a
Compensation Committee to consist of three (3) or more Directors as the Board
may from time to time determine. The Compensation Committee shall have the power
to:
(a) with respect to all aspects and forms of compensation,
including employment contracts (the "Terms of Compensation"),
of the officers of the Corporation, confer with the Chief
Executive Officer and make recommendations to the Board;
provided, that the Chief Executive Officer shall be
authorized with respect to determining the Terms of
Compensation as described in Section 4.13 of these Bylaws;
(b) recommend to the Board with respect to the oversight of
medical, retirement, insurance and other benefit plans of the
Corporation for the Corporation's employees and directors;
(c) in the event that it shall be formed of non-employee Directors
(except for Directors who are members ex officio) and the
Board shall have authorized it to exercise the functions
described in this Section 3.09(c), undertake and exercise any
administrative or other functions in compliance with section
162(m) of the Internal Revenue Code, as amended; provided,
that the Compensation Committee shall confer with and report
to the Board regarding the Compensation Committee's actions
under this Section 3.09(c);
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(d) recommend to the Board with respect to the administration of
the Corporation's stock option plan, stock purchase plan and
any other bonus or incentive plans of the Corporation, except
for those functions which are described in Section 3.09(c) and
which have been delegated to the Compensation Committee or to
any other committee of the Board;
(e) undertake any investigation on behalf of, and make such
reports to, the Board as and when the Board shall reasonably
request; and
(f) exercise any other powers as are lawfully delegated to it by
the Board, not in conflict with specific powers conferred by
the Board upon any other committee appointed by it.
Section 3.10. Directors' Consent in Lieu of Meeting. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all the members of the Board or such committee and such
consent is filed with the minutes of the proceedings of the Board or such
committee.
Section 3.11. Action by Means of Telephone or Similar Communications
Equipment. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
Section 3.12. Compensation. Directors may be paid such compensation for
their services as Directors or as members of committees and such reimbursement
for expenses of attendance at meetings as the Board may from time to time
determine. No such payment shall preclude any Director from serving the
corporation or any of its subsidiaries in any other capacity and receiving
compensation for such service.
Section 3.13. Interested Directors; Quorum. (a) No contract or
transaction between the Corporation and one or more of its Directors or
officers, or between the Corporation and any other corporation, partnership,
association, firm or other organization in which one or more of its Directors or
officers are Directors or officers, or have a financial interest, or in which
any of the foregoing may be pecuniarily or otherwise interested, shall be void
or voidable solely for this reason, or solely because the Director or officer is
present at or participates in the meeting of the Board or Committee thereof
which authorizes the contract or transaction, or solely because the votes of one
or more of such Directors or officers are counted for such purpose, if:
(1) the material facts as to that person's relationship or interest
and as to the contract or transaction are disclosed or are known to the
Board or the
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Committee, and the Board or Committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
Directors, even though the disinterested Directors be less than a quorum;
or
(2) the material facts as to that person's relationship or interest
and as to the contract or transaction are disclosed or are known to the
Stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by a majority of the votes cast by the
Stockholders entitled to vote with regard to such a matter, other than the
votes of shares owned of record or beneficially by the interested Director,
officer, or otherwise interested entity; or
(3) the contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors,
a Committee thereof, or the Stockholders.
(b) Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a Committee
which authorizes the contract or transaction.
Article IV
OFFICERS
Section 4.01. Election of Officers. The Board of Directors may elect a
Chairman of the Board of Directors, a Chief Executive Officer, a President, one
or more Vice Presidents, a Treasurer, one or more Assistant Treasurers, a
Secretary, one or more Assistant Secretaries and such other officers as it may
determine. Any vacancies in the above offices shall be filled in the same
manner. Each such officer shall serve at the pleasure of the Board of Directors
and until his successor shall have been duly elected and qualified, unless he
shall die, resign or be removed. Any two offices may be held by the same person,
except that no person shall hold the offices of Chairman and Secretary
concurrently unless all of the outstanding stock of the Corporation is owned by
one person.
