<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-72133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($.01 par value).................... $77,625,000 $21,580
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares of common stock that the underwriters have the option to
purchase to cover any over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
(3) Of this amount, $15,985 was previously paid upon the initial filing of the
registration statement.
------------------------
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 12, 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. We have applied to have our common stock 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.
We integrate these 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.
As of December 31, 1998, we had over 600 customers in a wide range of
industries.
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 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
<PAGE> 5
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.
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
2
<PAGE> 6
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.................. 20,470,179 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 at March 31, 1999. Excludes
3,112,271 shares of common stock reserved for issuance upon exercise of
outstanding options under our stock option plans as of that date at a
weighted average exercise price of $2.01 per share.
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. Such control could
discourage others from initiating potential merger, takeover or other change in
control transactions. As a consequence, our business could be hurt. IXC, Grumman
Hill and NYSERNet.net each have one representative on our board of directors. In
addition, three of our directors and/or executive officers are also directors of
NYSERNet.net and NYSERNet.org, 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 SUCH 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
20,470,179 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 15,970,179 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 such 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 will be exercised. 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>
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<PAGE> 33
- ---------------
(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.
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.
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<PAGE> 34
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 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
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<PAGE> 35
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.
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 will 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.
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<PAGE> 36
In the case of our Web hosting services, the worst case scenario would be
the inability to access the Web sites we manage. A more likely risk would be
that our service would be unavailable to some sites for time periods of less
than one week. In such cases we may give service credits to our customers whose
service is interrupted.
Our Web enabling solutions applications may experience problems such as a
customer data feed not being Year 2000 ready or customers failing to make
necessary changes. In such a case our technical support and operations groups
would help customers fix these problems to the best of our ability.
Contingency Plans. If our Internet access and value added services are not
Year 2000 ready, we are prepared to move customers' local loop access services
to other providers or to offer service credits. We do not currently have any
information that would cause us to believe that any of our third party vendors
will experience substantial Year 2000 problems, however, if during the course of
our Year 2000 testing we find that any particular vendor is being unresponsive,
we will attempt to locate a replacement for that vendor. Additionally, we will
communicate with our customers throughout the year in order to alert them to
third party issues that may affect them.
In the case of our Web hosting services, we 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 certain 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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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 certain 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 such 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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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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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
December 31, 1998, no borrowings were 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.
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(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 ($100,000 in the
aggregate) in connection with the commencement of Mr. Greenbaum's
employment in 1997 that was paid in 1998.
OPTION GRANTS IN LAST FISCAL YEAR. The following table summarizes
information with respect to options to purchase our common stock granted to the
named executive officers during 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS(1) APPRECIATION FOR OPTION TERM(2)
------------------------------------------------------------------ ------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED TO OR BASE MARKET PRICE
UNDERLYING EMPLOYEES IN PRICE ON DATE OF EXPIRATION
NAME OPTIONS FISCAL YEAR ($/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 certain
performance goals established by the board of directors in its discretion.
Dr. Mandelbaum's employment agreement is for an initial five-year term. It
automatically renews for consecutive one-year periods unless either we or Dr.
Mandelbaum deliver a notice of non-renewal at least one year before termination
of the initial five-year period. The employment agreements with Messrs. Luckett,
Martin, Oros and Buckel are for three-year terms.
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
- 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.
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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 certain 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. 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 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.
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The provisions of Mr. Helft's agreement 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 March 31, 1999,
under our 1996 option plan we had options outstanding for the purchase of
approximately 3,112,271 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;
- 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.
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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.
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. 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 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
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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. These shares will be any combination of newly issued
shares reserved for issuance under the plan, treasury shares and shares
purchased on the open market.
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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 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, unless otherwise determined by
the board, will not bear interest. On the last day of each applicable six month
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 date
of this offering or 24 months before the day of the purchase, whichever
date is later; 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 March 31, 1999, 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 March 31, 1999 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
such person, but not deemed outstanding for the purpose of calculating the
percentage owned by any other person listed. As of March 31, 1999, we had
15,970,179 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 by NYSERNet.net as
described under "Certain Transactions -- Stock Purchase Agreement." Does
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<PAGE> 79
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 been granted to Grumman Hill Investments III,
LP under an irrevocable proxy as described under
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<PAGE> 80
"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 20,470,179 shares of common stock will be
outstanding, based on the number of shares of common stock outstanding on March
31, 1999. 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 March 31, 1999, there were approximately 44 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 such 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 20,470,179 shares of our
common stock issued and outstanding, based on the number of shares of our common
stock outstanding as of March 31, 1999. 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
15,970,179 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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<PAGE> 86
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. We have applied to have our common
stock listed 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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<PAGE> 89
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..................... 13,080 150,039
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 6,581,730
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............ 129,986 475 (130,461)
Preferred stock dividends......... (210,000)
Net loss for the year............. (6,882,571)
---------- -------- ------ -------- ---------- ------------
Balance, December 31, 1998........ 15,039,488 $150,039 54,848 $ 548 $6,581,730 $(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
As of March 31, 1999, 4,495,179 shares of common stock have been issued 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. As of March 31, 1999, options to purchase
up to an aggregate of 8,036,355 shares of common stock had been granted to
employees of AppliedTheory, of which options to purchase up to an aggregate of
3,112,271 shares of common stock remained outstanding on that date at a weighted
average exercise price of $2.01 per share.
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.+
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.+
</TABLE>
II-3
<PAGE> 116
<TABLE>
<C> <C> <S>
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,
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.
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.
- ---------------
* To be filed by amendment.
+ Previously filed.
II-4
<PAGE> 117
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. 2 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Great Neck, New
York, on April 12, 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. 2 to its Registration Statement has been signed by the
following persons on April 12, 1999 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, Chief April 12, 1999
- --------------------------------------------------- Executive Officer and Director
Richard Mandelbaum (Principal Executive Officer)
/s/ DAVID A. BUCKEL Vice President and Chief April 12, 1999
- --------------------------------------------------- Financial Officer (Principal
David A. Buckel Financial and Accounting Officer)
* Director April 12, 1999
- ---------------------------------------------------
James Guthrie
* Director April 12, 1999
- ---------------------------------------------------
Shelley A. Harrison
* Director April 12, 1999
- ---------------------------------------------------
James T. Kelsey
* Director April 12, 1999
- ---------------------------------------------------
John J. Pendray
* Director April 12, 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,
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.
</TABLE>
<PAGE> 122
<TABLE>
<C> <C> <S>
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.
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>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 2.01
FORM OF
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of , 1999 (the
"Agreement"), is made by and between AppliedTheory Corporation (formerly
AppliedTheory Inc.), a Delaware corporation ("AppliedTheory"), and AppliedTheory
Communications, Inc. (formerly NYSERNet.com, Inc.), a New York corporation
("AppliedTheory Communications").
WHEREAS, AppliedTheory and AppliedTheory Communications have
each determined that it is in the best interests of their respective
stockholders for AppliedTheory Communications to merge with and into
AppliedTheory upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the respective Boards of Directors of AppliedTheory
and AppliedTheory Communications have each approved this Agreement and the
consummation of the transactions contemplated hereby and approved the execution
and delivery of this Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and
agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I.
THE MERGER
1.1 MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2), AppliedTheory
Communications will be merged with and into AppliedTheory and the separate
corporate existence of AppliedTheory Communications will thereupon cease (the
"Merger") in accordance with the applicable provisions of the New York Business
Corporation Law ("BCL"), including, without limitation, Sections 905 and 907
thereof, and the Delaware General Corporation Law ("DGCL").
1.2 EFFECTIVE TIME. As soon as practicable after satisfaction
or waiver of all conditions to the Merger, AppliedTheory and AppliedTheory
Communications shall cause a certificate of ownership and merger complying with
the requirements of the DGCL (the "Delaware Certificate of Merger") to be filed
with the Secretary of State of the State of Delaware and a certificate of merger
complying with the requirements of the BCL (the "New York Certificate of
Merger") to be filed with the Secretary of State of the State of New York. The
Merger will become effective at the time of the later of the following to occur:
(a) the filing of the Delaware Certificate of Merger with the Secretary of State
of the State of Delaware, (b) the filing of the New York Certificate of Merger
with Secretary of State of the State of New York, or (c) such later time as
shall be specified in such filings (the "Effective Time").
<PAGE> 2
1.3 EFFECT OF MERGER. The Merger will have the effects
specified in the BCL, the DGCL and this Agreement. Without limiting the
generality of the foregoing, AppliedTheory will be the surviving corporation in
the Merger (sometimes hereinafter referred to as the "Surviving Corporation")
and will continue to be governed by the laws of the State of Delaware, and the
separate corporate existence of AppliedTheory and all of its rights, privileges,
powers and franchises, public as well as private, and all its debts, liabilities
and duties as a corporation organized under the DGCL, will continue unaffected
by the Merger.
1.4 CERTIFICATE OF INCORPORATION AND BY-LAWS. The Certificate
of Incorporation and By-laws of AppliedTheory in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation and By-laws of the
Surviving Corporation, until amended in accordance with their terms and the
DGCL.
1.5 DIRECTORS AND OFFICERS OF SURVIVING CORPORATION. The
directors and officers of AppliedTheory immediately prior to the Effective Time
will be the directors and officers, respectively, of the Surviving Corporation,
from and after the Effective Time, until their successors have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with the terms of the Surviving Corporation's Certificate of
Incorporation and By-laws and the DGCL.
1.6 ADDITIONAL ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any further
deeds, assignments or assurances in law or any other acts are necessary or
desirable to (i) vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of AppliedTheory Communications, or (ii) otherwise
carry out the purposes of this Agreement, AppliedTheory Communications and its
officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
deeds, assignments or assurances in law or any other acts as are necessary or
desirable to (a) vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of AppliedTheory Communications and (b) otherwise
carry out the purposes of this Agreement, and the officers and directors of the
Surviving Corporation are authorized in the name of AppliedTheory Communications
or otherwise to take any and all such action.
ARTICLE II.
CONVERSION OF SHARES
2.1 CONVERSION OF SHARES. At the Effective Time:
(a) each then outstanding share of voting common stock, par
value $.01 per share, and non-voting common stock, par value $.01 per
share, of AppliedTheory Communications (collectively, "AppliedTheory
Communications
2
<PAGE> 3
Common Stock") shall by virtue of the Merger, and without any action on
the part of AppliedTheory Communications, AppliedTheory or the holder
thereof, be converted into such number of shares of legally and validly
issued, fully-paid and nonassessable common stock, par value $.01 per
share, of AppliedTheory ("AppliedTheory Common Stock"), as may be
determined by the Capital Formation Committee of the Board of Directors
of AppliedTheory Communications (such committee consisting of Richard
Mandelbaum, Shelley A. Harrison and James T. Kelsey) (the "Capital
Formation Committee") after consultation with the representatives of
the underwriters of the initial public offering of AppliedTheory
contemplated by the Registration Statement on Form S-1 (Registration
No. 333-72133) filed by AppliedTheory with the Securities and Exchange
Commission (the "Initial Public Offering") (provided, that each holder
of AppliedTheory Communications Common Stock immediately prior to the
Effective Time shall have his or her shares converted into such number
of shares of AppliedTheory Common Stock representing the same
percentage of the total outstanding AppliedTheory Common Stock
immediately following the Effective Time (without giving effect to the
Initial Public Offering) as the percentage of the total outstanding
AppliedTheory Communications Common Stock held by such holder
immediately prior to the Effective Time);
(b) each then outstanding share of Preferred Stock, par value
$.01 per share, of AppliedTheory Communications ("AppliedTheory
Communications Preferred Stock") shall by virtue of the Merger, and
without any action on the part of AppliedTheory Communications,
AppliedTheory or the holder thereof, be converted into such number of
shares of legally and validly issued, fully-paid and nonassessable
Preferred Stock, par value $.01 per share, of AppliedTheory
("AppliedTheory Preferred Stock"), as may be determined by the Capital
Formation Committee after consultation with the representatives of the
underwriters of the Initial Public Offering (provided, that each holder
of AppliedTheory Communications Preferred Stock immediately prior to
the Effective Time shall have his or her shares converted into such
number of shares of AppliedTheory Preferred Stock representing the same
percentage of the total outstanding AppliedTheory Preferred Stock
immediately following the Effective Time as the percentage of the total
outstanding AppliedTheory Communications Preferred Stock held by such
holder immediately prior to the Effective Time);
(c) each share of AppliedTheory Common Stock issued and
outstanding immediately prior to the Effective Time and owned by
AppliedTheory Communications will be cancelled and retired.
2.2 ASSUMPTION OF OPTIONS.
Each option or other right, whether vested before or after the
Effective Date, to purchase or otherwise acquire shares of
AppliedTheory Communications Common Stock pursuant to stock option or
other stock-based plans of AppliedTheory Communications and each other
similar right to acquire shares of
3
<PAGE> 4
AppliedTheory Communications Common Stock, in each case granted and
outstanding immediately prior to the Effective Time, shall, by virtue
of the Merger, and without any action on the part of the holder of such
option or right, be converted into and become a right to purchase or
otherwise acquire such number of shares of AppliedTheory Common Stock
at a price per share that, in the case of both the number of shares and
price per share, gives effect to the conversion rate with respect to
AppliedTheory Communications Common Stock as determined in accordance
with Section 2.1(a). All other terms and conditions applicable to such
options or other rights immediately prior to the Effective Time shall
remain the same.
