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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [ NO FEE REQUIRED ]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 000-25759
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 16-1491253
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
1500 BROADWAY, 3RD FLOOR, NEW YORK, N.Y. 10036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(212) 398-7070
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE THE NASDAQ STOCK MARKET
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant on March 24, 2000, based upon the closing
price of the Common Stock on the NASDAQ Stock Market for such date, was
approximately $209,532,146.
The number of shares outstanding of the registrant common stock as of March
24, 2000 was approximately 23,540,798.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission on or prior to April 28, 2000 and to be used in connection
with the annual meeting of stockholders expected to be held on May 16, 2000 are
incorporated by reference in Part III of this Form 10-K.
The index of Exhibits filed with this report begins at page 63.
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APPLIEDTHEORY CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 22
Item 3. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 23
Item 6. Selected Financial Data..................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 60
Item 11. Executive Compensation...................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
Item 13. Certain Relationships and Related Transactions.............. 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 60
Signatures............................................................ 66
Exhibits.............................................................. 67
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PART I
From time to time, in both written and in oral statements by our senior
management, we express expectations and other statements regarding future
performance. These forward-looking statements are inherently uncertain and you
must recognize that events could turn out to be different than such expectations
and statements. We discuss key factors impacting current and future performance
in this annual report on Form 10-K (Commission File No. 000-25759) filed with
the SEC and in our other filings and reports. In addition, you should consider
the risk factors included in Item 1, as well as any other information in this
Form 10-K in evaluating our business and us. Any investment in our common stock
involves a high degree of risk.
ITEM 1. BUSINESS.
OUR COMPANY
We are a leading provider of Internet business solutions to mid-sized
businesses, mid-sized departments of larger businesses, and specifically
targeted vertical markets. We offer an extensive array of high performance,
reliable and scalable Internet solutions designed to give our customers the
technological and strategic advantages necessary to effectively compete in a
global digital economy. Our solutions, which fall into the four categories
described below, can be tailored to meet each customers' specific requirements.
We provide these solutions, either as an individually tailored solution or as
part of a fully integrated comprehensive solution. Both approaches are supported
by an unprecedented customer care model.
- E-Business Solutions -- Internet business strategy consulting, solution
integration and enterprise portal development, including custom software
application development, interactive marketing design, Web site
implementation and deployment and integration of legacy systems to
Internet-based applications.
- Web Hosting Solutions -- Customized suite of Unix, NT and Linux
Web-hosting solutions supported by redundant data centers and unmatched
customer care services. Our services include custom offerings of shared,
dedicated and co-location services.
- Security Solutions -- Security consulting services, managed firewalls,
virtual private networks and intrusion detection systems are a few of our
offerings to ensure the integrity of a customer's network.
- Access Solutions -- Internet connectivity, including tiered dedicated,
burstable dedicated, national dial, DSL services and Domain Name
Services.
We operate as one business segment, as a provider of Internet solutions,
and follow the requirements of Statement of Financial Accounting Standards No.
131 ("SFAS No. 131"). "Disclosures About Segments of an Enterprise and Related
Information." Due to the way we manage our operations, we do not account for or
report operating expenses by product/service offering. However, the distribution
of revenues from our major service offerings is approximately as follows:
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YEAR ENDED DECEMBER 31,
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1997 1998 1999
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Net revenues
Internet connectivity (Access and Security solutions)..... 81% 67% 52%
Internet integration and enterprise portal development
(e-Business Solutions)................................. 13 26 40
Web Hosting Solutions..................................... 6 7 8
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100% 100% 100%
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Having evolved out of one of the founding institutions of the Internet, we
have significant experience in delivering the solutions described above. We also
have a robust physical infrastructure. Therefore, we are uniquely able to
recommend, implement, enhance and support comprehensive Internet business
solutions. A 67% increase in our revenue and doubling of our customer base in
1999 and a 95% customer satisfaction rating are evidence of the results of our
strategic competencies.
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As of December 31, 1999, we had over 850 high end customers in a wide range
of industries throughout the United States. Our customers include Time Warner,
Blue Cross/Blue Shield, Gabelli Asset Management, Citibank, Memorial Sloan
Kettering Cancer Center, and Ziff-Davis. In addition, through NYSERNET.org,Inc.,
a not-for-profit corporation that is also affiliated with one of our major
stockholders, we provide services to research and education institutions
including New York University, Columbia University, Brookhaven National
Laboratory, Cornell University, New York City Board of Education and throughout
the State University of New York (SUNY) system. Finally, through the New York
State Department of Labor we provide services to over 47 different states and
territories.
We target mid-sized enterprises and mid-sized departments of larger
enterprises within the commercial markets and the public sector. Additionally,
we focus on a number of strategic vertical markets, including higher education,
the federal government, state and local governments, healthcare and automotive.
Although all of our revenue is currently derived from customers in the United
States, we are beginning to market and develop plans to provide services to
customers in China. During 1998 a small sales office located in Shanghai, China
was established and in 2000 we expect to continue to market and begin providing
training and other services to customers in China. We integrate our solutions to
enable customers to extend their businesses, leverage their legacy databases and
systems, and take advantage of Internet-based marketing opportunities. Driven by
competition and governmental mandates, public and private sector customers
similarly benefit by making greater use of the Internet to serve their
constituencies more cost-effectively with greater returns. Increasingly, these
businesses and institutions are demanding "one-stop-shop" solutions for Internet
services due to the risk, difficulty and expense associated with managing and
integrating the products and services of multiple vendors. Key advantages we
offer our customers include:
- wide breadth of flexible and scalable Internet solutions;
- robust and reliable infrastructure;
- advanced data management;
- simplicity of implementation and lower risk;
- superior customer support.
Superior customer support is the cornerstone of our operational strategy.
Making every customer a reference account is not just a goal, but one of the key
components of our corporate culture and business model. We maintain a proactive
support model using sophisticated monitoring techniques allowing us to minimize
the need for reactive measures and ensure our customers the highest levels of
reliability and availability of their services. Our 95% customer satisfaction
rate in the second half of 1999 demonstrates our exceptional performance. In
addition, our monthly revenue churn has averaged approximately .15% over the
last three years. Revenue churn is the amount of revenue, stated as a percentage
of total revenue for the period, generated by customers who terminated their
service during the period.
Our advanced network technology starts with a fully redundant, rigorously
engineered national Tier 1 backbone. Our national network features network
operation centers on both the Atlantic and the Pacific coasts of the U.S. We
utilize one of the fastest and most reliable Internet backbones in the industry,
ensuring high-speed, reliable data transmissions. We work collaboratively with
industry leaders such as AT&T, Sprint, Bell Atlantic, Pacific Bell and MFS and
have demonstrated a network availability rate of 99.97% since January of 1996.
Complementing our network infrastructure, we have two state-of-the-art data
centers, which provide the foundation necessary to flawlessly operate today's
business-critical Internet applications. Our data centers feature redundant
high-bandwidth connectivity to the Internet, fault-tolerant and self-healing
local area networks, as well as advanced security and power generating systems.
We operate on both the Atlantic and the Pacific coasts of the U.S., with a data
center in Hayward, California and in Syracuse, New York. We offer near 100%
availability through options like content mirroring and local or geographic load
balancing. We intend to add new data centers in fiscal 2000. These new data
centers would be interconnected, together with our existing data centers, by a
full mesh of high-speed data lines to form what we call a virtual gigacenter.
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Our infrastructure-based services, combined with our expertise in creating,
designing and implementing Web-based portals and applications, make us uniquely
able to both recommend and implement total Internet business solutions.
Specifically, we offer our customers:
- a wide breadth of scalable solutions, which can be combined together or
individually deployed to meet the challenges of effectively delivering
digital applications and services;
- Internet business solutions designed to meet long-term business goals and
initial time-to-market demands;
- greater reliability, lower downtime and maximum performance via
state-of-the-art networks and robust, redundant data centers;
- the ability to leverage existing databases and systems that contain as
much as 80% of the information required on a Web-site; and
- a customer care model built around the critical importance of the
Internet in today's business and designed to deliver professional,
effective total commitment to meeting the customer's needs.
We are rapidly strengthening our sales and marketing efforts nationally to
more aggressively pursue customers. Historically, we have generated our revenues
using a small sales force and have expanded our customer base primarily through
word of mouth. In 1999, we tripled our sales staff and now operate 13 sales
offices in key cities throughout the east coast of the U.S. Already in 2000, we
have expanded into northern California and began our Midwest presence with a new
office opening in Detroit, Michigan. In addition, we have created a vertical
sales effort focussed on the following markets:
- higher education;
- the federal government;
- state and local governments;
- healthcare; and
- automotive.
We have targeted a total of 20-30 metropolitan areas throughout the United
States, areas with high concentrations of businesses, and intend to grow our
direct and indirect sales force to more than 150 in the year 2000. We also
intend to extend our vertical market focus to strategic segments where our
services have competitive differentiation and the market opportunity is
significant.
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, Broadwing,
Inc. and Grumman Hill Investments III, LP, a private equity fund advised by
Grumman Hill Group LLC, invested $12.9 million and $6.5 million, respectively,
to acquire approximately 4.4 million and 2.2 million shares of our common stock,
respectively. 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. Since April 30, 1999, our common stock has been publicly traded
on the NASDAQ Stock Market. Our corporate headquarters is located at 1500
Broadway; Third Floor; New York, New York 10036, and our telephone number at
that location is (212) 398-7070.
OUR MARKET OPPORTUNITY
The industry projects that the global information technology professional
services market will grow at a 16.7% compound annual growth rate (CAGR) while
the global Internet professional services market is growing by a 58% CAGR. The
Web-hosting market for small and medium sized businesses is projected to be $16
billion by 2003, according to a study by International Data Corp., or IDC. The
Yankee Group projects that 86% of all medium sized businesses will be online by
the year 2004.
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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. Technology
standards are making it easier and less expensive to provide global Internet
access to businesses and individuals. IDC estimates that Internet users
worldwide will increase from 69 million in 1997 to 320 million in 2002. It took
radio over 38 years, the personal computer over 16 years and the television over
13 years to reach the forecasted market penetration of the Internet.
Increasingly enterprises are finding that in order to remain competitive
they must immediately create and deploy an Internet strategy. According to a
recent Forrester Research study, a full two-thirds of the respondents cited a
lack of internal resources as the impetus for their decision to outsource their
Web-hosting requirements. We believe that in order for business to leverage the
Internet effectively and in the time frames needed to establish competitive
positioning, they must partner with firms who provide the expertise and the
services necessary to meet those challenges. Additionally, these businesses and
institutions are demanding "one-stop-shop" solutions for Internet services due
to the risk, difficulty and expense associated with managing and integrating the
products and services of multiple vendors.
To 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, robust and reliable connections to the Internet;
- sophisticated Internet strategies which are designed to attract and
retain users and customers, improve operating efficiencies and strengthen
relationships with suppliers in order to increase revenue or decrease
expenses;
- design and deployment methodologies that are focussed on the time within
which an initial presence can be established and the breadth of solutions
that are available;
- to operate these solutions in a secure 24x7, 365 day/year environment;
and
- to procure and manage the services and operations to integrate all these
needs.
OUR STRATEGY
Our objective is to be the leading provider of Internet business solutions
to our target markets. To achieve this objective, we will continue to:
- offer an extensive array of high-performance, reliable, and scalable
Internet technology solutions either individually or as part of a
complete package.
- be on the forefront of new technologies and augment our solutions set to
meet the needs of the most demanding global Internet applications.
- rapidly expand our sales & marketing capabilities while increasing our
focus on vertical and horizontal opportunities where we have a
significant strategic competitive advantage.
- enhance our national network and hosting infrastructure by adding
locations and advanced routing capabilities; integrate content delivery
technologies into our existing infrastructure and offerings.
- acquire complementary assets, technologies or businesses which hasten the
attainment of our vision.
Since our initial public offering, we invested in Planning Technologies,
Inc. in 1999 and acquired CRL in January 2000. These measures are intended to
allow us to increase our geographic market presence and enhance the available
solutions to our customers. We intend to continue acquiring or making
investments in complimentary companies in order to expand and enhance both our
geographic market presence and the diversity of our Business solutions. However
in 1999 we did not complete any acquisitions. Our investment in Planning
Technologies Inc. was accounted for as an investment and we did not report any
revenue from this transaction.
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SIGNIFICANT CUSTOMERS
We currently derive a substantial portion of our total revenue from
contracts with two customers -- NYSERNet.org and the New York State Department
of Labor. Under an agreement with NYSERNet we provide services to approximately
140 different customers affiliated with NYSERNet. Each of these customers makes
individual buying decisions resulting in separate agreements. Our contract with
the New York State Department of Labor is for the development and maintenance of
the America's Job Bank Web site. Although this contract is initiated by the New
York State Department of Labor, the contract includes separate maintenance of
America's Job Bank Web sites for 47 different states and territories. Each of
these states and territories make individual buying decisions. For the years
ended December 31, 1999, 1998 and 1997, revenue from NYSERNet.org, Inc.
represented approximately 27%, 37%, and 47% of our total revenue, respectively.
Revenue under the agreement with the New York State Department of Labor for the
years ended December 31, 1999, 1998 and 1997 represented 39%, 28% and 16% of our
total revenue, respectively.
RECENT DEVELOPMENTS
On January 5, 2000, we acquired CRL Network Services, Inc. (CRL) and
renamed the surviving entity AppliedTheory California Corporation. AppliedTheory
California is now a wholly owned subsidiary of us. In connection with this
transaction, we acquired all the outstanding capital stock of CRL in exchange
for up to approximately 2,022,287 shares of our common stock and up to
approximately $9.9 million in cash.
From its base of operations in San Francisco, AppliedTheory California will
extend our business and operations in the western United States. In concert with
our new data center in Hayward, California, AppliedTheory California will
provide advanced Web-hosting services, e-business solutions consulting high
speed Internet access and data networking solutions. AppliedTheory California
owns and operates a national Tier 1 network backbone, providing services
including connectivity, data marketing, hosting, high-bandwidth Intranet and
Internet connectivity services, e-mail services and domain name registration
services.
LEGAL PROCEEDINGS
The Company is involved in various legal proceeding that have arisen
through the normal course of business. Coincident with the acquisition of CRL,
most legal proceedings relating to CRL were assigned to James G. Couch, formerly
the majority stockholder, president and chief executive officer of CRL, and we
have been indemnified against any adverse results of these proceedings.
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.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 1999, we completed our IPO of 5,175,000 shares of our common
stock. The offering was made pursuant to a registration statement on Form S-1
(File No. 333-72133) which registered up to 5,175,000 shares of our common stock
and was declared effective on April 29, 1999. The offering commenced on April
30, 1999 and all 5,175,000 shares registered in our offering were sold at an
initial public offering price of $16.00 per share. The managing underwriters
were Bear, Stearns & Co. Inc., CIBC World Markets Corp., Lehman Brothers Inc.
and Wit Capital Corporation. Gross proceeds from the offering were $82.8
million, $5.8 million of which was applied to the underwriting discount.
Approximately $1.8 million was applied to expenses incurred for our offering. As
a result, net proceeds from the offering approximated $75.2 million. Except as
discussed herein with respect to our repayment of a revolving line of credit and
redemption of our preferred stock to NYSERNet.net, none of the net proceeds of
our offering were paid by us, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person or entity owning 10
percent or more of our equity securities or the equity securities of any of our
affiliates.
On May 5, 1999, we paid approximately $3.8 million to repay outstanding
borrowings under our revolving line of credit with NYSERNet.net, including
accrued interest. We also paid approximately $2.0 million to redeem our
outstanding preferred stock, including accrued dividends, all of which was held
by
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NYSERNet.net. As of March 24, 2000, NYSERNet.net owns approximately 20.0% of our
common stock and has one representative on our board of directors.
On June 22, 1999, the Company purchased convertible preferred stock of
Planning Technologies, Inc. for $5.0 million. For additional information about
this investment, please see our current report on Form 8-K (File No. 000-25749),
filed with the Securities and Exchange Commission, or the SEC, on July 7, 1999.
On January 5, 2000, the Company acquired CRL Network Services, Inc. for up
to approximately $9.9 million in cash and up to approximately 2,022,287 shares
of AppliedTheory Common Stock. For additional information about this investment,
please see our current report on Form 8-K (File No. 000-25749), filed with the
SEC on January 20, 2000.
We used $9 million to date in operations and intend to use the remaining
$38 million of the net proceeds from the offering for general corporate purposes
and working capital requirements, including the following:
- to expand our sales and marketing efforts in 20-30 metropolitan areas;
- to continue to increase the size of our sales force;
- to expand our customer support services;
- for working capital requirements and other general corporate purposes;
and
- for possible acquisitions.
No portion of the proceeds has been allocated for any of the specific
purposes referred to above. We have discretionary authority over the use of the
net proceeds from our offering. In addition, we intend to use a portion of the
net proceeds from our offering to build new data centers and add additional data
center capacity. Pending the above uses, we have invested the proceeds of our
offering in short-term, interest bearing investment grade securities.
During the year ended December 31, 1999, proceeds of approximately $627,000
were generated from the exercise of options for 1,115,818 shares of our common
stock. There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. These options had been granted under our 1996
Incentive Stock Option Plan and were exercised by certain employees and
directors. During the year ended December 31, 1999, proceeds of approximately
$304,000 were generated from issuances under our Employee Stock Purchase Plan of
28,208 shares of our common stock. There were no significant expenses,
underwriting discounts or commissions attributable to these proceeds. The shares
were issued under our 1996 Option Plan and Employee Stock Purchase Plan were
registered through our registration statement on Form S-8 (File No. 333-83177),
which we filed with the SEC on July 19, 1999.
EMPLOYEES
As of December 31, 1999, we had approximately 412 full-time employees
located primarily in the United States, including approximately 210 in data
communications and operational positions, 123 in sales and marketing, and 79 in
general and administrative positions. We believe that our relations with our
employees are good. None of our employees are represented by a labor union or
covered by a collective bargaining agreement and we have never experienced a
work stoppage.
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EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of AppliedTheory:
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NAME AGE TITLE
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Richard Mandelbaum................... 53 Chairman of the Board, Director and Chief
Executive Officer
Lawrence B. Helft.................... 54 President and Chief Operating Officer
James D. Luckett..................... 46 Senior Vice President
Denis J. Martin...................... 41 Senior Vice President and Chief Software
Engineer
David A. Buckel...................... 38 Senior Vice President and Chief Financial
Officer
Dominic DeAngelo..................... 56 Director
Shelley A. Harrison.................. 57 Director
James T. Kelsey...................... 48 Director
George Sadowsky...................... 63 Director
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Additional information regarding our executive officers is incorporated by
reference to "Executive Officers" in our proxy statement to be used in
connection with our 2000 annual meeting of stockholders and to be filed with the
SEC on or prior to April 28, 2000.
AVAILABLE INFORMATION
We are 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. You may read and copy all or any portion of
the reports 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). Other information about the
Company may be obtained from AppliedTheory's Web site at
http://www.appliedtheory.com.
RISK FACTORS
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.
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WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO INCREASE IN
THE FORESEEABLE FUTURE.
We have incurred significant net losses and negative cash flows from
operations in each quarterly and annual period since inception and expect to
continue to do so for the foreseeable future. At December 31, 1999 and 1998, we
had an accumulated deficit of approximately $29.8 million and $15.7 million,
respectively. We incurred net losses of $14.1 million, $7.1 million and $6.1
million in the three years ended December 31, 1999, 1998 and 1997, respectively.
In connection with our expansion plans, we anticipate making significant
investments in sales and marketing, new distributed data centers, customer
support and personnel. As a result of our expansion plans, we expect our net
losses and negative cash flows from operations on a quarterly and annual basis
to increase in the foreseeable future. Our ability to achieve profitability is
dependent in large part upon the successful implementation of our regional and
nationwide expansion strategy. We cannot assure you that we will achieve or
sustain revenue growth or profitability on either a quarterly or annual basis.
TO DATE, MOST OF OUR REVENUES HAVE BEEN DERIVED FROM CUSTOMERS LOCATED IN NEW
YORK STATE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR NATIONWIDE GROWTH STRATEGY.
To date, most of our revenues have been derived from customers located in
New York State. Our business strategy is to become a leading national provider
of advanced Internet technology solutions to mid-sized businesses, mid-sized
departments of larger businesses, and specifically targeted vertical markets.
The risks we may encounter in executing our nationwide growth strategy include
the possibility that:
- our solutions are not accepted beyond our current market;
- there are significant delays in the completion of any new data centers or
any existing data centers;
- we fail to successfully implement our sales and marketing strategy on a
national scale;
- we fail in our efforts to build a national sales force; and/or
- we fail to develop a nationally recognized brand.
OUR RAPID GROWTH STRATEGY IS LIKELY TO PLACE A SIGNIFICANT STRAIN ON OUR
RESOURCES.
Our future success depends in large part on our ability to manage any
achieved growth in our business. For our nationwide growth strategy to succeed,
we will need:
- to expand our business with new and current customers;
- to develop and offer successful new products and services;
- to retain key employees and hire new employees; and
- to ensure that any future business we may develop or acquire will perform
in a satisfactory manner.
These activities are expected to place a significant strain on our
resources. Also, we cannot guarantee that any of these will occur or that we
will succeed in managing the results of any success in our nationwide growth
strategy.
OUR ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF
OPERATIONS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
We have experienced significant fluctuations in our results of operations
on a quarterly and annual basis. We expect to continue to experience significant
fluctuations in our future quarterly and annual results of operations due to a
variety of factors, many of which are outside of our control, including:
- demand for and market acceptance of our services;
- customer retention;
- the timing and success of our marketing efforts;
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- the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
- the timely expansion of existing facilities and completion of new
facilities;
- the ability to increase bandwidth as necessary;
- fluctuations in bandwidth used by customers;
- introductions of new services or enhancements by us and our competitors;
- increased competition in our markets;
- economic conditions including those in the Internet access industry;
- potential unfavorable legislative and regulatory developments;
- growth of Internet use and establishment of Internet operations by
mainstream enterprises; and
- changes in our pricing policies and our competitors' pricing policies.
A RELATIVELY LARGE PORTION OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM. AS A
RESULT, OUR RESULTS OF OPERATIONS WILL BE PARTICULARLY SENSITIVE TO FLUCTUATIONS
IN REVENUE.
A relatively large portion of our expenses are fixed in the short-term,
particularly in respect of data and telecommunications costs, depreciation, real
estate occupancy costs, interest expense and personnel. Because we will be
required to incur these fixed expenses, irrespective of our revenue, our future
results of operations are particularly sensitive to fluctuations in revenue.
THE EXPECTED CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES MAY
NOT MATERIALIZE OR MAY MATERIALIZE IN A MANNER WE HAVE NOT ANTICIPATED.
Our market is new and rapidly evolving. Whether, and the manner in which,
the market for our products and services will continue to grow is uncertain. The
market for our products and services may be inhibited for a number of reasons,
including:
- the reluctance of businesses to outsource their Internet integration,
enterprise portal development, Web hosting and Internet connectivity
needs;
- our failure to successfully market our products and services to new
customers; and
- the inability to maintain and strengthen our brand awareness.
OUR SUCCESS DEPENDS IN LARGE PART ON THE CONTINUED GROWTH OF THE INTERNET
MARKET.
Our business will be hurt if Internet usage does not continue to grow.
Internet usage may be inhibited for a number of reasons, including:
- access costs;
- inadequate network infrastructure;
- security concerns;
- uncertainty of legal and regulatory issues concerning use of the
Internet;
- inconsistent quality of service; and
- lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network
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infrastructure. If these outages or delays occur frequently, use of the Internet
as a commercial or business medium could, in the future, grow more slowly or
decline. This could hurt our business.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The Internet-based services market is extremely competitive and many of our
competitors are more established and have greater financial resources than us.
In addition, there are no substantial barriers to entry in this market. We also
expect that competition will intensify in the future. Many of our competitors
have greater market presence, engineering and marketing capabilities and
financial, technological and personnel resources than we do. As a result, as
compared to us our competitors may:
- develop and expand their network infrastructures and service offerings
more efficiently or more quickly;
- adapt more swiftly to new or emerging technologies and changes in
customer requirements;
- take advantage of acquisitions and other opportunities more effectively;
and
- more effectively leverage existing relationships with customers or
exploit a more recognized brand name to market and sell their services.
Our current and prospective competitors, both in New York State and
nationally, generally may be divided into the following three groups:
- Internet access, VPNs and security providers including GTE
Internetworking, Verio Inc., Qwest Communications International Inc.,
Sprint Corporation, AT&T Corp., UUNET Technologies, Inc., Concentric
Network Corp., Cable & Wireless plc, MCI WorldCom, Inc. and other
national and regional providers;
- Web and application hosting companies including Digex, Inc., Frontier
Global Center, GTE Internetworking, Globix Corporation, PSINet Inc.,
Exodus Communications, Inc. and other companies; and
- e-Business solution companies including Razorfish Inc., IBM Global
Services, Andersen Consulting, US Internetworking Inc., Scient Corp.,
Cambridge Technology Partners, Inc., Whittman-Hart Inc., Oracle
Corporation, the Big 5 accounting firms, EDS Corporation and other
companies.
We believe that we may also face competition from other large computer
hardware and software companies and other media, technology and
telecommunications companies.
The number of businesses providing Internet-related services is rapidly
growing. We are aware of other companies, in addition to those named above, that
have entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
WE COULD ENCOUNTER SIGNIFICANT PRICING PRESSURE AS A RESULT OF INCREASED
COMPETITION AND INDUSTRY CONSOLIDATION.
As a result of increased competition and consolidation in the industry, we
could encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of our services. We may not
be able to offset such price reductions even if we obtain an increase in the
number of our customers, derive higher revenue from enhanced services or manage
to reduce our costs. Increased price or other competition could erode our market
share and could significantly hurt our business. We cannot assure you that we
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully in that environment.
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OUR REVENUES ARE HEAVILY DEPENDENT ON TWO CUSTOMERS. IF WE LOSE EITHER OF THESE
CUSTOMERS, IF EITHER OF THEM REDUCES THE AMOUNT OF WORK IT DOES 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
contracts with two customers -- NYSERNet.org, Inc., a not-for-profit corporation
that is also affiliated with one of our major stockholders, and the New York
State Department of Labor. The loss of either of these customers could
significantly hurt our business. For the years ended December 31, 1999, 1998 and
1997, revenue from NYSERNet.org, Inc. represented approximately 27%, 37%, and
47% of our total revenue, respectively. Revenue under the agreement with the New
York State Department of Labor for the years ended December 31, 1999, 1998 and
1997 represented 39%, 28%, and 16% of our total revenue, respectively.
We have an agreement with NYSERNet to provide NYSERNet and its customers
with services. Under this long term agreement we provide services to
approximately 140 different customers affiliated with NYSERNet. Each of these
customers makes individual buying decisions resulting in separate agreements. As
the initial agreements with NYSERNet's customers expire some customers began
contracting directly with us. The initial master agreement has an original term
of three years, ending October 1, 2001, and is automatically renewable for
successive one-year terms. In March 2000 we extended and expanded these services
through an agreement with NYSERNet to upgrade and maintain a minimum of 10 full
OC-3 network backbone connections for NYSERNet and its customers. This agreement
extends until October 2005 and it is estimated that we will receive
approximately $40 million for our services over the term of the agreement. While
these agreements only allow termination by either party under special
circumstances, it is still possible that NYSERNet could terminate the agreement
or cease working with us.
On June 14, 1999, we concluded a contract with NYSERNet to enhance, operate
and maintain NYSERNet2000, NYSERNet's next generation Internet backbone network.
We completed construction of the network in April 1999. Under the terms of the
contract, which extends until 2002, we will enhance and maintain the first OC-12
research network backbone in New York State. We expect to receive approximately
$5.2 million for our services over the term of the contract.
Our contract with the New York State Department of Labor is for the
development and maintenance of the America's Job Bank Web site. Although this
contract is initiated by the New York State Department of Labor, the contract
includes separate maintenance of America's Job Bank Web sites for 47 different
states and territories. Each of these states and territories make individual
buying decisions and may terminate their affiliation with America's Job Bank
annually. The America's Job Bank agreement is subject to cancellation upon 15
days notice by the New York State Department of Labor.
We cannot assure you that revenue from these two customers, or from other
customers that have accounted for significant revenue in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period. In addition, we may not succeed in
diversifying our customer base in future periods.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF SOME OF OUR SERVICES. IF PROBLEMS OCCUR AS A RESULT OF THE CHANGE OF
OWNERSHIP OF BROADWING INTERNET SERVICES, INC. AND THE GEMINI2000 NETWORK, OUR
BUSINESS COULD SUFFER.
Our business model assumes we will use the Gemini2000 Network for delivery
of some of our services. Any failure by Broadwing to maintain the Gemini2000
Network could hurt our business.
OUR BUSINESS AND EXPANSION MODELS ASSUME THAT WE WILL BE ABLE TO EASILY SCALE
THE NETWORK INFRASTRUCTURE WE USE TO ACCOMMODATE INCREASING NUMBERS OF CUSTOMERS
AND INCREASED TRAFFIC. HOWEVER, THE SCALABILITY OF THE GEMINI2000 NETWORK IS
UNPROVEN.
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
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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.