Section 4.02. Authority and Duties. All officers shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these Bylaws or, to the extent not so provided, by resolution of the
Board.
Section 4.03. Term of Office, Resignation and Removal. (a) Each officer
shall be appointed by the Board and shall hold office for such term as may be
determined by the Board. Each officer shall hold office until his successor has
been appointed and qualified or his earlier death or resignation or removal in
the manner hereinafter provided. The Board may require any officer to give
security for the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to the
Board, the Chairman, the Chief Executive Officer, the President or the
Secretary. Such resignation shall take effect at the time specified in such
notice or, if the time be not
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specified, upon receipt thereof by the Board, the Chairman, the Chief Executive
Officer, the President or the Secretary, as the case may be. Unless otherwise
specified therein, acceptance of such resignation shall not be necessary to make
it effective.
(c) All officers and agents appointed by the Board shall be subject to
removal, with or without cause, at any time by the Board.
Section 4.04. Vacancies. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled by action of the Board. Unless
earlier removed pursuant to Section 4.03 hereof, any officer appointed by the
Board to fill any such vacancy shall serve only until such time as the unexpired
term of his predecessor expires unless reappointed by the Board.
Section 4.05. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Shareholders and Directors and shall perform such
other duties as the Board may direct.
Section 4.06. Chief Executive Officer. The Chief Executive Officer
shall have all the powers and perform all the duties normally incident to the
office of Chief Executive Officer, including the authority to instruct the
Treasurer with respect to the disbursement of the Corporation's funds as
directed by the Board, subject to the control and direction of the Board of
Directors, together with such other powers and duties as may from time to time
be properly prescribed by the Board of Directors.
Section 4.07. President. The President shall be the chief operating
officer and shall have all the powers and perform all the duties normally
incident to the office of chief operating officer, including the authority to
instruct the Treasurer with respect to the disbursement of the Corporation's
funds as directed by the Board, subject to the control and direction of the
Chief Executive Officer, together with such other powers and duties as may from
time to time be properly prescribed by the Board of Directors.
Section 4.08. Vice Presidents. Vice Presidents, if any, in order of
their seniority or in any other order determined by the Board, shall perform
such duties as the Board, the Chief Executive Officer or the President shall
prescribe.
Section 4.09. The Treasurer. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, or any officer or officers, or any
officer and agent jointly, duly authorized by the Board, shall, from time to
time, direct or approve. He shall disburse the funds of the Corporation under
the direction of the Board, the Chief Executive Officer and the President. He
shall keep a full and accurate account of all moneys received and paid on
account of the Corporation and shall render a statement of his accounts whenever
the Board, the Chairman, the Chief Executive Officer or the President shall so
request. He shall perform all other necessary actions and duties in connection
with the administration of the financial affairs of the Corporation and shall
generally perform all the duties usually appertaining to the office of treasurer
of a
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corporation. When required by the Board, he shall give bonds for the faithful
discharge of his duties in such sums and with such sureties as the Board shall
approve.
Section 4.10. Assistant Treasurers. Assistant Treasurers of the
Corporation, if any, in order of their seniority or in any other order
determined by the Board, shall generally assist the Treasurer and perform such
other duties as the Board or the Treasurer shall prescribe, and, in the absence
or disability of the Treasurer, shall perform the duties and exercise the powers
of the Treasurer.
Section 4.11. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman, the Chief
Executive Officer or the President. He shall keep in safe custody the seal of
the Corporation and affix the same to any instrument that requires that the seal
be affixed to it and which shall have been duly authorized for signature in the
name of the Corporation and, when so affixed, the seal shall be attested by his
signature or by the signature of the Treasurer of the Corporation or an
Assistant Secretary or Assistant Treasurer of the Corporation. He shall keep in
safe custody the certificate books and stockholder records and such other books
and records of the Corporation as the Board, the Chairman, the Chief Executive
Officer or the President may direct and shall perform all other duties incident
to the office of Secretary and such other duties as from time to time may be
assigned to him by the Board, the Chairman, the Chief Executive Officer or the
President.