2.3 CERTIFICATES.
(a) After the Effective Time, any certificate theretofore
evidencing outstanding shares of AppliedTheory Communications Common
Stock shall, without any action on the part of the holder thereof,
represent the number of shares of AppliedTheory Common Stock into which
such AppliedTheory Communications Common Stock shall have been
converted as provided in Section 2.1(a).
(b) After the Effective Time, any certificate theretofore
evidencing outstanding shares of any series of AppliedTheory
Communications Preferred Stock shall, without any action on the part of
the holder thereof, represent the number of shares of AppliedTheory
Preferred Stock into which such AppliedTheory Communications Preferred
Stock shall have been converted as provided in Section 2.1(b).
(c) If, after the Effective Time, certificates formerly
representing shares of AppliedTheory Communications Common Stock or
AppliedTheory Communications Preferred Stock are surrendered to the
Surviving Corporation for exchange or transfer, they shall be cancelled
and certificates representing shares of AppliedTheory Common Stock or
AppliedTheory Preferred Stock, as the case may be, shall be issued to
the holder or transferee thereof, as the case may be.
ARTICLE III.
CONDITIONS
3.1 SHAREHOLDER APPROVAL.
Consummation of the Merger is subject to the satisfaction at
or prior to the Effective Time of the Merger of the following condition:
This Agreement and the Merger shall have been adopted and
approved by: (i) the affirmative vote of two-thirds of the votes of the
shares of AppliedTheory Communications Common Stock (both voting and
non-voting) and AppliedTheory Communications Preferred Stock entitled
to vote thereon, voting
4
<PAGE> 5
together as a single class, (ii) the affirmative vote of a majority of
the votes of the shares of AppliedTheory Communications Common Stock
(both voting and non-voting) entitled to vote thereon, voting
separately as a class, and (iii) the affirmative vote of a majority of
the votes of the shares of AppliedTheory Communications Preferred Stock
entitled to vote thereon, voting separately as a class. This Agreement
and the Merger shall also have been adopted and approved by
AppliedTheory Communications as the holder of all the outstanding
shares of AppliedTheory Common Stock prior to the Effective Time of the
Merger.
ARTICLE IV.
TERMINATION
This Agreement shall be terminated and abandoned without
further action by the parties hereto in the event that one or more of the Boards
of Directors of AppliedTheory or AppliedTheory Communications by requisite
action deems it advisable to terminate and abandon this Agreement, and in such
event this Agreement shall have no further force or effect and there shall be no
liability on the part of the parties hereto.
ARTICLE V.
MISCELLANEOUS
5.1 DESIGNATION AND NUMBER OF OUTSTANDING SHARES.
AppliedTheory Communications.
<TABLE>
<CAPTION>
Designation of Shares Shares
Class Authorized Outstanding(1)
------------------------ ---------- --------------
<S> <C> <C>
Voting Common Stock, par 25,000,000 10,551,745
value $.01 per share
Non-Voting Common Stock, 5,000,000 54,851
par value $.01 per share
Preferred Stock, par value 75,000 15,000
$.01 per share
</TABLE>
- ------------------------------------
(1) Based on number of shares outstanding as of January 31, 1999. Outstanding
shares of Voting Common Stock and Non-Voting Common Stock of AppliedTheory
Communications are subject to increase in the event of the exercise of
outstanding stock options prior to the Effective Time. No outstanding shares of
Voting Common Stock, Non-Voting Common Stock or Preferred Stock of AppliedTheory
Communications are owned by AppliedTheory.
5
<PAGE> 6
AppliedTheory.
<TABLE>
<CAPTION>
Designation of Shares Shares
Class Authorized Outstanding(1)
------------------------ ---------- --------------
<S> <C> <C>
Common Stock, par value 60,000,000 100
$.01 per share
Preferred Stock, par value 1,000,000 0
$.01 per share
</TABLE>
- ------------------------------------
(1) Based on number of shares outstanding as of January 31, 1999. AppliedTheory
owns none of its outstanding shares of Common Stock.
5.2 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of
such counterparts together shall constitute one and the same
instrument.
5.3 AMENDMENTS. Subject to applicable law, and except as
otherwise provided herein, this Agreement may be amended, modified or
supplemented only by written agreement of AppliedTheory and
AppliedTheory Communications or by their respective officers thereunto
duly authorized, at any time prior to the Effective Date.
5.4 GOVERNING LAW. This Merger Agreement shall be construed in
accordance with the laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State.
6
<PAGE> 7
IN WITNESS WHEREOF, each undersigned corporation has caused
this Agreement and Plan of Merger to be executed as of the date first written
above by a duly authorized officer.
AppliedTheory Corporation,
a Delaware corporation
By: _________________________
Richard Mandelbaum
Chairman of the Board and
Chief Executive Officer
Attest:
_________________________
David A. Buckel
Vice President and Chief Financial
Officer and Assistant Secretary
(Corporate Seal)
AppliedTheory Communications, Inc., a New York
corporation
By: _________________________
Richard Mandelbaum
Chairman of the Board and
Chief Executive Officer
Attest:
_________________________
David A. Buckel
Vice President and Chief Financial
Officer and Assistant Secretary
(Corporate Seal)
7
<PAGE> 1
Exhibit 3.01
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
APPLIEDTHEORY CORPORATION
PURSUANT TO SECTIONS 242 AND 245 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
AppliedTheory Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
First: The name of the Corporation is AppliedTheory Corporation.
Second: The name under which the Corporation was originally
incorporated was AppliedTheory Inc.
Third: The Corporation was initially incorporated and its Certificate
of Incorporation was initially filed in the office of the Secretary of State of
the State of Delaware on January 28, 1999.
Fourth: The Board of Directors of the Corporation duly adopted a
resolution pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware (the "DGCL") to adopt an Amended and Restated Certificate
of Incorporation for the Corporation and to adopt such amendments to the
Corporation's Certificate as arise from such Amended and Restated Certificate of
Incorporation.
Fifth: The Sole Stockholder of the Corporation, by written consent,
duly adopted this Amended and Restated Certificate of Incorporation in
accordance with Sections 228, 242 and 245 of the DGCL.
The Amended and Restated Certificate of Incorporation shall read as follows:
ARTICLE 1. The name of the corporation is APPLIEDTHEORY CORPORATION (the
"Corporation").
ARTICLE 2. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE 3. The nature of the business and the purposes to be conducted and
promoted by the Corporation are to conduct any lawful business, to promote any
lawful purpose and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware (the "DGCL").
<PAGE> 2
ARTICLE 4. The aggregate number of shares of all classes of stock which the
Corporation has authority to issue is 91,000,000 shares, consisting of (A)
90,000,000 shares of Common Stock, par value $.01 per share ("Common Stock"),
and (B) 1,000,000 shares of Preferred Stock, par value $.01 per share
("undesignated Preferred Stock") (all Preferred Stock, whether designated or
undesignated shall be collectively referred to as "Preferred Stock"), which
shall be undesignated subject to designation and having such rights and
preferences as set forth in a resolution adopted by the Board of Directors of
the Corporation in accordance with the DGCL.
The designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof in respect of the Common
and Preferred Stock are as follows:
A. COMMON STOCK
1. Rights.
Each share of Common Stock issued and outstanding shall be identical in
all respects one with the other, and no dividends shall be paid on any shares of
Common Stock unless the same dividend is paid on all shares of Common Stock
outstanding at the time of such payment. Except for and subject to those rights
expressly granted to the holders of the Preferred Stock, or except as may be
provided by the laws of the State of Delaware, the holders of Common Stock shall
have exclusively all other rights of stockholders including, but not by way of
limitation, (i) the right to receive dividends, when and as declared by the
Board of Directors of the Corporation out of assets lawfully available therefor,
and (ii) in the event of any distribution of assets upon liquidation,
dissolution or winding-up of the Corporation or otherwise, the right to receive
ratably and equally all the assets and funds of the Corporation remaining after
the payment to the holders of the Preferred Stock of the specific amounts which
they are entitled to receive upon such liquidation, dissolution or winding-up of
the Corporation or otherwise.
B. UNDESIGNATED PREFERRED STOCK
The Board of Directors is authorized by duly adopted resolution or
resolutions, subject to limitations prescribed by law and the provisions of this
Article 4, to provide for the issuance of the shares of Preferred Stock in one
or more additional series by filing a certificate of designation pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof.
The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
1. The number of shares constituting that series and the distinctive
designation of that series;
2
<PAGE> 3
2. The dividend rate on the shares of that series, whether dividends
shall 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 that series;
3. Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
4. Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
5. Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and
different redemption dates;
6. Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
7. The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series; and
8. Any other relative rights, preferences and limitations of that
series.
ARTICLE 5.
1. The directors of the Corporation, other than directors elected by one or more
series of Preferred Stock, shall be divided into 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, provided that directors initially designated as Class I
directors shall serve for a term ending on the date 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. Notwithstanding the
foregoing, each director shall hold office until such director's successor shall
have been duly elected and qualified or until such director's earlier death,
resignation, disqualification or removal.
2. 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 of, or a written consent executed by, the holders of not less than 75% of
the total voting power of all
3
<PAGE> 4
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.
3. If the authorized number of directors (other than directors elected by one or
more series of Preferred Stock is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, but in no event will a decrease in the number
of directors shorten the term of any incumbent director. Vacancies on the Board
of Directors resulting from death, resignation, removal or otherwise and newly
created directorships resulting from any increase in the number of directors
shall be filled (other than directors elected by one or more series of Preferred
Stock) in accordance with the Bylaws of the Corporation, and each director so
elected shall hold office for a term that shall coincide with the remaining term
of the class to which such director shall have been elected.
4. 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 this Article 5 unless otherwise
provided for in the certificate of designation of such series.
5. Elections of directors need not be by written ballot unless required by the
Bylaws of the Corporation.
6. The provisions of this Article 5 shall not be amended or repealed, nor shall
any provision of this Amended and Restated Certificate of Incorporation be
adopted that is inconsistent with this Article, unless such action shall have
been approved by the 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.
ARTICLE 6. In furtherance and not in limitation of the powers conferred upon the
Board of Directors by law, the Board of Directors shall have the power to make,
adopt, alter, amend and repeal from time to time the Bylaws of the Corporation
subject to the right of the stockholders entitled to vote with respect thereto
to alter, amend and repeal Bylaws made by the Board of Directors.
ARTICLE 7. A director of the Corporation shall not be personally liable to the
Corporation or to its stockholders for monetary damages for breach of fiduciary
duty as a director of the Corporation, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or to its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derives any improper
personal benefit. If, after approval of this Article by the stockholders of the
Corporation, the DGCL is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent permitted
by the DGCL, as so amended. Any repeal or modification of this Article by the
stockholders of the Corporation shall not
4
<PAGE> 5
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE 8. 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 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 9. Unless otherwise provided in the Amended and Restated Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed by statute or this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
5
<PAGE> 6
IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of
_______, 1999 and acknowledge the same to be my act and deed.
APPLIEDTHEORY CORPORATION
By:
-----------------------------------
Richard Mandelbaum
Chairman of the Board and
Chief Executive Officer
Attest:
- -----------------------
David A. Buckel
Assistant Secretary
6
<PAGE> 7
CERTIFICATE OF DESIGNATION
of
14% CUMULATIVE PREFERRED STOCK
of
APPLIEDTHEORY CORPORATION
------------------------------
pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------
APPLIEDTHEORY CORPORATION, a Delaware corporation (the "Corporation"),
hereby certifies that:
1. The Certificate of Incorporation, as amended, of the Corporation
(the "Certificate of Incorporation") fixes the total number of shares of all
classes of capital stock that the Corporation shall have the authority to issue
at ninety million (90,000,000) shares of common stock, par value $.01 per share
("Common Stock"), and one million (1,000,000) shares of preferred stock, par
value $0.01 per share ("Preferred Stock").
2. The Certificate of Incorporation expressly grants to the Board of
Directors of the Corporation (the "Board of Directors") authority to provide for
the issuance of the shares of Preferred Stock in series, and to establish from
time to time the number of shares to be included in each such series and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
3. Pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation, the Board of Directors, by action duly taken
on March 8, 1999, adopted resolutions that provide for a series of Preferred
Stock as follows:
RESOLVED, that an issue of a series of Preferred Stock is hereby
provided for, and the number of shares to be included in such series is
established, and the designation, powers, preference and rights, and
qualifications, limitations or restrictions thereof, of such series are fixed,
hereby as follows:
Section 1. Definitions. As used in this Certificate of Designation:
(a) the term "Capital Stock" shall mean and include Preferred
Stock, Common Stock and all (if any) other Junior Stock;
<PAGE> 8
(b) the term "Distributable Assets" shall mean, in relation to
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation at any particular time, all of the property and assets of the
Corporation (whether from capital, surplus or earnings) available for
distribution to the Corporation's shareholders upon such liquidation,
dissolution or winding up of the Corporation, calculated as though all
subsidiaries of the Corporation had been liquidated and their assets distributed
to the Corporation;
(c) the term "Junior Stock" shall mean and include Common
Stock and any other capital stock of the Corporation of any class or of any
series of any class which is junior to Preferred Stock as to the payment of
dividends or as to distributions upon dissolution, liquidation, winding up or
redemption;
(d) the term "Liquidation Value" shall mean $100.00 per share
of Preferred Stock (subject to proportionate adjustment in the event of any
stock split of, stock dividend on, or reclassification or similar event
involving the Preferred Stock).