Furthermore, additional network capacity may not be available from Broadwing or
other third-party suppliers as we need it. As a result, our network may not be
able to achieve or maintain a sufficiently high capacity for data transmission.
Any failure on our part to achieve or maintain high data transmission capacity
could significantly reduce customer demand for our services and hurt our
business. If we are required to expand our network significantly and rapidly due
to increased usage, additional stress will be placed upon our network hardware,
traffic management systems and hosting facilities.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH WOULD AFFECT
OUR ABILITY TO COMPETE.
Interruptions in service to our customers could hurt our business. To
succeed, we must be able to operate our network management infrastructure 24
hours per day, seven days per week, without interruption. Our operations depend
upon our ability to protect our network infrastructure, our equipment 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 by
establishing a fully redundant, rigorously engineered national Tier 1 backbone
connected to three different data centers, 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 and dedicate more resources to replacing
existing equipment, expanding facilities or adding redundant facilities;
- cause us to spend money on existing or new equipment and infrastructure
earlier than we plan;
- damage our reputation for reliable service;
- cause existing end-users and resellers to cancel our contracts; or
- make it more difficult for us to attract new end-users and partners.
Any of these results could hurt our business.
Failure of the national telecommunications network and Internet
infrastructure to continue to grow in an orderly manner could result in service
interruptions. While the national telecommunications network and Internet
infrastructure have historically developed in an orderly manner, there is no
guarantee that this will continue as the network expands and more services,
users and equipment connect to the network. Failure by our telecommunications
providers to provide us with the data communications capacity we require could
cause service interruptions, which could hurt our business.
WE ARE DEPENDENT ON NETWORKS BUILT AND OPERATED BY OTHERS. IF WE DO NOT HAVE
CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER.
In delivering our services, we rely on networks, which are built and
operated by others. We do not have control over these networks, nor can we
guarantee that we will continue to have access on terms that fit our business
needs.
Our use of the infrastructure of other communications carriers presents
risks. Our success partly depends upon the capacity, scalability, reliability
and security of the network infrastructure provided to us by telecommunications
network suppliers, including AT&T Corp., Sprint Corporation, Bell Atlantic
Corp., Pacific Bell and Broadwing. Our nationwide expansion plans require rapid
expansion of network capacity,
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which we expect will be satisfied through our internal network and use 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.
The current consolidation of network providers similar to the proposed
merger of MCI WorldCom and Sprint could adversely affect our peering and transit
arrangements with Sprint and UUNet if peering criteria becomes more restrictive
or cost prohibitive. 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, our business could suffer.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS
WHICH COULD RESULT IN OUR BEING LIABLE 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 being
liable 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 purchased 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 AS WELL KNOWN AS SOME OF OUR COMPETITORS, AND FAILURE TO
DEVELOP BRAND RECOGNITION COULD HURT OUR BUSINESS.
To successfully execute our strategy, we must strengthen our brand
awareness. While many of our competitors have well-established brands in
Internet services, to date, our market presence has been limited principally to
New York State. We have generated our existing revenue primarily through a small
sales force and word of mouth. In order to build our brand awareness, our
marketing efforts must succeed, and we must provide high quality services. We
expect to increase our marketing budget substantially as part of our brand
building efforts. We cannot assure you that these investments will succeed as
planned. If we do not build our brand awareness, our ability to realize our
strategic and financial objectives could be hurt.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD SUFFER.
If we do not successfully use or develop new technologies, introduce new
services or enhance our existing services on a timely basis, or new technologies
or enhancements used or developed by us do not gain market acceptance, our
business could be hurt. The Internet industry is characterized by rapidly
changing technology, industry standards, customer needs and competition, as well
as by frequent new product and service introductions. Our future success will
depend, in part, on our ability to accomplish all of the following in a
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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 53%
of our revenues in year ended December 31, 1999. Government contracts are often
subject to a competitive bidding process, which is governed by applicable
federal and state statutes and regulations. The procurement process for
government contracts is complex and can be very time consuming.
Because of our contracts with governmental agencies, we are required to
comply with various government regulations and policies. For instance, we are
required to maintain employment policies relating to equal opportunity, and we
are subject to audit by the government to confirm our compliance with these
policies. If we fail to comply with regulations which apply to government
contractors, we may face sanctions, including substantial fines and
disqualification from being awarded government contracts in the future.
Contracts with governmental agencies are subject to the risk of unilateral
termination by the government for its convenience and reductions in services, or
modifications in contractual terms, due to changes in the government's
requirements or to budgetary restraints.
In addition, the government may not continue to fund the projects and
programs with which we work. Even if funding continues, we may not obtain this
funding. We cannot assure you that we will be able to procure additional
government contracts, that we will be able to retain our existing government
contracts or, if retained, that these contracts will be fully funded.
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WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS, INCLUDING INTEGRATION
RISKS AND RISKS ASSOCIATED WITH METHODS OF FINANCING AND THE IMPACT OF
ACCOUNTING TREATMENT. ALSO, COMPLETED ACQUISITIONS MAY NOT ENHANCE OUR BUSINESS.
A component of our strategy is to acquire network assets, Internet-related
technologies, e-Business companies and other businesses complementary to our
operations. In the 14 months ending February 29, 2000 we have acquired or
invested in several companies. In the future, we intend to acquire additional
Internet companies that complement our existing business model and growth
strategies. However, we expect that competition for appropriate acquisition
candidates may be significant. 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;
- our management's inability to maximize our financial and strategic
position through the incorporation of an acquired technology or business
into our service offerings;
- the difficulty of maintaining uniform standards, controls, procedures and
policies;
- the potential loss of key employees from acquired businesses, and the
impairment of relationships with the employees and customers of an
acquired business as a result of changes in management; and
- the inaccuracy of financial data of acquired companies.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more acquisitions in which the consideration
consists of cash, a significant portion of our available cash, including
proceeds of our initial public 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. The
purchase price of future acquisitions will most likely be significantly greater
than the fair value of the acquired net assets. Acquisitions required to be
accounted for under the purchase method could result in significant goodwill
and/or amortization charges for acquired technology.
WE ARE DEPENDENT ON OUR HARDWARE AND SOFTWARE SUPPLIERS TO PROVIDE US WITH THE
PRODUCTS AND SERVICES WE NEED TO SERVE OUR CUSTOMERS.
We rely on outside vendors to supply us with computer hardware, software
and networking equipment. These products are available from only a few sources.
We purchase virtually all of these products from Sun Microsystems, Inc., Compaq
Computer Corporation and Cisco Systems, Inc. We cannot assure you that we will
be able to obtain the products and services that we need on a timely basis and
at affordable prices.
We have in the past experienced delays in receiving shipments of equipment
purchased for resale. To date, these delays have not adversely affected us, but
we cannot guarantee that we will not be adversely affected by delays in the
future. We may not be able to obtain computer equipment on the scale and at the
times required by us at an affordable cost. Our suppliers may enter into
exclusive arrangements with our competitors or stop selling us their products or
services at commercially reasonable prices. If our sole or limited source
suppliers do not provide us with products or services, our business, financial
condition and results of operations may be significantly hurt.
WE OPERATE IN AN UNCERTAIN REGULATORY AND LEGAL ENVIRONMENT. NEW LAWS AND
REGULATIONS COULD HARM OUR BUSINESS.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. Our
business could suffer depending on the extent to which our activities are
regulated or proposed to be regulated.
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While there are currently few laws or regulations which specifically
regulate Internet communications, laws and regulations directly applicable to
online commerce or Internet communications are becoming more prevalent. There is
much uncertainty regarding the market-place impact of these laws. In addition,
various jurisdictions already have enacted laws covering intellectual property,
privacy, libel and taxation that could affect our business by virtue of their
impact on online commerce. Further, the growth of the Internet, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. If we become subject to claims that we have violated
any laws, even if we successfully defend against these claims, our business
could suffer. Moreover, new laws that impose restrictions on our ability to
follow current business practices or increase our costs of doing business could
hurt our business.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR DISTRIBUTING OR PUBLISHING CONTENT OVER
THE INTERNET, WHICH COULD BE COSTLY FOR US TO DEFEND.
It is possible that claims will be made against online service companies
and Internet access providers in connection with the nature and content of the
materials disseminated through their networks. Several private lawsuits are
pending which seek to impose liability upon online services companies and
Internet access providers as a result of the nature and content of materials
disseminated over the Internet. If any of these actions succeed, we might be
required to respond by investing substantial resources in connection with this
increased liability or by discontinuing some of our service or product
offerings. Also, any increased attention focused upon liability issues relating
to the Internet could also have a negative impact on the growth of Internet use.
Although we carry general liability insurance, it may not be adequate to
compensate us or it may not cover us in the event we become liable for
information carried on or disseminated through our networks. Any costs not
covered by insurance that we incur as a result of liability or asserted
liability for information carried on or disseminated through our networks could
hurt our business.
OUR COMPUTER SYSTEMS AND THOSE OF OUR BUSINESS PARTNERS MAY NOT BE YEAR 2000
COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF OPERATIONS.
The risks posed by the Year 2000 issue could hurt our business in a number
of significant ways. Many currently installed computer systems and software
products accept only two digit entries in the date code field and will not
distinguish 21st century dates from 20th century dates. This may result in
system failures or miscalculations causing disruptions of operations, including
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
We completed a Year 2000 readiness review that included assessment,
implementation, testing and contingency planning. After evaluating our
internally developed software, we believe that this software is Year 2000
compliant. However, we utilize software and hardware developed by third parties
both for our network and for our internal information systems.
We did not experience any significant Year 2000 related problems during the
Year 2000 rollover or in the following months. However, we will continue
monitoring and testing our internal information technology systems throughout
2000 to identify potential problems. 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. We also did not experience any significant problems with these
entities during the Year 2000 rollover and thereafter. However, if these
entities experience future Year 2000 problems and fail to take preventative or
corrective actions in a timely manner, the Year 2000 issue could hurt our
business in ways which are not now quantifiable.
We do not have any information regarding the Year 2000 status of our
customers, most of whom are private companies. We also did not experience any
significant problems with our customers during the Year 2000 rollover and
thereafter. If our customers experience future 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.
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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 have and intend to use the remaining proceeds from our initial public
offering on April 30, 1999 to fund the expansion of our sales and marketing
efforts, build our new data centers, expand our customer support services and
for working capital, making investments or acquisitions and general corporate
purposes. Our business plan includes aggressive expansion through acquisitions
funded mostly with stock but requiring some cash expenses and consideration.
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 financing in order to:
- take advantage of anticipated opportunities or acquisitions of
complementary assets, technologies or businesses;
- develop new products; or
- respond to unanticipated competitive pressures.
If additional funds become necessary, additional financing may not be
available on terms favorable to us or available at all. If adequate funds are
not available or are not available on acceptable terms when needed, our business
could be hurt.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our then current stockholders may be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. If additional funds are raised through
the issuance of debt securities, these securities would have some rights,
preferences and privileges senior to those of the holders of our common stock,
and the terms of this debt could impose restrictions on our operations and
result in significant interest expense to us.
SIGNIFICANT STOCKHOLDERS AND CURRENT MANAGEMENT CONTROL APPROXIMATELY 66% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
Broadwing, NYSERNet.net, Inc. and Grumman Hill control approximately 24.0%,
20.0% and 12.0%, respectively, of our outstanding common stock at March 24,
2000. In addition, our executive officers and directors may be deemed to
beneficially own in the aggregate approximately 66% of our outstanding common
stock, including shares of our common stock owned by Broadwing, 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,
Broadwing, NYSERNet.net, Grumman Hill and our officers and directors, whether
acting alone or together, are able to exert considerable influence over any
stockholder vote, including any vote on the election or removal of directors and
any merger, consolidation or sale of all or substantially all of our assets, and
control our management and affairs. Such control could discourage others from
initiating potential merger, takeover or other change in control transactions.
As a consequence, our business could be hurt. Broadwing, Grumman Hill and
NYSERNet.net each have one representative on our board of directors. In
addition, two of our directors and/or executive officers are also directors of
NYSERNet.net and NYSERNet.org, Inc., a not-for-profit corporation that is also
affiliated with NYSERNet.net. Two of our executive officers are executive
officers of NYSERNet.net and/or NYSERNet.org. Grumman Hill has a significant
equity interest in Broadwing. NYSERNet.net, NYSERNet.org, Broadwing, Grumman
Hill and our officers and directors may have conflicts of interest among
themselves, and their interests could conflict with the interests of our other
stockholders.
WE ARE DEPENDENT ON KEY PERSONNEL AND OPERATE IN AN INDUSTRY WHERE IT IS
DIFFICULT TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
We expect that we will need to hire additional personnel in all areas of
our business. The competition for personnel throughout our industry is intense.
At times, we have experienced difficulty in attracting qualified new personnel.
If we do not succeed in attracting new, qualified personnel or retaining and
motivating our current personnel, our business could suffer. We are also
dependent on the continued services of our key
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personnel, including our senior management. We have entered into employment
agreements with Richard Mandelbaum, Lawrence B. Helft, Denis J. Martin, and
David A. Buckel. We have also secured key man insurance policies on the lives of
Messrs. Mandelbaum and Martin.
OUR STOCK PRICE MAY BE VOLATILE.
Stock prices of technology companies, especially Internet-related
companies, have been highly volatile. The current trading price of our common
stock may not be indicative of prices that will prevail in the trading market.
Various factors could cause the market price of our common stock to fluctuate
substantially. These factors may include:
- variations in our revenue, earnings and cash flow;
- announcements of new service offerings, technological innovations or
price reductions by us, our competitors or providers of alternative
services;
- changes in analysts' recommendations or projections; and
- changes in general economic and market conditions.
In addition, the U.S. equity markets in general have periodically had
significant price corrections, trading volume fluctuations and prolonged periods
of decline. These events would particularly impact the stock prices for
Internet-related, technology and telecommunications companies. Specifically,
these events may adversely affect the future market price of our common stock in
a significant manner. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against the company in question. If we become subject to
securities litigation, we could incur substantial costs and experience a
diversion of management's attention and resources.
Also, a substantial number of shares of common stock issuable upon exercise
of outstanding stock options are available for resale in the public market as a
result of our registering a registration statement on Form S-8 with the SEC on
July 19, 1999 (File No. 333-83177) in order to register the shares issued and
issuable upon the exercise of options granted under our 1996 Incentive Stock
Option Plan, or granted and to be granted under our 1999 Stock Option Plan and
our 1999 Employee Stock Purchase Plan.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR FUTURE SALE.
THE FUTURE SALE OF A LARGE AMOUNT OF OUR STOCK, OR THE PERCEPTION THAT THESE
SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of future sales
of a large number of shares of for common stock in the market after our initial
public offering.
As a result of our re-offer prospectus filed on Form S-8 with the SEC on
July 19, 1999, approximately 19.2% of the shares of our outstanding common stock
no longer qualify as "restricted securities" under Rule 144 of the Securities
Act and, under the Securities Act, these shares may be freely re-offered and re-
sold. However, stockholders who sell shares of our common stock under this
re-offer prospectus must comply with the volume of sale limitations imposed
under Rule 144(e) of the Securities Act.
As of March 24, 2000 56.7% of the shares of our common stock continue to be
restricted securities. The holders of these restricted securities have
registration rights with respected to these restricted shares and with respect
to any after-acquired shares. Also, under Rule 144 these shares become freely
tradable in the future.
Therefore, through the re-offer prospectus, as a result of registration
rights and under Rule 144, a large number of shares of our common stock may
become freely tradable and affect the market for our stock.
GLOSSARY
Set forth below are definitions of some of the technical terms used in this
annual report on Form 10-K.
Backbone A centralized high-speed network that interconnects
smaller, independent networks.
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<PAGE> 21
Bandwidth The number of bits of information which can move
over a communications medium in a given amount of
time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users in
increments from 56 Kbps to T-3.
Data center A collection of Web servers, routers and
infrastructure used to perform Web hosting
services.
DSL A term referring to a variety of new digital
subscriber line technologies. Some of these
varieties are asymmetric with different data rates
in the downstream and upstream directions. Others
are symmetric. Downstream speeds range from 384
kilobits (or "SDSL") to 1.5-8 Mbps (or "ADSL").
e-business Business conducted using any aspect of the Internet
including consumer to business and business to
business.
Electronic mail or e-mail An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an e-mail
address.
56 Kbps Equivalent to a single high-speed telephone service
line; capable of transmitting one voice call or 56
Kbps of data. Currently in widespread use by medium
and large businesses primarily for entry level
high-speed data and very low-speed video
applications.
Host A computer with direct access to the Internet.
HTML Hypertext Markup Language used to produce Web
pages. It is a method of presenting information
where selected words can be "expanded" to provide
other information about the word.
Internet An open global network of interconnected
commercial, educational and governmental computer
networks which utilize TCP/IP, a common
communications protocol.
Intranet A TCP/IP based network or Web site that is securely
isolated from the Internet and serves the internal
needs of a company or institution.
IP Internet protocol.
ISDN Integrated services digital network. A network that
provides digital voice and data services through a
single medium.
Kbps Kilobits per second. A measure of digital
information transmission rates. One kilobit equals
1,000 bits of digital information. Normally, 10
bits are used for each alphanumeric character.
Linux An operating system designed to provide personal
computer users a free operating system similar to
UNIX.
Local area network or LAN A data communications network designed to
interconnect personal computers, workstations,
minicomputers, file servers and other
communications and computing devices within a
localized environment.
MBPS Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.
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<PAGE> 22
Modem A device for transmitting information over an
analog communications channel such as a traditional
telephone circuit.
Network A collection of distributed computers which share
data and information through inter-connected lines
of communication.
NOC Network operation center.
NT An operating system developed by Microsoft
Corporation to take advantage of enhanced features
from Windows 95.
OC-3 OC-3 SONET high capacity optical telecommunications
line capable of transmitting data at 155.52 Mbps.
OC-12 OC-12 SONET high capacity optical
telecommunications line capable of transmitting
data at 622.08 Mbps.
On-line services Commercial information services that offer a
computer user access through a modem to a specified
slate of information, entertainment and
communications menus. These services are generally
closed systems, although many are now offering full
Internet access.
Peering The commercial practice under which nationwide
Internet service providers exchange each other's
traffic, in most cases, without the payment of
settlement charges.
POPs Points-of-presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a
local telephone call or using a short-distance
permanent data circuit.
Protocol A formal description of message formats and the
rules two or more machines must follow in order to
communicate.
Router A device that receives and transmits data packets
between segments in a network or different
networks.
Route Mile One mile of the actual geographic length of the
high capacity telecommunications fiber route.
Server Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. The term also refers to the computer on
which server software runs.
SONET Synchronous optical network.
Tier 1 A national high-speed network capable of providing
high speed, reliable data transmission.
Tier 2 or 3 A regional or local network capable of providing
moderate to low speed data transmission.
TCP/IP Transmission control protocol/Internet protocol. A
compilation of network and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
T-3 or DS-3 A data communications line capable of transmitting
data at 45 Mbps.
UNIX A computer operating system for workstations and
personal computers and noted for its portability
and communications functionality.
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<PAGE> 23
Virtual gigacenter 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.
Web or World Wide Web A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
Web hosting The process of hosting Web sites and providing
access to customers.
Web server The computer system that runs Web software, used to
create custom Web sites, Web pages, and home pages.
Web sites or Web pages A site located on the Web, written in the HTML or
SGML language.
ITEM 2. PROPERTIES.
Our primary operations and administrative workforce is based in Syracuse,
New York occupying 44,000 square feet of office space in downtown Syracuse under
a lease expiring in December 2007. Our largest data center and an engineering
facility occupy 21,250 square feet and 7,700 square feet, respectively, located
in an office park in Liverpool, New York, a suburb of Syracuse. These leases
expire in November 2008 and May 2009, respectively. Our data center for the
Pacific Coast of the U.S. is located in 15,400 square feet in an office park in
Hayward, California under a lease expiring in September 2009. The Company's
executive offices and marketing and sales personnel are located in 17,300 square
feet in an office building in New York, New York under a lease expiring in July
2009. Another data center is located in 5,250 square feet in a different office
building in New York City under a lease expiring in September 2006. We are
currently in the process of relocating this data center to another facility. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other Expense.
Our network operations center is located in 6,500 square feet of office
space in Columbia, Maryland under a lease expiring in September 2006. We also
lease various office space and rack space to provide POPs and sales offices in
metropolitan cities across the United States.
We believe that these facilities are adequate for our current needs and
that additional space required resulting from our expansion shall be available
at appropriate commercial rates.
ITEM 3. LEGAL PROCEEDINGS.
The Company is periodically involved in certain disputes, claims and
threatened with or named as a defendant in lawsuits. Some of these disputes,
lawsuits and threatened litigation include claims asserting alleged breach of
agreements and some of them relate to unresolved issues of law arising out of or
relating to the developing nature of the Internet and on-line services
industries. See, for example, "Risk Factors -- Legal liability for distributing
or publishing content over the Internet" in Item 1 of this Form 10-K.
On January 5, 2000, AppliedTheory California Corporation, a Delaware
corporation that is a successor to CRL Network Services, Inc., became a wholly
owned subsidiary of the Company as a result of the closing of the Company's
acquisition of CRL Network Services, Inc. AppliedTheory California is a party to
an action filed in the Superior Court of California by Zero.net, Inc. against
CRL Network Services, Inc., James G. Couch, a major stockholder in CRL, and
other parties. In this suit Zero.net seeks damages in excess of $5 million for
fraud and breach of fiduciary duty allegedly committed by the defendants in
connection with the purchase by Zero.net of CRL common stock from James G.
Couch, a holder of 7% of the voting stock of AppliedTheory. As a result of our
acquisition of CRL, all CRL common stock has converted into the right to receive
shares of our common stock. All liabilities for claims of CRL have been assigned
to Mr. Couch in connection with the Agreement and Plan of Merger, dated January
5, 2000, by and among James G. Couch, CRL, us and certain other parties and
pursuant to which we acquired CRL.
We are not involved in any other legal proceedings which we believe would,
if adversely determined, have a material adverse effect upon our business,
financial condition or results of operations. There can be no
22
<PAGE> 24
assurance whether these matters will be determined in a manner which is
favorable to us or, if adversely determined, whether such determination would
have a material adverse effect upon our business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is traded on The NASDAQ Stock Market under the symbol
"ATHY". The following table sets forth, for the periods indicated, the high and
low sales prices on The NASDAQ Stock Market for our common stock as reported
during each of the quarterly periods following our initial public offering of
common stock on April 30, 1999. The prices do not include retail mark ups, mark
downs or commissions.
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
- ---------------- ------- -------
<S> <C> <C>
First Quarter............................................ N/A N/A
Second Quarter........................................... $20.500 $10.938
Third Quarter............................................ 18.343 11.812
Fourth Quarter........................................... 27.750 10.875
</TABLE>
The last reported sale price of our common stock on The NASDAQ Stock Market
on March 24, 2000 was $26.25 per share. There were approximately 77 holders of
record of our common stock as of March 24, 2000. This excludes approximately
5,721 individual stockholders whose holdings are registered to brokerage firms,
financial institutions and similar entities at June 1, 1999.
COMMON STOCK DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends on our common stock in the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of this annual report
Form 10-K.
RECENT SALES OF UNRESTRICTED SECURITIES
On January 5, 2000, we issued 2,022,287 shares of our common stock to
purchase all the outstanding common stock of CRL Network Services, Inc. In
connection with that acquisition we also delivered up to approximately $9.9
million in cash, for total consideration (including our common stock) of up to
approximately $48.7 million.
These securities were issued to James G. Couch, Zero.net, Inc. and other
holders of CRL stock in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
for transactions by an issuer not involving any public offering. Appropriate
legends regarding restrictions on the resale of the securities delivered were
affixed to the certificates representing these securities. For additional
information about this transaction, please see our report on Form 8-K/A (File
No. 000-25749) filed with the SEC on March 20, 2000.
USE OF PROCEEDS
On May 5, 1999, we completed our initial public offering, or IPO, of
5,175,000 shares of our common stock. The offering was made pursuant to a
registration statement on Form S-1 (File No. 333-72133) which
23
<PAGE> 25
registered up to 5,175,000 shares of our common stock and was declared effective
on April 29, 1999. The offering commenced on April 30, 1999 and all 5,175,000
shares registered in our offering were sold at an initial public offering price
of $16.00 per share. The managing underwriters were Bear, Stearns & Co. Inc.,
CIBC World Markets Corp., Lehman Brothers Inc. and Wit Capital Corporation.
Gross proceeds from the offering were $82.8 million, $5.8 million of which was
applied to the underwriting discount. As of December 31, 1999, approximately
$1.8 million was applied to expenses incurred for our offering. As a result, net
proceeds from the offering are approximately $75.2 million. Except as discussed
herein with respect to our repayment of a revolving line of credit and
redemption of our preferred stock to NYSERNet.net, none of the net proceeds of
our offering were paid by us, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person or entity owning 10
percent or more of our equity securities or the equity securities of any of our
affiliates.
On May 5, 1999, we paid approximately $3.8 million to repay outstanding
borrowings under our revolving line of credit with NYSERNet.net, including
accrued interest. We also paid approximately $2.0 million to redeem our
outstanding preferred stock, including accrued dividends, all of which was held
by NYSERNet.net. NYSERNet.net owns approximately 20.0% of our common stock and
has one representative on our board of directors.
On June 22, 1999, the Company purchased 10% of the ownership interests of
Planning Technologies, Inc., or PTI, for $5.0 million, by purchasing
approximately 2,976,190 shares of convertible preferred stock of PTI. For
additional information about this investment, please see our current report on
Form 8-K (File No. 000-25749), filed with the SEC on July 7, 1999.
On January 5, 2000, the Company acquired CRL Network Services, Inc. for up
to approximately $9.9 million in cash and up to approximately 2,022,287 shares
of our common stock. For additional information about this acquisition, please
see our current report on Form 8-K (File No. 000-25749), filed with the SEC on
January 20, 2000.
We intend to use the remaining $38.0 million of the net proceeds from the
offering for general corporate purposes and working capital requirements,
including the following:
- to expand our sales and marketing efforts in 20-30 metropolitan areas;
- to continue to increase the size of our sales force;
- to build additional data centers;
- to expand our customer support services;
- for working capital requirements and other general corporate purposes;
- for possible acquisitions.
No portion of the proceeds has been allocated for any specific purpose
referred to above. We have discretionary authority over the use of net proceeds
from the offering. In addition, we intend to use a portion of the net proceeds
from this offering to build new data centers and add additional data center
capacity.
Pending the above uses, we have invested the proceeds of the offering in
short-term, interest bearing investment grade securities.
During the year ended December 31, 1999, proceeds of approximately $627,000
were generated from the exercise of options for 1,115,818 shares of our common
stock. There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. These options had been granted under our 1996
Incentive Stock Option Plan and were exercised by certain employees and
directors. During the year ended December 31, 1999, proceeds of approximately
$304,000 were generated from issuances under our Employee Stock Purchase Plan of
28,208 shares of our common stock. There were no significant expenses,
underwriting discounts or commissions attributable to these proceeds. The shares
issued pursuant to our 1996 Option Plan and our Employee Stock Purchase Plan
were registered through our registration statement on Form S-8 (File No.
333-83177), which we filed with the SEC on July 19, 1999.
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<PAGE> 26
ITEM 6. 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 the
related notes included elsewhere in this Form 10-K.
The selected financial data as of December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999 have been derived from audited
financial statements included elsewhere in this Form 10-K. The selected
financial data as of December 31, 1995, September 30, 1996 and December 31, 1996
and 1997, and as of and for the year ended December 31, 1995, the nine months
ended September 30, 1996, the three months ended December 31, 1996 are derived
from audited financial statements which are not included in this Form 10-K. Our
audited financial statements and those of our predecessor have been audited by
Grant Thornton LLP, independent certified public accountants.