Section 4.12. Assistant Secretaries. Assistant Secretaries of the
Corporation, if any, in order of their seniority or in any other order
determined by the Board, shall generally assist the Secretary and perform such
other duties as the Board or the Secretary shall prescribe, and, in the absence
or disability of the Secretary, shall perform the duties and exercise the powers
of the Secretary.
Section 4.13. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board; provided, that the Chief Executive
Officer shall be authorized to fix the compensation of any officers of the
Corporation below the level of Vice President.
Article V
SHARES AND TRANSFERS OF SHARES
Section 5.01. Certificates Evidencing Shares. Shares shall be evidenced
by certificates in such form or forms as shall be approved by the Board.
Certificates shall be issued in consecutive order and shall be numbered in the
order of their issue, and shall be signed by the Chairman, the Chief Executive
Officer, the President or any Vice President and by the Secretary, any Assistant
Secretary, the
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Treasurer or any Assistant Treasurer. Any or all of the signatures on a
Certificate may be a facsimile. In the event any such officer who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to hold such office or to be employed by the Corporation before such certificate
is issued, such certificate may be issued by the Corporation with the same
effect as if such officer had held such office on the date of issue.
Section 5.02. Stock Ledger. A stock ledger in one or more counterparts
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the Shares evidenced by each
certificate evidencing Shares issued by the Corporation, the number of Shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name Shares stand on the stock ledger of
the Corporation shall be deemed the owner and record holder thereof for all
purposes.
Section 5.03. Transfers of Shares. Registration of transfers of Shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such Shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
Section 5.04. Addresses of Stockholders. Each Stockholder shall
designate to the Secretary an address at which notices of meetings and all other
corporate notices may be served or mailed to such Stockholder, and, if any
Stockholder shall fail to so designate such an address, corporate notices may be
served upon such Stockholder by mail directed to the mailing address, if any, as
the same appears in the stock ledger of the Corporation or at the last known
mailing address of such Stockholder.
Section 5.05. Lost, Destroyed and Mutilated Certificates. Each record
holder of Shares shall promptly notify the Corporation of any loss, destruction
or mutilation of any certificate or certificates evidencing any Share or Shares
of which he is the record holder. The Board may, in its discretion, cause the
Corporation to issue a new certificate in place of any certificate theretofore
issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon
the surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction, and the Board may, in its discretion, require the record holder of
the Shares evidenced by the lost, stolen or destroyed certificate or his legal
representative to give the Corporation a bond sufficient to indemnify the
Corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 5.06. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
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Section 5.07. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of Stockholders or any adjustment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other such action. A determination of the Stockholders
entitled to notice of or to vote at a meeting of Stockholders shall apply to any
adjournment of such meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
Article VI
SEAL
Section 6.01. Seal. The corporate seal shall be in such form as shall
be approved by the Board.
Article VII
FISCAL YEAR
Section 7.01. Fiscal Year. The fiscal year of the Corporation shall end
on the thirty-first day of December of each year unless changed by resolution of
the Board.
Article VIII
VOTING OF SHARES IN OTHER CORPORATIONS
Section 8.01. Voting of Shares in Other Corporations. Shares in other
corporations which are held by the Corporation may be represented and voted by
the Chairman, the Chief Executive Officer, the President or a Vice President of
the Corporation or by proxy or proxies appointed by one of them, in all cases as
directed by the Board. The Board may, however, appoint some other person to vote
the shares.