(e) Unless the context otherwise requires, the term
"distribution" shall mean (i) the declaration, payment or transfer of cash or
other property of the Corporation without consideration on or in respect of any
Capital Stock of the Corporation, whether by way of dividend or otherwise, or
(ii) the purchase or redemption of shares of the Capital Stock of the
Corporation for cash or property of the Corporation, including in the case of
each of clauses (i) and (ii), any such declaration, payment, transfer, purchase
or redemption by a subsidiary of the Corporation. Securities issued by the
Corporation shall not be deemed property of the Corporation.
Section 2. Dividends on Preferred Stock.
2.01 General Dividend Obligation. The Corporation shall pay to
the holders of the Preferred Stock out of the assets of the Corporation at any
time available for the payment of dividends under the provisions of the Delaware
General Corporation Law, preferential dividends at the times and in the amounts
provided for in this Section 2; provided, however, that the Board of Directors
of the Corporation may elect not to pay any such dividend, whether or not the
Corporation is legally entitled to pay such dividend, and instead to accrue such
dividend until such time as the Board of Directors of the Corporation shall
elect to pay the same; provided, however, that any such dividend so accrued
shall, in any event, be payable upon redemption of the Preferred Stock in
accordance with the provisions of Section 3.05.
2.02 Accrual of Dividends. Dividends on each share of
Preferred Stock shall be cumulative from January 1, 1997, whether or not at the
time such dividend shall accrue or become due or at any other time there shall
be profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Dividends shall accrue on each share of Preferred Stock
(at the rate and in the manner prescribed by Sections 2.02, 2.03 and 2.04) from
and including January 1, 1997 to and including the date on which such share
shall have been redeemed or otherwise acquired in accordance with the provisions
of Section 3.
2
<PAGE> 9
2.03 Payment of Dividends. Dividends shall accrue on each
share of Preferred Stock at the rate of 14% per annum of the Liquidation Value.
Dividends shall be payable on Preferred Stock on the first day of each January,
April, July and October, beginning April 1, 1999, and each such day is herein
called a "Dividend Payment Date." On each Dividend Payment Date all dividends
which shall have accrued on each share of Preferred Stock then outstanding
during the calendar quarter ending upon such Dividend Payment Date shall be
deemed to become "due" for all purposes of this Section regardless of whether
the Corporation shall be able or legally permitted to pay such dividend on such
Dividend Payment Date. If any dividend on any share of Preferred Stock shall for
any reason not be paid at the time such dividend shall become due, then such
dividend in arrears shall be paid as soon as payments of same shall be
permissible under the provisions of the Delaware General Corporation Law. Until
such dividend in arrears is paid, dividends shall continue to accrue on each
share of Preferred Stock, but the percentage rate expressed herein shall be
applied to the Liquidation Value thereof plus all dividends in arrears thereon
(including dividends computed pursuant to this sentence).
2.04 Distribution of Partial Dividend Payments. If at any time
the Corporation shall pay less than the total amount of dividends due on
outstanding Preferred Stock at the time of such payment, such payment shall be
distributed among the holders of Preferred Stock so that an equal amount shall
be paid with respect to each outstanding share of Preferred Stock.
Section 3. Redemption.
3.01 Optional Redemption. All or any Section of the Preferred
Stock may be redeemed by the Corporation at any time and from time to time on or
after December 31, 2001, by resolution of its Board of Directors, in the manner
prescribed in this Section 3, provided that in any redemption under this Section
3.01 the Corporation shall redeem not less than the lesser of 1,000 shares of
Preferred Stock or the number of shares of Preferred Stock then outstanding.
3.02 Required Redemption. At any time on or after December 31,
2001, any holder of Preferred Stock may request, by mailing a notice to the
Corporation certified or registered mail, return receipt requested, that the
Corporation redeem some or all of the shares of Preferred Stock owned by such
Holder, and the Corporation shall redeem such Preferred Stock within sixty (60)
days of such request. Redemptions under this Section 3.02 shall not cause any
forfeiture of dividends accrued on any share of Preferred Stock from the
preceding Dividend Payment Date to the redemption date. If the funds of the
Corporation legally available for redemption of shares are insufficient to
redeem the shares of such Preferred Stock tendered for redemption, funds to the
extent legally available for such purpose shall be used to redeem the number of
shares of Preferred Stock which may be redeemed. At any time thereafter when
additional funds of the Corporation are legally applicable to the redemption of
shares, such funds shall be immediately used to redeem the balance of the shares
of Preferred Stock requested to be redeemed. If at any time more than one holder
of Preferred Stock has requested redemption of some or all of the shares of
Preferred Stock held by such holder, and the Corporation has insufficient funds
legally available for redemption of Preferred Stock to redeem all of the shares
of Preferred Stock which have then been tendered for redemption, then the funds
which the Corporation then has legally available for such purpose shall be used
to redeem the number of
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<PAGE> 10
shares of Preferred Stock which may be redeemed from the holders who have
requested redemption, pro rata to the number of shares as to which they have
requested redemption.
3.03 Redemption Notice. Before making any redemption pursuant
to Section 3.01, the Corporation shall mail by certified or registered mail,
return receipt requested, to each record holder of any Preferred Stock at the
address shown on the Corporation's records, a written notice (a "Redemption
Notice"), stating: (i) the number of shares of Preferred Stock held of record by
such holder which the Corporation proposes to redeem; (ii) the date (herein
called the "Redemption Date") on which the Corporation proposes to pay the
Redemption Price for the shares to be redeemed; (iii) the Redemption Price which
under this Section 3 is to be paid for each share repurchased; and (iv) the
place at which the shares to be redeemed may be surrendered in exchange for the
Redemption Price for such shares. Upon the mailing of a Redemption Notice with
respect to any optional repurchase which the Corporation may choose to make
pursuant to rights granted in Section 3.01, the Corporation shall become
obligated to redeem the Preferred Stock specified in such notice on the date
specified in such notice as the Redemption Date. Each Redemption Notice under
Section 3.01 shall be mailed at least 10 days before the Redemption Date,
provided that if the Corporation fails to pay the Redemption Price on such date
(for a reason other than a holder's failure to deposit Preferred Share
certificates pursuant to Section 3.05(c)), the Redemption Date shall be the date
on which the Corporation actually pays the Redemption Price.
3.04 Determination of Number of Each Holder's Shares to be
Redeemed. The number of shares of Preferred Stock to be redeemed from each
holder thereof in repurchases under Section 3.01 shall be determined by
multiplying the total number of Preferred Shares to be redeemed times a
fraction, the numerator of which shall be the total number of shares of
Preferred Stock held by such holder and the denominator of which shall be the
total number of shares of Preferred Stock outstanding, except that in situations
to which Section 3.05(b) hereof applies, the Corporation shall not repurchase
the last share of Preferred Stock held by any holder.
3.05 Redemption Price
(a) For each share of Preferred Stock which shall be
redeemed by the Corporation at any time for any reason in redemptions pursuant
to Section 3.01 and Section 3.02, the Corporation shall be obligated to pay to
the holder of such share an amount (herein called the "Redemption Price" for
such share) equal to the Liquidation Value of such share and all dividends which
shall have accrued (computed on a daily basis) on each share to and including
the date of such redemption and which shall not previously have been paid. Such
payments which the Corporation shall be obligated to make on the date of any
such redemption shall be deemed to become "due" for all purposes of this Section
regardless of whether the Corporation shall be able or legally permitted to make
such payments on such date.
(b) If for any reason the Corporation is prohibited
from paying accrued unpaid dividends on shares of Preferred Stock being redeemed
from any holder, then such accrued unpaid dividends shall be added in equal
amounts per share to the Liquidation Value of the shares of Preferred Stock
remaining outstanding in the hands of such holder; provided, however, that in no
event shall the Corporation redeem the last share of Preferred Stock (the
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<PAGE> 11
"Last Share") held by any holder until the Corporation shall have paid to such
holder all accrued unpaid dividends on all shares of Preferred Stock held by
such holder at any time. The remaining Preferred Stock outstanding after any
redemption (including the Last Share), and including the accrued unpaid
dividends thereon, shall continue to earn cumulative dividends at the rate and
in the manner prescribed in Section 2.
(c) Each holder of shares of Preferred Stock shall be
entitled to receive on or at any time after the last date for a redemption of
shares as determined pursuant to Section 3.02 or any Redemption Date, as the
case may be, the full Redemption Price, plus accrued unpaid dividends, for each
share of Preferred Stock held by such holder which the Corporation shall then be
obligated to redeem, upon surrender by such holder at the Corporation's
principal office of the certificate representing such share duly endorsed in
blank or accompanied by an appropriate form of assignment duly endorsed in
blank. After the payment by the Corporation of the full Redemption Price for any
share of Preferred Stock, plus accrued unpaid dividends except as otherwise
provided in Section 3.05(b), all rights of the holder of such share shall
(whether or not the certificate representing such share shall have been
surrendered for cancellation) cease and terminate with respect to such share.
3.06 Redeemed or Acquired Preferred Stock to be Canceled. All
shares of Preferred Stock redeemed or otherwise acquired by the Company shall be
retired and canceled and shall be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to series, and may
thereafter be reissued.
Section 4. Liquidation Preference of Holders of Preferred Stock. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, each holder of Preferred Stock shall be entitled to be paid on
such Preferred Stock out of the Distributable Assets of the Corporation, whether
from capital, surplus or earnings, before any payment or distribution of any
kind shall be made to any holder of Junior Stock on such Junior Stock, the
aggregate amount of the Liquidation Value of all shares of Preferred Stock then
held of record by such holder of Preferred Stock. If the Distributable Assets
shall be insufficient to pay to each holder of Preferred Stock the full amount
to which such holder shall be entitled in respect thereof pursuant to this
Section 4, then the remaining Distributable Assets shall be allocated among
holders of Preferred Stock on a pro rata basis in accordance with the number of
shares of Preferred Stock then held by
Section 5. Notices. Any notice or request required or permitted by the
provisions of this Article 4 shall be deemed given to and received by the
Corporation (i) when delivered in hand or by courier or telecopier, or (ii) on
the third business day after the same has been deposited in the United States
mail, certified or registered mail, return receipt requested, postage prepaid,
and addressed to the Secretary of the Corporation at the chief executive office
of the Corporation, and shall be deemed given to and received by any holder of
record of shares of Preferred Stock, (iii) when delivered in hand or by courier
or telecopier, or (iv) on the third business day after the same has been
deposited in the United States mail, certified or registered mail, return
receipt requested, postage prepaid, and addressed to such holder of record at
the address of such holder as it appears in the records of the Corporation at
the time of mailing.
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<PAGE> 12
Section 6. Shareholder Lists. Upon written request of any holder or
holders of shares of Preferred Stock holding in the aggregate more than ten
percent (10%) of the shares of Preferred Stock then outstanding, the Corporation
will promptly furnish to such holder or holders a list of the names, addresses
and number of shares held by each holder of record of shares of Preferred Stock
as shown by the records of the Corporation.
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<PAGE> 13
AppliedTheory Corporation has caused this Certificate to be duly executed by its
Chairman of the Board and Chief Executive Officer, and attested by its Assistant
Secretary this 31st day of March, 1999.
APPLIEDTHEORY CORPORATION
By: _________________________
Richard Mandelbaum
Chairman of the Board and
Chief Executive Officer
Attest:
___________________________
David A. Buckel
Assistant Secretary
7
<PAGE> 1
EXHIBIT 10.02
NYSERNet.com, INC.
1996 INCENTIVE STOCK OPTION PLAN
as amended by Resolution of the Board of Directors on 09/02/98
and of the shareholders on 10/14/98
1. Purpose. The NYSERNet.com, Inc. 1996 INCENTIVE STOCK OPTION PLAN
(hereinafter referred to as the "Plan") is designed to furnish additional
incentive to key employees and, as to Nonstatutory Options (as hereinafter
defined) directors, advisors, consultants and other employees of NYSERNET.com,
Inc., a New York corporation (hereinafter referred to as the "Company"), and its
parents or subsidiaries, upon whose judgment, initiative and efforts the
successful conduct of the business of the Company largely depends, by
encouraging such persons to acquire a proprietary interest in the Company or to
increase the same, and to strengthen the ability of the Company to attract and
retain persons of training, experience and ability. Such purpose will be
effected through the granting of stock options ("Stock Options"), as herein
provided. Such options will either be "Incentive Stock Options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") ("Statutory Options") or nonstatutory stock options which are not
Incentive Stock Options ("Nonstatutory Options") as determined by the Board of
Directors of the Company at the time each option is granted.
2. Eligibility.
(a) The persons who shall be eligible to receive Statutory Options
under the Plan shall be those employees of the Company, or of any of its parents
or subsidiaries within the meaning of Section 425(e) and (f) of the Code, who
are exempt from the overtime provisions of the Fair Labor Standards Act of 1938,
as amended, by reason of employment in an executive, administrative or
professional capacity under 29 U.S.C. Section 213(a)(1). No Statutory Option
shall be granted to a person who would, at the time of the grant of such option,
own, or be deemed to own for purposes of Section 422(b)(6) of the Code, more
than 10% of the total combined voting power of all classes of shares of stock of
the Company or its parents or subsidiaries unless at the time of the grant of
the option both of the following conditions are met:
(i) the option price is at least 110% of the fair market value
of the shares of stock subject to the option, as defined in
subparagraph 4(a) hereof, and
(ii) the option is, by its terms, not exercisable after the
expiration of five years from the date the option is granted.
(b) The persons who shall be eligible to receive Nonstatutory Options
shall be those employees, officers and directors of, and advisors and
consultants to, the Company as the Board of Directors may from time to time
select.