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 year ended
December 31, 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
----------------------------- ------------------------------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------ -------------- ------------- --------------------------------------
1995 1996 1996 1997 1998 1999
------------ -------------- ------------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Internet connectivity revenues... $ 4,607 $ 5,691 $ 2,508 $ 12,249 $ 15,077 $ 19,573
Internet integration and
enterprise portal development
revenues....................... 13 244 268 1,915 5,940 14,871
Web hosting revenues............. 322 291 300 1,008 1,546 3,201
------- ------- ---------- ---------- ----------- -----------
Total net revenues................. 4,942 6,226 3,076 15,172 22,563 37,645
------- ------- ---------- ---------- ----------- -----------
Cost of revenues................. 5,163 5,742 2,331 10,796 13,316 24,988
Sales and marketing.............. 466 1,298 792 3,706 6,400 14,124
General and administrative....... 1,185 2,819 1,591 4,283 6,349 10,180
Research and development......... 129 43 680 243 321
Depreciation and amortization.... 126 158 81 1,095 1,672 3,403
Other expenses................... 112 900
------- ------- ---------- ---------- ----------- -----------
Total costs and expenses........... 6,940 10,146 4,838 20,672 28,880 53,016
Loss from operations............... (1,998) (3,920) (1,762) (5,500) (6,317) (15,371)
Interest (income) expense, net..... (26) 5 347 566 (1,377)
------- ------- ---------- ---------- ----------- -----------
Net loss........................... (1,972) (3,925) (1,762) (5,847) (6,883) (13,994)
Preferred stock dividends.......... 210 210 73
------- ------- ---------- ---------- ----------- -----------
Net loss attributable to common
stockholders..................... $(1,972) $(3,925) $ (1,762) $ (6,057) $ (7,093) $ (14,067)
------- ------- ---------- ---------- ----------- -----------
Basic and diluted loss per common
share............................ $ (0.18) $ (0.62) $ (0.56) $ (0.72)
---------- ---------- ----------- -----------
Shares used in computing basic and
diluted loss per share........... 9,750,000 9,756,248 12,665,940 19,491,711
OTHER DATA:
EBITDA(a)........................ $(1,846) $(3,762) $ (1,681) $ (4,405) $ (4,645) $ (11,968)
Capital expenditures(b).......... 756 -- 506 1,270 2,480 11,643
Cash flow information:
Net cash provided by (used in)
operating activities......... 578 (2,098) (834) (5,185) (2,704) (9,114)
</TABLE>
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<PAGE> 27
<TABLE>
<CAPTION>
PREDECESSOR APPLIEDTHEORY
----------------------------- ------------------------------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------ -------------- ------------- --------------------------------------
1995 1996 1996 1997 1998 1999
------------ -------------- ------------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
investing activities......... (756) 56 (506) (1,266) (2,779) (49,340)
Net cash provided by (used in)
financing activities......... 178 2,041 1,513 6,413 7,134 71,502
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR APPLIEDTHEORY
----------------------------- -------------------------------------------
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
------------ -------------- -------------------------------------------
1995 1996 1996 1997 1998 1999
------------ -------------- ------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ -- $ -- $ 173 $ 135 $ 1,786 $14,834
Marketable securities..................... 32,727
Working capital (deficiency).............. (2,982) (6,775) (1,379) (3,579) (3,249) 40,945
Total assets.............................. 2,690 3,161 3,365 5,444 10,518 76,935
Current portion of long-term debt and
capital lease obligations............... 211 551 1,215
Long-term debt and capital lease
obligations, less current portion....... 4,361 5,979 6,783
Borrowings from NYSERNet.net.............. 1,500 2,445 2,957
Redeemable preferred stock................ 1,500 1,500
Total stockholders' equity (deficit)...... (2,759) (6,684) (2,576) (8,626) (9,007) 54,209
</TABLE>
- ---------------
(a) EBITDA is earnings (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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read and consider the following discussion in conjunction with
our audited financial statements and notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as of
and for the year ended December 31, 1998 which is included in the registration
statement on Form S-1 (File No. 333-72133), as filed with the Securities and
Exchange Commission in connection with our initial public offering ("IPO") of
common stock.
Certain statements in this annual report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or those of the industry in which we
operate, to be materially different from any expected future results,
performance or achievements expressed or implied by these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below, as well as those discussed in
Part I, Item 1 of this Form 10-K and in the registration statement for our
initial public offering of common stock.
Unless the context otherwise requires, references in this Form 10-K to
"AppliedTheory", the "Company", "we", "our" and "us" refer to AppliedTheory
Corporation.
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<PAGE> 28
OVERVIEW
We are a leading provider of Internet business solutions to mid-sized
businesses, mid-size departments of larger businesses, and specifically targeted
vertical markets. We offer an extensive array of high performance, reliable and
scalable Internet solutions that are designed to give our customers the
technological and strategic advantages necessary to compete in a global digital
economy. Our solutions, which are described below and fall into four categories,
can be tailored to meet our customers' requirements. We provide these solutions,
either as an individually tailored solution or as part of a fully integrated
comprehensive solution, both of which are supported by an unprecedented customer
care model.
- E-Business Solutions -- Internet business strategy consulting, solution
integration and enterprise portal development, including custom software
application development, interactive marketing design, Web site
implementation and deployment and integration of legacy systems to
Internet-based applications.
- Web Hosting Solutions -- Customized suite of Unix, NT and Linux
Web-hosting solutions supported by redundant data centers and unmatched
customer care services. Our services include custom offerings of shared,
dedicated and co-location services.
- Security Solutions -- Security consulting services, managed firewalls,
virtual private networks and intrusion detection systems are a few of our
offering to ensure the integrity of a customers network.
- Access Solutions -- Internet connectivity, including tiered dedicated,
burstable dedicated, national dial, DSL services and Domain Name
Services.
We target mid-sized enterprises and mid-sized departments of larger
enterprises within the commercial markets and the public sector. Additionally,
we focus on a number of strategic vertical markets including higher education,
the federal government, state & local governments, healthcare and automotive. We
integrate our solutions to enable customers to extend their businesses, leverage
their legacy databases and systems, and take advantage of Internet-based
marketing opportunities. Driven by competition and governmental mandates, public
and private sector customers both benefit by making greater use of the Internet
to serve their constituencies more cost-effectively with greater returns.
Increasingly, these businesses and institutions are demanding "one-stop-shop"
solutions for Internet services due to the risk, difficulty and expense
associated with managing and integrating the products and services of multiple
vendors.
We are rapidly strengthening our sales and marketing efforts nationally to
more aggressively pursue customers. This represents a change from our historic
approach of generating our revenues using a small sales force and growing our
customer base primarily through word of mouth. In 1999, we tripled our sales
force and now operate 13 sales offices in key cities throughout the east coast
of the U.S. Already in 2000, we have expanded into northern California and began
our Midwest presence with a new office opening in Detroit, Michigan. In
addition, as previously discussed we have launched a vertical sales effort to
focus on markets such as higher education, the federal government, state and
local governments, healthcare and automotive. We have also targeted
approximately 20-30 metropolitan areas throughout the United States with high
concentrations of businesses and intend to grow our direct and indirect sales
force to more than 150 in the Year 2000. We also intend to extend our vertical
market focus to strategic segments where our solutions have competitive
differentiation and the market opportunity is significant.
REVENUE. We derive our revenue from three principal solutions:
- Internet integration and enterprise portal development (e-Business
Solutions);
- Web Hosting Solutions; and
- Internet Connectivity (Access and Security Solutions).
We generally sell our solutions under contracts with terms ranging from one
to five years.
From the year ended December 31, 1997 to the year ended December 31, 1999,
revenue from Internet integration and enterprise portal development increased
from approximately 13% to approximately 40% of our
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<PAGE> 29
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
solutions represents professional service fees that are recognized principally
on a time and material basis as services are performed. Revenue from Web hosting
solutions 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 solutions is typically derived
from fixed price and usage based fees.
COST OF REVENUE. Cost of revenue consists primarily of:
- backbone and Internet access costs;
- access charges from local exchange carriers;
- personnel costs to operate our network and data centers; and
- personnel costs to provide Internet integration and enterprise portal
development solutions.
SALES AND MARKETING EXPENSE. We have made a substantial investment in our
sales and marketing groups to achieve and properly support the continued
expansion in our customer base. Sales and marketing expense consists primarily
of sales personnel deployed throughout major cities on the east coast of the
U.S., Detroit and San Francisco. We support our growing sales force with
extensive demand creation campaigns, telemarketing and branding programs.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists primarily of costs relating to personnel, including customer support,
occupancy, general operating costs, and professional fee expenses. We have made
and will continue to make a significant investment in the organization to
properly manage the financial, legal and administrative aspects of the business.
RESEARCH AND DEVELOPMENT. Research and development costs are principally
focused in our Internet integration and enterprise portal development and Web
hosting service offerings.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists primarily of depreciation of computer equipment, network 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 and expanded 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 increase compared to expenditures made in prior
periods. We also intend to make acquisitions of certain complimentary companies.
We anticipate these acquisitions to provide long-term strategic benefits,
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, 1999 Compared to Year Ended December 31, 1998
REVENUE. Total net revenues increased approximately $15.1 million, or 67%,
from $22.6 million in the year ended December 31, 1998 to $37.6 million in the
year ended December 31, 1999. Approximately $4.5 million of this growth was from
Internet connectivity revenue, which resulted primarily from the customer
upgrades to higher speed connections and as a result of growth in the number of
connectivity customers from December 31, 1998 to December 31, 1999. Web hosting
revenue increased by approximately $1.7 million. Approximately $.7 million of
the increase resulted from an increase in Web monitoring, management and hosting
solutions for the New York State Department of Labor in connection with
America's Job Bank and $.8 million as a result of expansions of our managed
dedicated Web hosting solution. The remaining increase
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<PAGE> 30
in total net revenues of approximately $8.9 million was derived from Internet
integration and enterprise portal development solutions. These solutions
include:
- linking existing databases and legacy systems with the Web; and
- creating open, universal interfaces to business-critical information and
standards-based software used to link with the systems of suppliers,
partners and customers.
The $8.9 million increase in Internet integration and enterprise portal
development includes $7.7 million from the expansion in the number of solutions
we provide to the New York State Department of Labor in connection with
America's Job Bank and the remaining $1.2 million from new professional services
and governmental customers. For the year ended December 31, 1999, as a
percentage of total net revenues, Internet connectivity represented 52%,
Internet integration and enterprise portal development represented 40% and Web
hosting represented 8%. 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%.
COST OF REVENUE. Cost of revenue for the year ended December 31, 1999
totaled approximately $25.0 million compared with approximately $13.3 million
for the year ended December 31, 1998. This increase is attributable to the
overall growth in the size of our network. As a percentage of revenue, cost of
revenue increased to 66% of revenue in the year ended December 31, 1999 from 59%
of revenue in the year ended December 31, 1998. Approximately $5.9 million of
this increase was due to the expansion and upgrade of our network to support
customer growth, improve the efficiency and performance of our solutions and
build and staff our network operations center. The New York State portion of the
network was upgraded to OC-12 and we expanded our network out of New York State
throughout the Eastern Seaboard. Additionally, approximately $3.4 million of the
increase in the year ended December 31, 1999 from the same periods last year was
derived from an increase in labor and other professional service costs
associated with the on-going expansion of Internet integration and enterprise
portal development solutions.
SALES AND MARKETING. For the years ended December 31, 1999 and 1998, sales
and marketing expense was approximately $14.1 million and $6.4 million. The $7.7
million increase in 1999 reflects a substantial investment in the sales and
marketing organizations necessary to support our current and anticipated
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. Significant components of the increase include $4.5 million in
additional salary and benefit costs, $.9 million in incremental direct marketing
costs, $.6 million in recruiting expenses and $.6 million in market development
costs in new geographic areas. Sales and marketing expense as a percentage of
revenue increased to 38% for the year ended December 31, 1999 from 28% for the
year ended December 31, 1998. This was a result of our commitment to building
our sales and marketing program by establishing a nationwide sales force,
expanding our presence to over ten new sales locations and the creation of four
national strategic vertical markets sales teams.
GENERAL AND ADMINISTRATIVE. For the years ended December 31, 1999 and
1998, general and administrative expenses were approximately $10.2 million and
$6.3 million. An increase in general and administrative expenses of
approximately $3.9 million was primarily attributable to:
- $1.8 million in costs related to salaries and recruiting new personnel;
- $.7 million in additional audit, legal and other professional service
costs;
- $.7 million in increased real estate occupancy costs; and
- other increases necessary to manage the financial, legal and
administrative aspects of our business.
For the year ended December 31, 1999, general and administrative expense
declined slightly as a percent of revenue to 27% from 28% for the year ended
December 31, 1998 as a result of our increased revenue.
RESEARCH AND DEVELOPMENT. For the years ended December 31, 1999 and 1998,
research and development expense has been consistent at approximately $.3
million and $.2 million, respectively.
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DEPRECIATION AND AMORTIZATION. For the years ended December 31, 1999 and
1998, depreciation and amortization expense was approximately $3.4 million and
$1.7 million. The increase in depreciation and amortization of approximately
$1.7 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 INCOME AND EXPENSE. Interest expense remained consistent at
approximately $0.6 million for the years ended December 31, 1999 and 1998.
However an increase in interest income of $1.9 million occurred from the
investment of proceeds from the IPO of AppliedTheory common stock on April 30,
1999. During the year ended December 31, 1999, cash payments of approximately
$.3 million in deferred interest expense were made.
OTHER EXPENSE. The decline in other expenses was a result of a $.9 million
non-recurring charge in 1998 to write-down equipment and leasehold improvements
and accrue costs under a plan to close a leased facility principally used as a
Web hosting data center.
NET LOSS. For the year ended December 31, 1999, our net loss attributable
to common stockholders totaled $14.1 million as compared to $7.1 million for the
year ended December 31, 1998.
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 high end 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
solutions 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 solutions. These solutions 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 solutions
to the New York State Department of Labor in connection 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 solutions.
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
30
<PAGE> 32
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 $6.3 million and
$4.3 million. An increase in general and administrative expenses of
approximately $2.0 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.
For the year ended December 31, 1998, general and administrative expense as a
percent of revenue remained stable at 28% when compared to the year ended
December 31, 1997.
RESEARCH AND DEVELOPMENT. For the years ended December 31, 1998 and 1997,
research and development expense was approximately $.2 million and $.7 million.
The decrease was due to the completion of a significant portion of the
enterprise portal development and Web hosting products.
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;
- limited uninterruptible power supply system; and
- 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 Recognition 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 data center facility by September 1999.
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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.
Quarterly Results of Operations
The following tables set forth unaudited statements of operations data for
the eight quarters ended December 31, 1999, 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 Form 10-K 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>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
1998 1999
----------------------------------------------- -----------------------------------------------
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
revenue................... $3,577 $ 3,518 $ 3,834 $ 4,148 $ 4,161 $ 4,947 $ 5,081 $ 5,384
Internet integration and
enterprise portal
development revenues...... 1,361 943 1,981 1,655 2,095 2,939 4,250 5,587
Web hosting revenues........ 396 321 373 456 611 807 846 937
------ ------- ------- ------- ------- ------- ------- -------
Total net revenues............ 5,334 4,782 6,188 6,259 6,867 8,693 10,177 11,908
------ ------- ------- ------- ------- ------- ------- -------
Cost and expenses:
Cost of revenues............ 2,940 2,864 3,433 4,079 4,103 5,789 6,818 8,277
Sales and marketing......... 1,438 1,536 1,771 1,655 1,764 2,644 3,688 6,028
General and
administrative(a)......... 1,143 1,159 1,604 2,443 1,814 2,055 2,958 3,353
Research and development.... 46 74 22 101 63 67 66 125
Depreciation and
amortization.............. 360 399 422 491 616 791 879 1,118
Other expenses(b)........... 2 (2) 900 3 (3)
------ ------- ------- ------- ------- ------- ------- -------
Total costs and expenses...... 5,929 6,032 7,250 9,669 8,363 11,346 14,409 18,898
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations.......... (595) (1,250) (1,062) (3,410) (1,496) (2,653) (4,232) (6,990)
Net interest (income)
expense..................... 142 141 141 142 162 (359) (627) (553)
Preferred stock dividends..... 52 53 52 53 52 21
------ ------- ------- ------- ------- ------- ------- -------
Net loss attributable to
common stockholders......... $ (789) $(1,444) $(1,255) $(3,605) $(1,710) $(2,315) $(3,605) $(6,437)
====== ======= ======= ======= ======= ======= ======= =======
Basic and diluted loss per
common share................ $(0.07) $ (0.13) $ (0.09) $ (0.24) $ (0.11) $ (0.12) $ (0.17) $ (0.30)
Shares used in computing basic
and diluted loss per share
(in thousands).............. 10,907 11,038 13,540 15,078 15,930 19,441 21,180 21,338
OTHER DATA:
EBITDA(c)..................... $ (235) $ (850) $ (639) $(2,921) $ (880) $(1,862) $(3,353) $(5,871)
Capital expenditures(d)....... 626 214 345 1,295 889 1,120 2,165 7,469
(AS A PERCENTAGE OF TOTAL NET REVENUES)
Net revenues:
Internet connectivity
revenue................... 67% 74% 62% 67% 61% 57% 50% 45%
Internet integration and
enterprise portal
development revenues...... 26 20 32 26 30 34 42 47
Web hosting revenues........ 7 6 6 7 9 9 8 8
------ ------- ------- ------- ------- ------- ------- -------
Total net revenues............ 100% 100% 100% 100% 100% 100% 100% 100%
------ ------- ------- ------- ------- ------- ------- -------
</TABLE>
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<TABLE>
<CAPTION>
(AS A PERCENTAGE OF TOTAL NET REVENUES (CONTINUED))
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
1998 1999
----------------------------------------------- -----------------------------------------------
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>
Cost and expenses:
Cost of revenues............ 55 60 55 65 60 67 67 70
Sales and marketing......... 27 32 29 26 26 30 36 51
General and
administrative(a)......... 21 24 26 39 26 24 29 28
Research and development.... 1 2 0 2 1 0 1 1
Depreciation and
amortization.............. 7 8 7 9 9 9 9 9
Other expense(b)............ 0 0 0 14 0 0 0 0
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations.......... (11) (26) (17) (55) (22) (30) (42) (59)
Net interest (income)
expense..................... 3 3 2 2 2 (4) (6) (5)
------ ------- ------- ------- ------- ------- ------- -------
Net loss attributable to
common stockholders......... (14) (29) (19) (57) (24) (26) (36) (54)
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Includes compensation expense included in general and administrative
expenses of approximately $0.1 million for each of the quarters ended March
31, 1998, June 30, 1998 and September 30, 1998 and $1.16 million for the
quarter ended December 31, 1998, relating to stock appreciation rights and
stock options. Includes compensation expense included in general and
administrative expenses of approximately $0.3 million for each of the
quarters ended March 31, 1999, June 30, 1999 and September 30, 1999 and $.4
million for the quarter ended December 31, 1999, relating to stock options.
See Note K 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 E of our audited
financial statements.
(c) EBITDA is earnings (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.
(d) Capital expenditures include assets acquired with debt and exclude assets
acquired through capital lease financing.
LIQUIDITY AND CAPITAL RESOURCES
On May 5, 1999, we completed our initial public offering ("IPO") of
5,175,000 shares of our common stock sold at an initial public offering price of
$16.00 per share. Gross proceeds from the offering were $82.8 million, $5.8
million of which was applied to the underwriting discount and approximately $1.8
million was applied to expenses related to our offering. As a result, net
proceeds from the offering are approximately $75.2 million.
At December 31, 1999, we had $14.8 million in cash and cash equivalents,
$32.7 million in marketable securities and a $40.9 million working capital
surplus. Our marketable securities are generally fixed rate short-term
investment grade corporate bonds and notes. At December 31, 1999, all of our
investments are due to mature within seventeen months but could be sold to
provide working capital or finance future acquisitions.
At December 31, 1999 we have two lines of credit available to provide
working capital.
- The first is 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 assets pledged by NYSERNet.net. At December 31, 1999,
borrowings
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under this line amounted to $5.5 million. As of December 31, 1999, as a
result of restrictions under the line of credit, no additional credit was
available under this agreement.
- We also have an unsecured revolving borrowing facility with NYSERNet.net,
which expires January 1, 2002, which provides for borrowings up to a
maximum amount of approximately $6.2 million, less any preferred stock
issued to NYSERNet.net. As of December 31, 1999, $6.2 million was
available under this borrowing facility.
Our principal uses of cash are to fund operations, working capital
requirements and capital expenditures. We had an accumulated deficit of $29.8
million at December 31, 1999, and have used $17.8 million in cash in the
aggregate to fund operations since our inception on October 1, 1996 through
December 31, 1999. Until the successful completion of our initial public
offering, we had satisfied our cash requirements primarily through the sale of
common and preferred stock and borrowings under credit agreements and equipment
financing arrangements.
Net cash used in operating activities for the years ended December 31, 1999
and 1998 was approximately $9.1 million and $2.7 million. Net cash used in
investing activities for the years ended December 31, 1999 and 1998 was
approximately $49.3 million and $2.8 million. The increase of approximately
$46.5 million is associated with the net purchases of marketable securities of
$33.0 million and a $5.0 million investment using net proceeds of our IPO offset
by an increase in fixed asset purchases of $9.2 million. For the years ended
December 31, 1999 and 1998, cash of approximately $71.5 million and $7.1 million
was provided by financing activities. This increase of approximately $64.4
million consists principally of $75.2 million in net proceeds in connection with
our IPO, less repayment of all outstanding borrowings from NYSERNet.net, Inc.,
including deferred interest, of approximately $3.5 million and redemption of
preferred stock including dividends payable of approximately $2.0 million. 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 Broadwing and Grumman Hill.
We have made capital investments in our network operations center, data
centers and other capital assets totaling $1.3 million, $2.5 million and $11.6
million in the years ended December 31, 1997, 1998 and 1999. We acquired assets
under capital leases for $.5 million in 1997 and $1.5 million in 1999.
At December 31, 1999 we had $32.7 million in marketable securities, $14.8
in cash and $6.2 million in availability under the aforementioned financing
agreements. We believe that the net proceeds from our IPO and availability under
the aforementioned financing agreements, will be sufficient to meet our
anticipated cash needs for growth, expansion, working capital requirements and
general corporate purposes. However, there can be no assurance regarding the
period of time through which our financial resources will be adequate to support
our operations. We may need to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be no
assurance that additional financing, if needed, will be available on terms
acceptable to us, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available may involve
restrictive covenants and significant interest expense. Strategic arrangements,
if necessary to raise additional funds, may require us to relinquish rights to
some of our technologies.
COMMITMENTS
As of December 31, 1999, our operating lease obligations will be $2.4
million, $2.3 million and $2.2 million for 2000, 2001, and 2002. We also had
purchase commitments at December 31, 1999 totaling approximately $5 million for
various network equipment.
On January 5, 2000, the Company purchased the outstanding common stock of
CRL Network Services, Inc. for up to approximately $9.9 million in cash and up
to approximately 2,022,287 shares of AppliedTheory common stock. In connection
with the acquisition of CRL, we retained a portion of the purchase price to
cover various contingencies, under the terms of the Agreement and Plan of Merger
and two escrow agreements that governed this transaction. Any losses incurred
for contingencies will be recorded as additional
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<PAGE> 36
cost of the acquired company when the amount to be paid, if any, becomes
probable. At December 31, 1999, no amount has been accrued since the final
outcome of the contingencies was not determinable.
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.
We did not experience any significant Year 2000 related problems during the
Year 2000 rollover or in the following months. However, we will continue
monitoring and testing our internal information technology systems throughout
2000 to identify potential problems. We may experience material unanticipated
problems and costs caused by undetected errors or defects in our systems.
Our Year 2000 Compliance Program
During the second quarter of 1998, we formed a working group to ensure that
our solutions are Year 2000 compliant. These included:
- our commercial product line;
- internal software business applications;
- hardware;
- desktop support;
- telephone systems;
- office equipment; and
- facilities.
All of these components had undergone 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.
All AppliedTheory Internet connectivity, NT Web hosting and Unix Web
hosting solutions were tested and were deemed to be compliant. Scheduled
maintenance and system upgrades necessary were fully tested for compliance.
Custom developed code for our customers was completely tested. Based on
requested Year 2000 readiness statements from each of our third party vendors,
software upgrades were applied where appropriate. Internal systems were tested
and deemed to be compliant.
Year 2000 and our Internal Applications
Our State of Readiness. All of our internally developed systems, upgrades
and applications are Year 2000 ready. Most of our system packages have also been
deemed compliant by our vendors. We did not experience any significant Year 2000
related problems related to our internal applications during the Year 2000
rollover or in the following months. However, we will continue monitoring and
testing our internal information technology systems throughout 2000 to identify
potential problems.
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<PAGE> 37
Year 2000 and our Services and Products.
Our State of Readiness. The AppliedTheory Internet connectivity products
are Year 2000 ready. The previous dial product, which was not compliant, was
transitioned to a new dial up service provided by a third party, Concentric
Networks. The Concentric product is Y2K compliant and customer transition was
completed by December 15, 1999. We did not experience any significant Year 2000
related problems in our connectivity products during the Year 2000 rollover or
in the following months.
Regarding our security solutions offerings, while versions 4.0a and higher
of the Gauntlet firewall software program which we use have been tested and are
Year 2000 ready, we have recommended that all of our Gauntlet customers upgrade
to version 4.2 or higher. We have sent the Gauntlet version 4.2 or higher to all
our existing Gauntlet customers.
We deliver Web hosting solutions 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. All critical third party
vendors are compliant. We tested 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 did not experience any significant Year 2000
related problems in our Web hosting solutions during the Year 2000 rollover or
in the following months.
Contingency Plans. If our Internet access and value-added solutions
experience any Year 2000 issues, we are prepared to move customers' local loop
access solutions 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.
Additionally, we have communicated, and will continue to communicate, with our
customers throughout the Year 2000 in order to alert them to third party issues
that may affect them.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after September 15, 2000. The Company
currently does not use derivative instruments as defined by SFAS No. 133. If the
Company continues to not use these derivative instruments by the effective date
of SFAS No. 133, the adoption of this statement will have no effect on the
results of operations or the financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 1999, we had various financial instruments consisting of
variable rate debt and short-term investments entered into for purposes other
than trading. The substantial majority of our outstanding debt obligations have
variable interest rates of LIBOR plus 50 basis points or prime rate less 200
basis points. Annual maturities of our debt obligations are as follows: $1.2
million in 2000, $6.5 million in 2001, $.3 million in 2002. At December 31,
1999, the carrying value of our debt obligations approximate the fair value due
to the short maturity and variable interest rates of a majority of these
instruments. The weighted average interest rate of our debt obligations at
December 31, 1999 was 6.6%.
Our investments are generally fixed rate short-term investment grade
corporate bonds and notes. At December 31, 1999, all of our investments are due
to mature within seventeen months and are carried at fair value of $32.7
million. These investments are subject to interest rate risk, market risk and in
some cases foreign currency risk. Market risk is estimated as the potential loss
in fair value resulting from a hypothetical 10% adverse change in the
securities' quoted market prices which would amount to $3.3 million at December
31, 1999. We actively monitor the capital and investing markets in analyzing our
capital raising and investing decisions.
36
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONTENTS TO FINANCIAL STATEMENTS OF
APPLIEDTHEORY CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... 38
Financial Statements
Balance Sheets -- December 31, 1998 and 1999.............. 39
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999.................................... 40
Statement of Stockholders' Equity (Deficit) and
Comprehensive Loss for the Years Ended December 31,
1997, 1998 and 1999.................................... 41
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999.................................... 42
Notes to Financial Statements............................. 43 - 57
Report of Independent Certified Public Accountants on
Schedule.................................................. 58
Schedule II -- Valuation and Qualifying Accounts............ 59
</TABLE>
37
<PAGE> 39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
AppliedTheory Corporation
We have audited the balance sheets of AppliedTheory Corporation as of
December 31, 1998 and 1999 and the related statements of operations,
stockholders' equity (deficit) and comprehensive loss and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of AppliedTheory Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AppliedTheory Corporation as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ GRANT THORNTON LLP
New York, New York
February 4, 2000
38
<PAGE> 40
APPLIEDTHEORY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,786 $ 14,834
Marketable securities..................................... 32,727
Accounts receivable, net of allowance of $157 and $231 in
1998 and 1999, respectively............................ 3,584 6,714
Due from related parties.................................. 59
Prepaid expenses and other current assets................. 255 2,133
-------- --------
Total current assets.............................. 5,625 56,467
Property and equipment, net................................. 4,203 13,881
Investment, at cost......................................... 5,000
Other assets................................................ 690 1,587
-------- --------
Total assets...................................... $ 10,518 $ 76,935
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 2,149 $ 5,025
Accrued payroll........................................... 582 2,012
Accrued expenses.......................................... 2,473 4,794
Deferred revenue.......................................... 1,849 2,476
Current portion of long-term debt and capital lease
obligations............................................ 551 1,215
Preferred stock dividends payable......................... 420
Due to related parties.................................... 850
-------- --------
Total current liabilities......................... 8,874 15,522
Long-term debt and capital lease obligations................ 5,979 6,783
Borrowings from NYSERNet.net, Inc........................... 2,957
Other liabilities........................................... 215 421
Redeemable preferred stock -- cumulative 14% dividend; $100
per share liquidation value; 1,000,000 shares authorized;
15,000 shares issued and outstanding in 1998.............. 1,500
Stockholders' equity (deficit):
Common stock, $.01 par value; 90,000,000 shares
authorized; issued and outstanding, 15,039,488 voting
and 54,848 nonvoting shares in 1998 and 21,413,362
voting shares in 1999.................................. 151 214
Additional paid-in capital.................................. 6,581 84,052
Accumulated deficit......................................... (15,739) (29,806)
Accumulated other comprehensive loss........................ (251)
-------- --------
Total stockholders' equity (deficit).............. (9,007) 54,209
-------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $ 10,518 $ 76,935
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
39
<PAGE> 41
APPLIEDTHEORY CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenues
Third-party customers................................. $ 8,023 $ 14,236 $ 27,328
NYSERNet.org, Inc. customers and services............. 7,149 8,327 10,317
--------- ---------- ----------
Total net revenues............................ 15,172 22,563 37,645
--------- ---------- ----------
Costs and expenses
Cost of revenues...................................... 10,796 13,316 24,988
Sales and marketing................................... 3,706 6,400 14,124
General and administrative............................ 4,283 6,349 10,180
Research and development.............................. 680 243 321
Depreciation and amortization......................... 1,095 1,672 3,403
Other expenses........................................ 112 900
--------- ---------- ----------
Total costs and expenses...................... 20,672 28,880 53,016
--------- ---------- ----------
Loss from operations.......................... (5,500) (6,317) (15,371)
Interest income......................................... (42) (1,938)
Interest expense........................................ 347 608 561
--------- ---------- ----------
Net Loss......................................... (5,847) (6,883) (13,994)
Preferred stock dividends............................... 210 210 73
--------- ---------- ----------
Net loss attributable to common stockholders............ $(6,057) $ (7,093) $(14,067)
========= ========== ==========
Basic and diluted loss per common share................. $ (.62) $ (.56) $ (.72)
========= ========== ==========
Shares used in computing basic and diluted loss per
share................................................. 9,756,248 12,665,940 19,491,711
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
40
<PAGE> 42
APPLIEDTHEORY CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1997, 1998, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NONVOTING COMMON
COMMON STOCK STOCK ADDITIONAL
------------------- ------------------ PAID-IN ACCUMULATED ACCUMULATED OTHER
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPREHENSIVE LOSS
---------- ------ --------- ------ ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... 9,750,000 $ 13 $ (2,589)
Issuance of common stock pursuant
to exercise of stock options..... 60,000 $ 8
Preferred stock dividends.......... (210)
Net loss........................... (5,847)
---------- ---- ------- --------
Comprehensive loss.................