Article IX
INDEMNIFICATION
Section 9.01. Indemnification. The Corporation shall indemnify, in the
manner and to the full extent permitted by law, any person (or the estate of any
person) who was or is a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
Director, officer, employee or agent of the
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Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. Where required by
law, the indemnification provided for herein shall be made only as authorized in
the specific case upon a determination, in the manner provided by law, that
indemnification of the Director, officer, employee or agent is proper in the
circumstances. The Corporation may, to the full extent permitted by law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person. To the full extent
permitted by law, the indemnification provided herein shall include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
and, in the manner provided by law, any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person for any such expenses to
the full extent permitted by law, nor shall it be deemed exclusive of any other
rights to which any person seeking indemnification from the Corporation may be
entitled under any agreement, vote of Stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office. Such indemnification shall continue
as to a person who has ceased to be a Director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such
person.
Article X
AMENDMENTS
Section 10.01. Amendments. Any Bylaw (including these Bylaws) may be
adopted, amended or repealed by the vote of the record holders of a majority of
the Shares then entitled to vote at an election of Directors or by written
consent of Stockholders pursuant to Section 2.09 hereof, or by vote of the Board
or by a written consent of Directors pursuant to Section 3.10 hereof; provided,
that the provisions of Sections 3.02 and 3.04 of these Bylaws shall not be
amended or repealed, nor shall any provision of these Bylaws be adopted, amended
or repealed the result of which is to give rise to an inconsistency with
Sections 3.02 and 3.04 of these Bylaws, unless such action shall have been
approved by an affirmative vote of the holders of not less than 75 % of the
total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of Directors, voting together as a
single class, or by written consent of Stockholders pursuant to Section 2.09
hereof, or by an affirmative vote of not less than 75 % of the members of the
Board or by written consent of Directors pursuant to Section 3.10 hereof.
14
<PAGE> 1
Exhibit 10.24
REQUEST FOR SERVICE
LATA AGGREGATION NODE SERVICE
LIMITED SERVICE OFFERING
NYSERNet, Inc. ("Customer") subscribes to Lata Aggregation Node Service
("Service") provided by New York Telephone Company ("Company") at the prices and
under the terms and conditions specified in this Request for Service.
1. DESCRIPTION OF SERVICE
(a) The Service consists of aggregating, routing and transporting data
communications of Customer's Affiliates (i.e., customers of NYSERNet now and in
the future) utilizing internet protocols (TCP/IP) (such communications
hereinafter referred to as "Customer data traffic") between LATA Aggregation
Nodes provided by the Company. The Company shall provide a minimum of one (1)
Lata Aggregation Node ("N-LAN") in each of the Company's LATAs in New York
State. An N-LAN shall consist of a router located at a Company central office
building and the interfaces and related termination equipment, including
DSU/CSUs, modems and communications servers, to support dialup, private line,
frame relay and FDDI access connections to the router. In addition, the Company
shall provide extended LATA Aggregation Nodes ("X N-LANS") in certain LATAs. An
X N-LAN shall be the same as an N-LAN, except that an X N-LAN may be configured
to support dialup access connections only. An X N-LAN shall receive Customer
data traffic from remote locations within a LATA and route such traffic over
dedicated circuits to the N-LAN located in the same LATA (N-LANS and X N-LANS
hereinafter shall be referred to collectively as "LANS"). The initial
configuration of the Service, including the number and types of access
connection interfaces at each LAN, is set forth in Appendix A. The location of
each LAN is listed in Appendix B.
(b) IntraLATA Customer data traffic shall be routed from the N-LAN to the
appropriate Affiliate location in the same LATA. InterLATA originating Customer
data traffic shall be routed from the N-LAN to an Interexchange Carrier Point
of Presence ("IXC POP") designated by the Customer in each LATA. InterLATA
terminating Customer data traffic shall be received by the N-LAN from the IXC
POP in the terminating LATA and routed to the appropriate Affiliate location in
the terminating LATA.
<PAGE> 2
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(c) The components of the Service in each LATA shall conform to the
Service Performance Criteria to be established pursuant to Section 9 herein.