<PAGE> 2
3. Shares Subject to Options.
(a) Subject to the provisions of Section 4(g) hereof, Stock Options may
be granted under the Plan to purchase in the aggregate not more than 8,000,000
shares of the Common Stock of the Company, consisting of a combination of not
more than 7,500,000 shares of the $0.01 par value Voting Common Stock and not
more than 4,500,000 shares of the $0.01 par value Non-Voting Common Stock of the
Company (hereinafter referred to as "Shares"), which Shares may, in the
discretion of the Board of Directors of the Company, consist either in whole or
in part of authorized but unissued Shares or Shares held in the treasury of the
Company. Any Shares subject to an option which for any reason expires or is
terminated unexercised as to such Shares shall continue to be available for
options under the Plan.
(b) The aggregate fair market value, determined as of the time any
Statutory Option is granted to any individual, of Shares for which Incentive
Stock Options within the meaning of the Code are exercisable for the first time
by such individual in any calendar year, under all incentive stock option plans
of the Company or in any corporation which is a parent or subsidiary of the
Company, shall not exceed $100,000. Any options granted hereunder in excess of
such number shall be Nonstatutory Options. In determining whether any option is
a Statutory or Nonstatutory Option, options shall be considered in the order in
which they were granted.
4. Terms and Conditions of Stock Options. Stock Options shall by
granted by the Board of Directors or by any other party delegated such authority
pursuant to section 8 of this Plan and shall be subject to the following terms
and conditions:
(a) Price. Each Stock Option shall state the number of Shares subject
to the option and the option price, which, in the case of Statutory Options,
shall be not less than the fair market value of the Shares with respect to which
the option is granted at the time the option is granted; provided, however, that
the option price shall be at least 110% of fair market value in the case of a
grant of a Statutory Option to a person who would at the time of the grant, own,
or be deemed to own for purposes of Section 422(b)(6) of the Code, more than 10%
of the total combined voting power of all classes of the capital stock of the
Company or its parents or subsidiaries. For purposes of this subsection, "fair
market value" shall mean:
(i) the mean between the bid and asked price for the Shares on
the business day immediately preceding the date of the grant of the
option; or
(ii) the most recent sale price for the Shares as of the date
of the grant of the option; or
(iii) such price as shall be determined by the Board of
Directors of the Company in an attempt made in good faith to meet the
requirements of Section 422(b)(4) of the Code.
(b) Term. Except as otherwise provided in subparagraphs 4(d) and 4(e),
the term of each Stock Option shall be determined by the Board of Directors of
the
2
<PAGE> 3
Company, but in no event shall an option be exercisable either in whole or in
part after the expiration of ten years from the date on which it is granted. The
Board of Directors and an optionee may, by mutual agreement, terminate any Stock
Option granted to such optionee. In the case of the merger, consolidation,
dissolution, liquidation, or change in ownership of the Corporation, the Board
of Directors of the Corporation may, in its sole discretion, accelerate the
expiration date and the dates on which any part of any Stock Option shall be
exercisable; provided, however, that such acceleration shall be effective only
upon the consummation of any such transaction.
(c) Non-Assignment During Life. During the lifetime of the optionee, a
Stock Option shall be exercisable only by him and shall not be assignable or
transferable by him, whether voluntarily or by operation of law or otherwise,
and no other person shall acquire any rights therein.
(d) Death of Optionee. In the event that an optionee shall die while
employed by the Company or within three months after retirement, but prior to
the exercise of all Statutory Options granted to him under the Plan, the
remaining Statutory Options may be exercised in whole or in part after the date
of the optionee's death only: (i) by the optionee's estate or by or on behalf of
the person or persons to whom the optionee's rights under the option pass under
the optionee's Will or the laws of descent and distribution; (ii) to the extent
that the optionee was entitled to exercise the option at the date of his death;
and (iii) during the balance of the term of the option or within one year of the
date of the Optionee's death, whichever is shorter.
(e) Order of Option Exercise. An optionee may exercise Stock Options in
any order the Optionee chooses, regardless of the order in which the Stock
Options were granted.
(f) Termination of Employment. A Statutory Option shall be exercisable
during the lifetime of the optionee to whom it is granted only if, at all times
during the period beginning on the date of the granting of the Statutory Option
and ending on the day three months before the date of such exercise, he is an
employee of the Company or any of its parents or subsidiaries, or an employee of
a corporation or a parent or subsidiary of such corporation issuing or assuming
a Statutory Option granted hereunder in a transaction to which Section 425(a) of
the Code applies; provided, however, that in the case of an optionee who is
disabled within the meaning of Section 105(d)(4) of the Code, the three-month
period after cessation of employment during which a Statutory Option shall be
exercisable shall be one year. A Nonstatutory Option shall terminate (i)
immediately upon the resignation of the optionee from any position held by him
as an officer, director, employee, advisor or consultant to the Company, (ii)
immediately upon the termination by the Company of the optionee from any such
position for cause or (iii) thirty (30) days after the termination by the
Company of the optionee from any such position without cause. Notwithstanding
the foregoing, no Stock Option shall be exercisable after the expiration of the
stated term thereof. For purposes of this subsection, an employment relationship
will be treated as continuing intact while the optionee is on military duty,
sick leave or other bona fide leave of absence, such as temporary employment by
the Government, if the period of such leave does not exceed
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<PAGE> 4
90 days, or, if longer, so long as a statute or contract guarantees the
optionee's right to re-employment with the Company, or any of its parents or
subsidiaries, or another corporation issuing or assuming a Stock Option granted
hereunder in a transaction to which Section 425(a) of the Code applies. When the
period of leave exceeds 90 days and the individual's right to re-employment is
not guaranteed either by statute or by contract, the employment relationship
will be deemed to have terminated on the 91st day of such leave.
(g) Anti-Dilution Provisions. Subject in the case of Statutory Options
to the provisions of Section 422 of the Code and the regulations promulgated
thereunder, the aggregate number and kind of Shares available for Stock Options
under the Plan, and the number and kind of Shares subject to, and the option
price of, each outstanding Stock Option shall be proportionately adjusted by the
Board of Directors of the Company for any increase, decrease or change in the
total outstanding Shares of the Company resulting from a stock dividend,
recapitalization, merger, consolidation, split-up, combination, exchange of
Shares or similar transaction (but not by reason of the issuance or purchase of
Shares by the Company in consideration for money, services or property).
(h) Power to Establish Other Provisions. Subject to the discretion of
the Board of Directors of the Company and, in the case of Statutory Options,
subject to the provisions of Section 422 of the Code and the regulations
promulgated thereunder, Stock Options granted under the Plan shall contain such
other terms and conditions as the Board of Directors of the Company shall deem
advisable.
5. Exercise of Option. Stock Options shall be exercised as follows:
(a) Notice and Payment. Each Stock Option, or any installment thereof,
shall be exercised, whether in whole or in part, by giving written notice to the
Company at its principal office, specifying the number of Shares purchased and
the purchase price being paid, and accompanied by the payment of all or such
part of the purchase price as shall be specified in the option, by cash or by
certified or bank check payable to the order of the Company. Each such notice
shall also contain representations on behalf of the optionee that
(i) the optionee acknowledges that the Company is selling the
Shares being acquired by him under a claim of exemption from
registration under the Securities Act of 1933, as amended (hereinafter
referred to as the "Act"), as a transaction not involving any public
offering;
(ii) the optionee is acquiring the Shares without a view to
distribution or resale;
(iii) the optionee understands and agrees that the Shares
purchased may not be thereunder transferred unless (A) a registration
statement with respect thereto shall then be effective under the Act,
and the Company will have complied with any other applicable laws, or
(B) the optionee shall have obtained an opinion of counsel, in form and
content reasonably satisfactory to the
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<PAGE> 5
Company and to its counsel, to the effect that the proposed transfer
will be exempt from the registration provisions of the Act, will comply
with applicable state laws, and will not result in any violation of the
Act or of any other applicable laws;
(iv) because any Shares purchased will not have been
registered under the Act, they must be held indefinitely unless and
until they are subsequently registered under the Act or an exemption
from such a registration is available;
(v) any routine sales of the Shares purchased made in reliance
upon Rule 144 promulgated under the Act can be made only in limited
amounts and in accordance with all the terms and conditions of that
Rule, and in case the Rule is not applicable, compliance with
Regulation A or some other disclosure exemption may be required; and
(vi) the Company has no obligation to register the Shares, to
comply with any disclosure exemption, or to take such action as may be
necessary to meet the requirements of Rule 144.
Appropriate legends may be placed on any certificate for Shares received by an
optionee pursuant to the exercise of a Stock Option in order to give notice of
the transfer restrictions set forth herein, and the Company may cause stop
transfer orders to be placed against such certificate(s). It shall be a further
condition to any exercise of the option and the purchase of Shares pursuant
thereto that the Company counsel be satisfied that the issuance of such Shares
will be in compliance with the Act and any other laws applicable thereto, and
the Company shall be entitled to receive such other information, assurances,
documents, representations or warranties as it or its counsel may reasonably
require with respect to such compliance.
(b) Issuance of Certificates. Certificates representing the Shares
purchased by the optionee shall be issued as soon as practicable after the
optionee has complied with the provisions of Section 5(a) hereof.
(c) Rights as a Shareholder. The optionee shall have no rights as a
Shareholder with respect to the Shares purchased until the date of the issuance
to him of a Certificate representing such Shares.
(d) Order of Option Exercise. An optionee may exercise Stock Options
granted by the Company under the Plan in any order the optionee chooses,
regardless of the chronological order in which the options were granted.
6. Term of Plan. Stock Options may be granted pursuant to the Plan from
time to time within a period of ten years after the date the Plan is adopted by
the Board of Directors of the Company or the date the Plan is approved by the
holders of a majority of the outstanding Shares of the Company, whichever date
is earlier. However, the Plan shall not take effect until approved by the
holders of a majority of the outstanding Shares of the Company, at a duly
constituted meeting thereof held, or by
5
<PAGE> 6
unanimous written consent of such Shareholders obtained, within 12 months before
or after the date the Plan is adopted by the Board of Directors.
7. Amendment and Termination of Plan. The Board of Directors of the
Company, without further approval of the Shareholders of the Company, may at any
time suspend or terminate the Plan, or may amend it from time to time in any
manner; provided, however, that no amendment shall be effective without prior
approval of the Shareholders of the Company which would: (i) except as provided
in Section 4(g) hereof, increase the maximum number of Shares for which Stock
Options may be granted under the Plan; (ii) change the eligibility requirements
for individuals entitled to receive Stock Options under the Plan; or (iii) cause
Stock Options granted or to be granted under the Plan which are designated as
Statutory Options to fail to qualify as Incentive Stock Options under Section
422 of the Code and the regulations promulgated thereunder.
8. Administration. The Plan shall be administered by the Board of
Directors of the Company and decisions of the Board of Directors concerning the
interpretation and construction of any provisions of the Plan or of any Stock
Option granted pursuant to the Plan shall be final. The Company shall effect the
grant of Stock Options under the Plan in accordance with the decisions of the
Board of Directors, which may, from time to time, adopt rules and regulations
for the carrying out of the Plan. For purposes of the Plan, a Stock Option shall
be deemed to be granted on the date the grant of such stock option is approved
by the Board of Directors of the Company. Subject to the express provisions of
the Plan, the Board of Directors shall have the authority, in its discretion and
without limitation (a) to determine: the individuals to receive Stock Options;
the times when such individuals shall receive Stock Options; the number of
Shares to be subject to each option; the term of each option; the date(s) on
which each option shall become exercisable; whether an option shall be
exercisable in whole, in part, or in installments; the number of Shares to be
subject to each installment; the date each installment shall become exercisable;
the term of each installment; the option price of each option; and the terms of
payment for Shares purchased by the exercise of each option; (b) to accelerate
the date of exercise of any installment; and (c) to make all other
determinations necessary or advisable for administering the Plan. The Board of
Directors may appoint a Stock Option Committee or a Compensation Committee of
not less than three members, and may delegate to such Committee the
responsibilities and authority of the Board of Directors hereunder. In the event
of such appointment and delegation, any reference in the Plan to the Board of
Directors shall be deemed a reference to such Committee. The Board of Directors
and any Stock Option Committee or Compensation Committee thereof may authorize
the President and Chief Executive Officer of the Company to grant a maximum of
5,000 Stock Options per quarter, such Stock Options to be granted in the
discretion of the President and Chief Executive Officer to employees of the
Company; provided, that the President and Chief Executive Officer shall not be
authorized to grant more than 750 options to any particular employee in any
given quarter; provided, further that the President and Chief Executive shall
not have the authority to grant options to any Company employee who is employed
at or above the level of Director.
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<PAGE> 7
9. Reservation of Shares. The Board of Directors of the Company shall
be under no obligation to reserve Shares to fill Stock Options. Likewise,
because of the substantial nature of the conditions which must be met to entitle
eligible employees to deliveries of reserved Shares, the Board of Directors
shall be under no obligation to reserve Shares against such deliveries. The
optioning and reservation of Shares for employees hereunder shall not be
construed to constitute the establishment of a trust of the Shares so optioned
and reserved, and no particular Share shall be identified as optioned and
reserved for employees hereunder. The Company shall be deemed to have complied
with the terms of the Plan if, at the time of the issuance and delivery pursuant
to option or reservation, or both, it has a sufficient number of Shares
authorized and unissued for the purpose of the Plan, irrespective of the date
when such Shares were authorized.
10. Application of Proceeds. The proceeds of the sale of Shares by the
Company under the Plan will constitute general funds of the Company and may be
used by the Company for any purpose.