BALANCE, DECEMBER 31, 1997......... 9,810,000 13 8 (8,646)
Issuance of common stock, net of
issuance costs of $81............ 1,725,000 2 4,983
Issuance of common stock pursuant
to exercise of stock options..... 3,504,488 5 54,848 264
Compensation expense related to
stock option plan................ 117
Conversion of stock appreciation
rights to nonstatutory stock
options.......................... 1,340
Effect of stock splits............. 130 $ 1 (131)
Preferred stock dividends.......... (210)
Net loss........................... (6,883)
---------- ---- --------- --- ------- --------
Comprehensive loss.................
BALANCE, DECEMBER 31, 1998......... 15,039,488 150 54,848 1 6,581 (15,739)
Issuance of common stock, net of
issuance costs of $7,620......... 5,175,000 52 75,180
Issuance of common stock pursuant
to exercise of stock options..... 1,049,193 11 66,625 616
Issuance of common stock pursuant
to Employee Stock Purchase
Plan............................. 28,208 304
Compensation expense related to
stock option plan................ 1,371
Conversion of nonvoting common
stock to voting common stock..... 121,473 1 (121,473) (1)
Preferred stock dividends.......... (73)
Unrealized loss on marketable
securities....................... $(251)
Net loss........................... (13,994)
---------- ---- --------- --- ------- -------- -----
Comprehensive loss.................
BALANCE, DECEMBER 31, 1999......... 21,413,362 $214 $ -- $-- $84,052 $(29,806) $(251)
========== ==== ========= === ======= ======== =====
<CAPTION>
COMPREHENSIVE
TOTAL LOSS
------- -------------
<S> <C> <C>
BALANCE, JANUARY 1, 1997........... $(2,576)
Issuance of common stock pursuant
to exercise of stock options..... 8
Preferred stock dividends.......... (210)
Net loss........................... (5,847) $ (5,847)
------- --------
Comprehensive loss................. $ (5,847)
========
BALANCE, DECEMBER 31, 1997......... (8,625)
Issuance of common stock, net of
issuance costs of $81............ 4,985
Issuance of common stock pursuant
to exercise of stock options..... 269
Compensation expense related to
stock option plan................ 117
Conversion of stock appreciation
rights to nonstatutory stock
options.......................... 1,340
Effect of stock splits.............
Preferred stock dividends.......... (210)
Net loss........................... (6,883) $ (6,883)
------- --------
Comprehensive loss................. $ (6,883)
========
BALANCE, DECEMBER 31, 1998......... (9,007)
Issuance of common stock, net of
issuance costs of $7,620......... 75,232
Issuance of common stock pursuant
to exercise of stock options..... 627
Issuance of common stock pursuant
to Employee Stock Purchase
Plan............................. 304
Compensation expense related to
stock option plan................ 1,371
Conversion of nonvoting common
stock to voting common stock.....
Preferred stock dividends.......... (73)
Unrealized loss on marketable
securities....................... (251) $ (251)
Net loss........................... (13,994) (13,994)
------- --------
Comprehensive loss................. $(14,245)
========
BALANCE, DECEMBER 31, 1999......... $54,209
=======
</TABLE>
The accompanying notes are an integral part of this statement.
41
<PAGE> 43
APPLIEDTHEORY CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.................................................. $(5,847) $(6,883) $(13,994)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 1,095 1,672 3,403
Provision for bad debts................................. 119 60 90
Deferred payment of interest expense to NYSERNet.net,
Inc. ................................................. 59 211 (270)
Loss on sale of property and equipment.................. 111 21 3
Realized loss on sale of marketable securities.......... 26
Loss from assets not usable in operations............... 900
Conversion of stock appreciation rights to nonstatutory
stock options......................................... 1,340
Compensation expense related to stock option plans...... 117 1,371
Changes in assets and liabilities
Accounts receivable................................... 66 (2,433) (3,220)
Due to (from) related parties......................... (1,229) 450 (909)
Prepaid expenses, other current assets and other
assets............................................. (61) (68) (3,074)
Accounts payable...................................... 577 142 2,876
Accrued payroll....................................... 229 214 1,430
Accrued expenses and other liabilities................ (373) 612 2,527
Deferred revenue...................................... 69 941 627
------- ------- --------
Net cash used in operating activities.............. (5,185) (2,704) (9,114)
------- ------- --------
Cash flows from investing activities
Purchases of property and equipment....................... (1,270) (2,480) (11,643)
Issuance of notes receivable.............................. (309)
Purchase of marketable securities......................... (80,724)
Proceeds from sales of marketable securities.............. 47,720
Investment in certain businesses.......................... (5,000)
Payments received on notes receivable..................... 2 299
Proceeds from sale of property and equipment.............. 4 8 8
------- ------- --------
Net cash used in investing activities.............. (1,266) (2,779) (49,340)
------- ------- --------
Cash flows from financing activities
Issuance of common stock, net of issuance costs........... 8 5,254 76,163
Payment of deferred stock dividends....................... (493)
Redemption of preferred stock............................. (1,500)
Borrowings from NYSERNet.net, Inc......................... 2,385 301 800
Repayment of borrowings from NYSERNet.net, Inc............ (3,487)
Proceeds from line of credit borrowings, net.............. 4,144 1,286 70
Principal payments on capital leases...................... (124) (350) (1,072)
Proceeds received from long-term debt..................... 1,025 1,021
Security deposit on equipment financing................... (382)
------- ------- --------
Net cash provided by financing activities.......... 6,413 7,134 71,502
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (38) 1,651 13,048
Cash and cash equivalents, beginning of year................ 173 135 1,786
------- ------- --------
Cash and cash equivalents, end of year...................... $ 135 $ 1,786 $ 14,834
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest.................................................. $ 288 $ 396 $ 831
Noncash investing and financing transactions:
Fixed asset acquisitions financed through capitalized
lease obligations....................................... 551 1,448
Dividends payable......................................... 210 210
Advances from NYSERNet.org, Inc. to purchase fixed
assets.................................................. 2,129
Issuance of preferred stock in settlement of advances due
NYSERNet.net, Inc....................................... 1,500
</TABLE>
The accompanying notes are an integral part of these statements.
42
<PAGE> 44
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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. For
purposes of these financial statements and notes thereto, AppliedTheory
Corporation and AppliedTheory Communications, Inc. are used interchangeably and
referred to as the "Company" (Note K). 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, NET's direct sale of 4,875,000 shares it owned in
AppliedTheory) and the effect of the Company's initial public offering ("IPO")
in April 1999, NET's ownership percentage in AppliedTheory declined to less than
50% (Note K).
In conjunction with its IPO, AppliedTheory Communications, Inc. reorganized
as a Delaware corporation. On January 28, 1999, the Company established its
wholly-owned subsidiary, AppliedTheory Corporation. The Company merged into
AppliedTheory Corporation, which is the surviving entity.
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.
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
$435,000, $1,363,000 and $1,337,000 for the years ended December 31, 1997, 1998
and 1999, 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
43
<PAGE> 45
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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
5,837,708, 3,998,333 and 3,348,837 for the years ended December 31, 1997, 1998
and 1999, respectively.
7. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which principally
consist of money market funds and time deposits, with an original maturity of
three months or less at the date of acquisition to be cash equivalents.
8. MARKETABLE SECURITIES
Investments classified as marketable securities represent fixed maturity
instruments (corporate bonds and notes) which are reported at their fair values.
Unrealized gains and losses on these securities, net of related tax effects, are
included in stockholders' equity as a component of accumulated other
comprehensive loss. The Company considers all marketable securities as available
for sale. Investment income is recognized when earned. Realized gains and losses
on sales and maturities of investments are determined on a specific
identification basis. The amortization of premiums and accretion of discounts
are computed on the straight-line basis. Fair values are based on quoted market
prices.
9. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements 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 five years. Leasehold
improvements are amortized over the term of the lease or the service lives of
the improvements, whichever is shorter.
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.
10. 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 an asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds 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.
44
<PAGE> 46
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. 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.
12. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash, cash equivalents, accounts receivable
and marketable securities. 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 47%, 37% and 27% of total net revenues for the years ended
December 31, 1997, 1998 and 1999, respectively (Note L). One third-party
customer accounted for 16%, 28% and 39% of total net revenues for the years
ended December 31, 1997, 1998 and 1999, respectively. Accounts receivable at
December 31, 1999 include approximately $3,584,000 from this third party
customer.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
marketable securities, accounts payable, accrued expenses, long-term debt and
capital lease obligations approximate fair value because of the short maturity
of these items.
The carrying amount of the debt issued pursuant to the Company's bank
credit agreement approximates fair value because the interest rates change with
market interest rates.
14. SEGMENT AND RELATED INFORMATION
The Company operates as one business segment, as a provider of Internet
solutions, and follows the requirements of Statement of Financial Accounting
Standards ("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>
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues
Internet connectivity............................... $12,249 $15,077 $19,573
Internet integration and enterprise portal
development...................................... 1,915 5,940 14,871
Web hosting......................................... 1,008 1,546 3,201
------- ------- -------
$15,172 $22,563 $37,645
======= ======= =======
</TABLE>
Due to the way the Company manages its operations, it does not account for
or report operating expenses by product/service offering.
15. 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 liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the
45
<PAGE> 47
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
16. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after September 15, 2000. The Company
currently does not use derivative instruments as defined by SFAS No. 133. If the
Company continues to not use these derivative instruments by the effective date
of SFAS No. 133, the adoption of this statement will have no effect on the
Company's results of operations or financial position.
17. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
NOTE C -- COMPREHENSIVE LOSS
Comprehensive loss for the years ended December 31, 1997, 1998 and 1999,
was as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss............................................. $(5,847) $(6,883) $(13,994)
Other comprehensive income (loss):
Unrealized loss on marketable securities, net of
income tax effect of $0......................... (251)
------- ------- --------
Comprehensive loss................................... $(5,847) $(6,883) $(14,245)
======= ======= ========
</TABLE>
NOTE D -- MARKETABLE SECURITIES
Marketable securities at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
--------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Available-for-sale securities (carried on the balance
sheet at fair value)
Debt securities with maturities:
Less than one year................................. $31,096 $30,875 $(221)
Due in 1 -- 2 years................................ 1,882 1,852 (30)
------- ------- -----
$32,978 $32,727 $(251)
======= ======= =====
</TABLE>
46
<PAGE> 48
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE E -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment.......................................... $ 5,468 $14,168
Office furniture and equipment.............................. 440 1,080
Equipment under capital leases.............................. 551 2,000
Leasehold improvements...................................... 353 2,634
------- -------
6,812 19,882
Less accumulated depreciation and amortization.............. (2,609) (6,001)
------- -------
$ 4,203 $13,881
======= =======
</TABLE>
The accumulated depreciation associated with equipment under capital leases
was $113,082 and $675,847 in 1998 and 1999, respectively.
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 and 1999, 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
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity" (Note H). This accrued liability provides for only those costs
subsequent to exiting the facility, that was expected to occur in September
1999, and costs prior thereto will be recognized during the period in which 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. As of December 31, 1999, no amounts have been charged
against this liability. The closure date has been delayed pending completion of
additional data centers.
NOTE F -- INVESTMENT IN PLANNING TECHNOLOGIES, INC.
On June 22, 1999, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Planning Technologies, Inc. ("PTI"), a Georgia
corporation, which provides consulting and network engineering services, along
with Grumman Hill Investments III, L.P., ("Grumman Hill") (Note K) and certain
shareholders of PTI. Pursuant to the Stock Purchase Agreement, the Company
acquired approximately 10% of the capital stock of PTI on a fully diluted basis,
as defined in the Stock Purchase Agreement, for $5 million. The Company's 10%
ownership interest in PTI is represented by 2,976,190 shares of PTI's
Convertible Preferred Stock, which represent approximately 50% of PTI's
outstanding Convertible Preferred Stock. The investment is being accounted for
under the cost method.
The Stock Purchase Agreement provides a definition of service revenues for
PTI for the year ended December 31, 1999. In the event that PTI's service
revenues for that period are below thresholds which are
47
<PAGE> 49
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
described in the Stock Purchase Agreement, the Company will receive additional
shares of PTI Convertible Preferred Stock representing up to 5% of the fully
diluted capital stock of PTI.
As a result of its investment in PTI, so long as the Company continues to
hold at least 25% of the total outstanding Convertible Preferred Stock of PTI,
the Company will be entitled to designate and elect one director out of a total
of six seats on the Board of Directors. Pursuant to the terms of its investment,
during the period beginning June 30, 2000 and ending December 31, 2000, the
Company will have the option to purchase all the outstanding capital stock of
PTI at a price, which at that time is determined to be fair market value.
During 1999, the Company paid PTI approximately $26,000 in network
operation related consulting fees.
NOTE G -- 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,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit.............................................. $5,430 $ 5,500
Borrowings from NYSERNet.net, Inc........................... 2,957
Equipment financing......................................... 897 1,408
Capital lease obligations (net interest of $23,400 and
$78,200 in 1998 and 1999, respectively)................... 203 1,090
------ -------
9,487 7,998
Less current portion........................................ (551) (1,215)
------ -------
$8,936 $ 6,783
====== =======
</TABLE>
Line of Credit
On January 20, 1998, the Company entered into a credit agreement with a
bank for an aggregate amount of $7,500,000, which expires on January 19, 2001.
The agreement provides for the payment on January 19, 2001 of the unpaid
principal balance of all amounts advanced on and outstanding at that time.
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.
In accordance with the terms of the credit agreement, as amended on August
3, 1999, the bank issued a standby letter of credit in the Company's name for
$650,000, expiring July 30, 2000, pursuant to the amended agreement,
collateralizing the Company's obligation to a third party for a real property
lease. The Company's available credit under its line of credit agreement is
effectively reduced by the outstanding amount of the letter of credit.
At December 31, 1999, the Company had $5,500,000, outstanding under the
line of credit and, as a result of certain restrictions, has no additional
availability at December 31, 1999. The average interest rate on outstanding
borrowings was 6.1% and 5.7% at December 31, 1998 and 1999, 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 J), for working capital
48
<PAGE> 50
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
requirements. Interest on the loans accrues at the prime rate (7.75% and 8.5% at
December 31, 1998 and 1999, 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 no principal borrowings outstanding under this facility as
of December 31, 1999. Amounts charged to interest expense on the borrowings
under this related party debt facility amounted to $58,915, $211,323 and $69,414
for the years ended December 31, 1997, 1998 and 1999, respectively.
Equipment Financing
During 1998 and 1999, the Company entered into equipment financing
agreements with a secured lender. Borrowings under these agreements are
repayable in thirty-six (36) varying monthly installments of approximately
$33,000 with interest at a fixed rate of 10.3% through September 2002. 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" at December 31, 1998 and 1999, earns interest at a
rate of 5.0% per annum and one-half is refundable on September 1, 2001, and
beginning May 1, 2002, the monthly payments will be deducted from the
outstanding security deposit.
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 2001, with implicit interest rates ranging
from 10.0% to 16.6%. In connection with the financing in 1999, the Company was
required to deliver a security deposit by placing on deposit $782,000 as
additional collateral. The security deposit was fully refunded to the Company in
June 1999.
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, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------ (IN THOUSANDS)
<S> <C>
2000.................................... $1,215
2001.................................... 6,471
2002.................................... 312
------
$7,998
======
</TABLE>
NOTE H -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Network costs............................................... $1,020 $2,511
Lease and contractual commitments........................... 185 1,035
Other....................................................... 1,268 1,248
------ ------
$2,473 $4,794
====== ======
</TABLE>
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Lease and contractual commitments........................... $215 $421
==== ====
</TABLE>
49
<PAGE> 51
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE I -- COMMITMENTS AND CONTINGENCIES
1. TELECOMMUNICATIONS
The Company is committed to minimum annual and cumulative purchase
commitments to two telecommunications vendors for various products and services
as follows: (1) an aggregate minimum cumulative purchase commitment, beginning
in November 1999, over the three-year term of the agreement of $9 million, with
minimum annual commitments of $1,000,000 in 2000, 2001 and 2002 and (2) an
aggregate minimum cumulative purchase commitment, beginning in December 1999,
over the three-year term of the agreement of $25 million, as defined, with
minimum annual commitments of $4,000,000 in 2000, $8,000,000 in 2001 and
$10,000,000 in 2002.
In 1999, the Company satisfied the purchase commitment under a previous
arrangement with one of the aforementioned telecommunications vendors.
The Company has also entered into contracts expiring at various times
through the year 2002 with various communications vendors to provide services
consisting of aggregating, routing and transporting data communications over the
Company's network. Such contracts contain no minimum purchase commitments and
are cancelable by either party.
The Company had purchase commitments at December 31, 1999 totaling
approximately $5,000,000 for various network equipment.
2. FACILITIES AND EQUIPMENT LEASES
The Company leases office facilities, data centers and certain equipment
with expiration dates through November 2009. 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
by the straight-line method over the terms of the lease.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------ (IN
THOUSANDS)
<S> <C>
2000............................................. $ 2,400
2001............................................. 2,336
2002............................................. 2,164
2003............................................. 2,209
2004............................................. 2,257
Thereafter....................................... 7,917
-------
$19,283
=======
</TABLE>
Total rent expense for operating leases amounted to $862,000, $898,000 and
$1,736,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
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, 1999, excluding benefits, was approximately $1,276,000.
50
<PAGE> 52
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. LITIGATION MATTERS
The Company is involved in various litigation, which arises 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 J -- 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 (Note L(1)). 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. On May 5, 1999, the Company paid approximately $1,993,000 to fully
redeem all outstanding preferred stock and accrued dividends with a portion of
the proceeds from the Company's IPO.
NOTE K -- STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTION PLANS
Capitalization
On January 29, 1999, the Company's Board of Directors authorized an
increase in the number of common stock and preferred stock authorized to
90,000,000 and 1,000,000, respectively. Further all non-voting common shares are
converted into voting common shares.
On May 5, 1999, the Company completed its IPO. Through the IPO, 5,175,000
shares of the Company's common stock were issued for net proceeds of
approximately $75.2 million after deduction of the underwriting discount,
commissions and other offering costs of approximately $7.6 million.
Private Placement
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 is registered under
the Securities 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
Broadwing Communication Services, Inc.'s ("Broadwing"), formerly IXC Internet
Services, Inc., 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. As of December 31, 1999, the number of shares covered by the proxy is
389,723.
Stock Splits
On October 14, 1998 and April 12, 1999, the Board of Directors approved a
five-for-one stock split and a one and one half-for-one stock split,
respectively. 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.
51
<PAGE> 53
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Employee Stock Purchase Plan
In March 1999, the Board of Directors adopted an Employee Stock Purchase
Plan, which permits eligible employees to purchase shares of the Company's
common stock at a discounted price of 85% of the market value of the shares at
the date of purchase, as defined. A total of 2,250,000 shares of the Company's
common stock may be purchased under the employee plan. During 1999, employees
purchased 28,208 shares, at $10.78 per share. Total proceeds received by the
Company were approximately $304,000. The Plan conforms with Section 423 of the
Internal Revenue Code of 1986 and is considered to be non-compensatory for
financial reporting purposes.
Stock Option Plans
The Company's 1996 Incentive Stock Option Plan had 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 than the fair market value of the shares at the date of grant. All options
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 occurrence of certain
conditions, as defined. This plan was frozen on January 1, 1999 and accordingly
no options were granted under the plan in 1999.
On March 12, 1999, the Board of Directors approved its 1999 Stock Option
Plan. The Plan has authorized the grant of options to employees and directors
for up to 2,400,000 shares of the Company's common stock with an exercise price
of not less than the fair market value of the shares at the date of grant. This
plan allows for the granting of incentive stock options qualified under Section
422 of the Internal Revenue Code and also non-qualified options. All options
granted have ten-year terms and vest immediately or over a period of 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 occurrence of
certain conditions, as defined.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," method of determining
compensation cost. Under APB 25, if 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 granted and shares purchased through the employee stock purchase plan
under the fair value method of that Statement. The fair value for these options
and shares was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1998 1999
------- ------------ -------
<S> <C> <C> <C>
Risk-free interest rate............................. 5.40% 4.80% 5.70%
Volatility factor................................... .001 .001 .80
Expected life of options............................ 5 years 5 years 4 years
</TABLE>
52
<PAGE> 54
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Had the Company determined compensation cost 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,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net loss attributable to common
stockholders....................................... $(6,070) $(7,288) $(15,098)
Pro forma basic and diluted loss per common share.... $ (.62) $ (.58) $ (.77)
</TABLE>
A summary of the Company's stock option activity and related information
under the plans for the years ended December 31, 1997, 1998 and 1999, follows:
<TABLE>
<CAPTION>
WEIGHTED
PRICE AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
---------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997................... 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
Granted.................................... 674,850 11.18 - 20.38 14.68
Exercised.................................. (1,115,818) .056 - 2.93 .57
Forfeited.................................. (208,528) .056 - 16.00 2.65
---------- --------------------
BALANCE, DECEMBER 31, 1999................. 3,348,837 $ .056 - $20.38 $ 4.50
---------- ====================
Exercisable, December 31, 1997............. 1,378,470 $ .056 - $ .40 $ .103
---------- ==================== ==============
Exercisable, December 31, 1998............. 1,760,858 $ .056 - $ 2.93 $ .473
---------- ==================== ==============
</TABLE>
The weighted average fair values of options granted were $.00, $3.02 and
$9.24 for the years ended December 31, 1997, 1998 and 1999, respectively.
Certain options were granted in 1998 and 1999 at exercise prices below the
fair market value of the Company's stock, resulting in aggregate total
compensation of $5,059,000, of which a non-cash compensation expense of $117,000
and $1,371,000 was recorded for the years ended December 31, 1998 and 1999,
respectively, with the remaining charge of $3,571,000 at December 31, 1999 to be
recognized over the remaining vesting period of approximately three years.
53
<PAGE> 55
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Information, at date of issuance, regarding stock option grants during the
year ended December 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
------- --------- ---------
<S> <C> <C> <C>
Exercise price exceeds market price.................. 135,900 $16.00 $8.90
Exercise price equals market price................... 278,450 14.89 9.28
Exercise price is less than market price............. 260,500 13.70 9.36
</TABLE>
The following table summarizes information about the shares outstanding and
exercisable for options at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
--------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .056 - .056 77,622 7.0 $ .056 15,390 $ .056
.13 - .13 585,000 7.0 .13 585,000 .13
.40 - .40 280,585 7.5 .40 67,939 .40
2.93 - 2.93 1,738,030 8.9 2.93 595,487 2.93
11.19 - 16.00 612,350 9.7 14.20 6,250 16.00
17.50 - 20.38 55,250 9.8 19.60
--------- ---------
$ .056 - 20.38.. 3,348,837 8.5 4.50 1,270,066 $ 1.54
========= =========
</TABLE>
Common Stock Reserved
At December 31, 1999, the Company reserved for issuance 7,295,779 shares of
its common stock as follows: (a) 5,073,987 shares pursuant to the Company's
stock option plans and (b) 2,221,792 shares issuable under the Employee Stock
Purchase Plan.
Stock Appreciation Rights
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
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 L -- RELATED PARTY TRANSACTIONS
1. TRANSACTIONS WITH NET AND ORG
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.
54
<PAGE> 56
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
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 those
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>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrelated customers..................................... $3,705 $3,052 $ 3,000
Member institutions..................................... 2,891 4,477 4,885
Services to ORG......................................... 553 798 2,432
------ ------ -------
$7,149 $8,327 $10,317
====== ====== =======
</TABLE>
The excess of the Company's revenues over amounts charged by ORG to its
member institutions was approximately $1,490,000, $2,814,000 and $3,037,000 for
the years ended December 31, 1997, 1998 and 1999, 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 years ended December 31, 1997, 1998 and 1999, the
Company charged NET approximately $91,500, $100,000 and $100,000 and ORG
approximately $210,000, $300,000 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 J).
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 was due in 2001. Interest was being accrued at a rate of 5.56%. Upon
demand by the Company, the officers/stockholders were required to pledge common
stock of the Company as collateral on these borrowings. These term notes and
accrued interest were repaid in full during 1999.
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,
the Board of Directors will establish payment terms, interest rates and
collateral provisions. This line of credit agreement terminated upon
consummation of the initial public offering transaction described in Note K.
3. CONSULTING AND SERVICE AGREEMENTS
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 cancelable
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.
55
<PAGE> 57
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
These stock options became fully exercisable in 1998 as a result of the August
4, 1998 private placement transaction described in Note K. The Company incurred
consulting fees of $60,000 in each of the years ended December 31, 1997, 1998
and 1999.
During the years ended December 31, 1998 and 1999, the Company incurred
$25,000 and $90,000, respectively, in consulting fees to one of its principal
stockholders.
During 1999, the Company and Broadwing, a principal stockholder, signed a
Joint Marketing and Services Agreement. Under the agreement, each party can
resell the services of the other party. During 1999, the Company purchased
network access services under contract from Broadwing totaling approximately
$840,000.
NOTE M -- INCOME TAXES
The Company generated losses for income tax purposes of approximately
$5,526,000, $4,800,000 and $12,078,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Expenses not currently deductible.................... $ 375 $ 766 $ 515
Net operating loss carryforwards..................... 2,711 4,607 9,477
Amortization of intangible and fixed assets.......... 504 471 556
Deferred compensation................................ 447
------- ------- --------
Total deferred tax assets............................ 3,590 5,844 10,995
Valuation allowance.................................. (3,590) (5,844) (10,995)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
A reconciliation between the Company's effective tax rate and the Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate........................... 34% 34% 34%
Valuation allowance on net operating loss................... (32)% (32)% (28)%
Valuation allowance on temporary differences................ (1)% (1)% (3)%
Expenses not deductible for income tax purposes............. (1)% (1)% (3)%
--- --- ---
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 and 1999, the Company had net operating loss
carryforwards of approximately $11,611,000 and $23,689,000, respectively, for
income tax purposes. These net operating losses expire through year 2019.
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.
56
<PAGE> 58
APPLIEDTHEORY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE N -- RETIREMENT SAVINGS PLANS
As of January 1, 1997, all employees covered under a former plan were
transferred to The AppliedTheory Communications, Inc. 401(k) Profit Sharing Plan
(the "401(k) Plan") and the Money Purchase Pension Plan and the former plan was
terminated and all participants were fully vested in their account balances.
The 401(k) Plan covers substantially all employees. In addition to employee
contributions, the Company matches a percentage of the employee's elective
salary deferral into the Plan and contributes a percentage of each eligible
employee's salary to the Money Purchase Plan Pension. Effective October 1, 1997,
the Company terminated the Money Purchase Pension Plan. All employees in the
Plan were vested, and all assets were transferred into the 401(k) Plan. The
total contributions made by the Company under both Plans totaled approximately
$587,000, $373,000 and $688,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
NOTE O -- SUBSEQUENT EVENT
1. PURCHASE OF CRL NETWORK SERVICES, INC.
On January 5, 2000, the Company's newly formed wholly-owned subsidiary,
AppliedTheory Reef Acquisition Corp., ("the Merger Sub"), a Delaware
corporation, purchased all of the capital stock of CRL Network Services, Inc.
("CRL") for up to approximately $9.9 million in cash and up to approximately
2,022,287 shares of common stock of the Company. Also the Merger Sub changed its
name to AppliedTheory California Corporation. The Company owns all capital stock
of AppliedTheory California Corporation. CRL provides high-speed Internet access
and data networking solutions across the United States and owns and operates a
Tier 1 network backbone.
The acquisition will be accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price will be allocated to
the identifiable net assets acquired based on the estimated fair values. The
balance of the purchase price will be recorded as goodwill.
57
<PAGE> 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
AppliedTheory Corporation
In connection with our audit of the financial statements of AppliedTheory
Corporation referred to in our report dated February 4, 2000, we have also
audited Schedule II for each of the three years in the period ended December 31,
1999. 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.