(d) Customer shall be responsible for obtaining access connections on
behalf of its Affiliates from the Affiliates' locations to the LANS. Customer
shall obtain such connections by subscribing, pursuant to the prices, terms and
conditions of the Company's PSC No. 900 Tariff, to one or more of the Company's
services which are compatible with the initial Service configuration set forth
in Appendix A.
(e) Customer shall be responsible for obtaining access connections from
the N-LANS to the IXC POPs. Customer shall obtain such connections by
subscribing, pursuant to the prices, terms and conditions of the Company's FCC
No. 1 Tariff, to one or more of the Company's services which are compatible with
the initial Service configuration set forth in Appendix A.
(f) Customer represents, to the best of its knowledge and belief, that:
(1) the traffic to be carried from the Affiliates' locations to the LANS will be
at least 90 percent intrastate in nature; and (2) the traffic to be carried from
the N-LANS to the IXC POPs will be at least 10 percent interstate in nature.
(g) The Company shall use its best efforts to purchase routers from
Customer's approved vendor, but only if, in the Company's sole discretion, such
purchase is consistent with the Company's approved purchasing guidelines,
practices and procedures.
2. CUTOVER AND SERVICE PERIOD
(a) Prior to the cutover of Service, the Company shall conduct a Beta Test
of the Service, at no charge to the Customer. The purpose of the Beta Test shall
be to test and evaluate the Service, the access connections from the Service to
Affiliate the IXC POP locations, and the procedures to be followed to implement
Service cutover. Customer shall designate which of its Affiliate locations shall
participate in the Beta Test. Customer and its designated Affiliates shall
cooperate fully with the Company in conducting the Beta Test.
<PAGE> 3
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(b) In order to conduct the Beta Test, the Company shall establish the
following facilities: (1) Beta Test Nodes ("BTNs") at the locations in the New
York Metro and Syracuse LATAs indicated on Appendix B; (2) access connections
from the BTNs to the designated Affiliate locations participating in the Beta
Test; and (3) access connections from the BTNs to the designated IXC POPs
participating in the Beta Test.
(c) Unless the Company's performance is excused by Force Majeure, as
defined in Section 11(a) herein, the Company shall begin the Beta Test in the
third quarter of 1994. The Beta Test shall conclude at a time to be mutually
agreed upon by Customer and the Company.
(d) Upon the mutual agreement of Customer and the Company that the Beta
Test has been successful, the Company shall begin to cutover the Service.
Cutover shall be complete when the Customer and the Company agree that all LANS
are operational.
(e) The target cutover date is November 15, 1994.
(f) Billing shall commence, at 25 percent of the total monthly recurring
charge set forth in Section 3(a) herein, when cutover is complete. Billing
shall increase to 50 percent of the total monthly recurring charge set forth in
Section 3(a) herein 120 days after cutover is complete. Billing shall increase
to 75 percent of the total monthly recurring charge set forth in Section 3(a)
herein 240 days after cutover is complete. Billing shall increase to 100
percent of the total monthly recurring charge set forth in Section 3(a) herein
360 days after cutover is complete.
(g) The Company shall provide the Service to the Customer for a period of
seventy-eight (78) months ("Service Period"). The Service Period shall commence
when billing reaches 100 percent of the total monthly recurring charge set
forth in Section 3(a) herein, as determined in accordance with Section 2(f)
herein.
(h) The Service Period may be extended upon terms and conditions that are
mutually agreeable to Customer and the Company.
<PAGE> 4
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3. PRICES
(a) Customer shall pay for the Service on a monthly recurring basis.
Customer shall pay a monthly recurring charge of $47,725.00 for the Service.
(b) If Customer is obligated to pay the Company a termination charge
pursuant to Section 7(a) herein, then, upon Customer's payment of such
termination charge, Customer thereafter shall pay, in lieu of the monthly
recurring charge quoted in Section 3(a) above, a new monthly recurring charge
equal to the recomputed monthly recurring charge computed in accordance with
Section 7(a) herein.