Date approved by
Board of Directors - September 2, 1998
Shareholders - October 14, 1998
7
<PAGE> 1
EXHIBIT 10.19
PROMISSORY NOTE
$6,187,000 Date: January 27, 1999
For Value Received, APPLIEDTHEORY COMMUNICATIONS, INC., a
corporation formed under the laws of the State of New York, or any successor
thereof (the "Borrower"), hereby promises to pay to the order of NYSERNet.net,
Inc. (the "Lender") at its office in Syracuse, NY (i) the principal sum of Six
Million One Hundred Eighty Seven Thousand Dollars ($6,187,000) less the
liquidation value (as such term is defined in Borrower's Certificate of
Incorporation) of any shares of preferred stock of Borrower owned by Lender or
(ii) the aggregate unpaid principal amount of all advances made by the Lender to
the Borrower (which aggregate unpaid principal amount shall be equal to the
amount duly endorsed and set forth opposite the date last appearing on the
schedule attached to this note), whichever is less.
Each advance hereunder shall bear interest at a rate per annum
equal to the Prime Rate, but in no event in excess of the maximum rate permitted
by law. Interest shall be computed on the basis of a 365/366 day year for the
actual number of days elapsed.
"Prime Rate" shall mean, for any day, a rate per annum equal
to the prime commercial lending rate of Fleet National Bank in Syracuse, NY as
publicly announced to be in effect from time to time, such rate to be adjusted
automatically, without notice, on the effective date of any change in such rate.
Each advance hereunder shall be payable on December 31, 2001
(the "Maturity Date") and may be prepaid in whole at any time or in part from
time to time (without penalty). Interest on each advance shall be payable at
maturity. Upon any prepayment of an advance, the Borrower shall pay interest on
the amount so prepaid to the date of such prepayment. Each prepayment made
hereunder shall be credited to the advance or advances as designated by the
Borrower.
If any payment hereof becomes due and payable on a day other
than a business day, such payment shall be extended to the next succeeding
business day. If the date for any payment of principal is so extended, interest
thereon shall be payable for the extended time.
This note amends and restates evidence of the advances made by
the Lender to the Borrower on the dates and in the amounts set forth on the
schedule attached hereto (the aggregate outstanding principal amount of which is
as of the date hereof, $4,187,000 including the liquidation value of shares of
the Borrower).
The Borrower hereby authorizes the Lender to accept telephonic
instructions from a duly authorized representative of the Borrower to make an
advance or
<PAGE> 2
receive a payment hereof, and to endorse on the schedule attached hereto the
amount of all advances hereunder and all principal payments hereof received by
the Lender.
The proceeds of each advance hereunder shall be transferred to
a bank designated by the Borrower at the time of such advance for credit to the
Borrower's account maintained at such bank. The Borrower agrees that the actual
receipt of the proceeds of an advance by the bank designated by the Borrower
(properly identified as for credit to the Borrower's account maintained at such
bank) shall constitute evidence that the advance was made.
All payments hereof shall be made in lawful money of the
United States of America and in immediately available funds.
All advances hereunder, together with all accrued interest
thereon, shall become immediately and automatically due and payable, without
demand, presentment, protest or notice of any kind, upon the insolvency, general
assignment, receivership, bankruptcy or dissolution of the Borrower. The
Borrower does hereby forever waive presentment, demand, protest, notice of
protest and notice of nonpayment or dishonor of this note.
No failure on the part of the Lender to exercise, and no delay
in exercising, any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Lender of any right,
remedy or power hereunder preclude any other or future exercise thereof or the
exercise of any other right, remedy or power.
Each and every right, remedy and power hereby granted to the
Lender or allowed it by law or other agreement shall be cumulative and not
exclusive the one of any other, and may be exercised by the Lender from time to
time.
Every provision of this note is intended to be severable; if
any term or provision of this note shall be invalid, illegal or unenforceable
for any reason whatsoever, the validity, legality and enforceability of the
remaining provisions hereof shall not in any way be affected or impaired.
THE PROVISIONS OF THIS NOTE SHALL BE CONSTRUED AND INTERPRETED
AND ALL RIGHTS AND OBLIGATIONS HEREUNDER DETERMINED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
APPLIEDTHEORY COMMUNICATIONS, INC.
By: /s/ David A. Buckel
-------------------------
Name: David A. Buckel
Title: Vice President and
Chief Financial Officer
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<PAGE> 1
Exhibit 10.21
APPLIEDTHEORY CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee
Stock Purchase Plan of AppliedTheory Corporation
1. Purpose. The purpose of the Plan is to provide employees of
the Company and its Designated Subsidiaries with added
incentive to continue in their employment and to encourage
increased efforts to promote the best interests of the Company
by permitting eligible employees to purchase shares of Common
Stock of the Company at prices less than the current market
price thereof. It is the intention of the Company to have the
Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended.
The provisions of the Plan, accordingly, shall be construed so
as to extend and limit participation in a manner consistent
with the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the
Company.
(d) "Commencement Date" shall mean a date to be selected by
the Board as the date upon which this Plan shall be effective and begin
operation.
(e) "Company" shall mean AppliedTheory Corporation, a
Delaware corporation, and any Designated Subsidiary of the Company.
(f) "Compensation" shall mean the total cash compensation
received by an Employee from the Company, before tax withholdings and other
deductions, including base compensation, overtime, shift or other compensatory
premiums, payments in substitution of base compensation such as vacation,
holiday and sick pay, and including all cash bonus compensation, but not
including short or long-term disability payments.
(g) "Designated Subsidiary" shall mean any Subsidiary which
has been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(h) "Employee" shall mean each employee of the Company
whose customary employment is at least twenty (20) hours a week and more than
five months in a calendar year. For purposes of the Plan, "employment" shall be
determined in
<PAGE> 2
accordance with the provisions of Section 1.421-7(h) of the Treasury Regulations
(or any successor regulations).
(i) "Enrollment Date" shall mean the first day of each
Offering Period.
(j) "Exercise Date" shall mean the last day of each
Purchase Period.
(k) "Fair Market Value" of a share of Common Stock as of a
given date means the closing sales price of the Common Stock on the Nasdaq Stock
Market on the trading day immediately preceding the date as of which Fair Market
Value is to be determined or, in the absence of any reported sales of Common
Stock on such date, on the first preceding date on which any such sale shall
have been reported. If Common Stock is not listed on the Nasdaq Stock Market on
the date as of which Fair Market Value is to be determined, the Board shall
determine in good faith the Fair Market Value in whatever manner it considers
appropriate.
(l) "Offering Periods" shall mean the periods of
approximately twenty-four (24) months during which an option granted pursuant to
the Plan may be exercised. The duration and timing of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(m) "Plan" shall mean this AppliedTheory Corporation 1999
Employee Stock Purchase Plan.
(n) "Purchase Price" shall mean an amount equal to 85% of
the Fair Market Value of a share of Common Stock on the Enrollment Date or on
the relevant Exercise Date, whichever is lower.
(o) "Purchase Period" shall mean the approximately six
month periods within each Offering Period commencing the day following each
Exercise Date and ending with the next Exercise Date, except that the first
Purchase Period of any Offering Period shall commence on the Enrollment Date and
end with the next Exercise Date.
(p) "Reserves" shall mean the number of shares of Common
Stock covered by each option under the Plan which have not yet been exercised
and the number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
(q) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(r) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
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3. Eligibility.
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. The Plan shall be implemented by
consecutive, overlapping Offering Periods with the initial Offering Period
beginning on the Trading Day nearest the Commencement Date (the " Initial
Offering Period Date ") and terminating on the last Trading Day in the month
which is twenty-four months later and with successive Offering Periods
commencing on the first Trading Day on or after every six month anniversary of
the Initial Offering Period Date, or on such other date as the Board shall
determine, and continuing thereafter until terminated in accordance with Section
20 hereof. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the
Plan by completing a subscription agreement authorizing payroll deductions in a
form determined by the Board and filing it with the Company's payroll office at
least 15 days prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on
the first payroll following the Enrollment Date and shall end on the last
payroll in the Offering Period to which such authorization is applicable, unless
sooner terminated by the participant as provided in Section 10 hereof.
(c) By enrolling in the Plan, each participant will be
deemed to have authorized the establishment of a brokerage account in his or her
name at a securities brokerage firm or other financial institution, if approved
by the Board in its discretion.
6. Payroll Deductions.
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(a) At the time a participant files his or her
subscription agreement, he or she shall elect to have payroll deductions made on
each pay day during the Offering Period in an amount not exceeding 10% of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan. A participant may not make any
additional payments into such account.
(c) A participant's contribution rate, once established,
shall remain in effect for all Purchase Periods in an Offering Period unless
changed by the participant in writing delivered to the Company at least 15 days
prior to the commencement of the next Purchase Period. A participant's
contribution rate for a Purchase Period may not be increased, decreased or
otherwise modified at any time during the 15-day period prior to the
commencement of such Purchase Period. In the event that a participant's payroll
deductions are prevented by legal process, the Participant will be deemed to
have terminated from the Plan. A participant's subscription agreement shall
remain in effect for successive Offering Periods unless terminated as provided
in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary
to comply with Section 423(b)(8) of the Code, Section 3(b) and Section 7 hereof,
a participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in
part, or at the time some or all of the Company's Common Stock issued under the
Plan is disposed of, the participant must make adequate provision for the
Company's federal, state, or other tax withholding obligations, if any, which
arise upon the exercise of the option or the disposition of the Common Stock. At
any time, the Company may, but shall not be obligated to, withhold from the
participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering
Period, each eligible Employee participating in such Offering Period shall be
granted an option to purchase on each Exercise Date during such Offering Period
(at the applicable Purchase Price) up to a number of shares of the Company's
Common Stock determined by dividing such Employee's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price; provided that
in no event shall an Employee be permitted to purchase during each Purchase
Period more than 15,000 shares of the Company's Common Stock (subject to any
adjustment pursuant to Section 19) on the Enrollment Date; and provided further
that such purchase shall be subject to the limitations set forth in Section 3(b)
hereof. Exercise
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<PAGE> 5
of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall expire
on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the
Plan as provided in Section 10 hereof, his or her option for the purchase of
shares shall be exercised automatically on the Exercise Date, and the maximum
number of full shares subject to option shall be purchased for such participant
at the applicable Purchase Price with the accumulated payroll deductions in his
or her account. No fractional shares shall be purchased. Any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. Unless otherwise determined by the Board, as
promptly as practicable after each Exercise Date on which a purchase of shares
occurs, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the shares purchased upon exercise of
his or her option.
10. Withdrawal.
(a) A participant may notify the Company of such
participant's desire to discontinue his or her contributions by delivering to
the Company written notice on such forms as determined by the Board at least 15
days prior to the Exercise Date of the relevant Purchase Period. Upon such
request, there shall be promptly refunded to such participant as soon as
practicable the entire cash balance in his or her contribution account. In
addition, upon such request, such participant's option for the Offering Period
shall be automatically terminated and no further payroll deductions for the
purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period
shall not have any effect upon his or her eligibility to participate in any
similar plan which may hereafter be adopted by the Company or in succeeding
Offering Periods which commence after the termination of the Offering Period
from which the participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to
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<PAGE> 6
exercise the option shall be returned to such participant or, in the case of his
or her death, to the person or persons entitled thereto under Section 15 hereof,
and such participant's option shall be automatically terminated.
12. Interest. No interest shall accrue on the payroll
deductions of a participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common
Stock which shall be made available for sale under the Plan shall be 2,250,000
shares, subject to adjustment upon changes in capitalization of the Company as
provided in Section 19 hereof. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right
in shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
(d) Any cash dividends paid with respect to shares of
Common Stock held for the account of a participant shall be, as determined by
the Board on a uniform basis as to all participants, either (i) distributed to
the participant or (ii) credited to the participant's account and used, in the
same manner as payroll deductions, to purchase additional shares of Common Stock
under the Plan on the next Exercise Date (subject to the limitations of Section
3 and 7 hereof).
14. Administration.
(a) The Board shall be responsible for the administration
of the Plan and shall have the authority to delegate its powers in this respect
to any committee of the Board. The Board shall have the discretionary authority
to interpret the Plan and determine all questions arising in the administration,
application and operation of the Plan, including all questions of fact and all
questions of interpretation of the provisions of the Plan. All such
determinations by the Board shall be conclusive and binding on all persons. The
Board, from time to time, may adopt, amend and rescind rules and regulations not
inconsistent with the Plan for carrying out the Plan, and may approve the forms
of any documents or writings provided for in the Plan. The Board shall have full
discretionary authority to delegate ministerial functions of the Plan to
employees of the Company. No member of the Board of Directors or the Board shall
be liable for any action, determination or omission taken or made in good faith
with respect to the Plan or any right granted hereunder.
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<PAGE> 7
(b) The Board may in its discretion engage a bank trust
department, securities brokerage firm or other financial institution as agent to
perform custodial and record-keeping functions for the Plan, such as holding
record title to the Participants' stock certificates, maintaining an individual
investment account for each Participant and providing periodic account status
reports to Participants.
(c) The Board shall have the authority to adopt and
enforce such special rules and restrictions under the Plan to be applicable to
Participants who are subject to Section 16 of the Securities Exchange Act of
1934, as amended, as the Board shall deem are necessary or appropriate to exempt
certain Plan transactions from the requirements of such Section 16.