/s/ GRANT THORNTON LLP
--------------------------------------
New York, New York
February 4, 2000
58
<PAGE> 60
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>
Year ended December 31, 1997
Allowances for doubtful accounts................ $ 24 119 21 122
Deferred tax valuation allowance................ 1,273 2,317 3,590
Year ended December 31, 1998
Allowances for doubtful accounts................ 122 60 25 157
Deferred tax valuation allowance................ 3,590 2,254 5,844
Year ended December 31, 1999
Allowances for doubtful accounts................ 157 90 16 231
Deferred tax valuation allowance................ 5,844 5,151 10,995
</TABLE>
59
<PAGE> 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference to our
proxy statement, which will be filed with the SEC on or before April 28, 2000 in
connection with our annual meeting of stockholders for the year 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to our
proxy statement, which will be filed with the SEC on or before April 28, 2000 in
connection with our annual meeting of stockholders for the year 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to our
proxy statement, which will be filed with the SEC on or before April 28, 2000 in
connection with our annual meeting of stockholders for the year 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to our
proxy statement, which will be filed with the SEC on or before April 28, 2000 in
connection with our annual meeting of stockholders for the year 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
1. FINANCIAL STATEMENTS
The following financial statements of AppliedTheory Corporation and related
notes, together with the report thereon of Grant Thornton LLP, the Company's
independent auditors, are set forth herein as indicated below.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants.......... 38
Balance Sheets -- December 31, 1998 and 1999.............. 39
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999.................................... 40
Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss for the Years Ended December 31,
1997, 1998 and 1999.................................... 41
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999.................................... 42
Notes to Financial Statements............................. 43-57
Report of Independent Certified Public Accountants on
Schedule.................................................. 58
Schedule II -- Valuation and Qualifying Accounts............ 59
</TABLE>
60
<PAGE> 62
2. FINANCIAL STATEMENT SCHEDULES
All financial statements schedules required to be filed in Part IV, Item
14(a) have been omitted because they are not applicable, not required, or
because the required information is included in the financial statements or
notes thereto.
61
<PAGE> 63
3. EXHIBITS
EXHIBIT INDEX
(a.) EXHIBITS.
The following Exhibits are filed or incorporated by reference herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.01 Form of Agreement and Plan of Merger between AppliedTheory
Corporation and AppliedTheory Communications, Inc.
2.1 Agreement and Plan of Merger, dated December 3, 1999, by and
among AppliedTheory Corporation, AppliedTheory Reef
Acquisition Corp., CRL Network Services, Inc., a Delaware
Corporation, and James G. Couch.
2.2 Escrow Agreement, dated January 5, 2000, by and among,
AppliedTheory Corporation, AppliedTheory Reef Acquisition
Corp., United States Trust Company of New York, and James G.
Couch.
2.3 Put Option Agreement dated January 5, 2000, by and between,
AppliedTheory Corporation, James G. Couch and other holders
of capital Stock of CRL Network Services, Inc.
2.4 Registration Rights Agreement dated January 5, 2000 by and
between AppliedTheory Corporation, James G. Couch and any
other holders of registerable stock of CRL Network Services,
Inc. who may join the agreement.
2.5 Tax Escrow Agreement dated January 5, 2000, by and among
AppliedTheory Corporation, AppliedTheory Reef Acquisition
Corp., CRL Network Services, Inc. and United States Trust
Company of New York.
2.6 Stock Purchase Agreement, dated June 22, 1999, by and among
AppliedTheory Corporation, a Delaware corporation, Grumman
Hill Investments III, L.P., a Delaware limited partnership,
Planning Technologies, Inc., a Georgia corporation, Arturo
Sanchez, Ronald G. Spencer and Peter Korman.
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.
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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 July 1,
1996.
10.07 Lease Agreement between Elwood Davis Road Company and
AppliedTheory Communications, Inc. (as successor to
NYSERNet, Inc.), dated November 1995.
10.08 Form of Employment and Non-Competition Agreement between
AppliedTheory Communications, Inc. and Richard Mandelbaum,
Lawrence B. Helft, James Luckett, Mark Oros, Denis Martin
and David Buckel.
10.09 Agreement between AppliedTheory Communications, Inc. (as
successor to NYSERNet, Inc.) and Sprint Communications Co.,
L.P., dated August 11, 1994.
10.10 Consulting Agreement between AppliedTheory Communications,
Inc. and Shelley A. Harrison, dated October 5, 1996.
10.11 Form of Indemnification Agreement between AppliedTheory
Corporation and certain directors.
10.12 Note with David A. Buckel, dated July 30, 1998.
10.13 Note with James D. Luckett, dated July 30, 1998.
10.14 Assignment, Software Development and License Agreement
Between NYSERNet.org, Inc. and AppliedTheory Communications,
Inc., dated October 1, 1996.
10.15 Joint Marketing and Services Agreement between AppliedTheory
Communications, Inc. and IXC Internet Services, Inc., dated
January 26, 1999.
10.16 Resale Agreement between AppliedTheory Communications, Inc.
(as successor to NYSERNet.com, Inc.), and NYSERNet.org,
Inc., dated October 1, 1996.
10.17 Resource Sharing Agreement between AppliedTheory
Communications, Inc. (as successor to NYSERNet.com, Inc.)
and NYSERNet.org, Inc., dated October 1, 1996.
10.18 Agreement between AppliedTheory Communications, Inc. (as
Successor to NYSERNet, Inc.) and the New York State
Department of Labor, dated September 27, 1994.
10.19 Promissory Note between AppliedTheory Communications, Inc.
and NYSERNet.net, Inc., dated January 27, 1999.
10.20 Revolving Note Agreement between Fleet National Bank and
AppliedTheory Communications, Inc., dated January 20, 1998.
10.21 1999 Employee Stock Purchase Plan.
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.22 1999 Stock Option Plan.
10.23 Form of Preferred Stock Purchase Agreement by and between
AppliedTheory Corporation and NYSERNet.net, Inc.
10.24 Request for Service between AppliedTheory Communications,
Inc. (as successor to NYSERNet, Inc.) and Bell Atlantic
Corp. (as successor to New York Telephone Company)
10.25 Consent of Grant Thornton LLP.
10.26 Consent of Dewey Ballantine LLP (contained in Exhibit 5.01
of Form S-1).
10.27 Power of Attorney.
10.28 Master Service Agreement between AppliedTheory Corporation
and NYSERNet.org, Inc. dated June 14, 1999.
10.29 Amendment No. 6 to Agreement between AppliedTheory
Corporation and the New York State Department of Labor,
dated August 11, 1998.
10.30 Amendment No. 7 to Agreement between AppliedTheory
Corporation and the New York State Department of Labor,
dated July 1, 1999.
10.31 Sublease Agreement between AppliedTheory Corporation and
Time Square Studios Ltd., dated July 20, 1999
10.32 Amendment No. 8 to Agreement between AppliedTheory
Corporation and the New York State Department of Labor,
dated August 17, 1999.
10.33 Lease Agreement between 224 Harrison Associates, LLC and
AppliedTheory Corporation, dated September 17, 1999.
10.34 Lease Agreement between Hayward Point Eden I Limited
Partnership and AppliedTheory Corporation, dated September
3, 1999.
10.35 Agreement between Sprint Communications Company LP and
AppliedTheory Corporation dated November 1, 1999
10.36 Agreement between and AT&T Corp. and AppliedTheory
Corporation dated November 8, 1999.
10.37 Master building space license agreement between
AppliedTheory Corporation and AT&T Corp. dated July 2, 1999.
10.38 Lease agreement between Merritt-CCP III, LLC and
AppliedTheory Corporation dated July 19, 1999
10.39 Opinion and Consent of Dewey Ballantine LLP with respect to
the legality of the securities being registered
10.40 Consent of Dewey Ballantine LLP (contained in their opinion
filed as Exhibit 5.1 to Form S-8)
10.41 Consent of Grant Thornton, L.L.P.
10.42 Power of Attorney of directors and certain officers of the
Company (included on Signature Page)
11.1 Calculation of basic and diluted loss per share and weighted
average shares used in calculation for the year ended
December 31, 1997.
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
11.2 Calculation of basic and diluted loss per share and weighted
average shares used in calculation for the year ended
December 31, 1998.
11.3 Calculation of basic and diluted loss per share and weighted
average shares used in calculation for the year ended
December 31, 1999.
23.1 Consent of Grant Thornton LLP
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only.
</TABLE>
(b) Reports on Form 8-K
On December 20, 1999, we filed a current report on Form 8-K that included
information relating to an agreement and plan of merger dated December 3, 1999
to purchase CRL Network Services, Inc. AppliedTheory agreed to acquire all of
the capital stock of CRL for up to $10 million in cash and up to 2,031,250
shares in AppliedTheory common stock. The acquisition was consummated on January
5, 2000, as reported in a current report on Form 8-K that was filed on January
20, 2000, CRL's financial statements and pro forma financial information, was
included in the current reports on Form 8-K for this transaction through a Form
8-K/A filed on March 20, 2000.
65
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AppliedTheory Corporation
<TABLE>
<S> <C>
Date: March 26, 2000 by: /s/ RICHARD MANDELBAUM
--------------------------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 26, 2000 /s/ RICHARD MANDELBAUM
--------------------------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: March 26, 2000 /s/ LAWRENCE B. HELFT
--------------------------------------------------------
Lawrence B. Helft
President and Chief Operating Officer
Date: March 26, 2000 /s/ DAVID BUCKEL
--------------------------------------------------------
David Buckel
Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 26, 2000 /s/ DOMINICK DEANGELO
--------------------------------------------------------
Dominick DeAngelo
Director
Date: March 26, 2000 /s/ SHELLEY HARRISON
--------------------------------------------------------
Shelley Harrison
Director
Date: March 26, 2000 /s/ JAMES KELSEY
--------------------------------------------------------
James Kelsey
Director
Date: March 26, 2000 /s/ GEORGE SADOWSKY
--------------------------------------------------------
George Sadowsky
Director
</TABLE>
66
<PAGE> 68
EXHIBIT INDEX
(a.) EXHIBITS.
The following Exhibits are filed or incorporated by reference herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION/PAGE #
- ------- ----------- ---------------
<C> <S> <C>
2.01 Form of Agreement and Plan of Merger between Incorporated by reference from
AppliedTheory Corporation and AppliedTheory AppliedTheory's Form S-1 located under
Communications, Inc. SEC File No. 333-72133 ("Form S-1")
2.1 Agreement and Plan of Merger, dated December 3, Incorporated by reference from
1999, by and among AppliedTheory Corporation, AppliedTheory's Form 8-K filed December
AppliedTheory Reef Acquisition Corp., CRL 20, 1999
Network Services, Inc., a Delaware Corporation,
and James G. Couch.
2.2 Escrow Agreement, dated January 5, 2000, by and Incorporated by reference from
among, AppliedTheory Corporation, AppliedTheory AppliedTheory's Form 8-K filed December
Reef Acquisition Corp., United States Trust 20, 1999
Company of New York, and James G. Couch.
2.3 Put Option Agreement dated January 5, 2000, by Incorporated by reference from
and between, AppliedTheory Corporation, James G. AppliedTheory's Form 8-K filed December
Couch and other holders of capital Stock of CRL 20, 1999
Network Services, Inc.
2.4 Registration Rights Agreement dated January 5, Incorporated by reference from
2000 by and between AppliedTheory Corporation, AppliedTheory's Form 8-K filed December
James G. Couch and any other holders of 20, 1999
registerable stock of CRL Network Services, Inc.
who may join the agreement.
2.5 Tax Escrow Agreement dated January 5, 2000, by Incorporated by reference from
and among AppliedTheory Corporation, AppliedTheory's Form 8-K filed January
AppliedTheory Reef Acquisition Corp., CRL 20, 2000
Network Services, Inc. and United States Trust
Company of New York.
2.6 Stock Purchase Agreement, dated June 22, 1999, Incorporated by reference from Exhibit
by and among AppliedTheory Corporation, a 99.1 in AppliedTheory's Form 8-K filed
Delaware corporation, Grumman Hill Investments June 22, 1999
III, L.P., a Delaware limited partnership,
Planning Technologies, Inc., a Georgia
corporation, Arturo Sanchez, Ronald G. Spencer
and Peter Korman.
3.01 Certificate of Incorporation of the Registrant. Incorporated by reference from Form S-1
3.02 Bylaws of the Registrant. Incorporated by reference from Form S-1
4.01 Specimen of Certificate for Common Stock of the Incorporated by reference from Form S-1
Registrant.
</TABLE>
67
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION/PAGE #
- ------- ----------- ---------------
<C> <S> <C>
4.02 Registration Rights Agreement by and among IXC Incorporated by reference from Form S-1
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. Incorporated by reference from Form S-1
10.01 Stock Purchase Agreement by and among IXC Incorporated by reference from Form S-1
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. Incorporated by reference from Form S-1
10.03 Form of Option Agreements among the Registrant, Incorporated by reference from Form S-1
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 Incorporated by reference from Form S-1
Harrison.
10.05 Agreement of Lease between 55 Broad Street Incorporated by reference from Form S-1
Company and AppliedTheory Communications, Inc.
(as successor to NYSERNet, Inc.), dated May 1,
1996.
10.06 Agreement of Lease between Cuttermill Realty Co. Incorporated by reference from Form S-1
and AppliedTheory Communications, Inc. and
NYSERNet.org, Inc. (together as successors to
NYSERNet, Inc.), dated July 1, 1996.
10.07 Lease Agreement between Elwood Davis Road Incorporated by reference from Form S-1
Company and AppliedTheory Communications, Inc.
(as successor to NYSERNet, Inc.), dated November
1995.
10.08 Form of Employment and Non-Competition Agreement Incorporated by reference from Form S-1
between AppliedTheory Communications, Inc. and
Richard Mandelbaum, Lawrence B. Helft, James
Luckett, Mark Oros, Denis Martin and David
Buckel.
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION/PAGE #
- ------- ----------- ---------------
<C> <S> <C>
10.09 Agreement between AppliedTheory Communications, Incorporated by reference from Form S-1
Inc. (as successor to NYSERNet, Inc.) and Sprint
Communications Co., L.P., dated August 11, 1994.
10.10 Consulting Agreement between AppliedTheory Incorporated by reference from Form S-1
Communications, Inc. and Shelley A. Harrison,
dated October 5, 1996.
10.11 Form of Indemnification Agreement between Incorporated by reference from Form S-1
AppliedTheory Corporation and certain directors.
10.12 Note with David A. Buckel, dated July 30, 1998. Incorporated by reference from Form S-1
10.13 Note with James D. Luckett, dated July 30, 1998. Incorporated by reference from Form S-1
10.14 Assignment, Software Development and License Incorporated by reference from Form S-1
Agreement Between NYSERNet.org, Inc. and
AppliedTheory Communications, Inc., dated
October 1, 1996.
10.15 Joint Marketing and Services Agreement between Incorporated by reference from Form S-1
AppliedTheory Communications, Inc. and IXC
Internet Services, Inc., dated January 26, 1999.
10.16 Resale Agreement between AppliedTheory Incorporated by reference from Form S-1
Communications, Inc. (as successor to
NYSERNet.com, Inc.), and NYSERNet.org, Inc.,
dated October 1, 1996.
10.17 Resource Sharing Agreement between AppliedTheory Incorporated by reference from Form S-1
Communications, Inc. (as successor to
NYSERNet.com, Inc.) and NYSERNet.org, Inc.,
dated October 1, 1996.
10.18 Agreement between AppliedTheory Communications, Incorporated by reference from Form S-1
Inc. (as Successor to NYSERNet, Inc.) and the
New York State Department of Labor, dated
September 27, 1994.
10.19 Promissory Note between AppliedTheory Incorporated by reference from Form S-1
Communications, Inc. and NYSERNet.net, Inc.,
dated January 27, 1999.
10.20 Revolving Note Agreement between Fleet National Incorporated by reference from Form S-1
Bank and AppliedTheory Communications, Inc.,
dated January 20, 1998.
10.21 1999 Employee Stock Purchase Plan. Incorporated by reference from Form S-1
10.22 1999 Stock Option Plan. Incorporated by reference from Form S-1
10.23 Form of Preferred Stock Purchase Agreement by Incorporated by reference from Form S-1
and between AppliedTheory Corporation and
NYSERNet.net, Inc.
</TABLE>
69
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION/PAGE #
- ------- ----------- ---------------
<C> <S> <C>
10.24 Request for Service between AppliedTheory Incorporated by reference from
Communications, Inc. (as successor to NYSERNet, AppliedTheory's Form S-1/A located
Inc.) and Bell Atlantic Corp. (as successor to under Securities and Exchange
New York Telephone Company) Commission File No. 333-72133
10.25 Consent of Grant Thornton LLP. Incorporated by reference from Exhibit
23.1 of Form S-1
10.26 Consent of Dewey Ballantine LLP (contained in Incorporated by reference from Exhibit
Exhibit 5.01 of Form S-1). 23.2 of Form S-1
10.27 Power of Attorney. Incorporated by reference from Exhibit
24.1 of Form S-1
10.28 Master Service Agreement between AppliedTheory Incorporated by reference from Exhibit
Corporation and NYSERNet.org, Inc. dated June 10.1 of AppliedTheory's Quarterly
14, 1999. Report on Form 10-Q for the quarter
ended June 30, 1999 located under
Securities and Exchange Commission File
No. 000-25759 ("June 1999 10-Q")
10.29 Amendment No. 6 to Agreement between Incorporated by reference from Exhibit
AppliedTheory Corporation and the New York State 10.2 of June 1999 Form 10-Q
Department of Labor, dated August 11, 1998.
10.30 Amendment No. 7 to Agreement between Incorporated by reference from Exhibit
AppliedTheory Corporation and the New York State 10.3 of June 1999 Form 10-Q
Department of Labor, dated July 1, 1999.
10.31 Sublease Agreement between AppliedTheory Incorporated by reference from Exhibit
Corporation and Time Square Studios Ltd., dated 10.4 of June 1999 Form 10-Q
July 20, 1999
10.32 Amendment No. 8 to Agreement between Incorporated by reference from Exhibit
AppliedTheory Corporation and the New York State 10.1 of AppliedTheory's Quarterly
Department of Labor, dated August 17, 1999. Report on Form 10-Q for the quarter
ended September 30, 1999 located under
Securities and Exchange Commission File
No. 000-25759 ("September 1999 10-Q")
10.33 Lease Agreement between 224 Harrison Associates, Incorporated by reference from Exhibit
LLC and AppliedTheory Corporation, dated 10.2 of September 1999 10-Q
September 17, 1999.
10.34 Lease Agreement between Hayward Point Eden I Incorporated by reference from Exhibit
Limited Partnership and AppliedTheory 10.3 of September 1999 10-Q
Corporation, dated September 3, 1999.
10.35 Agreement between Sprint Communications Company Filed herewith
LP and AppliedTheory Corporation dated November
1, 1999
</TABLE>
70
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION/PAGE #
- ------- ----------- ---------------
<C> <S> <C>
10.36 Agreement between and AT&T Corp. and Filed herewith
AppliedTheory Corporation dated November 8,
1999.
10.37 Master building space license agreement between Filed herewith
AppliedTheory Corporation and AT&T Corp. dated
July 2, 1999.
10.38 Lease agreement between Merritt-CCP III, LLC and Filed herewith
AppliedTheory Corporation dated July 19, 1999
10.39 Opinion and Consent of Dewey Ballantine LLP with Incorporated by reference from Exhibit
respect to the legality of the securities being 5.1 of AppliedTheory's Form S-8 located
registered under Securities and Exchange
Commission File No. 333-83177 ("Form
S-8")
10.40 Consent of Dewey Ballantine LLP (contained in Incorporated by reference from Exhibit
their opinion filed as Exhibit 5.1 to Form S-8) 5.1 of AppliedTheory's Form S-8 located
under Securities and Exchange
Commission File No. 333-83177 ("Form
S-8")
10.41 Consent of Grant Thornton, L.L.P. Incorporated by reference from Exhibit
23.2 of AppliedTheory's Form S-8
located under Securities and Exchange
Commission File No. 333-83177 ("Form
S-8")
10.42 Power of Attorney of directors and certain Incorporated by reference from Exhibit
officers of the Company (included on Signature 24.1 of AppliedTheory's Form S-8
Page) located under Securities and Exchange
Commission File No. 333-83177 ("Form
S-8")
11.1 Calculation of basic and diluted loss per share Filed herewith
and weighted average shares used in calculation
for the year ended December 31, 1997.
11.2 Calculation of basic and diluted loss per share Filed herewith
and weighted average shares used in calculation
for the year ended December 31, 1998.
11.3 Calculation of basic and diluted loss per share Filed herewith
and weighted average shares used in calculation
for the year ended December 31, 1999.
23.1 Consent of Grant Thornton LLP Filed herewith
27.1 Financial Data Schedule, which is submitted Filed herewith
electronically to the Securities and Exchange
Commission for information only.
</TABLE>
71
<PAGE> 1
EXHIBIT 10.35
[SPRINT LOGO]
Agreement No. BSG-9912-294
SPRINT CUSTOM SERVICE AGREEMENT
This Custom Service Agreement ("Agreement") between Sprint Communications
Company L.P. ("Sprint"), and AppliedTheory Corporation, formerly known as
AppliedTheory Communications, Inc. ("AppliedTheory", "ATC" or "Customer")
establishes the terms and conditions governing Sprint's provision of
telecommunications products and services ("Services" and "Equipment") to
Customer. This Agreement supersedes the Agreement between the parties dated
August 11, 1994.
Sprint is a common carrier providing telecommunications services pursuant to
tariffs on file with the Federal Communications Commission ("FCC") and state
regulatory commissions ("Tariff(s)"). Sprint provides enhanced voice and data
telecommunications services pursuant to Sprint's standard terms and conditions
for non-tariffed services.
In the event of a conflict between and among the provisions and attachments of
this Agreement, the inconsistency will be resolved by giving precedence in the
following order:
1. The Terms and Conditions of this Agreement, Articles 1 - 24
2. Attachment E: Sprint's Acceptable Conduct Policy for Sprint IP Products
and Services
3. Attachment A: Price Schedule dated December 30, 1999
4. Attachment B: Revised Statement of Work dated December 30, 1999
5. Attachment C: Sprint IP Services Standard Terms and Conditions (Rev.
01.99) and Terms and Conditions for Internet and Intranet Dedicated and
Dial Services (Rev. 01.99)
6. Attachment D: Sprint Terms and Conditions for Internet Service Providers
7. Sprint Internet Services, Customer Reference Guide (Ver. 1.0)
8. Attachment F: Domestic Sprint Internet and Intranet IP Products and
Services Port Availability Service Level Agreement - Performance Guarantee
(Rev. 10/23/98) and Network Delay Service Level Agreement - Performance
Guarantee (Rev. 10/23/98)
9. Attachment G: Sprint Customer Premise Equipment Standard Terms and
Conditions - Maintenance Only
10. Applicable Sprint Tariffs
11. Order(s) for Data Communication Products and Services Form (Appendix 1)
1. TERM
1.1 AGREEMENT TERM. The term of this Agreement ("Agreement Term") and
the period during which Customer may place orders, as accepted by
Sprint (as defined in 9.2 below), under this Agreement will begin
on November 1, 1999 and will expire on October 31, 2002, unless
extended by mutual agreement of both parties (except as outlined
in 6.2C below). Upon expiration or other termination of this
Agreement, Sprint will provide Services to Customer, subject to
Tariffs or Sprint's standard terms and conditions for
non-tariffed services, at then current Tariff or standard list
prices.
1.2 ORDER TERM. The term for each order ("Order Term") for the
Services will be stated on each Order and will begin on the first
day of the month following the date the Services are installed
and accepted by Customer, in accordance with Clause 4, Acceptance
Criteria, below. The terms, conditions and prices established
under this Agreement will govern all Orders in force and effect
beyond the termination or expiration of this Agreement.
2. RATES AND DISCOUNTS
2.1. SERVICES' PRICING. Customer will receive the rates and discounts
("Discounts") on Services and Equipment in Attachment A, subject
to the terms of Sprint's Tariffs and this Agreement.
2.2. FIXED RATES. Fixed rates will remain fixed for the Agreement
Term. Percentage Discounts will remain fixed for the Agreement
Term, but Sprint may modify the underlying tariff rate (or list
price for non-tariffed services) against which Sprint applies
Discounts.
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3. PAYMENT TERMS
3.1. PAYMENT DATE. Customer will fully pay Sprint's monthly
invoice in U.S. currency within 45 days of the invoice date.
Customer will pay any applicable sales, use, excise and like
taxes that are stated separately on each invoice.
3.2. INTEREST CHARGES. If Customer fails to pay all valid charges
for Services within 45 days of the invoice date, Sprint may
charge Customer interest on those charges equal to the lesser of
1 1/2% per month or the maximum rate allowed by law. If Customer
fails to pay for Services six (6) months in arrears, Sprint
reserves the right, in addition to other remedies, to discontinue
Discounts until such failure to pay for Services is cured by
Customer.
3.3 INVOICING. Sprint will begin charging Customer for Services
on the date they are installed by Sprint and accepted by
Customer, in accordance with Clause 4, Acceptance Criteria,
below. Sprint will prorate fixed recurring charges for partial
months on a 30-day basis.
3.4 DISPUTED INVOICE CHARGES. Customer may in good faith withhold
payment of any disputed charges. But Customer will pay all
undisputed charges. A charge is not "disputed" until Customer
provides Sprint with written explanation of the disputed charge.
Customer will cooperate with Sprint, in good faith to resolve any
disputed charge expeditiously.
3.5 AUDIT PROVISION. Customer has the right to request copies of
all backup documentation from Sprint for items invoiced for the
purposes of verifying costs.
4. ACCEPTANCE CRITERIA
If the required circuit(s) and hardware are installed by Sprint, the required
software is installed and configured by Sprint, and the Service is capable of
passing traffic, the Services will be deemed accepted by Customer.
5. DELIVERY AND RETURN
5.1 DELIVERY.
A. Delivery Date. All delivery dates are approximate and are
based on current lead-times. But Sprint will use commercially
reasonable efforts to deliver, or cause to have delivered, the
Services by the delivery date specified in the Order.
B. Customer-Requested Delay.
(1) Customer may request a delay in the delivery date set
forth in the Order ("Original Delivery Date") if: (a)
the delay does not exceed 30 calendar days from the
Original Delivery Date; (b) Sprint receives Customer's
written request for the delay at least 10 days before
the Original Delivery Date; and (c) Customer pays any
additional charges, including thiry party charges
incurred by Sprint, resulting from the delay.
(2) If the Customer-requested delay is more than 30 calendar
days from the Original Delivery Date, as approved by
Sprint, Customer will pay Sprint all charges imposed on
Sprint by third parties, provided that such third
parties were promptly notified by Sprint.
(3) If Sprint receives Customer's written notice to cancel
the affected Services on or before the 30th calendar day
from the Original Delivery Date, Customer will pay
Sprint any cancellation charges imposed on Sprint by
third parties, provided that such third parties were
promptly notified by Sprint.
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5.2 RETURN OF EQUIPMENT. No Equipment will be returned without prior
approval and specific shipping instructions from Sprint. In
addition to all other applicable charges, Customer will pay
Sprint a restock charge upon the return of Equipment if: (a) the
return is due to a Customer ordering error; (b) the product has
been damaged while in Customer's possession; (c) the return is
due to Customer's late cancellation of an Order; or (d) a restock
charge is assessed by the manufacturer.
6. MINIMUM SERVICE COMMITMENTS
6.1. FIRST MINIMUM SERVICE COMMITMENT. Customer's First Minimum
Service Commitment ("First MSC") is as follows:
A. Minimum Commitment for Term. Subject to the provisions of
Section 19 below, Customer's Minimum Commitment ("MC") for
the Term is $9,000,000 in MSC Contributory Services, as
defined in 6.3 below.
B. If Customer fails to meet its MC at the end of the
three-year Agreement Term, unless caused by Sprint's
material failure to perform under this Agreement or as a
result of a Force Majeure event, Customer will pay Sprint,
in addition to all other applicable charges for Services
rendered, the difference between the MC and Customer's
actual MSC Contributory Services Usage Charges for the
period in which Customer does not achieve the MC ("First
Shortfall Liability").
6.2 SECOND MINIMUM SERVICE COMMITMENT. Customer's Second Minimum
Service Commitment ("Second MSC") is as follows:
A. Minimum Annual Commitment. Subject to the provisions of
Section 19 below, during each "Contract Year" (defined as
the twelve (12) month period commencing on the Commencement
Date and each anniversary thereof) of this Agreement,
Customer agrees to purchase a minimum of $1,000,000
("Minimum Annual Commitment" or "MAC") in MSC Contributory
Services, as defined in 6.3 below.
B. Second Shortfall Liability. If Customer fails to meet its
MAC, unless caused by Sprint's material failure to perform
under this Agreement or as a result of a Force Majeure
event, Customer will pay Sprint, in addition to all other
applicable charges, the difference between the MAC and
Customer's actual MSC Contributory Services Usage Charges
for each period in which Customer does not achieve the MAC
("Second Shortfall Liability").