(c) The monthly recurring charges referred to in Sections 3(a) and 3(b)
above are guaranteed against Company-initiated change during the Service
Period.
(d) In addition to the monthly recurring charges referred to in Sections
3(a) and 3(b) above, Customer shall pay the following charges: (1) applicable
recurring and non-recurring charges for services used to connect Affiliate
locations to LANs and to connect LANs to IXC POPs, pursuant to Sections 1(d)
and 1(e) herein; and (ii) sales and excise taxes and tariff surcharges that
applicable laws and tariffs require Customer to pay.
4. DELAY IN CUTOVER
(a) The Company shall use its best efforts to complete cutover of the
Service by the target cutover date. If cutover of the Service has not been
completed by that date, and the delay is not excused by Force Majeure, as
defined in Section 11(a) herein, then the monthly recurring charge quoted in
Section 3(a) above shall be reduced as follows. For each day after the target
cutover date, up to thirty (30) such days, that cutover of the Service has not
been completed, the monthly recurring charge quoted in Section 3(a) above shall
be reduced, for the first year of the Service Period, by $100.00, up to a
maximum reduction of $3,000.00 per month for the first year of the Service
Period. For each day after the target cutover date from the thirty first (31st)
up to the sixtieth (60th) such day, that cutover of the Service has not been
completed, the monthly recurring charge quoted in Section 3(a) above shall be
reduced, for the first year of the Service Period, by $3,000.00 and the
monthly recurring charge quoted in Section 3(a) above shall be reduced, for the
second year of the Service Period, by $100.00, up to a maximum reduction of
$3,000.00 per month for the second year of the Service Period.
<PAGE> 5
-5-
(b) Except as provided in Section 4(a) above, the monthly recurring charge
shall be as set forth in Section 3(a) herein.
5. ADDITIONS
The monthly recurring charge set forth in Section 3(a) herein is based on
the initial configuration of the Service, including the number and types of
access connection interfaces at each LAN initially requested by Customer, as set
forth in Appendix A. Customer may request that the Company increase the number
of access connection interfaces comprising the Service. Upon receiving such a
request, the Company shall develop proposed prices for such additional access
connection interfaces. The parties shall negotiate in good faith to agree on
mutually acceptable prices for such additional access connection interfaces.
6. CANCELLATION OF SERVICE
If Customer cancels the Service after acceptance of this Request for
Service but before the beginning of the Service Period, then Customer shall
reimburse the Company for the total costs and expenses the Company reasonably
incurred after execution of this Request for Service and prior to the date of
cancellation to provide or to prepare to provide the Service to the Customer,
less the recoverable value, if any, of any facilities obtained by the Company in
providing or in preparing to provide the Service to the Customer.
7. TERMINATION OF SERVICE
(a) If, after commencement of the Service Period, Customer terminates
Service at a LAN, then Customer shall pay the Company a termination charge
computed as follows. The monthly recurring charge for the Service quoted in
Section 3(a) herein shall be recomputed as if the Service Period for the
terminated LAN was scheduled to end when the Customer terminated Service at the
LAN. The average cost of a LAN shall be used to recompute the monthly recurring
charge. The difference between the recomputed monthly recurring charge and the
monthly recurring charge quoted in Section 3(a) herein shall be multiplied by
the number of months between the commencement of the Service Period and the date
when Service at the LAN is terminated to determine the amount of the termination
charge.
<PAGE> 6
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(b) If, after commencement of the Service Period, Customer terminates all
Service, then Customer shall pay to the Company a termination charge computed as
follows. The monthly recurring charge for the Service quoted in Section 3(a)
herein shall be recomputed as if the Customer had originally requested the same
Service for a shorter Service Period ending when the Customer terminated all
Service. The difference between the recomputed monthly recurring charge and the
monthly recurring charge quoted in Section 3(a) herein shall be multiplied by
the number of months between the commencement of the Service Period and the
date when all Service is terminated to obtain the amount of the termination
charge.