(d) The Company shall bear the cost of administering the
Plan, including any fees, costs and expenses relating to the purchase of shares
of Common Stock under the Plan. Notwithstanding the foregoing, Participants will
be responsible for all fees, costs and expenses incurred in connection with the
disposition of shares of Common Stock purchased under the Plan.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
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<PAGE> 8
17. Use of Funds. All payroll deductions received or held by
the Company under the Plan may be used by the Company for any corporate purpose,
and the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the Reserves, the maximum number of
shares each participant may purchase each Purchase Period (pursuant to Section
7), as well as the price per share and the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New Exercise
Date"), and shall terminate immediately prior to the consummation of such
proposed dissolution or liquidation, unless provided otherwise by the Board. The
New Exercise Date shall be before the date of the Company's proposed dissolution
or liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale
of all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new
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<PAGE> 9
Exercise Date (the "New Exercise Date") and any Offering Periods then in
progress shall end on the New Exercise Date. The New Exercise Date shall be
before the date of the Company's proposed sale or merger. The Board shall notify
each participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the Exercise Date for the participant's option has been
changed to the New Exercise Date and that the participant's option shall be
exercised automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time
and for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to
whether any participant rights may be considered to have been "adversely
affected," the Board (or its authorized committee) shall be entitled to change
the Offering Periods, limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio applicable to
amounts withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods
and/or accounting and crediting procedures to ensure that amounts applied toward
the purchase of Common Stock for each participant properly correspond with
amounts withheld from the participant's Compensation, and establish such other
limitations or procedures as the Board (or its committee) determines in its sole
discretion advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a
participant to the Company under or in connection with the Plan shall be deemed
to have been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the receipt
thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated
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<PAGE> 10
thereunder, and the requirements of any stock exchange upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the
earlier to occur of its adoption by the Board of Directors or its approval by
the stockholders of the Company. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 20 hereof.
24. Governing Law; Compliance With Law. The Plan shall be
construed in accordance with the laws of the State of Delaware. The Company's
obligation to sell and deliver shares of Common Stock hereunder shall be subject
to all applicable federal and state laws, rules and regulations and to such
approvals by any regulatory or governmental agency as may, in the opinion of
counsel for the Company, be required. The Company may make such provisions as it
may deem appropriate for the withholding of any taxes or payment of any taxes
which it determines it may be required to withhold or pay in connection with a
participant's participation in the Plan.
25. No Contract of Employment. The Plan will not be deemed to
constitute a contract between the Company and any participant or to be a
consideration or an inducement for the employment of any participant or
Employee. Nothing contained in the Plan shall be deemed to give any participant
or Employee the right to be retained in the service of the Company or to
interfere with the right of the Company to discharge any participant or Employee
at any time regardless of the effect which such discharge shall have upon him or
her as a participant of the Plan.
26. No Rights as Stockholder. No eligible Employee or
participant shall by reason of participation in the Plan have any rights of a
stockholder of the Company until he or she acquires shares of Common Stock as
herein provided
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Exhibit 10.22
APPLIEDTHEORY CORPORATION
1999 STOCK OPTION PLAN
ARTICLE I
PURPOSE
This AppliedTheory Corporation 1999 Stock Option Plan is
intended to advance the interests of the Company and its stockholders by
attracting, retaining and motivating key personnel of the Company upon whose
judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, and to encourage and enable such persons to
acquire and retain a proprietary interest in the Company by ownership of its
stock. Options granted under the Plan may either be "incentive stock options"
intended to qualify as such under the Internal Revenue Code, or "nonqualified
stock options," which are not intended to so qualify.
ARTICLE II
DEFINITIONS
(a) "Board" means the Board of Directors of the Company or any
Committee.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" means the Company's Common Stock, par value
$.01 per share.
(d) "Committee" means any committee of the Board, including
the Compensation Committee, which the Board has from time to time been
authorized by the Board to administer the Plan.
(e) "Company" means AppliedTheory Corporation, a Delaware
corporation.
(f) "Date of Grant" means the date on which an Option becomes
effective in accordance with Section 6.1 hereof.
(g) "Eligible Person" means any person who is an employee,
officer, director, consultant or advisor of the Company or any Subsidiary, or
any person who is determined by the Board to be a prospective employee, officer,
director, consultant or advisor of the Company or any Subsidiary.
(h) "Employee" means any person who is an employee of the
Company or any Subsidiary; provided, however, that with respect to Incentive
Stock Options, "Employee" means any person who is considered an employee of the
Company or any Subsidiary for purposes of Treasury Regulation Section
1.421-7(h).
(i) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
<PAGE> 2
(j) "Fair Market Value" of a share of Common Stock as of a
given date means the closing sales price of the Common Stock on the Nasdaq Stock
Market on the trading day immediately preceding the date as of which Fair Market
Value is to be determined or, in the absence of any reported sales of Common
Stock on such date, on the first preceding date on which any such sale shall
have been reported. If Common Stock is not listed on the Nasdaq Stock Market on
the date as of which Fair Market Value is to be determined, the Board shall
determine in good faith the Fair Market Value in whatever manner it considers
appropriate.
(k) "Incentive Stock Option" means a stock option granted
under the Plan that is intended to meet the requirements of section 422 of the
Code and the regulations promulgated thereunder.
(l) "Nonqualified Stock Option" means a stock option granted
under the Plan that is not an Incentive Stock Option.
(m) "Option" means an Incentive Stock Option or a Nonqualified
Stock Option granted under the Plan.
(n) "Optionee" means an Eligible Person to whom an Option has
been granted, which Option has not expired, under the Plan.
(o) "Option Price" means the price at which each share of
Common Stock subject to an Option may be purchased, determined in accordance
with Section 6.3 hereof.
(p) "Plan" means this AppliedTheory Corporation 1999 Stock
Option Plan.
(q) "Stock Option Agreement" means an agreement between the
Company and an Optionee under which the Optionee may purchase Common Stock under
the Plan.
(r) "Subsidiary" means a subsidiary corporation of the
Company, within the meaning of section 424(f) of the Code.
ARTICLE III
ELIGIBILITY
All Eligible Persons are eligible to receive a grant of an
Option under the Plan. The Board shall, in its sole discretion, determine and
designate from time to time those Eligible Persons who are to be granted an
Option.
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ARTICLE IV
ADMINISTRATION
4.1 Plan Administration. The Plan shall administered by the
Board unless and until the Board shall have authorized a Committee to administer
the Plan. Such a Committee shall be comprised of no fewer than two persons
selected by the Board. Solely to the extent deemed necessary or advisable by the
Board, each Committee member shall meet the definition of a "nonemployee
director" for purposes of such Rule 16b-3 under the Exchange Act and of an
"outside director" under section 162(m) of the Code. Notwithstanding the Board's
appointment of a Committee, the Board shall nonetheless have the authority to
exercise its powers and duties with respect to the administration of the Plan.
4.2 Board Authority. Subject to the express provisions of the
Plan, the Board shall have the authority, in its discretion, to determine the
Eligible Persons to whom an Option shall be granted, the time or times at which
an Option shall be granted, the number of shares of Common Stock subject to each
Option, the Option Price of the shares subject to each Option and the time or
times when each Option shall become exercisable and the duration of the exercise
period. Subject to the express provisions of the Plan, the Board shall also have
discretionary authority to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to it, to determine the provisions of each Stock
Option Agreement, and to make all the determinations necessary or advisable in
the administration of the Plan. All such actions and determinations by the Board
shall be conclusively binding for all purposes and upon all persons. No Board
member shall be liable for any action or determination made in good faith with
respect to the Plan, any Option or any Stock Option Agreement entered into
hereunder.
4.3 Delegation of Authority. The Board shall have the right,
from time to time, to delegate to one or more officers of the Company the
authority of the Board to grant and determine the terms and conditions of
Options awarded under the Plan, subject to such limitations as the Board shall
determine; provided, however, that no such authority may be delegated with
respect to Options awarded to any member of the Board or any Optionee who the
Board determines may be subject to Rule 16b-3 under the Exchange Act or section
162(m) of the Code.
4.4 Grants to Non-Employee Directors. Awards of Options to
non-employee directors under the Plan shall be approved by the Board. With
respect to awards to such directors, all rights, powers and authorities under
the Plan shall be exercised exclusively by the Board of Directors and not by any
Committee, and all provisions of this Plan relating to the Board shall be
interpreted in a manner consistent with the foregoing by treating any such
reference as a reference to the Board of Directors for such purpose.
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ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 Number of Shares. Subject to adjustment pursuant to the
provisions of Section 5.2 hereof, the maximum aggregate number of shares of
Common Stock which may be issued and sold hereunder shall be two million four
hundred thousand (2,400,000) shares. Shares of Common Stock issued and sold
under the Plan may be either authorized but unissued shares or shares held in
the Company's treasury. The number of shares of Common Stock reserved for
issuance under the Plan shall at no time be less than the maximum number of
shares which may be purchased at any time pursuant to outstanding options.
Shares of Common Stock covered by an Option that shall have been exercised shall
not again be available for an Option grant. If an Option shall terminate or
expire for any reason without being wholly exercised, the number of shares to
which such Option termination relates shall again be available for grant
hereunder.
5.2 Adjustments. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger or
consolidation, or the sale, conveyance, or other transfer by the Company of all
or substantially all of its property, or any other change in the corporate
structure or shares of the Company, pursuant to any of which events the then
outstanding shares of Common Stock are split up or combined, or are changed
into, become exchangeable at the holder's election for, or entitle the holder
thereof to cash, other shares of stock or any other consideration, or in the
case of any other transaction described in section 424(a) of the Code, the Board
may change the number and kind of shares (including by substitution of shares of
another corporation) subject to the Options and/or the Option Price of such
shares in the manner that it shall deem to be equitable and appropriate. In no
event may any such change be made to an Incentive Stock Option which would
constitute a "modification" within the meaning of section 424(h)(3) of the Code
without the consent of any affected Optionee.
ARTICLE VI
OPTIONS
6.1 Grant of Option. An Option may be granted to any Eligible
Person selected by the Board. The grant of an Option shall first be effective
upon the date it is approved by the Board, except to the extent the Board shall
specify a later date upon which the grant of an Option shall first be effective.
Each Option shall be designated, at the discretion of the Board, as an Incentive
Stock Option or a Nonqualified Stock Option, provided, however, that Incentive
Stock Options may only be granted to Eligible Persons who are Employees of the
Company. The Company and the Optionee shall execute a Stock Option Agreement
which shall set forth such terms and conditions of the Option as may be
determined by the Board to be consistent with the Plan, and which may include
additional provisions and restrictions that are not inconsistent with the Plan.
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6.2 Maximum Limit. Notwithstanding anything elsewhere in the
Plan to the contrary, the maximum number of shares of Common Stock that may be
subject to Options granted to any Optionee during any one calendar year shall be
five hundred and twenty five thousand (525,000) shares, subject to adjustment
as provided in Section 5.2 hereof.
6.3 Option Price. The Option Price shall be determined by the
Board; provided, however, that, in the case of an Incentive Stock Option, the
Option Price shall not be less than 100 percent of the Fair Market Value of a
share of Common Stock on the Date of Grant.
6.4 Vesting; Term of Option. An Option shall vest and become
exercisable in the manner and subject to such conditions provided by the Board
and set forth in the Stock Option Agreement. The Board, in its sole discretion,
may accelerate the exercisability of any Option at any time. The period during
which a vested Option may be exercised shall be determined by the Board, subject
to a maximum term of ten years from the Date of Grant and such other limitations
as may apply upon the termination of an Optionee's employment or other service
or as otherwise specified by the Board in the Stock Option Agreement.
6.5 Option Exercise; Withholding. Subject to such terms and
conditions as shall be specified in a Stock Option Agreement, an Option may be
exercised in whole or in part at any time, with respect to whole shares only,
within the period permitted for the exercise thereof, and shall be exercised by
written notice of intent to exercise the Option with respect to a specified
number of shares delivered to the Company at its principal office, and payment
in full to the Company at said office of the amount of the Option Price for the
number of shares of the Common Stock with respect to which the Option is then
being exercised. Payment of the Option Price shall be made (i) in cash or by
cash equivalent, (ii) at the discretion of the Board, in Common Stock that has
been held by the Optionee for at least six months (or such other period as the
Board may deem appropriate for purposes of applicable accounting rules), valued
at the Fair Market Value of such shares determined on the date of exercise,
(iii) at the discretion of the Board, by a delivery of a notice that the
Optionee has placed a market sell order (or similar instruction) with a broker
with respect to shares of Common Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale to the Company in satisfaction of the Option Price
(conditioned upon the payment of such net proceeds), (iv) at the discretion of
the Board, by a combination of the methods described above, or (v) by such other
method as may be approved by the Board and set forth in the Stock Option
Agreement. In addition to and at the time of payment of the Option Price, the
Optionee shall pay to the Company the full amount of all federal and state
withholding and other employment taxes required to be withheld in connection
with such exercise, in any manner consistent with the foregoing that is approved
by the Board and set forth in the Stock Option Agreement.
6.6 Limited Transferability of Option. All Options shall be
nontransferable except (i) upon the Optionee's death, by the Optionee's will or
the laws of descent and distribution or (ii) in the case Nonqualified Stock
Options only, on a case-by-case basis as may be approved by the Board in its
discretion, in accordance with the terms provided below. A Stock Option
Agreement for a Nonqualified Stock Option may provide that the Optionee shall be
permitted to, during his or her lifetime and subject to the prior approval of
the Board at the time of proposed transfer, transfer all or part of the Option
to the Optionee's family member (as defined in the Stock Option Agreement in a
manner consistent with the requirements for the Form S-8 registration
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<PAGE> 6
statement, if applicable). Any such transfer shall be subject to the condition
that it is made by the Optionee for estate planning, tax planning, donative
purposes or pursuant to a domestics relations order, and no consideration (other
than nominal consideration) is received by the Optionee therefor. The transfer
of a Nonqualified Stock Option may be subject to such other terms and conditions
as the Board may in its discretion impose from time to time, including a
condition that the portion of the Option to be transferred be vested and
exercisable by the Optionee at the time of the transfer. Subsequent transfers of
an Option shall be prohibited other than by will or the laws of descent and
distribution upon the death of the transferee.