C. MAC Carry-Forward.
1. Except as specified in Subsection 6.2.C.2
below, if Customer does not satisfy its MAC, Customer
may, instead of paying the entire Second Shortfall
Liability, add a portion of the Second Shortfall
Liability, not to exceed 10% of that MAC, to the MAC
for the next Contract Year. Customer will pay to
Sprint the portion of the Second Shortfall Liability
that is not carried forward to the next Contract
Year. If Customer does not satisfy its adjusted MAC
in this Agreement's last Contract Year, then, at the
Customer's option, either: 1) Customer will pay the
unsatisfied portion of the re-adjusted MAC, or 2) the
last Contract Year may be extended for 12 months. If
Customer does not satisfy its adjusted MAC during the
last Contract Year as extended, Customer will pay
Sprint, in addition to all other charges, the
difference between its adjusted MAC and Customer's
MSC Contributory Services Usage Charges in the last
Contract Year as extended.
2. Customer will not be eligible to add a portion of any
Second Shortfall Liability to the MAC for the next
Contract Year as set forth above if Customer has
ceased to utilize the Services to a material extent
(unless due to Sprint's material breach). For purpose
of this Subsection 6.2.C.2, Customer will have ceased
to use the Sprint Services to a material extent if
either: (a) the average monthly MSC Contributory
Services Usage Charges over the previous twelve-month
period, multiplied by 12, is less than 70% of the
MAC.
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6.3 MSC CONTRIBUTORY SERVICES. The Services contributing to
Customer's MSC ("MSC Contributory Services") are: Backbone
Private Lines; Egress Ports; Backbone Engineering Consulting;
Backbone Management; Backbone Router Initialization and Upgrades
- Software; Backbone Router Installation and Upgrades - Hardware;
Installation CPE and Software; Customer Router Management;
Customer DNS and News Services Usage Charges, calculated after
all available discounts. "Usage Charges" are the variable
recurring charges or fixed monthly recurring charge for the
Services. Except as expressly provided in this Agreement, Usage
Charges excludes taxes, interest, surcharges, access line
charges, access facilities charges, other charges associated with
access, fixed recurring charges (other than specified
interexchange circuit charges), feature charges, operator service
surcharges, directory assistance charges, installation charges,
account charges, set up fees, report charges, and other
non-recurring charges.
7. REGULATORY PROGRAMS
Sprint may impose additional charges on Customer to recover amounts Sprint
is required by regulatory or other governmental authorities to collect on
behalf of or pay to others in support of statutory or regulatory programs.
Examples of these programs include, but are not limited to, the Universal
Service Fund, the Presubscribed Interexchange Carrier Charge, and
compensation to payphone service providers for use of their payphones to
access Sprint's Service.
8. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SERVICES
Additional terms and conditions for Services are contained in ATTACHMENTS
B, C, D, E, F AND G to this Agreement.
9. ORDERS
9.1. ORDERING PROCEDURES. Customer will order Services pursuant to
Sprint's standard ordering procedures, subject to Sprint's acceptance,
that may include signing Sprint's standard Order for Data Communication
Products and Services form(s) or other applicable order forms designated
by Sprint ("Orders"). Such applicable forms are included in Appendix 1 to
this Agreement.
9.2 SPRINT ORDER ACCEPTANCE. Sprint agrees to provide Customer, subject to
availability of facilities, the Products and Services set forth in this
Agreement, provided such Orders are accepted by Sprint (which acceptance
will not be unreasonably withheld), as evidenced by the execution of the
Order by both parties. Should an Order be rejected due to the availability
of facilities or other business reason, Sprint will, upon Customer's
written request, provide Customer with a technical or business description
of such rejection. Should the rejection be due to the prior assignment of
such facilities to another customer, Sprint will accept Customer's Order
and provision such Order's Products and Services as soon as facilities
become available. In the event an accepted Order in found to be invalid
and/or incomplete, both Sprint and Customer may consider such Order null
and void until the deficiency is corrected.
10. CUSTOMER RESPONSIBILITIES
10.1. PREPARATION FOR SERVICES. Customer will:
A. at its own expense, prepare its site(s) to comply with
Sprint's installation and maintenance specifications;
B. pay Sprint any applicable charges to relocate any installed
Services, to the extent such relocation is necessary to
provide such Services;
C. provide Sprint and its suppliers reasonable access to its
premises to perform any required acts; and
D. be responsible for cabling that connects equipment not
provided by Sprint to Services.
10.2. USE OF SERVICES.
A. Customer will properly use Services and will not, nor will
it permit or assist others to, use Services for any purpose
other than their intended purpose, fail to maintain a
suitable environment according to the manufacturer's
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specifications, or tamper with Services. If Customer fails
to comply with this Section, Customer will release Sprint
from all liabilities or obligations (including any warranty
or indemnity obligation) to Customer under this Agreement
and Customer will pay Sprint all costs or damages Sprint
incurs.
B. Customer will not knowingly permit or assist others to
abuse or fraudulently use Services, including, but not
limited to, unauthorized or attempted access, alteration,
or destruction of another Sprint customer's information, or
using Services that cause interference with another
customer's or authorized user's use of the Sprint network.
If Customer fails to comply with this Section, Sprint may
suspend its performance or terminate Order(s) with no
further obligation to Customer, if Customer fails within
ten (10) days after written notice by Sprint to cure
non-compliance to this Section. Notwithstanding anything in
this Section, if Customer's failure to comply with this
Section adversely affects the performance of Sprint's
network, Sprint may take such corrective action, as it
deems appropriate, without prior notice to Customer.
11. CUSTOMER-PROVIDED HARDWARE OR SOFTWARE
11.1. CUSTOMER-PROVIDED HARDWARE OR SOFTWARE. Customer will install,
operate, and maintain any non-Sprint provided hardware or
software ("Customer-provided"). Sprint is not responsible for the
information transmitted or received on Customer-provided hardware
or software. If Customer provides its own router to interface
with the Services, then Customer is fully responsible for the
installation, maintenance, and configuration of such
Customer-provided router, however, Sprint will have the right, in
cooperation with Customer, to set the initial configuration for
the router interface into the Services.
11.2. SERVICE IMPAIRMENT. Customer will ensure that Customer-provided
hardware or software is compatible with Services, except if such
hardware and software is based upon specifications provided by
Sprint. If Customer-provided hardware or software, which does not
comply with Sprint specifications, impairs Customer's use of
Services, Customer will continue to pay Sprint for Services. Upon
notice from Sprint that the hardware or software not provided by
Sprint is causing or is likely to cause hazard, interference, or
service obstruction Customer will eliminate such hazard,
interference, or service obstruction. Sprint reserves the right
to disconnect the Services until such hazard, interference, or
service obstruction is corrected. If requested by Customer,
Sprint may, at its then-current rates, troubleshoot difficulties
caused by hardware or software not provided by Sprint.
11.3 EQUIPMENT ALTERATION. Customer is responsible for making any
alteration or attachment ("Equipment Alteration") to Equipment
for its use, and for the results of the Equipment Alteration.
11.4 REPLACEMENT OF CUSTOMER-PROVIDED HARDWARE OR SOFTWARE. At
Customer's request, Sprint will replace Customer-provided
hardware or software (except for Equipment Alteration) when those
parts are directly interchangeable with Sprint maintenance parts.
Those parts will be replaced at Sprint's then-current public list
prices.
11.5 SERVICE CHANGES. Sprint is not liable if any changes in Services
cause Customer-provided hardware or software to become obsolete,
require alteration, or affect performance of the
Customer-provided hardware or software.
11.6 ROUTERS. Customer may provide its own routers if Sprint gives
advance written approval for those routers (including associated
software), which shall not be unreasonably withheld or delayed.
12. PERSONAL INJURY AND PROPERTY DAMAGE
Each party will indemnify the other party, its directors, employees,
agents and their successors against all claims, damages or liabilities,
including costs and reasonable attorneys' fees, for claims that arise
directly from performance of this Agreement made for personal injury,
death, or damage to personal property resulting from the negligent or
willful misconduct, errors, or omissions of the indemnifying party or its
subcontractors, directors, employees or agents. If the claim of a party's
employee is covered under applicable workers' compensation laws, that
claim will not be indemnified under this Agreement.
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Agreement No. BSG-9912-294
13. THIRD PARTY CLAIMS
Customer will indemnify Sprint against all claims, damages, or
liabilities, including reasonable attorneys' fees, third party claims for
libel, slander, invasion of privacy, or private record or data invasion or
alteration arising from the use of the Services, unless such claims result
from any action or inaction of Sprint or from any service provided by
Sprint pursuant to this Agreement.
14. LIMITATIONS OF LIABILITY
14.1. REMEDIES. Customer's exclusive remedies are those in Sprint's
Tariffs, Sprint's standard terms and conditions for non-tariffed
services, and this Agreement.
14.2. DIRECT DAMAGES. Sprint's entire liability for direct and
liquidated damages caused by its failure to perform its
obligations under this Agreement will not exceed monthly charges
paid by Customer for Products and Services in the most recent
preceding twelve (12) month period, excluding Service Credits.
Sprint is not liable for any incidental damage to Customer's
premises for Services installation. This limitation of liability
will not apply to claims under Sections 12, 13 or 15.
14.3. CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL BE LIABLE FOR ANY
CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES FOR ANY CAUSE OF
ACTION, WHETHER IN CONTRACT OR TORT. Consequential, incidental,
and indirect damages include, but are not limited to, lost
profits, lost revenues, and loss of business opportunity, whether
or not the other party was aware or should have been aware of the
possibility of these damages.
14.4. DISCLAIMER. THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, WARRANTIES OF NON-INFRINGEMENT, AND ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, NOT EXPLICITLY STATED IN THIS
AGREEMENT ARE EXCLUDED FROM THE SERVICES AND THIS AGREEMENT.
14.5. UNAUTHORIZED ACCESS. Sprint is not liable in contract or tort for
unauthorized access by an individual or entity to Customer's
transmission facilities or Customer premise equipment, or for
unauthorized access to, or alteration, theft, or destruction of
Customer's data files, programs or other information through
accident, wrongful means or any other cause, unless such
unauthorized access is caused by the gross negligence of Sprint.
14.6. SERVICES ON CUSTOMER PREMISES. Customer is liable for all damages
to Services located on Customer's premises excluding reasonable
wear and tear, and Sprint-caused damages. After an Order or this
Agreement expires or terminates, Customer will surrender to
Sprint any Sprint-owned property.
15. PROPRIETARY RIGHTS
15.1. THIRD PARTY CLAIMS. If Customer notifies Sprint promptly in
writing of a third party claim, and gives Sprint full and
complete authority, information and assistance (at Sprint's
expense) for the claim's defense and settlement, and if Customer
or its agents do not by any act (including any admission or
acknowledgement) materially impair or compromise a claim's
defense, Sprint will defend any third party claim, and pay all
court-awarded damages or out of court settlements agreed to by
Sprint, brought against Customer based on an allegation that
Sprint-provided Services or Customer's use of the Services as
provided by Sprint infringe any copyright, trade-secret, or
patent, protected under United States law. For any third party
claims that Sprint receives, or to minimize the potential for a
claim, Sprint may at its option and expense either (1) procure
the right for Customer to continue using the Services; (2)
replace or modify the Services with comparable Services; or (3)
terminate the Services with a pro-rata refund of all monies paid
in advance by Customer.
15.2. PATENT INDEMNIFICATION. Customer will indemnify Sprint against
all claims, damages and liabilities for claims for patent or
copyright infringement from the use of Customer-provided
hardware or software.
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16. PROPERTY RIGHTS PROTECTION
16.1. LICENSE.
A. Sprint grants Customer a non-exclusive and non-transferable
license to use Sprint-provided software, including any
related documentation, solely to enable Customer to use the
Services for its own internal operation. Customer, as
licensee, is granted no rights to use software on behalf of
others, except incidental where such use is necessary to
permit Customer to use Services, and Sprint grants no
rights for time share or service bureau activities.
B. Sprint grants no rights to Customer to any source code and
Customer will not reverse engineer, decompile, modify,
enhance, copy or prepare any derivative works from the
Sprint-provided software. Sprint grants no licenses to
modify the Services or software, or combine the Services or
software with any other services not provided by Sprint.
C. Customer will keep a current record of the location of any
Sprint-provided software and Customer will return the
software to Sprint when Customer ceases using the software,
or no later than 15 days after termination of Services for
any reason. If Sprint authorizes in writing the making of
any software copies, the copies must reproduce the
copyright or any other proprietary legends appearing on the
original copy.
16.2. TITLE.
A. Sprint-Provided Software or Equipment. Sprint or its
suppliers will retain title and property rights to
Sprint-Provided software and equipment, whether or not they
are embedded or attached to realty. Customer neither owns
nor will it acquire any claim or right of ownership to:
1. Sprint-provided equipment not purchased by Customer;
2. software (including the original media and all
subsequent copies of the software, regardless of the
media's form) and associated documentation (including
copies);
3. any patents, copyrights, trademarks, or other
intellectual property related to Section 14.1; or
4. IP addresses assigned to Customer, except Class C
address 169.130 and Autonomous System Number 1785,
which are in the process of being transferred to
Customer. The Customer will assume all responsibility
for acquiring and maintaining IP address from the
assigning authority.
B. Title to Customer-Purchased Equipment. Sprint will pass
title to purchased Equipment to Customer upon delivery.
Sprint will retain a security interest in
Customer-purchased Equipment until the Equipment is paid
for in full. Sprint may require that plates or markings be
affixed to specific Equipment to: (a) indicate Sprint's
ownership interest in the Equipment until Sprint receives
full payment of the purchase price; and (b) identify the
specific Equipment on which Sprint will provide Maintenance
Service.
16.3. TRADE SECRET PROTECTION. Sprint Services are valuable trade
secrets of Sprint or its suppliers. Customer will protect any
software it uses that is provided with or included in Services.
Customer will not examine, copy, alter, reverse engineer or
misuse the software.
16.4 DAMAGES. Sprint will pass risk of loss or damage to equipment to
Customer upon delivery and inspection. Sprint will pass title to
purchased equipment to Customer upon delivery. Sprint will retain
a security interest in purchased equipment until the equipment is
paid for in full.
17. ALLOWANCE FOR SERVICE INTERRUPTIONS (SERVICE CREDITS)
17.1 Sprint will provide Services to Customer that meet applicable
service level agreements ("SLAs"). Customer will be entitled to
the SLA's exclusive remedies in lieu of other remedies (other
than as provided under Section 19. 1D), if the Services fail to
meet the performance guarantees outlined in Attachment F,
Domestic Sprint Internet and Intranet IP Products and Services
Port Availability Service Level Agreement - Performance
Guarantee (Rev. 10/23/98) and Network Delay Service Level
Agreement - Performance Guarantee (Rev. 10/23/98). Customer
shall not receive Service Credit(s) if an interruption is (a)
caused by the negligence or willful misconduct of
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Customer or others authorized by Customer to use the Services
provided by Sprint: (b) due to failure of power, or any problem of
any type occurring at the Customer's side of the Service
Demarcation; (c) caused by the failure of access to Customer's
network, unless such failure is solely caused by Sprint; (d) a
result of scheduled maintenance, or (e) due to any cause beyond
Sprint's control.
17.2 If Sprint's Standard Service Level Agreements for those Services
covered by the SLAs in Attachment F are or become more favorable
than the SLAs in Attachment F, Sprint will apply the Standard
Service Level Agreements to those applicable Services.
18. TRANSITION
Upon execution of this Agreement, the parties will begin to transition the
network and services procured under the Agreement dated August 11, 1994.
Sprint acknowledges that Customer has met all commitments required under
the 9/11/94 Agreement, including minimum revenue guarantees, and will not
assess any termination penalties, except for third party charges imposed
on Sprint, which may be associated with early termination of the 8/11/94
Agreement, disconnection of any circuits, leases or other services and
products under the Agreement.
19. TERMINATION
19.1. SERVICE ELEMENT TERMINATION.
A. If Customer terminates any Order before the end of the Order Term,
Sprint may charge Customer the Termination Charges as stated
below.
1. Customer will pay Sprint a lump-sum amount equal to the
difference between the rates applicable to the Order Term and
the rates applicable to the actual last 12-month term completed
in effect before termination of the Order, multiplied by the
actual number of months in effect before termination of the
Order. For example, if Customer has a 3-year Order Term and
terminates the Order effective in the 16th month of the Order
Term, Customer will pay Sprint the difference between the
3-year Order Term rates and the 1-year Order Term rates,
multilied by 16.
2. Customer will pay Sprint any third-party charges incurred by
Sprint resulting from termination of the Order.
3. Installation Waivers. Customer will pay Sprint a pro-rated
amount of any waived installation charges based on the number
of months remaining in the Initial Order Term.
B.. Replacement Service. Customer will not be liable for the
Termination Charges, as specified in subsections 19.1 A above,
if another Sprint service, with an equal or greater monthly
price, is ordered at the same time the notice of termination is
received. In addition, the replacement service must have an
Order Term no less than the number of remaining months in the
Initial Term, or 1 year, whichever is greater.
C. Failure to Meet Service Level Agreement. If Sprint fails to
meet the Service Level Agreements set forth in Attachment F,
Customer will notify Sprint. If Sprint does not cure the
problem within 60 days from the date of Customer's notice, then
Customer may, upon written notice to Sprint, terminate the
affected Service and not be liable for the Termination Charges
specified in subsections 19.1 A above.
19.2. TERMINATION OF THIS AGREEMENT. The Discounts in this Agreement
are based on Customer's commitment to purchase Services for the
entire Agreement Term. If Sprint terminates this Agreement due to
Customer's material breach, or Customer terminates this Agreement
prior to the expiration of the Agreement Term (unless due to
Sprint's material breach), Customer will pay to Sprint, in
addition to all other applicable charges for Services rendered,
and any unpaid
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shortfall in the Second MSC for previous completed Contract
Years, the applicable Termination Charge from the table below
based on the Contract Year in which termination occurs:
<TABLE>
<CAPTION>
<S> <C>
------------------------------------- --------------------------------
Contract Year in which termination Termination Charge
occurs
------------------------------------- --------------------------------
1 $4,500,000
------------------------------------- --------------------------------
2 $2,000,000
------------------------------------- --------------------------------
3 $1,000,000
------------------------------------- --------------------------------
</TABLE>
The Termination Charges contained in this Section 19.2 are
Sprint's exclusive remedies for Customer's termination of the
Agreement prior to the expiration of the Agreement term.
20. MATERIAL FAILURE BY SPRINT
If Sprint materially fails to provide Services in accordance with the
Agreement or breaches a material term of this Agreement, Customer will
provide prompt written notice to Sprint detailing the failure. If Sprint
does not cure the failure within a reasonable time, not to exceed 30 days,
then Customer may, upon five (5) days' written notice to permit internal
management escalation, terminate this Agreement without incurring any
termination liability, except Customer will repay all Service Credits
attributable to such failure, issued under this Agreement. Sprint's
material failure does not include a failure caused by circumstances beyond
Sprint's control including, but not limited to, a failure caused by: (1) a
local exchange carrier; (2) Customer premise equipment (not provided by
Sprint); or (3) Customer.
21. PROPRIETARY INFORMATION
21.1. NONDISCLOSURE AGREEMENT. This Agreement and any information
concerning its terms and conditions are Sprint's proprietary
information and are governed by the parties' nondisclosure
agreement. The term of the parties' nondisclosure agreement is
extended to be coterminous with the Agreement Term. Customer
agrees not to disclose this Agreement or any information in this
Agreement to any third party. Notwithstanding the foregoing, both
parties may make such disclosures, as necessary, to comply with
Securities and Exchange Commission (SEC) regulations.
21.2. NONDISCLOSURE REQUIREMENTS. If the parties have not executed a
nondisclosure agreement, the following provisions will govern the
parties' exchange of information.
A. During the Agreement Term and for a 3 year period after the
Agreement Term, neither party will disclose any Agreement
terms, including pricing, or the other party's proprietary
information. Proprietary information will remain the
property of the disclosing party. The obligation not to
disclose software and related information will survive
after this 3 year period. Customer will only disclose the
software to its employees who have a need to know.
B. The receiving party may use the proprietary information
only to further the proposed relationship between the
parties. Proprietary information may not be disclosed to
any third party except upon written consent of the
disclosing party. No rights, licenses, trademarks,
inventions, copyrights, or patents are granted under this
Agreement.
C. Proprietary information disclosed to the other party must
be clearly identified. Written proprietary information must
be clearly marked in a conspicuous place as proprietary.
Verbal proprietary information must be confirmed in writing
within 15 days following disclosure. Proprietary
information includes, but is not limited to, all tangible,
intangible, present and future information such as:
(1) financial information including pricing;
(2) technical information including software, research,
development, procedures, algorithms, data, designs and
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know-how; and
(3) business information including operations, planning,
marketing interests and products.
D. Proprietary information does not include information that is:
(1) published or is in the public domain through no fault
of the receiving party;
(2) within the receiving party's legitimate possession
prior to disclosure with no confidentiality
obligations;
(3) lawfully received from a third party having rights
with no restriction;
(4) independently developed by the receiving party
without breaching this Agreement; or
(5) revealed with the disclosing party's consent.
E. If the proprietary information is required to be produced
by court order or government authority, the receiving party
must immediately notify the disclosing party of that
obligation. The disclosing party may move the ordering
court or authority for a protective order or other
appropriate relief.
22. FORCE MAJEURE
22.1. FORCE MAJEURE LIABILITY. Neither party will be responsible for
any delay, interruption or other failure to perform under this
Agreement due to acts beyond the control of the responsible
party. Force majeure events include, but are not limited to:
natural disasters (e.g. lightning, earthquakes, hurricanes,
floods); wars, riots, terrorist activities, and civil commotions;
cable cuts, local exchange carriers' activities, and other acts
of third parties; explosions and fires; embargoes, strikes, and
labor disputes; and governmental decrees.
22.2. TERMINATION. The affected party will give notice to the other
party of any force majeure event. Upon notice, either party may
cancel or delay performance without liability (except for payment
of any outstanding amounts due the other party) during the force
majeure event. If the event continues for more than 60 days and
adversely and materially impacts the affected party, that party
may terminate any affected elements of Services without
liability, or the Agreement without liability (except for payment
of a prorated portion of all Credits issued under this Agreement)
if a majority of Services are affected.
23. TARIFFS
23.1. APPLICABILITY. All terms and conditions in Sprint FCC Tariff No.
12 apply to this Agreement. Rates, charges and discounts for call
types, service elements, features and other Services not in this
Agreement are in the applicable Sprint Tariff(s) or public price
list(s).
23.2. TARIFF WITHDRAWAL. If Sprint withdraws any tariff that applies to
Services in this Agreement, the tariff terms and conditions then
in effect will continue to apply to this Agreement. After Sprint
withdraws any applicable tariff, this Agreement will control over
any inconsistent provision in the withdrawn tariff. But Sprint
may modify any tariff rate or list price that is not fixed by
this Agreement.
24. MISCELLANEOUS TERMS AND CONDITIONS
24.1. YEAR 2000 COMPLIANCE. Sprint's Services will operate as specified
in this Agreement during the 20th and 21st centuries. Sprint will
make reasonable efforts to cure any material failure to provide
Services caused solely by year 2000 defects in Sprint's hardware,
software or systems. Due to the interdependence among
telecommunications companies and the interrelationship with
non-Sprint processes, equipment and systems, Sprint is not
responsible for failures caused by circumstances beyond its
control including, but not limited to, failures caused by: (1) a
local exchange carrier; (2) Customer premise equipment not
provided by Sprint; or (3) Customer. In addition, Sprint does not
ensure compatibility between Sprint Services and non-Sprint
Services used by Customer.
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<PAGE> 11
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Agreement No. BSG-9912-294
24.2. RELIANCE. In accepting this Agreement, Customer is not relying on
any representations or promises not in this Agreement. When
signed by the parties this Agreement will: (1) constitute the
parties' entire understanding regarding Services; and (2)
supersede all agreements or discussions, oral or written,
regarding Services, unless explicitly stated in this Agreement.
24.3. DOMESTIC DEFINITION. The term "Domestic" means the 48 contiguous
states of the United States and the District of Columbia for:
Sprint Frame Relay Products and Services; Sprint Enhanced Frame
Relay Products and Services; Sprint IP Services; Sprint Managed
Network Products and Services; Sprint X.25 Products and Services;
and Sprint ATM Services. Otherwise, "Domestic" and other
geographic terms are defined in the applicable Sprint Tariffs.
24.4. INDEPENDENT CONTRACTOR. Sprint is an independent contractor under
this Agreement. The parties' relationship and this Agreement will
not constitute or create an association, joint venture,
partnership, or other form of legal entity or business enterprise
between the parties, their agents, employees or affiliates.
24.5. NO WAIVER OF RIGHTS. If either party fails to enforce any right
or remedy under this Agreement, that failure is not a waiver of
the right or remedy for any other breach or failure by the other
party.
24.6. NO THIRD PARTY BENEFICIARIES. This Agreement's benefits do not
extend to any third party, unless expressly stated in this
Agreement.
24.7 USE OF NAME, SERVICE MARKS, TRADEMARKS OR TRADE SECRETS. In
suitable advertising, press releases and sales presentations,
Customer may only identify Sprint as its service-provider and
Sprint may only identify Customer as its customer. Other than the
aforementioned identification, Sprint and Customer will not use
the name, service marks, trademarks, or trade secrets of the
other party or any of its affiliates for any purpose without the
other party's written consent, which will not be unreasonably
withheld.
24.8. AMENDMENT. Customer and Sprint may modify this Agreement only by
written amendment signed by the parties' officers or authorized
designees. Any oral agreement contrary to this Agreement's terms
is not admissible in any dispute, whether in a court of law or
arbitration.
24.10 NON-ASSIGNMENT. Neither party will assign or delegate its rights
or obligations under this Agreement to any person, corporation,
or other entity without the other party's written consent, which
consent shall not be unreasonably withheld. Notwithstanding the
foregoing, either party may assign this Agreement to another
entity, which 1) controls, is under common control with or is
controlled by such party or 2) succeeds (whether by merger,
reorganization, sale of assets or otherwise) to the business of
the party.
24.11. SEVERABILITY. If any provision of this Agreement is illegal or
unenforceable, the Agreement's unaffected provisions will remain
in effect. Sprint and Customer will negotiate a mutually
acceptable replacement provision for the illegal or unenforceable
provision consistent with the parties' original intent.
24.12. GOVERNING LAW. This Agreement will be governed by applicable
federal laws and regulations and the law of Delaware excluding
choice of law principles.
24.13. WAIVER OF JURY TRIAL. The parties mutually, expressly,
irrevocably and unconditionally waive trial by jury for any
proceedings arising out of, under, or in connection with this
Agreement. This Section survives the termination of the
Agreement.
24.14. ARBITRATION. Any dispute arising out of or relating to this
Agreement may, at the option of the parties, be finally settled
by arbitration. If the parties agree to arbitration, it will be
in accordance with the rules of the American Arbitration
Association. The arbitration will be governed by the United
States Arbitration Act, 9 U.S.C. Sect. 1 et seq., and judgment
upon the award may be entered by any court with jurisdiction.
The arbitration will be held in a jurisdiction mutually agreed
to by the parties.
24.15. RULES OF CONSTRUCTION. No rule of construction requiring
interpretation against the draftsman will apply in this
Agreement's interpretation.
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<PAGE> 12
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Agreement No. BSG-9912-294
24.16. NOTICE. Any notice required under this Agreement or related to
a dispute must be submitted in writing to the appropriate
party's address shown below. If a notice relates to a dispute,
Customer must provide a copy to Sprint at 8140 Ward Parkway,
Kansas City, Missouri 64114, Attention: Law
Department/Marketing and Sales.
24.17. HEADINGS. Headings are for reference only and have no effect on
any provision's meaning.
24.18. ALTERATIONS. Alterations to this Agreement will not be valid
unless accepted in writing by a Sprint officer or authorized
designee.
24.19. EFFECTIVE DATE. To become effective, this Agreement must be
signed by a Customer representative, delivered to Sprint on or
before December 31, 1999, and signed by a Sprint officer or
authorized designee.
<TABLE>
<S> <C>
APPLIEDTHEORY COMMUNICATIONS, INC. SPRINT COMMUNICATIONS COMPANY L.P.
By: /s/ Angelo A. Gencarelli III By: /s/ Steven T. Van Dorselaer
-------------------------------------- -------------------------------------
Name: Angelo A. Gencarelli III Name: Steven T. Van Dorselaer
------------------------------------ -----------------------------------
(Print/Type) (Print/Type)
Title: Vice President Title: Vice President
----------------------------------- ----------------------------------
Date: 12/31/99 Date: 1/12/00
------------------------------------ -----------------------------------
Address for Notice: Address for Notice:
2002 Edmund Halley Drive
Reston, VA 20191
</TABLE>
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SPRINT PROPRIETARY INFORMATION
<PAGE> 1
EXHIBIT 10.36
AT&T Contract Tariff Order Form
<TABLE>
<S> <C> <C>
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Customer Name (Full Legal Name):
Applied Theory Corporation AT&T CORP.
("Customer") ("AT&T")
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Customer Address: AT&T Address:
125 Elwood Davis Road 65 Wolf Road
- --------------------------------------------- ------------------------------------------- ------------------------------------------
AT&T Contact Name:
Floor 2 Floor 1 David Wisenburn
- --------------------------------------------- ------------------------------------------- ------------------------------------------
City State Zip Code City State Zip Code AT&T Contact Telephone Number:
Syracuse, New York 13212 Albany, New York 12205 (518) 437-3242
- --------------------------------------------- ------------------------------------------- ------------------------------------------
</TABLE>
Customer hereby places an order for:
New AT&T Contract Tariff Existing AT&T Contract Tariff No. ______
(attachment required) (attachment required)
================================================================================
Existing Pricing Plan Replacement/Discontinuance:
Check here and identify below any AT&T CT or other AT&T pricing plan being
discontinued in conjunction with this order. Also specify the CT No., Plan ID
No. or Main Billed Account No. (Note: Charges may apply as specified in the plan
being discontinued.)