(c) For purposes of computing the termination charges described in
Sections 7(a) and 7(b) above, partial months shall be counted as complete
months.
(d) The termination charges described in Sections 7(a) and 7(b) above
shall be due and payable sixty (60) days after the Service or applicable
portion thereof is terminated.
(e) Services which Customer obtains to connect its Affiliate locations to
LANS and to connect LANs to IXC POPs are subject to the termination charge
provisions contained in the Company's PSC No. 900 and FCC No. 1 Tariffs, as
applicable.
8. GENERAL TARIFF
(a) If a state regulatory agency requires the Company to file a general
tariff for the Service, the Company shall use its best efforts to obtain
approval of a general tariff that duplicates, in all material respects, the
features, functions, prices, terms and conditions of the Service offered under
this Request for Service. If a state regulatory agency approves a tariff that
requires the Company to offer, in all material respects, the same or
substantially the same features, functions, prices, terms and conditions of the
Service offered under this Request for Service, then the Service under this
Request for Service shall terminate as required under the Company's PSC No. 911
Tariff (see Appendix C), and Customer thereafter shall subscribe to Service
under the general tariff for the remaining months of the Service Period. In such
a case, a cancellation charge or termination charge pursuant to this Request for
Service shall not apply, and Customer's obligation to pay a cancellation or
termination charge shall be governed by the general tariff. The general tariff
shall be considered to offer, in all material respects, the same or
substantially the same features, functions, prices, terms and conditions of the
Service offered under this Request for
<PAGE> 7
-7-
Service if such tariff duplicates the features, functions, terms and conditions
of the Service offered under this Request for Service and contains
substantially no more or no fewer features and functions than those offered
under this Request for Service, and if the monthly rate for such Service
offered under the general tariff is no more than ten percent (10%) higher than
the monthly rate set forth in Section 3(a) herein.
(b) If such general tariff offers, in all material respects, features,
functions, prices, terms and conditions that are not the same or substantially
the same as those of the Service offered under this Request for Service,
Customer may elect to subscribe to Service under the general tariff for the
remaining months of the Service Period, but Customer shall not be obligated to
do so. If Customer elects to subscribe to Service under the general tariff for
the remaining months of the Service Period, then the Service under this Request
for Service shall terminate, and Customer thereafter shall subscribe to Service
under the general tariff for the remaining months of the Service Period. In such
a case, a cancellation charge or termination charge pursuant to this Request for
Service shall not apply, and Customer's obligation to pay a cancellation or
termination charge shall be governed by the general tariff.
9. SERVICE PERFORMANCE CRITERIA
Both parties shall negotiate in good faith to establish Service
Performance Criteria by which service performance will be measured. The Company
shall work in partnership with Customer to ensure that the objectives of both
parties are met. Upon final acceptance by both parties, the Service Performance
Criteria as will be stated in Appendix D shall then become part of this Request
for Service. The Company shall provide service in accordance with the accepted
Criteria. Both parties shall negotiate in good faith to establish and accept
the Service Performance Criteria by September 1, 1994. Should the parties not
agree on the Service Performance Criteria by September 1, 1994, then a mutually
agreeable date shall be selected. Should the parties still not be able to agree
on the Service Performance Criteria, either party may terminate this Request
for Service upon written notice to the other party thirty (30) days prior to
termination.
<PAGE> 8
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10. CONFIDENTIAL INFORMATION
Customer and the Company acknowledge that this Request for Service contains
commercially confidential information that may be considered proprietary by
either or both parties, and the parties agree to limit distribution of the
Request for Service to those individuals in their respective organizations
with a need to know its contents. In addition, the parties agree not to
disclose the specific prices, terms, or conditions applicable under this
Request for Service to any third party except Customers' Affiliates and the
Company's subcontractors, if any, and except pursuant to regulatory review or
judicial process. The parties further agree to seek commercial confidential
status for the Request for Service with any regulatory or judicial body with
which the Request for Service must be filed to the extent such a designation
may be secured. Nothing in this Section shall prevent the parties from
summarizing, in a general manner, the contents of this Request for Service
for purposes of required disclosure statements, for promotional purposes, for
advertising, or for media announcements, provided that the specific prices,
terms, and conditions are not disclosed.