6.7 Cancellation, Substitution and Amendment of Options. The
Board shall have the authority to effect, at any time and from time to time,
with the consent of the affected Optionees, (i) the cancellation of any or all
outstanding Options and the grant in substitution therefor of new Options
covering the same or different numbers of shares of Common Stock and having an
Option Price which may be the same as or different than the Option Price of the
cancelled Options or (ii) the amendment of the terms of any and all outstanding
Options.
ARTICLE VII
ADDITIONAL RULES FOR ISOS
7.1 Annual Limits. No Incentive Stock Option shall be granted
to an Optionee as a result of which the aggregate Fair Market Value (determined
as of the date of grant) of the stock with respect to which "incentive stock
options" are exercisable for the first time in any calendar year under the Plan
and any other stock option plans of the Company, any Subsidiary, or any parent
corporation, would exceed the maximum amount permitted under section 422(d) of
the Code. This limitation shall be applied by taking options into account in the
order in which granted.
7.2 Termination of Employment. An Incentive Stock Option may
provide that such Option may be exercised not later than three months following
termination of employment of the Optionee with the Company and all Subsidiaries,
subject to special rules relating to death and disability, as and to the extent
determined by the Board to be consistent with the requirements of section 422 of
the Code and Treasury Regulations thereunder.
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7.3 Other Terms and Conditions; Nontransferability. Any
Incentive Stock Option granted hereunder shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as are deemed
necessary or desirable by the Board, which terms, together with the terms of
this Plan, shall be intended and interpreted to cause such Incentive Stock
Option to qualify as an "incentive stock option" under section 422 of the Code.
Such terms shall include, if applicable, limitations on Incentive Stock Options
granted to ten-percent owners of the Company as determined under sections
422(b)(6) and 424(d) of the Code. A Stock Option Agreement for an Incentive
Stock Option may provide that such Option shall be treated as a Nonqualified
Stock Option to the extent that certain requirements applicable to "incentive
stock options" under the Code shall not be satisfied. An Incentive Stock Option
shall by its terms be nontransferable otherwise than by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of an
Optionee only by such Optionee.
7.4 Disqualifying Dispositions. If shares of Common Stock
acquired by exercise of an Incentive Stock Option are disposed of within two
years following the Date of Grant or one year following the transfer of such
shares to the Optionee upon exercise, the Optionee shall, promptly following
such disposition, notify the Company in writing of the date and terms of such
disposition and provide such other information regarding the disposition as the
Board may reasonably require.
ARTICLE VII
TERMINATION OF SERVICE
8.1 Death. Unless otherwise provided by the Board and set
forth in the Stock Option Agreement, if an Optionee shall die at any time after
the Date of Grant and while he is an Eligible Person, the executor or
administrator of the estate of the decedent, or the person or persons to whom an
Option shall have been validly transferred in accordance with Section 6.6 hereof
pursuant to will or the laws of descent and distribution, shall have the right,
during the period ending one year after the date of the Optionee's death
(subject to the term of the Option), to exercise the Optionee's Option to the
extent that it was exercisable at the date of the Optionee's death and shall not
have been previously exercised.
8.2 Disability. Unless otherwise provided by the Board and set
forth in the Stock Option Agreement, if an Optionee's employment or other
service with the Company or any Subsidiary shall be terminated as a result of
his permanent and total disability (within the meaning of section 22(e)(3) of
the Code) at any time after the Date of Grant and while he is an Eligible
Person, the Optionee (or in the case of an Optionee who is legally
incapacitated, his guardian or legal representative) shall have the right,
during a period ending one year after the date of his disability (subject to the
term of the Option), to exercise an Option to the extent that it was exercisable
at the date of such termination of employment or other service and shall not
have been exercised.
8.3 Termination for Cause. Unless otherwise provided by the
Board and set forth in the Stock Option Agreement, if an Optionee's employment
or other service with the Company or any Subsidiary shall be terminated for
cause, the Optionee's right to exercise any
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<PAGE> 8
unexercised portion of an Option shall immediately terminate and all rights
thereunder shall cease. For purposes of this Section 8.3, termination for
"cause" shall include, but not be limited to, embezzlement or misappropriation
of corporate funds, any acts of dishonesty resulting in conviction for a felony,
misconduct resulting in material injury to the Company or any Subsidiary,
significant activities harmful to the reputation of the Company or any
Subsidiary, a significant violation of Company or Subsidiary policy, willful
refusal to perform, or substantial disregard of, the duties properly assigned to
the Optionee, or a significant violation of any contractual, statutory or common
law duty of loyalty to the Company or any Subsidiary. Notwithstanding the
foregoing, in the event an Optionee is party to an employment (or similar)
agreement with the Company or any Subsidiary that defines the term "cause," such
definition shall apply for purpose of the Plan. The Board shall have the power
to determine whether the Optionee has been terminated for cause and the date
upon which such termination for cause occurs. Any such determination shall be
final, conclusive and binding upon the Optionee
8.4 Other Termination of Service. Unless otherwise provided by
the Board and set forth in the Stock Option Agreement, if an Optionee's
employment or other service with the Company or any Subsidiary shall be
terminated for any reason other than death, permanent and total disability or
termination for cause, the Optionee shall have the right, during the period
ending 90 days after such termination (subject to the term of the Option), to
exercise an Option to the extent that it was exercisable at the date of such
termination and shall not have been exercised. For purposes of this Section 8.4,
an Optionee shall not be considered to have terminated employment or other
service with the Company or any Subsidiary until the expiration of the period of
any military, sick leave or other bona fide leave of absence, up to a maximum
period of 60 days (or such greater period during which the Optionee is
guaranteed reemployment either by statute or contract).
8.5 Violation of obligations in respect of Confidentiality and
Non-Competition. Unless otherwise provided by the Board and set forth in the
Stock Option Agreement, if an Optionee shall breach obligations arising under a
written or oral agreement and relating to obligations in respect of
confidentiality, non-disclosure and non-competition, the Optionee's right to
exercise any unexercised portion of an Option shall immediately terminate and
all rights thereunder shall cease. The Board shall have sole discretion to
determine whether an Optionee has violated obligations in respect of
confidentiality, non-disclosure and non-competition.
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ARTICLE IX
CHANGE IN CONTROL
9.1 Consequences. With respect to any Optionee, unless
otherwise provided in the Stock Option Agreement and in all cases subject to any
provision in any employment agreement between the Company and an Optionee, upon
an "outright change in control" of the Company (as defined below), each
outstanding Option, to the extent that it shall not otherwise have become vested
and exercisable, shall automatically become fully and immediately vested and
exercisable, without regard to any otherwise applicable vesting requirement.
Upon a "significant change in control" of the Company (as defined below), unless
otherwise provided by the Board in its discretion at that time or at any
previous time or set forth in the Stock Option Agreement or elsewhere in this
Plan, and in all cases subject to any employment agreement between the Company
and the Optionee, with respect to any Optionee each outstanding Option shall
remain unchanged, regardless of whether it shall have become vested and
exercisable.
9.2 Definition. For purposes of Section 9.1 hereof, an
"outright change in control" of the Company shall mean:
(i) the approval by the stockholders of the Company, and the
completion of the transaction resulting from such approval, of (A) the sale or
other disposition of all or substantially all the assets of the Company or (B) a
complete liquidation or dissolution of the Company; or
(ii) the acquisition by any entity or individual of one
hundred percent of the capital stock of the Company, other than a transaction
described in Section 9.2(x).
For purposes of Section 9.1 hereof, a "significant change in
control" of the Company shall mean:
(x) the approval by the stockholders of the Company, and the
completion of the transaction resulting from such approval, of a merger,
consolidation, reorganization or similar corporate transaction, whether or not
the Company is the surviving corporation in such transaction, in which the
outstanding shares of common stock of the Company are converted into (A) shares
of stock of another company, other than a conversion into shares of voting
common stock of the successor corporation (or a holding company thereof)
representing fifty percent (50%) or more of the voting power of all capital
stock thereof outstanding immediately after the merger or consolidation or (B)
other securities (of either the Company of another company) or cash or other
property; or
(y) the removal of a majority of the individuals who are at
that time members of the Board of Directors.
Notwithstanding the foregoing, neither an "outright change
control" nor a "significant change in control" shall include any transaction the
purpose of which is to reorganize the Company's corporate structure,
reincorporate the Company in another jurisdiction or
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undertake any other action which does not materially affect the ownership and
control of the Company at the time of such transaction.
ARTICLE X
STOCK CERTIFICATES
10.1 Issuance of Certificates. Subject to Section 10.2 hereof,
the Company shall issue a stock certificate in the name of the Optionee (or
other person exercising the Option in accordance with the provisions of the
Plan) for the shares of Common Stock purchased by exercise of an Option as soon
as practicable after due exercise and payment of the aggregate Option Price for
such shares. A separate stock certificate or separate stock certificates shall
be issued for any shares of Common Stock purchased pursuant to the exercise of
an Option that is an Incentive Stock Option, which certificate or certificates
shall not include any shares of Common Stock that were purchased pursuant to the
exercise of an Option that is a Nonqualified Stock Option.
10.2 Conditions. The Company shall not be required to issue or
deliver any certificate for shares of Common Stock purchased upon the exercise
of any Option granted hereunder or any portion thereof prior to fulfillment of
all of the following conditions:
(i) the completion of any registration or other qualification
of such shares, under any federal or state law or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body, that the Board shall in its sole
discretion deem necessary or advisable;
(ii) the obtaining of any approval or other clearance from any
federal or state governmental agency which the Board shall in its sole
discretion determine to be necessary or advisable;
(iii) the lapse of such reasonable period of time following
the exercise of the Option as the Board from time to time may establish
for reasons of administrative convenience;
(iv) satisfaction by the Optionee of all applicable
withholding taxes or other withholding liabilities; and
(v) if required by the Board, in its sole discretion, the
receipt by the Company from an Optionee of (i) a representation in
writing that the shares of Common Stock received upon exercise of an
Option are being acquired for investment and not with a view to
distribution and (ii) such other representations and warranties as are
deemed necessary by counsel to the Company.
10.3 Legends. The Company reserves the right to legend any
certificate for shares of Common Stock, conditioning sales of such shares upon
compliance with applicable federal and state securities laws and regulations.
ARTICLE XI
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EFFECTIVE DATE, TERMINATION AND AMENDMENT
11.1 Effective Date; Stockholder Approval. The Plan shall
become effective on the date of its adoption by the Board; provided, however,
that no Incentive Stock Option shall be exercisable by an Optionee unless and
until the Plan shall have been approved by the stockholders of the Company,
which approval shall be obtained within 12 months before or after the adoption
of the Plan by the Board.
11.2 Termination. The Plan shall terminate on the date
immediately preceding the tenth anniversary of the date the Plan is adopted by
the Board. The Board may, in its sole discretion and at any earlier date,
terminate the Plan. Notwithstanding the foregoing, no termination of the Plan
shall in any manner affect any Option theretofore granted without the consent of
the Optionee or the permitted transferee of the Option.
11.3 Amendment. The Board may at any time and from time to
time and in any respect, amend or modify the Plan. Solely to the extent deemed
necessary or advisable by the Board, for purposes of complying with sections 422
or 162(m) of the Code or rules of any securities exchange or for any other
reason, the Board may seek the approval of any such amendment by the Company's
stockholders . Notwithstanding the foregoing, no amendment or modification of
the Plan shall in any manner affect any Option theretofore granted without the
consent of the Optionee or the permitted transferee of the Option.
ARTICLE XII
MISCELLANEOUS
12.1 Employment or Other Service. Nothing in the Plan, in the
grant of any Option or in any Stock Option Agreement shall confer upon any
Eligible Person the right to continue in the capacity in which he is employed by
or otherwise provides services to the Company or any Subsidiary. Notwithstanding
anything contained in the Plan to the contrary, with respect to any particular
Optionee unless otherwise provided in a Stock Option Agreement and, in the case
of any particular Optionee, subject to any agreement between the Company and the
respective Optionee, no Option shall be affected by any change of duties or
position of the Optionee (including a transfer to or from the Company or any
Subsidiary), so long as such Optionee continues to be an Eligible Person.
12.2 Rights as Stockholder. An Optionee or the permitted
transferee of an Option shall have no rights as a stockholder with respect to
any shares subject to such Option prior to the purchase of such shares by
exercise of such Option as provided herein. Nothing contained herein or in the
Stock Option Agreement relating to any Option shall create an obligation on the
part of the Company to repurchase any shares of Common Stock purchased
hereunder.
12.3 Other Compensation and Benefit Plans. The adoption of the
Plan shall not affect any other stock option or incentive or other compensation
plans in effect for the Company or any Subsidiary, nor shall the Plan preclude
the Company from establishing any other forms of incentive or other compensation
for employees of the Company or any Subsidiary. The amount of any compensation
deemed to be received by an Optionee as a result of the exercise of an Option or
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the sale of shares received upon such exercise shall not constitute compensation
with respect to which any other employee benefits of such Optionee are
determined, including, without limitation, benefits under any bonus, pension,
profit sharing, life insurance or salary continuation plan, except as otherwise
specifically determined by the Board or the Board or provided by the terms of
such plan.