================================================================================
1. Services will be provided under the Contract Tariff ("CT") ordered hereunder,
subject to the rates, terms and conditions in the CT as well as the AT&T tariffs
(if any) referenced in the CT ("Applicable Tariffs"), as those Applicable
Tariffs may be modified from time to time.
2. This Form (including its addenda, if any), the CT and the Applicable Tariffs
constitute the entire agreement (collectively the "Agreement") between Customer
and AT&T with respect to the services provided under the CT and supersede any
and all prior agreements, proposals, representations, statements, or
understandings, whether written or oral, concerning such services or the rights
and obligations relating to such services. In the event of any inconsistency
between the terms of this Form (including its addenda, if any) and the CT or
Applicable Tariffs, the terms of the Applicable Tariffs and CT shall prevail. In
the event of any inconsistency between the terms of the CT and the Applicable
Tariffs, the terms of the CT shall prevail. Except for changes to rates (to the
extent permitted under the CT) and changes to the Applicable Tariffs, no change,
modification or waiver of any of the terms of this Agreement shall be binding
unless reduced to writing and signed by authorized representatives of both
parties and, to the extent required by law, filed with the FCC.
3. Except to the extent that federal law applies, the construction,
interpretation and performance of this Agreement shall be governed by the
substantive law of the State of New York, excluding its choice of law rules.
4. EXCEPT FOR ANY WARRANTIES EXPRESSLY MADE IN THIS AGREEMENT, AT&T EXCLUDES ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AT&T DOES
NOT AUTHORIZE ANYONE TO MAKE A WARRANTY OF ANY KIND ON ITS BEHALF AND CUSTOMER
SHOULD NOT RELY ON ANYONE MAKING SUCH STATEMENTS.
5. As to new CTs, Customer may, as its sole remedy, cancel this order for the CT
without liability before the CT becomes effective if, without Customer's
consent: (a) AT&T fails to file the CT with the FCC within 30 days after the
date this Form is signed by both parties; (b) the CT as filed is not consistent
with the attached illustrative copy; or (c) the CT does not go into effect
within 30 days after filing.
6. Orders for existing CTs will be accepted and implemented by AT&T only if the
specified CT is available when ordered and Customer is eligible for the CT.
7. Customer shall provide installation instructions and other information as
required by AT&T.
================================================================================
YOUR SIGNATURE ACKNOWLEDGES THAT YOU HAVE READ, UNDERSTAND AND AGREE TO
THE PROVISIONS OF THIS AGREEMENT AND THAT YOU ARE DULY AUTHORIZED TO SIGN THIS
AGREEMENT.
================================================================================
<TABLE>
<S> <C>
Customer AT&T Corp.
Full Legal Name: Applied Theory Corporation
By: / s / Angelo Gencarelli By: /s/ Barry Lubitz
------------------------------------------------- ---------------------
(Authorized Customer Signature) (Authorized AT&T Signature)
Angelo Gencarelli, VP Business Integration and Administration Barry Lubitz
- ------------------------------------------------------------- --------------------------
(Typed or Printed Name and Title) (Typed or Printed Name and Title)
Date: 11/8/99 Date: 11/10/99
----------------- ---------------------
</TABLE>
<PAGE> 2
Addendum
to
AT&T Contract Tariff Order
Between AT&T Corp.
and
Applied Theory Corporation
The above referenced AT&T Contract Tariff Order dated contemporaneously herewith
("Agreement"), between AT&T Corp. ("AT&T") and Applied Theory Corporation
("CUSTOMER") is hereby revised by adding a new Section 8, as follows:
Section 8
In the event of a business downturn beyond the control of CUSTOMER, or in the
event that AT&T is unable to provide Service in the service areas which were
material in the development of the Customer's revenue projections, that
significantly reduces the volume of network services required by CUSTOMER, with
the result that CUSTOMER will be unable to meet its revenue and/or volume
commitments under this Agreement (notwithstanding CUSTOMER'S best efforts to
avoid such a shortfall), AT&T and CUSTOMER will cooperate in efforts to develop
a mutually agreeable alternative proposal that will satisfy the concerns of both
parties and comply with all applicable legal and regulatory requirements. By way
of example and not limitation, such alternative proposals may include changes in
rates, nonrecurring charges, revenue and/or volume commitments, discounts, the
multi-year service period and other provisions. If the parties reach mutual
agreement on an alternative, AT&T will prepare and file any necessary tariff
revisions and/or the parties will sign a contractual amendment to implement any
mutually agreeable alternative proposal, subject to all applicable legal and
regulatory requirements. This provision shall not apply to a change resulting
from a decision by CUSTOMER: (i) to transfer portions of its traffic or
projected growth to carriers other than AT&T, or (ii) as a result of a customer
decision that materially affects its ability to fulfill the requirements of the
Agreement. CUSTOMER must give AT&T written notice of the conditions it believes
will require the application of this provision. This provision does not
constitute a waiver of any charges, including shortfall charges, incurred by
CUSTOMER prior to the time the parties mutually agree to amend or replace this
Agreement.
Applied Theory Corporation AT&T Corp.
By: / s / Angelo Gencarelli By:__________________________
--------------------------------------------
Angelo Gencarelli
Title:__________________________________ Title:_______________________
VP Business Integration & Administration General Manager
Date: 11/8/99 Date:
----------------------------------------
<PAGE> 1
MASTER BUILDING SPACE LICENSE AGREEMENT
FOR CUSTOMER EQUIPMENT
NO. 99-183-0001
CUSTOMER: AppliedTheory Corporation
EFFECTIVE DATE: July 2, 1999
COMMITMENT PERIOD: Three (3) Years
ADDRESSES FOR NOTICES:
AppliedTheory Corporation AT&T
125 Elwood Davis Road 4480 Willow Road, C-15B
Syracuse, NY 13212 Pleasanton, CA 94588
Attn: Contracts Manager Attn: Cheryl Jurgensen
(315) 453-2912 Supervisor
(925) 224-4269
This Agreement between AT&T Corp. and its affiliated AT&T Communications
interexchange companies (collectively "AT&T") and Customer establishes the terms
and conditions under which AT&T will provide space and power to Customer's
Equipment and Cable in selected AT&T Central Office Buildings. The specific
Equipment, Cable, and AT&T Central Office Building will be identified in
separate Space License Supplements that are appended to this Agreement as
Appendix I-V. The terms and conditions for Customer's purchase of Cable are set
forth in Appendix III.
TERM OF AGREEMENT
- -----------------
After the Commitment Period, this Agreement will continue in effect until
replaced by a renewal agreement or terminated pursuant to Section 12.A.
Each Space License Supplement will be coterminous with this Agreement unless
terminated earlier under any of the termination provisions of this Agreement.
SPACE AND POWER
- ---------------
Under the terms and conditions of this Agreement and the Space License
Supplements, AT&T licenses Customer to situate Customer's Equipment and Cable in
AT&T Central Office Building space. This license is subject to the following
conditions:
Except as provided below, the sole purpose of this license is to enable
interconnection of the Equipment and Cable to telecommunications services
furnished by AT&T under applicable tariffs and contracts, and Customer agrees
not to make any other use of the license without the advance, express written
consent of AT&T. Customer will be permitted to interconnect its Equipment and
Cable to interexchange carriers other than AT&T (via baseline access services
obtained by Customer from a baseline access service provider that has entered
into an agreement with AT&T for the provision of baseline access services at the
AT&T Central Office Building)
<PAGE> 2
for no more than forty percent (40%) of its DS3 equivalent IOCs at each AT&T
Central Office Building covered by this Agreement. Customer shall have no more
than sixty (60) days following installation of its Equipment and Cable at the
AT&T Central Office Building to be in compliance with the forty percent (40%)
limitation. If, at any time after such sixty (60) days, Customer is not in
compliance with the forty percent (40%) limitation at an AT&T Central Office
Building, Customer and AT&T promptly will cooperate in reasonable efforts to
resolve amicably the non-compliance situation. If the parties are not able to
reach agreement on a resolution of the situation within ninety (90) days, AT&T
shall have the right to terminate the Space License Supplement at that AT&T
Central Office Building, and Customer shall pay AT&T a lump sum termination
charge equal to the applicable monthly License Fee multiplied by the number of
months remaining in the Commitment Period.
Customer will be the customer of record for all interconnected
telecommunications services.
The license is limited to the Equipment and Cable described in the Space License
Supplements. Additions or modifications require amendment or replacement of the
Space License Supplements pursuant to Section 20.B. AT&T will furnish electrical
power for the Equipment in accordance with the specifications in Appendix IV,
the Space License Supplement.
PRICE AND PAYMENT
- -----------------
The monthly License Fee for the Commitment Period and the Site Preparation Fee
are identified in Appendix IV, the Space License Supplement.
After the Commitment Period, the License Fee will be at AT&T's then-current
rate. Before any increase in the License Fee, AT&T will give Customer 90 days'
written notice, and Customer will have the opportunity to terminate this
agreement under Section 12.A.
The Site Preparation Fee and the first month's License Fee will be invoiced
after the Work Completion Date identified in Appendix IV, the Space License
Supplement.
Customer agrees to pay AT&T all charges under this Agreement within 30 days from
the date of the invoice. Restricted endorsements, releases, or other statements
on or accompanying checks accepted by AT&T will not be effective. E. The fixed
fees do not include taxes. Customer agrees to pay any taxes (other than taxes on
AT&T's real estate or net income) that may be levied upon any privileges and
services furnished under this Agreement, unless Customer has provided AT&T with
a valid tax exemption certificate.
INSTALLATION AND MAINTENANCE
- ----------------------------
If Customer has elected to have AT&T install or maintain Equipment, these
services will be performed under the terms and conditions of the applicable AT&T
Product Agreement, AT&T Maintenance Agreement, or equivalent. All other
Equipment will be installed by Customer in
2
<PAGE> 3
conformity with AT&T-furnished specifications, and maintained by Customer in
good working order.
Appendix III, Purchase of Cable, and Appendix IV, the Space License Supplement,
identify the parties responsible for installation and maintenance of Cable.
Cable that utilizes shared racks and risers will be installed and maintained by
AT&T under this Agreement, and cannot be installed or maintained by Customer.
Maintenance will be invoiced to Customer at AT&T's time and material rates.
CUSTOMER'S AGENTS
- -----------------
NOTE: THE REQUIREMENTS OF THIS SECTION APPLY ONLY IF CUSTOMERS ELECT TO
USE NON-AT&T PERSONNEL TO PERFORM WORK IN THE AT&T CENTRAL OFFICE
BUILDING.
AT&T licenses Customer, its non-AT&T contractors and subcontractors, and their
respective officers, agents, and employees (collectively "Customer's Agents") to
enter the AT&T Central Office Building, upon reasonable advance notice, for the
purpose of installing, adjusting, testing, maintaining, or removing Equipment
(and Cable, if Customer is permitted to do so under this Agreement). Entry for
restoration of a service interruption may be obtained at any time, but advanced
notice may be needed outside AT&T's regular business hours. Entry for routine or
scheduled work will be limited to AT&T's regular business hours unless special
arrangements have been made in advance.
Before using any non-AT&T contractor or subcontractor to perform work in an AT&T
Central Office Building, Customer will (1) notify AT&T and obtain AT&T's prior
written consent, which shall not be unreasonably withheld or delayed, and (2)
cause each such contractor and subcontractor to execute and deliver to AT&T the
nondisclosure agreement annexed to this Agreement as Appendix I.
Customer will furnish to AT&T, and keep current, a written list stating the name
and identification number of each person authorized to obtain entry under the
license granted in Section 5.A. All persons on the list who obtain entry will be
deemed Customer's Agents for purposes of this Agreement.
Customer's Agents will comply with all applicable laws and ordinances; with the
standards and practices of the telecommunications industry; and with all AT&T
security procedures, building rules, and safety practices that have been brought
to their attention. AT&T may revoke the entry privileges of persons who fail to
comply or are disorderly.
Customer's Agents are prohibited from bringing any of the following materials
into an AT&T Central Office Building: wet cell batteries, explosives, flammable
liquids or gases, alcohol, controlled substances, weapons, cameras, tape
recorders, and similar equipment and materials.
AT&T and its designees may observe the work activities of Customer's Agents in
the AT&T Central Office Building, and may inspect at any time the Equipment and
materials brought into the building. Customer's Agents shall refrain from using
any products, tools, materials, or
3
<PAGE> 4
methods that, in AT&T's sole judgment, might endanger or interfere with the
services, personnel, or property of AT&T or its vendors or customers, and AT&T
reserves the right to take any reasonable action to prevent such potential harm.
Customer will insure or self-insure in accordance with Section 7 against claims
involving Customer's Agents. Customer agrees to release and indemnify AT&T in
accordance with Section 17 against:
claims or charges alleging or resulting from negligence, willful misconduct, or
violations of law by Customer or Customer's Agents in connection with activities
enabled by this Agreement; and
claims by any of Customer's Agents arising from dismissal, suspension, or
termination of work, or from denial of entry to an AT&T Central Office Building;
and claims by any person arising from Customer's nonpayment for goods or
services.
RESPONSIBILITY FOR CUSTOMER'S EQUIPMENT
- ---------------------------------------
Customer is responsible for insuring or self-insuring its Equipment and Cable in
accordance with Section 7.
If AT&T negligently or willfully damages any of Customer's Equipment and Cable,
AT&T will repair or replace the damaged item (or, at AT&T's option, will
reimburse Customer for the reasonable cost of repair or replacement), to the
extent that the damage was caused by AT&T's negligence or willful misconduct,
without negligence or willful misconduct by Customer or Customer's Agents.
AT&T's responsibilities to Customer in the event of any defect in or
infringement by AT&T products will be governed by the contracts and associated
warranties under which those products were sold. With respect to any Equipment,
Cable, tools, test equipment, or other materials obtained by Customer or
Customer's Agents from non-AT&T sources for use in the AT&T Central Office
Building ("Non-AT&T Products"):
Customer agrees to indemnify AT&T in accordance with Section 17 against claims
or recovery by any person on the basis of any defect, failure, malfunction, or
harmful characteristic of the Non-AT&T Products; and
Customer agrees promptly to remove or render noninfringing, at Customer's own
expense, any Non-AT&T Products found to infringe any United States patent,
trademark, copyright, or other intellectual property right.
INSURANCE
- ---------
Unless self-insured pursuant to Section 7.B, Customer shall maintain the
insurance coverage described in Appendix II.
Customer may elect to self-insure in lieu of obtaining all or any part of the
insurance coverage required by this section, so long as Customer's net worth
exceeds $100 million.
4
<PAGE> 5
If Customer self-insures or fails to maintain required coverage, Customer will
release and indemnify AT&T in accordance with Section 17 against all claims
(including without limitation claims alleging negligence or breach of contract
by Customer, Customer's Agents, or AT&T) to the same extent that such claims
would have been within the scope of the insurance described in Appendix II had
Customer not elected to self-insure.
WARRANTY: WARRANTY EXCLUSION
- ----------------------------
AT&T provides no communications services under this Agreement. AT&T
warrants that any Cable installation and maintenance services furnished
under this Agreement will be performed in a careful and workmanlike
manner. AT&T MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, AND
SPECIFICALLY DISCLAIMS ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE.
LIMITATIONS OF LIABILITY
- ------------------------
AT&T's charges under this Agreement are based in part on the insurance
requirements and limitations of liability of this Agreement. Customer elects to
accept charges calculated on this basis, and not to pay higher charges in return
for an increase in the scope of AT&T's liability. Customer retains the right to
purchase insurance to cover any additional loss or liability.
Nothing in this Section 9.B shall limit AT&T's liability to Customer in tort for
AT&T's willful or intentional misconduct, or AT&T's liability under other
agreements with Customer. SUBJECT TO THE FOREGOING, AND TO THE EXTENT NOT
PROHIBITED BY LAW, CUSTOMER AGREES THAT AT&T'S ENTIRE LIABILITY FOR ANY SERVICE
OUTAGE, LOSS, INJURY, OR DAMAGE RESULTING FROM ANY ACT OR OMISSION RELATED TO
AT&T'S PROVISION OF SPACE, POWER, AND SERVICES UNDER THIS AGREEMENT SHALL NOT
EXCEED CUSTOMER'S ACTUAL PROVEN DIRECT DAMAGES FOR BODILY INJURY OR DEATH AND
(SUBJECT TO SECTION 6.B) THE REASONABLE COST OF REPAIR OR REPLACEMENT OF
CUSTOMER'S EQUIPMENT AND CABLE.
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, AND IRRESPECTIVE OF ANY
FAULT OR NEGLIGENCE OR GROSS NEGLIGENCE BY EITHER PARTY OR ANY PERSON, NEITHER
PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL,
RELIANCE, OR
5
<PAGE> 6
SPECIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR HARM TO BUSINESS, LOST
REVENUES, LOST SAVINGS, OR LOST PROFITS), IRRESPECTIVE OF WHETHER THE PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. WITHOUT PREJUDICE TO AT&T'S
RIGHT TO RECOVER PAYMENTS DUE AT&T UNDER THIS AGREEMENT, AT&T AGREES TO RELEASE
CUSTOMER FROM ANY CLAIM OR LIABILITY FOR ANY INDIRECT, INCIDENTAL,
CONSEQUENTIAL, RELIANCE, OR SPECIAL DAMAGES INCURRED BY AT&T AS A RESULT OF OR
IN CONNECTION WITH THE PERFORMANCE OR NONPERFORMANCE OF THIS AGREEMENT. CUSTOMER
AGREES TO RELEASE AT&T FROM ANY CLAIM OR LIABILITY FOR ANY INDIRECT, INCIDENTAL,
CONSEQUENTIAL, RELIANCE, OR SPECIAL DAMAGES INCURRED BY CUSTOMER, AND TO
INDEMNIFY AT&T IN ACCORDANCE WITH SECTION 17 AGAINST ANY SUCH CLAIM BY ANY
PERSON DIRECTLY OR INDIRECTLY UTILIZING PRODUCTS OR SERVICES PROVIDED BY
CUSTOMER, AS A RESULT OF OR IN CONNECTION WITH THE PERFORMANCE OR NONPERFORMANCE
OF THIS AGREEMENT. ANY HARM TO BUSINESS, LOST REVENUES, AND LOST PROFITS
PROXIMATELY CAUSED BY WRONGFUL DISCLOSURE OR USE OF PROPRIETARY INFORMATION
SHALL BE DEEMED DIRECT DAMAGES.
THE LIMITATIONS OF LIABILITY SHALL APPLY REGARDLESS OF THE FORM OF ACTION,
WHETHER IN CONTRACT, WARRANTY, STRICT LIABILITY, OR TORT (INCLUDING WITHOUT
LIMITATION NEGLIGENCE OF ANY KIND, WHETHER ACTIVE OR PASSIVE BY EITHER PARTY OR
BY ANY PERSON).
FORCE MAJEURE
- -------------
Neither party shall be liable under this Agreement or deemed in default of this
Agreement for any damages or failure of performance (other than Customer's
failure to pay amounts due) due to lightning; pest damage; power surges,
fluctuations, or failures; strikes or labor disputes; water; acts of God; the
elements; war, civil disturbances, acts of civil or military authorities or the
public enemy; inability to secure materials; requirements and service priorities
imposed by applicable laws, ordinances, regulations, or judicial or
administrative orders; fuel or energy shortages; acts or omissions of third
parties (other than Customer's Agents and AT&T's contractors); or any other
cause beyond a party's reasonable control, whether or not similar to the
foregoing.
If a force majeure event delays or prevents substantial performance of this
Agreement by either party for 30 successive days, the other party may terminate
the affected Space License Supplements without liability upon 10 days' written
notice.
GOVERNMENTAL REQUIREMENTS: NON-AT&T SPACE
- ------------------------------------------
Each party is responsible for complying, at its own expense, with all legal and
regulatory requirements applicable to its activities. If a governmental permit,
license, or approval needed by either party is denied, delayed, or granted
subject to conditions that either party finds unacceptable, either party may
terminate the affected Space License Supplement without liability by giving
written notice to the other party not later than 30 days after notice of such
governmental denial or conditional grant.
If Customer requires the use of non-AT&T space in the AT&T Central Office
Building, AT&T will assist Customer's efforts to acquire such rights. If such
rights are not available on terms and conditions satisfactory to Customer and
AT&T, either party may terminate the affected Space License Supplement without
liability on written notice to the other party.
Upon any termination under Section 11 .A or 11.B, Customer will pay AT&T on a
time and materials basis for site preparation work performed prior to AT&T's
receipt of the notice of termination.
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<PAGE> 7
TERMINATION
- -----------
After expiration of the Commitment Period, either party may terminate this
Agreement or any Space License Supplement upon 30 days' written notice. Upon
written notice either party may terminate this Agreement without liability at
any time if there is no Space License Supplement currently in effect.
During the Commitment Period, a party may terminate without liability only by
obtaining the other party's written consent, by declaring the other party to be
in default under Section 12.C, or by exercising any of the express termination
rights provided in this agreement. However, Customer for it's convenience may
terminate any of the Space License Supplements upon 30 days' written notice by
paying AT&T a lump sum termination charge equal to the monthly License Fee
multiplied by the number of months remaining in the Commitment Period.
If either party violates or fails to comply with any of the material terms or
conditions of this Agreement (including without limitation Customer's obligation
to pay charges when due and AT&T's obligation to provide the space and services
in accordance with the specifications contained in Appendix IV and V), and does
not correct the breach within 30 days after written notice to cure, the other
party may terminate this Agreement (or, at its option, the affected Space
License Supplements) by written notice to the party in default. For purposes of
Section 12.B, termination by AT&T for Customer's default during the Commitment
Period will be deemed a termination by Customer and will cause the termination
charge to become due.
Upon written notice, AT&T may terminate this Agreement or the affected Space
License Supplements without liability if AT&T reasonably determines that
furnishing by contract any of the privileges and services described in this
Agreement would violate any law, regulation, or ordinance. In such event, AT&T
will cooperate with Customer to enable orderly transition of Customer's
telecommunications services.
POST-TERMINATION ACTIVITIES
- ---------------------------
After termination of any Space License Supplement, Customer is responsible for
arranging removal of its Equipment from the AT&T Central Office Building at
Customer's sole risk and expense.
Because removal of installed Cable in shared racks and risers may cause damage
to other cables, Customer agrees to relinquish such Cable to AT&T in lieu of
removal. Upon termination of any Space License Supplement, all such Cable in
that AT&T Central Office Building will be deemed abandoned in place and
automatically conveyed to AT&T in "as is" condition, thereby becoming the
property of AT&T, free of any interest or lien of any kind by Customer (or by
any person claiming through Customer).
All obligations which by their nature continue beyond the term of this Agreement
shall survive termination of this Agreement and its Space License Supplements.
7
<PAGE> 8
TARIFFS
- -------
This Agreement does not govern or affect tariffed services. In the
event of any conflict between this Agreement and any tariff, the tariff
will govern. Charges under this Agreement will not be abated or
refunded for interruptions in tariffed services, and charges for
tariffed services will not be abated or refunded due to delay or
failure of performance of this Agreement.
RELOCATION
- ----------
AT&T will designate the locations for Customer's Equipment and Cable,
and the paths for ingress and egress by Customer's Agents. AT&T may
require relocation of the Equipment and Cable upon 30 days' prior
written notice to Customer. Cable and any Equipment that was originally
installed by AT&T will be relocated by AT&T at no charge to Customer.
Customer will be responsible for relocating all other Equipment, and
AT&T will reimburse Customer for the reasonable cost of such relocation
work performed by Customer's Agents. AT&T will provide at its own
expense any additional or replacement site preparation and Cable needed
to accommodate the new installation. AT&T and Customer will work
together cooperatively to minimize any disruption of service in
connection with such relocation.
NO ESTATE OR PROPERTY INTEREST: ENCUMBRANCES
- --------------------------------------------
The licenses granted by this Agreement are nonexclusive, personal privileges
allowing Customer to situate Equipment and Cable in AT&T Central Office
Buildings. These licenses and the payments by Customer under this Agreement do
not create or vest in Customer (or in any other person) any leasehold estate,
easement, ownership interest, or other property right or interest of any nature
in any part of an AT&T Central Office Building.
The parties intend that the Equipment and Cable, whether or not physically
affixed to the AT&T Central Office Building, shall not be construed to be
fixtures. Customer (or the lessor of the Equipment, if applicable) will report
the Equipment and Cable as its personal property wherever required by applicable
laws, and will pay all taxes levied upon them.
Customer agrees not to allow any third party to obtain any security or property
right or interest in Cable (including without limitation any ownership interest,
lien, or security interest).
Customer agrees to indemnify AT&T under Section 17 against actions by any person
claiming an ownership or possessory interest, lien, trust, pledge, or security
interest in any of the Equipment or Cable, including without limitation any
attempt by such third party to take possession.
RELEASES: INDEMNIFICATION
- -------------------------
Wherever this Agreement requires either party to release or indemnify the other
party, the protection shall extend to such other party and its parent,
subsidiaries, and affiliates, and their respective officers, directors,
employees, agents, and contractors.
8
<PAGE> 9
For purposes of this Agreement, to "indemnify" means to indemnify, defend, and
hold the indemnitee harmless against all losses, costs (including reasonable
attorneys' fees), damages, and liabilities arising from claims, charges, or
recovery by any person in connection with the causes for which indemnification
is required.
If an indemnitee receives a written claim, notice of lawsuit, or demand that is
covered by any of the indemnification provisions of this Agreement, the
indemnitee will notify the indemnitor in writing and tender to the indemnitor
the defense of such claim, lawsuit, or demand. If the indemnitor fails to assume
the defense, it shall accept liability for the indemnitee's settlement of such
third party claims, lawsuits, and demands.
NONDISCLOSURE: PUBLICITY
- ------------------------
In addition to the nondisclosure obligations of AT&T and Customer under law and
under other agreements, Customer agrees to hold in confidence any proprietary
information ("Information") of which Customer becomes aware in connection with
the licenses granted by this Agreement. This Information may include, among
other things, specifications, drawings, documentation, plans, and other
technical or business information of AT&T, its customers (other than Customer),
and its suppliers. For purposes of this Agreement, all such Information will be
deemed the property of AT&T, and shall be returned to AT&T upon request.
Customer shall not copy or remove Information from the AT&T Central Office
Building without express written permission of AT&T. Unless the Information was
known to Customer, free of any nondisclosure obligation, prior to disclosure by
AT&T, or is received by Customer from a third party whose disclosure does not
violate any nondisclosure obligation, Customer will:
hold the Information in confidence;
safeguard it with at least the same degree of care as Customer uses to prevent
disclosure, use, or publication of its own proprietary information;
disclose it only to those of Customer's Agents with a need to know;
use the Information solely to enable Customer's use of the licenses granted by
this Agreement; and
cause each of Customer's Agents to comply with the nondisclosure obligations of
this Section 18.
Neither AT&T nor Customer shall publish or use any advertising, promotions,
press releases, or other publicity materials which use the other party's name,
logos, trademarks, or service marks, or which describe the arrangements enabled
by this Agreement, without prior written approval of the other party.
Without using the other party's logos or marks, either party may disclose the
pricing, terms and conditions of this Agreement to the extent the party is
required to do so by a regulatory agency.
ASSIGNMENT
- ----------
9
<PAGE> 10
This Agreement is binding upon and shall inure to the benefit of the parties and
their permitted successors and assigns.
Customer may assign its rights and obligations under this Agreement to any
present or future affiliate, subsidiary, or successor, provided that customer
also assigns all of the AT&T telecommunications services interconnected with the
Equipment and Cable. Customer will remain jointly and severally liable with the
assignee for any obligations existing as of the effective date of the
assignment. The assignee must agree in writing to assume all obligations of
Customer under this Agreement as of the effective date of the assignment
(including without limitation any outstanding amounts payable under this
Agreement).
AT&T may assign this Agreement or any part of this Agreement to any present or
future affiliate, subsidiary, or successor, and may assign its right to receive
payments. AT&T may subcontract any or all of the work to be performed by it
under this agreement but shall retain responsibility for the work that is
subcontracted.
Except as provided in Section 19.B and 19.C, neither party may assign this
Agreement or any part of this Agreement without the prior written consent of the
other party.
ADDITIONAL TERMS AND CONDITIONS
- -------------------------------
All notices shall be in writing and delivered to each party at the address set
forth above. Notices shall become effective when delivered to the addressee. The
names and addresses may be changed at any time by written notice only.
Any modification or waiver of any provision of this Agreement or of any Space
License Supplement must be in writing and signed by authorized representatives
of both parties. However, each party may unilaterally designate a different
address for the receipt of notices.
If any section or clause of this Agreement is held to be invalid or
unenforceable, then the meaning of that section or clause shall be construed so
as to render it enforceable to the extent permitted by law, the unenforceable
portion shall be deemed stricken, and the remainder of the Agreement shall
remain in effect, provided that the unenforceable provision does not go to the
essence of the Agreement.