11. MISCELLANEOUS
(a) FORCE MAJEURE. The Company shall not be liable to Customer or any of
its Affiliates for any delay or failure to perform under this Request for
Service to the extent such failure or delay is due to a Force Majeure
condition. "Force Majeure" means acts of God, labor disputes, riots or other
public disturbances, regulatory or governmental action or inaction, power
failures, fires, floods or other natural disasters, unavailability of
rights-of-way, or any other cause beyond the Company's reasonable control.
(b) ASSIGNMENT. Neither party may assign rights and obligations under this
Request for Service without the written consent of the other party, which
consent shall not be unreasonably withheld.
(c) CHOICE OF LAW. The construction, interpretation, and performance of
this Request for Service shall be governed by the laws of the State of New
York.
(d) CONTINGENCY. This Request for Service is subject to change,
modification, or cancellation as may be required by state or federal
regulatory authority in the exercise of its lawful jurisdiction.
<PAGE> 9
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(e) Severability. If any of the provisions of this Request for Service
shall be invalid or unenforceable, such invalidity or unenforceability shall
not invalidate or render unenforceable the entire Request for Service, but
rather the entire Request for Service shall be construed as if not containing
the particular invalid or unenforceable provision or provisions.
(f) Non-Waiver. No course of dealing or failure of any party to strictly
enforce any term, right, or condition of this Request for Service shall be
construed as a waiver of such term, right, or condition.
(g) Entire Agreement. Except with reference to the Company's applicable
Tariffs, this Request for Service supersedes all proposals and negotiations
between the parties, whether oral or written, and constitutes the entire
agreement between the parties. It may be amended only by an instrument in
writing signed by the parties.
(h) Counterparts. This Request for Service may be executed in duplicate
originals, which together shall constitute the single Request for Service.
(i) Notices. Any notice required or permitted to be given by any party
to the other party shall be delivered by hand or sent by certified or registered
mail, return receipt requested, at the addresses stated below, and shall be
deemed to have been given when hand-delivered or when deposited in the United
States mail with postage prepaid.
NYSERNet, Inc.
Executive Director
200 Elwood Davis Road
Liverpool, NY 13088
NEW YORK TELEPHONE COMPANY
NYSERNet Account Manager
300 East Washington Street
Syracuse, NY 13202
General Attorney-Regulatory
1095 Avenue of the Americas
38th Floor
New York, NY 10036
<PAGE> 10
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12. PSC JURISDICTION
The Service is subject to the jurisdiction of the New York State Public
Service Commission, and is offered and provided under the standard terms and
conditions of the Company's PSC No. 911 Tariff for Limited Service Offerings. A
copy of such Tariff, which may be changed from time-to-time, is attached as
Appendix C. In addition, the Service shall be offered and provided under the
standard terms and conditions of Section 1, General Rules and Regulations, of
the Company's PSC No. 900 Tariff.
If this Request for Service is acceptable to the Customer, please sign in the
space provided below. If the Customer does not accept this Request for Service
by September 1, 1994, it shall be deemed withdrawn.
NYSERNet, Inc. NEW YORK TELEPHONE COMPANY
Signature: Signature:
---------------------- ----------------------
Typed Name: Richard Mandelbaum Typed Name:
--------------------- ---------------------
Title: Title:
-------------------------- --------------------------
Date: Date:
--------------------------- ---------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated January 29, 1999, except for Note L as to
which the date is April 12, 1999, accompanying the financial statements and
schedule of AppliedTheory Corporation and Predecessor contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the captions "Selected Financial Data" and
"Experts."
GRANT THORNTON LLP
New York, New York
April 28, 1999