12.4 Plan Binding on Successors. The Plan shall be binding
upon the Company, its successors and assigns, and the Optionee, his executor,
administrator and permitted transferees.
12.5 Construction and Interpretation. Whenever used herein,
nouns in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender. Headings of Articles and Sections hereof are
inserted for convenience and reference and constitute no part of the Plan.
12.6 Severability. If any provision of the Plan or any Stock
Option Agreement shall be determined to be illegal or unenforceable by any court
of law in any jurisdiction, the remaining provisions hereof and thereof shall be
severable and enforceable in accordance with their terms, and all provisions
shall remain enforceable in any other jurisdiction.
12.7 Governing Law. The validity and construction of this Plan
and of the Stock Option Agreements shall be governed by the laws of the State of
Delaware.
12.8 Section 162(m) IPO Transition Rule. The Plan is intended
to qualify for the transition relief provided under Treasury Regulation
Section 1.162-27(f). Accordingly, all compensation realized by Optionees in
connection with Options granted under the Plan within the reliance period
described therein is intended to be exempt from the limitation on tax
deductibility under section 162(m). For purposes of the Plan, the reliance
period will expire on the earlier of (i) the expiration of the Plan, (ii) a
"material modification" of the Plan (within the meaning of Treasury Regulation
Section 1.162-27(h)(1)(iii)), (iii) the issuance of all Common Stock that has
been allocated under the Plan, or (iv) the first meeting of Company stockholders
at which directors are to be elected that occurs after the close of the third
calendar year following the calendar year in which the initial public offering
occurs.
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EXHIBIT 10.23
FORM OF
PREFERRED STOCK PURCHASE AGREEMENT
BY AND BETWEEN
APPLIEDTHEORY CORPORATION
AND
NYSERNET.NET, INC.
DATED AS OF ______________, 1999
<PAGE> 2
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of ________________, 1999, by and between AppliedTheory
Corporation, a Delaware corporation (the "Company"), and NYSERNet.net, Inc., a
New York corporation (the "Seller").
RECITALS
WHEREAS, the Seller owns 15,000 shares of preferred stock, par value
$0.01 per share, of the Company (the "Preferred Shares"); and
WHEREAS, the Company has filed a registration statement on Form S-1
(the "Registration Statement") with respect to the sale of approximately
____________ shares of the Company's common stock, par value $0.01 per share, in
an underwritten initial public offering (the "Offering");
WHEREAS, the Company desires to purchase for cancellation (the "Company
Purchase") from the Seller the Preferred Shares, and the Seller desires to sell
the Preferred Shares to the Company at a price of $100 per Preferred Share, plus
accrued and unpaid dividends of $______, which amount is the total of accrued
and unpaid dividends to (but not including) the Closing Date (as hereinafter
defined) (the "Purchase Price per Share"), upon the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, the Company Purchase is conditioned upon, among other things,
the consummation of the proposed Offering.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. In addition to the terms defined elsewhere
herein, the following terms shall have the meanings specified below when used
herein:
"Business Day" means a day, other than a Saturday or a Sunday, on which
commercial banks are not required or authorized to close in the City of New
York.
"Closing Date" means the closing date with respect to the proposed
Offering.
"Governmental Agency" means (a) any domestic or foreign, federal,
state, county, local or municipal government or administrative agency or
political subdivision thereof,
<PAGE> 3
(b) any governmental agency, authority, board, bureau, commission, department or
instrumentality, (c) any court or administrative tribunal, (d) any
non-governmental agency, tribunal or entity that is vested by a governmental
agency with applicable jurisdiction or (e) any arbitration tribunal or other
non-governmental authority with applicable jurisdiction.
"Lien" means any lien, mortgage, pledge or other security interest.
"Permit" means any permit, approval, consent, authorization, license,
variance or permission required by a Governmental Agency under any applicable
laws.
"Person" means any individual, partnership, corporation, trust,
association, limited liability company, Governmental Agency or any other entity.
ARTICLE II
SALE AND PURCHASE
Section 2.1. Agreement to Sell and to Purchase for Cancellation. On the
terms set forth herein and subject to Section 2.3 below, on the Closing Date,
the Company shall purchase for cancellation from the Seller, and Seller shall
sell, transfer, assign, convey and deliver to the Company, the Preferred Shares.
Section 2.2. Purchase for Cancellation and Sale of Preferred Shares. On
the terms and subject to the conditions set forth in this Agreement, on the
Closing Date:
(a) The Seller shall deliver to the Company certificates
representing the Preferred Shares, duly endorsed in blank for transfer
or accompanied by appropriate powers duly executed in blank.
(b) The Company shall deliver to the Seller, by wire transfer
of immediately available funds, the Purchase Price per Share for each
Preferred Share purchased pursuant to this Agreement.
Section 2.3. The Company Purchase is conditioned only upon the
consummation of the proposed Offering and such other conditions as set forth in
Article V.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Company as follows:
Section 3.1. Authority of Seller.
(a) The Seller is duly organized, validly existing and in good
standing under the laws of the State of New York, with full corporate
power and authority to execute and deliver this Agreement.
(b) The execution and delivery by the Seller of this Agreement
and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the
part of the Seller, and this Agreement constitutes the legal, valid and
binding obligation of the Seller enforceable against the Seller in
accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, moratorium or similar laws from time
to time in effect which affect creditors' rights generally, and by
legal and equitable limitations on the enforceability of specific
remedies.
Section 3.2. Title to the Preferred Shares. The Seller has valid and
marketable title to the Preferred Shares, free and clear of any Liens.
Section 3.3. No Conflict or Violation. Neither the execution and
delivery of this Agreement by the Seller, nor the consummation of the
transactions contemplated hereby, nor the fulfillment of the terms hereof will
conflict with or result in a breach of or a default (or in an occurrence which
with the lapse of time or action by a third party, or both, could result in a
default) with respect to any of the terms, conditions or provisions of any
applicable order, writ or decree of any court or of any Governmental Agency
applicable to the Seller, or of the organizational documents of the Seller, as
they may be amended as of the date hereof, or of any indenture, contract,
agreement, lease or other instrument to which the Seller is a party or subject
or by which the Seller or any of its properties or assets are bound, or of any
applicable statute, rule or regulation to which the Seller or its businesses is
subject, except for those conflicts, breaches or defaults which could not
reasonably be expected to have a material adverse effect on the Seller or
materially impair the ability of the Seller to consummate the transactions
contemplated by this Agreement.
Section 3.4. Brokers. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried on by the Seller without
the intervention of any other Person acting on its behalf in such manner as to
give rise to any valid claim by any such Person against the Company for a
finder's fee, brokerage commission or other similar payment based on an
arrangement with the Seller.
3
<PAGE> 5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Seller as follows:
Section 4.1. Authority of the Company.
(a) The Company is duly organized, validly existing and in
good standing under the laws of the State of Delaware, with full
corporate power and authority to execute and deliver this Agreement.
(b) The execution and delivery by the Company of this
Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action
on the part of the Company, and this Agreement constitutes the legal,
valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium or similar
laws from time to time in effect which affect creditors' rights
generally, and by legal and equitable limitations on the enforceability
of specific remedies.
Section 4.2. No Conflict or Violation. Neither the execution and
delivery of this Agreement by the Company, nor the consummation of the
transactions contemplated hereby, nor the fulfillment of the terms hereof will
conflict with or result in a breach of or a default (or in an occurrence which
with the lapse of time or action by a third party, or both, could result in a
default) with respect to any of the terms, conditions or provisions of any
applicable order, writ or decree of any court or of any Governmental Agency
applicable to the Company, or of the Certificate of Incorporation or Bylaws of
the Company, as they may each be amended as of the date hereof, or of any
indenture, contract, agreement, lease or other instrument to which the Company
is a party or subject or by which the Company or any of its properties or assets
are bound, or of any applicable statute, rule or regulation to which the Company
or its businesses is subject, except for those conflicts, breaches or defaults
which could not reasonably be expected to have a material adverse effect on the
Company or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
Section 4.3. Brokers. All negotiations relative to this Agreement and
the transactions contemplated hereby have been carried on by the Company without
the intervention of any other Person acting on its behalf in such manner as to
give rise to any valid claim by any such Person against the Seller for a
finder's fee, brokerage commission or other similar payment based on an
arrangement with the Company.
4
<PAGE> 6
ARTICLE V
CERTAIN COVENANTS AND AGREEMENTS
Section 5.1. Transfer Taxes. Any sales, recording, transfer, stamp,
documentary or other similar taxes (but in any event not to include any income
taxes, taxes on capital gains or any taxes on unrelated business income
recognized or earned by the Seller) imposed as a result of the purchase for
cancellation of the Preferred Shares by the Company pursuant to this Agreement
shall be borne by the Company.
Section 5.2. Efforts. Upon the terms and subject to the conditions of
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable consistent with applicable law
to consummate and make effective the transactions contemplated hereby.
Section 5.3. Accuracy of Representations and Warranties of Seller on
Closing Date. It shall be a condition to the obligations of the Company to
purchase the Preferred Shares on the Closing Date that all the representations
and warranties of the Seller contained herein be true and correct on and as of
the Closing Date, as if made on and as of the Closing Date, and the Company
shall have received a certificate to that effect from an authorized
representative of the Seller.
Section 5.4. Accuracy of Representations and Warranties of Company on
Closing Date. It shall be a condition to the obligations of the Seller to sell
the Preferred Shares on the Closing Date that all the representations and
warranties of the Company contained herein be true and correct on and as of the
Closing Date, as if made on and as of the Closing Date, and the Seller shall
have received a certificate to that effect from an authorized representative of
the Company.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1. Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given (a) when delivered
personally to the recipient, (b) when sent to the recipient by telecopy (receipt
electronically confirmed by sender's telecopy machine) if during normal business
hours of the recipient, otherwise on the next Business Day, (c) one (1) Business
Day after the date when sent to the recipient by reputable express courier
service (charges prepaid) or (d) seven (7) Business Days after the date when
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
will be sent to the Company and to the Seller at the addresses indicated below:
(A) if to the Company, at 40 Cutter Mill Road, Suite 405,
Great Neck, NY 11021, Attention: David A. Buckel, Vice President and
Chief
5
<PAGE> 7
Financial Officer, or at such other address as the Company may have
furnished to the Seller in writing, with a copy to: Dewey Ballantine
LLP, 1301 Avenue of the Americas, New York, NY 10019, Attention: Frank
E. Morgan II, Esq.; and
(B) if to the Seller, at 125 Elwood Davis Road, Syracuse, NY
13212, Attention: Dr. Francis C. Lees, Chairman, or at such other
address as the Seller may have furnished to the Company in writing,
with a copy to: Underberg & Kessler LLP, 1800 Chase Square, Rochester,
NY 14604, Attention: Robert F. Mechur, Esq.
Section 6.2. Amendments. The terms, provisions and conditions of this
Agreement may not be changed, modified or amended in any manner except by an
instrument in writing duly executed by each party hereto.
Section 6.3. Assignment and Parties in Interest.
(a) Neither this Agreement nor any of the rights, duties, or
obligations of any party hereunder may be assigned or delegated (by
operation of law or otherwise) by any party hereto except with the
prior written consent of the other parties hereto.
(b) This Agreement shall not confer any rights or remedies
upon any person or entity other than the parties hereto and their
respective permitted successors and assigns.
Section 6.4. Expenses. Except as expressly set forth in this Agreement,
each party to this Agreement shall bear all of its legal, accounting, investment
banking and other expenses incurred by it or on its behalf in connection with
the transactions contemplated by this Agreement, whether or not such
transactions are consummated.
Section 6.5. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof,
supersedes and is in full substitution for any and all prior agreements and
understandings among them relating to such subject matter, and no party shall be
liable or bound to the other party hereto in any manner with respect to such
subject matter by any warranties, representations, indemnities, covenants, or
agreements except as specifically set forth herein.
Section 6.6. Descriptive Headings. The descriptive headings of the
several sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 6.7. Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by any one or more
parties hereto, and each such executed counterpart shall be, and shall be deemed
to be, an original, but all of which shall constitute, and shall be deemed to
constitute, in the aggregate but one and the same instrument.
6
<PAGE> 8
Section 6.8. Governing Law. This Agreement and the legal relations
between the parties hereto shall be governed by and construed in accordance with
the laws of New York, applicable to contracts made and performed therein without
regard to principles of conflicts of law.
Section 6.9. Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction will be applied against any party. Any
references to any federal, state, local or foreign statute or law will also
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. Unless the context otherwise requires: (a) a term has the
meaning assigned to it by this Agreement; (b) "or" is disjunctive but not
exclusive; (c) words in the singular include the plural, and in the plural
include the singular; and (d) provisions apply to successive events and
transactions.
Section 6.10. Severability. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument. Furthermore, in lieu of any such invalid
or unenforceable term or provision, the parties hereto intend that there shall
be added as a part of this Agreement a provision as similar in terms to such
invalid or unenforceable provision as may be possible and be valid and
enforceable.
Section 6.11. Specific Performance. Without limiting or waiving in any
respect any rights or remedies of the Company under this Agreement now or
hereinafter existing at law or in equity or by statute, each of the parties
hereto shall be entitled to seek specific performance of the obligations to be
performed by the other in accordance with the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first written above.
APPLIEDTHEORY CORPORATION
By: _________________________________
Name:
Title:
NYSERNET.NET, INC.
By: _________________________________
Name:
Title:
7
<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 12, 1999
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