If either party fails to enforce any right or remedy available under this
Agreement, that failure will not be construed as a waiver of any right or remedy
with respect to any other breach or failure by the other party.
Except as otherwise expressly provided in Section 17.A, this Agreement does not
provide third parties (including without limitation other customers of AT&T or
of Customer) with any remedy, claim, liability, reimbursement, cause of action,
or other right or privilege.
The section headings in this Agreement are inserted for convenience only and are
not intended to affect the meaning or interpretation of this Agreement.
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
10
<PAGE> 11
GOVERNED BY THE LOCAL LAWS OF THE STATE OF NEW JERSEY.
THIS AGREEMENT AND THE ANNEXED APPENDICES I - V CONSTITUTE THE ENTIRE AGREEMENT
BETWEEN THE PARTIES WITH RESPECT TO THE LICENSES, SERVICES AND PRODUCTS PROVIDED
UNDER THIS AGREEMENT. THIS AGREEMENT AND ITS APPENDICES SUPERSEDE ALL PRIOR
AGREEMENTS, PROPOSALS, COMMUNICATIONS BETWEEN THE PARTIES, AND UNDERSTANDINGS,
WHETHER WRITTEN OR ORAL, CONCERNING THESE LICENSES, SERVICES AND PRODUCTS.
11
<PAGE> 12
IN WITNESS WHEREOF, Customer and AT&T execute this Agreement by their duly
authorized representatives:
APPLIEDTHEORY CORPORATION AT&T CORP
By: /s/ John A. Wingert By: /s/ Barry Lubitz
------------------- --------------------
Name: John A. Wingert Name: Barry Lubitz
--------------- ----------------
Title: Vice President - Operations Title: General Manager
--------------------------- ---------------------
Date: 8/10/99 Date: 8/11/99
------- ---------------
<PAGE> 1
COLUMBIA CORPORATE PARK
OFFICE LEASE
BY AND BETWEEN
MERRITT-CCP III, LLC, LANDLORD AND
ALLIED THEORY COMMUNICATIONS CORPORATION, TENANT
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Rental...........................................................3
2. Use..............................................................4
3. Service and Utilities............................................4
4. Compliance With Laws.............................................8
5. Assignment and Subletting.......................................10
6. Operating Costs.................................................12
7. Increase in Landlord's Insurance Rates..........................17
8A. Insurance-Indemnity (TENANT)....................................17
8B. Insurance-Indemnity (LANDLORD)..................................20
8C. Miscellaneous Insurance and Indemnity Clauses...................22
9. Alterations.....................................................22
10. Ownership of Alterations........................................23
11. Repairs and Maintenance.........................................23
12. Default.........................................................26
13. Damage or Destruction...........................................29
14. Possession......................................................30
15. Exterior of Premises - Signs....................................31
16. Relocation......................................................32
17. For Rent Signs..................................................32
18. Water and Other Damage..........................................33
19. Right of Entry..................................................33
20. Termination of Term.............................................34
21. Condemnation....................................................34
22. Subordination...................................................35
23A. Landlord's Right to Perform Tenant's Covenants..................36
23B. Tenant's Right to Perform Landlord's Covenants..................37
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C> <C>
24. Attornment......................................................38
25. Non-Waiver of Future Enforcement................................38
26. Personal Property Taxes.........................................39
27. Recordation of Lease............................................39
28. Notices.........................................................39
29. Waiver of Jury Trial............................................40
30. Severability....................................................40
31. Non-Waiver......................................................41
32. Successors and Assigns..........................................41
33. Security Deposit................................................42
34. Notices to Mortgagee............................................44
35. Estoppel Certificate............................................44
36. Bankruptcy......................................................45
37. Lender's Approval...............................................48
38. Broker's Commission.............................................48
39. Rules and Regulations...........................................48
40. Captions........................................................49
41. Final and Entire Agreement......................................49
42A. Tenant Representative...........................................49
42B. Landlord Representative.........................................49
43. Renewal Options.................................................50
44. MISCELLANEOUS PROVISIONS........................................52
EXHIBIT A BUILDING PLAN
EXHIBIT B LEASE PLAN
EXHIBIT B-1 LANDLORD'S WORK
EXHIBIT C RULES AND REGULATIONS
EXHIBIT D JANITORIAL SPECIFICATIONS
EXHIBIT E FORM OF SECURITY DEPOSIT RECEIPT
</TABLE>
2
<PAGE> 3
THIS LEASE, made this __ day of ________, 1999, by and between
MERRITT-CCP III, LLC, hereinafter called "Landlord," and APPLIED THEORY
CORPORATION, hereinafter called "Tenant."
WITNESSETH, that in consideration of the rental hereinafter agreed
upon and the performance of all the conditions and covenants hereinafter set
forth on the part of the Tenant to be performed, the Landlord does hereby lease
unto the said Tenant, and the latter does lease from the former the following
premises (hereinafter sometimes called the "Premises"):
Being all those premises outlined in red on the Lease Plan attached
hereto as Exhibit B, said premises being approximately 6,552
rentable square feet. The computation of the rentable square foot
area of the premises to be made was made by measuring from the
primary inside face of the perimeter glass to the centerline of the
interior demising partitions the total area of which is multiplied
by 1.12 which represents the building core factor. The Premises,
being located within the building (hereinafter sometimes called the
"Building") known as "Columbia Corporate Park III," situate on a
parcel of land (hereinafter sometimes called the "Property") located
in the development known generally as Columbia Corporate Park; and
situate in 8830 Stanford Blvd, Suite 402, Columbia, Howard County,
Maryland 21045 which property is more fully described on Exhibit A
hereto.
The Premises are demised together with the non-exclusive right, in
common with Tenant's employees, agents, customers and invitees, Landlord, and
all others to whom Landlord has or may hereafter grant such right, to use the
common areas of the Property and the Building as reasonably designated from time
to time by Landlord (sometimes herein called "Common Areas"), for the term of
seven (7) years, beginning on the earlier to occur of the following: (i) the
date following the expiration of five (5) days after Tenant's receipt of
Landlord's Notice of "Substantial Completion" (as hereinafter defined) of
Landlord's Work, as set forth in Exhibit B-1, attached hereto; or (iii) the date
when Tenant commences operation of its business from the Premises (the earlier
to occur of such dates is herein called "Commencement Date"). Tenant may, prior
to the Commencement Date, and without incurring any liability for payment of
minimum rent, additional rent or other charges, enter into the Premises to
perform work
3
<PAGE> 4
thereto (including the installation of telephone lines, data and computer
lines), and to place and install Tenant's personal property, equipment and made
fixtures, in any part of the Premises (collectively, "Tenant's Work"), at
Tenant's expense; provided, however that the performing of Tenant's Work (1)
does not cause interference or delay in the completion of Landlord's Work; and
(2) shall be at Tenant's sole risk. Landlord agrees that it will, at its sole
cost and expense, as soon as reasonably possible after the execution of this
Lease, commence and pursue to completion the Landlord's Work set forth on
Exhibit B ("Landlord's Work"), subject to and in accordance with the provisions
of Section 14, below. The Premises shall be deemed to be "Substantially
Completed" on the date Landlord has completed Landlord's Work such that:
(i) Tenant can begin installation of its fixtures and equipment without
interference from Landlord's workmen;
(ii) adequate facilities exist for access to and egress from the
Premises;
(iii) Landlord has completed the work set forth on Exhibits B and B-1 in
accordance with Tenant's plans, subject to minor punch-list items,
and has secured a certificate of occupancy for the Premises, or
evidence that the Premises qualify for the same based upon
completion of Landlord's Work; and
(iv) all major Building systems, including the electrical, plumbing,
sprinkler and other fire safety systems, heating, ventilating, and
air conditioning ("HVAC") systems, utilities and elevators
(collectively, "Building Systems") are installed and are in good
working order.
Upon Substantial Completion of Landlord's Work, Landlord or its architect will
notify Tenant in writing that the Premises are substantially complete
("Landlord's Notice of Substantial Completion"), with the exception of minor
punch-list items which do not interfere with Tenant's installations and work in
order to outfit the Premises for Tenant's use. Landlord will complete the
punch-list items of Landlord's Work within thirty (30) days after Landlord's
Notice of Substantial Completion, subject to reasonable extension(s) as may be
required to perform the work and/or obtain necessary parts or items to perform
the work, provided that Landlord continues with all due diligence to perform the
work and obtain such parts/items as may be necessary to complete the punch-list
items within a reasonable period of time. Landlord hereby warrants all items of
Landlord's Work for a period of twelve (12) full calendar months following the
4
<PAGE> 5
Commencement Date ("Warranty Period"), and that Landlord shall correct any
defects of any kind or nature in Landlord's Work, at Landlord's expenses, within
thirty (30) days of written notice thereof from Tenant; provided that Landlord
receives notice of such defect on or before the expiration of the Warranty
Period.
This Lease is made subject to the following additional terms,
covenants and conditions:
1. Rental.
(a) Tenant covenants and agrees to pay Landlord as minimum rental,
without notice or demand, the annual rental as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TERM ANNUAL MONTHLY PER SQUARE FOOT
- ---- ------ ------- ---------------
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Year 1 $144,144.00 $12,012.00 $22.00
- ----------------------------------------------------------------------------
Year 2 $148,468.32 $12,372.36 $22.66
- ----------------------------------------------------------------------------
Year 3 $152,923.68 $12,743.64 $23.34
- ----------------------------------------------------------------------------
Year 4 $157,575.60 $13,131.30 $24.05
- ----------------------------------------------------------------------------
Year 5 $162,358.56 $13,529.88 $24.78
- ----------------------------------------------------------------------------
Year 6 $167,272.56 $13,939.38 $25.53
- ----------------------------------------------------------------------------
Year 7 $172,317.60 $14,359.80 $26.30
- ----------------------------------------------------------------------------
</TABLE>
Monthly payments due in advance on the first day of each month during the term
of this Lease, in equal monthly installments, without setoff or deduction except
as may be specifically herein permitted. If the term of this Lease shall
commence on a date other than the first day of a month, the rental of or the
period from the date of commencement of the term to the first day of the first
full calendar month of the term shall be prorated and shall be payable on the
first day of the term; if the term of this Lease shall end on a date other than
the last day of a month, the rent for the period from the first day of the last
month of the term to the date the term ends shall be prorated and shall be
payable on the first day of the last month of the term.
(b) INTENTIONALLY DELETED.
(c) All rentals shall be paid to MERRITT PROPERTIES, LLC c/o
Merritt, 2066 Lord Baltimore Drive, Baltimore, MD 21244, or at such other place
or to such appointee of the Landlord as the Landlord may from time to time
designate in writing.
(d) Tenant covenants and agrees to pay the rental herein reserved
and each installment thereof promptly when and as due, without setoff
5
<PAGE> 6
or deduction whatsoever except as may be specifically herein permitted.
2. Use.
Tenant covenants and agrees to use and occupy the Premises solely
for the following purposes: GENERAL OFFICE USE ("Permitted Use"). Tenant agrees
to comply with all applicable zoning and other laws and regulations with respect
to Tenant's use of the Premises, and to provide and install at its own expense
any additional equipment or alterations required to comply with all such laws
and regulations as required from time to time, except that Tenant shall be under
no obligation to comply with any law, ordinance, rule or regulation requiring
any capital improvements, modification(s) to or change(s) in the Buildings
Systems or any structural alteration of or in connection with the Premises,
which compliance shall be Landlord's sole responsibility, unless such capital
improvements, modification to or change in the Buildings Systems or structural
alteration is required by reason of a condition which has been created by, or at
the instance of, Tenant, in which case(s), the cost of such compliance shall be
borne by Tenant. Tenant further agrees not to make, or cause or permit to be
made, any use of the Premises which shall constitute a nuisance or shall
unreasonably interfere with the rights of other tenants in the Building to
quietly enjoy, use and occupy the Premises leased by them and the common areas
of the Building. Tenant will not permit, allow or cause any public or private
auction sales or sheriff's, or constables' sales to be conducted on or from the
Premises.
3. Service and Utilities.
NOTE: SUBJECT TO REVIEW AND COMMENT BY TENANT'S OPERATIONS MANAGER.
(a) Landlord agrees to furnish to the Premises, electricity for
normal desktop office equipment and normal copying equipment, and lighting,
heating, ventilation and air conditioning ("HVAC"), as well as other utility
services (including water, sewer, and telephone services) required for the
comfortable use and occupancy of the Premises for the Permitted Use. Landlord
shall equip the Premises with adequate equipment, facilities, and utilities, and
maintain the same, such that the Premises shall have a minimum power
availability throughout the term of the Lease of at least five (5) watts of
power per rentable square foot thereof. Subject to the limitations
6
<PAGE> 7
set forth below, such utilities shall be made available without additional
charge between the hours of 8:00 a.m. to 6:00 p.m., Monday through Friday, and
8:00 a.m. to 12:00 noon on Saturday ("Normal Operating Hours"), except for legal
holidays. If Tenant desires electricity or HVAC at any other time, Landlord
shall provide and shall bill Tenant for Tenant's actual usage at the actual rate
charged by the appropriate utility company providing the same ("Actual Rate"),
plus five percent (5%) for administration, and Tenant shall pay Landlord's such
charges therefor at the same time and in the same manner as is provided for the
payment of minimum rental hereunder. Landlord shall provide Tenant with evidence
of the computation of Tenant's charges pursuant to this paragraph, and of the
additional cost to Landlord upon which such computation is based, within ten
(10) days of Tenant's written request therefor. Landlord shall also maintain and
keep adequately lighted the common stairs, common entries and restrooms in the
Building. Except as herein provided, Landlord shall not be in default hereunder
or be liable for any damages directly or indirectly resulting from, nor shall
the rent be abated by reason of (i) the installation, use or interruption of use
of any equipment in connection with the furnishing of any of the services to be
furnished by Landlord as set forth in this Lease, unless the damages resulting
therefrom are the result of or arise out of Landlord's negligence or willful
misconduct, or that of its agents, contractors or employees; (ii) failure to
furnish or delay in furnishing any such services where such failure or delay is
caused by accident or any condition or event beyond the reasonable control of
Landlord, or by the making of necessary repairs to the Premises of the Building;
or (iii) the limitation, curtailment or rationing of, or restrictions on, use of
water, electricity, gas or any other form of energy serving the Premises or
Building to the extent (A) mandated by the appropriate state or local governing
authority, or by the utility company or authority supplying such service to the
Building, or (B) the same is not caused by any act or omission of Landlord,
Landlord's agents, employees, or contractors. Anything contained in the
foregoing or elsewhere in this Lease to the contrary notwithstanding, if any
interruption or curtailment of services in any manner caused by or resulting
from or arising out of any act or omission of Landlord, Landlord's agents,
employees or contractors, deprives Tenant of the reasonable use of or access to
the Premises for a period of more than (a) four (4) consecutive days, or (b)
seven (7)
7
<PAGE> 8
non-consecutive business days during any thirty (30) day period, there shall be
an equitable abatement of all Tenant's rent based upon that portion of the
Premises reasonably useable by Tenant during the period commencing with the day
following the expiration of (A) such three (3) consecutive business days or (B)
the seventh (7th) non-consecutive business day occurring during any thirty (30)
days period, respectively, through such day that the respective service(s) shall
be restored in full. Except as herein provided, Landlord shall not be liable for
a loss of or injury to property or business, through or in connection with or
incidental to failure to furnish any such services, unless the loss or injury to
property has resulted from or arisen out of Landlord's negligence or willful
misconduct, or that of its agents, contractors or employees. Tenant shall not
use heat-generating machines or equipment in the Premises which affect the
temperature otherwise maintained by the HVAC system without the prior written
consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or delayed, and if such equipment is used, Landlord reserves the
right to install supplementary air conditioning units in the Premises and the
cost thereof, including the cost of installation, operation and maintenance
thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Landlord
represents that the Premises contain individual thermostats for the control of
the Premises' HVAC system.
(b) Tenant shall not, without the written consent of Landlord (which consent
shall not be unreasonably withheld, conditioned or delayed), use any apparatus
or device in the Premises, including, without limitation, electronic data
processing machines, punch card machines or machines using in excess of 120
volts, which consumes more electricity than is usually furnished or supplied for
the use of Premises as general office space. Tenant shall not connect any
apparatus with electric current except through existing electrical outlets in
the Premises. Tenant shall not consume water or electric current in excess of
that usually furnished or supplied for the use of Premises as general office
space without first procuring the written consent of Landlord, which Landlord
may not unreasonably refuse, and in the event of consent, Landlord may have
installed a water meter in the Premises to measure the amount of water. The cost
of any such meter and of its installation, maintenance and repair shall be paid
for by Landlord and Tenant agrees to pay to Landlord promptly upon thirty (30)
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days' written demand (including a copy of the actual water bill) for all such
water consumed during periods other than the Normal Operating Hours as shown by
said meter, at the rates charged for such services by the local public utility
("Actual Rate(s)"). If a separate meter is not installed, the excess cost for
such water shall be re-established by Landlord from time to time at the average
per square foot cost to Landlord for the same, and in no event higher than the
Actual Rate plus five percent (5%) for administration.
(c) Nothing contained in this Section shall restrict Landlord's
right to require at any time separate metering of utilities furnished to the
Premises. In the event utilities are separately metered, Tenant shall pay
promptly within thirty (30) days of receipt of Landlord's written invoice demand
for all utilities consumed at the Premises beyond Normal Operating Hours at the
Actual Rate(s). Landlord shall provide Tenant with evidence of the computation
of Tenant's charges pursuant to this paragraph, including meter readings upon
which such computation is based, within ten (10) days of Tenant's written
request therefor. Tenant shall be responsible for the maintenance and repair of
any such meters at its sole cost. Tenant may, at its option, sole cost and
expense, cause the Premises to be separately metered.
(d) Landlord shall furnish elevator service, lighting replacement
for building standard lights, restroom supplies, exterior window washing and
janitorial services (including janitorial services for the Premises in
accordance with the "Janitorial Specifications" set forth on Exhibit "D",
attached hereto and made a part hereof), all in a manner that such services are
customarily furnished to comparable office buildings in the area, and consistent
with the manner in which the services are being performed at and provided to the
Building as of the Commencement Date. Landlord further covenants that it shall:
(i) maintain the Building Systems in reasonable working order and
repair;
(ii) maintain the outside walls, outside windows, roof, foundation
and other structural portions of the Building containing the Premises in
reasonable order and repair;
(iii) cause such of the Common Areas as
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are exposed to the elements to be properly drained and kept reasonably
free from ice and snow;
(iv) maintain the parking lot and landscaping of the Common Areas in
a reasonably good and clean condition and repair;
(v) maintain adequate parking facilities for the Building in
compliance with municipal requirements, subject to the provisions of
Section 21 of this Lease; and
(vi) maintain insurance in accordance with the provisions of Section
8-B, below.
4. Compliance With Laws.
(a) Tenant covenants and agrees that it will, at its own expense,
observe, comply with and execute all laws, orders, rules, requirements, and
regulations of any and all governmental departments, bodies, bureaus, agencies
and officers (collectively, "Governmental Requirements"), and all rules,
directions and requirements of the local board of fire underwriters and the fire
insurance rating organizations having jurisdiction over the area in which the
Premises are situated, or other bodies or agencies now or hereafter exercising
similar functions in the area in which the Premises are situated (collectively,
"Fire Insurance Requirements"), in any way pertaining to the Premises or the use
and occupancy thereof; except that Tenant shall be under no obligation to comply
with any Fire Insurance Requirement of which it has not received actual notice,
nor with any Governmental Requirement or Fire Insurance Requirement requiring
any capital improvements, modification(s) to or change(s) in the Buildings
Systems or any structural alteration of or in connection with the Premises,
which compliance shall be Landlord's sole responsibility, unless such capital
improvements, modification to or change in the Buildings Systems or structural
alteration is required by reason of a condition which has been created by, or at
the instance of, Tenant, in which case(s), the cost of such compliance shall be
borne by Tenant. In the event Tenant shall fail or neglect to comply with any of
the aforesaid Governmental Requirement or Fire Insurance Requirement to the
extent hereby required, and such failure shall continue for more than thirty
(30) days after Tenant's receipt of
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written notice thereof from Landlord, then, Landlord or its agents may enter the
Premises upon forty-eight (48) hours' prior notice and take all such actions and
do all such work in or to the Premises as may be reasonably necessary in order
to cause compliance with such Governmental Requirement or Fire Insurance
Requirement, as the case may be, and Tenant covenants and agrees to reimburse
Landlord promptly within thirty (30) days of receipt of written invoice,
including supporting documentation, for the expenses incurred by Landlord in
taking such action and performing such work. The foregoing notwithstanding, if
the nature of Tenant's non-compliance with any Governmental Requirement or Fire
Insurance Requirement is, in Landlord's reasonable judgment, of such nature that
its continuation will create an immediate danger to the health or safety of
individuals and/or create an immediate danger of additional damage to and/or
waste of the Premises and/or other property, Landlord shall have the right to
immediately take whatever actions reasonably necessary to alleviate such danger,
the notice requirements of this Section notwithstanding.
(b) Without limiting the generality of the foregoing provisions of
Section 4(a), Tenant further agrees that Tenant shall, at all times, comply with
all federal, state and local statutes, ordinances and codes governing the use,
storage, treatment, generation, transportation, processing, handling, production
or disposal of "Hazardous Substances" (as hereinafter defined), and any rules,
regulations, policies, guidelines, interpretations, decisions, orders and
directives of federal, state and local government agencies and authorities with
respect thereto (together with all amendments, "Environmental Laws") applicable
to the Premises and/or the operation of Tenant's business therefrom, and/or
Tenant's use of the Common Areas of the Building in accordance with the
provisions of this Lease. For purposes of this Lease, "Hazardous Substance"
shall mean: any flammable explosives, radon, radioactive materials, asbestos,
urea formaldehyde foam insulation, lead based paints, polychlorinated biphenyls,
petroleum and petroleum products, methane, and hazardous wastes, hazardous or
toxic substances or related materials as defined in or subject to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Sections 9601, et seq.), Articles 15 and 27 of the New
York State Environmental Conservation Act or any other applicable Environmental
Law and in the
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regulations adopted pursuant thereto. If Landlord determines that Tenant has
violated the foregoing, it shall promptly notify Tenant of such violation and
Tenant, upon verification thereof, shall promptly bring such violation into
compliance.
5. Assignment and Subletting.
(a) Except as provided by the provisions of this Section 5, Tenant
covenants and agrees not to assign this Lease, in whole or part, nor sublet the
Premises, or any part or portion thereof, nor grant any license or concession
for all or any part thereof, without the prior written consent of the Landlord
in each instance first had and obtained, which consent shall not be unreasonably
withheld, conditioned or delayed. If such assignment or subletting is permitted,
Tenant shall not be relieved from any liability whatsoever under this Lease. In
the event that the amount of the rent or other consideration to be paid to the
Tenant by any assignee or sublessee for Tenant's "Leasehold Interest" (defined
below) is greater than the rent required to be paid by the Tenant to the
Landlord pursuant to this Lease (herein, "Assignment Profit"), Tenant shall pay
to Landlord fifty percent (50%) any such Assignment Profit as is received by
Tenant from such assignee or sublessee, after deducting from such amount costs
incurred by Tenant in making such assignment or sublet, including any costs
incurred in preparation of the Premises for the transferee. Anything contained
in the foregoing to the contrary notwithstanding, "Assignment Profit" shall be
deemed to mean rent and/or other consideration received by Tenant specifically
as consideration for: (i) the assignment of this Lease and/or of Tenant's
leasehold interest in the Premises (including all "Permanent Leasehold
Improvements", excepting "Tenant's Personal Property", as such terms are defined
in Section 10, below), or (ii) a subletting of the Premises, including all
Permanent Improvements, excepting Tenant's Personal Property; but shall
specifically exclude any money or other consideration received by Tenant for
Tenant's Personal Property, and/or for Tenant's business and/or its good will,
stock, and/or other tangible and intangible items not comprising a portion of
the Premises or Tenant's interest therein (all of the foregoing, collectively,
"Tenant's Business Property"). Any consideration received by Tenant for Tenant's
Business Property shall remain the sole property of Tenant. Any consent by
Landlord to an assignment or subletting of this Lease shall not constitute a
waiver of the necessity of such consent as to any subsequent assignment or
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subletting. An assignment for the benefit of Tenant's creditors or otherwise by
operation of law shall not be effective to transfer or assign Tenant's interest
under this Lease unless Landlord shall have first consented thereto in writing.
(b) Anything contained in this Lease to the contrary
notwithstanding, Tenant shall have the right to assign this Lease and/or sublet
all or any portion of the Premises without the prior written consent of
Landlord, and without affording Landlord any profit sharing rights as set forth
in Subparagraph 5(a), nor any recapture rights as set forth in Subparagraph
5(c), below, to:
(i) any corporation or other entity that is a parent, subsidiary or
affiliate of Tenant;
(ii) any corporation or other entity which is a successor (immediate
or remote) to the initial Tenant hereunder, either by merger or
consolidation, in accordance with applicable law;
(iii) any corporation or other entity a majority of whose voting
stock is owned by Tenant;
(iv) any corporation or other entity which has the power to direct
Tenant's management and operation or whose management and operation is
controlled by Tenant; and
(v) any purchaser of all or substantially all of the assets or
substantially all of the voting stock and equity interests in Tenant;
(all of the foregoing collectively hereinafter referred to as
"Related Entities").
Tenant shall provide Landlord with written notice of any such assignment or
subletting within thirty (30) days of the effective date thereof, which notice
shall include the correct name and address of the assignee or sublessee. Tenant
shall not be released by any such assignment or sublet.
(c) In the event Tenant requests in writing to assign this Lease or
to sublease all or any substantial portion of the Premises to any person or
entity other than a Related Entity, Landlord shall have the option to terminate
this Lease, which option shall be exercisable by written notice from Landlord
("Recapture Notice") to
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Tenant within ten (10) business days from the date Tenant gives Landlord written
notice of its desire to assign or sublease; provided, however, that Tenant may
withdraw its request for Landlord's consent to a proposed assignment or sublet
within ten (10) business days of Tenant's receipt of Landlord's Recapture
Notice, and upon Landlord's receipt of Tenant's timely withdrawal, the
respective Recapture Notice shall be deemed null and void and this Lease shall
continue in full force and effect. If Landlord exercises its option to recapture
the Premises and Tenant does not timely withdraw its request for consent, the
Lease shall be cancelled and terminated as of a date which is mutually agreed to
by the parties, but in no event (i) prior to the date which is thirty (30) days
after the date of Tenant's receipt of Landlord's Recapture Notice or (ii) later
than the date which is ninety (90)days after the date of such receipt.
6. Operating Costs.
(a) "Operating Costs" are the actual costs paid by Landlord for
managing, operating, maintaining, repairing, refurbishing and insuring the
Building and all common areas and facilities within the Property (including, but
not limited to, elevators, stairwells, loading areas, parking areas, pavements
and walkways, landscaping, gardening, storm drainage, and other utility
systems); the cost of utilities for such common areas and facilities; fire
protection and security services, if any; traffic control equipment; repairs;
parking lot striping; lighting; sanitary control; removal of snow, trash,
rubbish, garbage and other refuse; depreciation on or rentals of machinery and
equipment used in such maintenance, provided that (1) the cost of the machinery
or equipment has not been and will not be included as part of Operating Costs,
and (2) the use of any such machinery shall contribute to the efficient and/or
economic operation or maintenance of the Building or the Property; the cost of
personnel to implement such services; reasonable insurance kept, or caused to be
kept, by Landlord out of or in connection with the ownership of the Building and
common areas, including, but not limited to, insurance insuring the same against
loss or damage by, or abatement of rental income resulting from, fire and other
such hazards, casualties, and contingencies, and liability and indemnity
insurance, but specifically excluding environmental hazards insurance or any
other insurance which is not customary for the operation of an office building
similar to the Building, and located in the town, county and state in which the
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Properly is located. Such costs shall not include the cost of any capital
improvements to the Building as determined under generally accepted accounting
principles or work which Landlord performs specifically for or at the expense of
any tenant of the Building. "Operating Costs" shall also include all taxes (as
hereinafter defined) assessed against the Property and Building, whether as a
result of an increase in the tax rate, or the levy, assessment or imposition of
any tax on real estate as such not now levied, assessed or imposed. The
foregoing shall apply to increases in real estate taxes assessed against the
Property or Building generally, and not resulting from improvements placed
thereon by Tenant. In the event of any increases in real estate taxes resulting
from improvements, alterations or additions made by Tenant, then, upon Tenant's
receipt of evidence that the increases are the result of and reasonably
attributable to such Tenant improvements, then Tenant shall pay the amount of
said increase so attributable. "Taxes" as used herein shall include, but not by
way of limitation, all paving taxes, special paving taxes, Metropolitan District
Charges, and any and all other assessments which may be levied on the Property
or the Building by the governmental taxing authority having appropriate
jurisdiction over the same, but shall not include any income tax on the income
or rent payable hereunder. Anything contained in the foregoing to the contrary
notwithstanding, "Operating Costs", including, without limitation, "Taxes",
shall specifically exclude the following:
(i) inheritance, estate, gift, franchise or income taxes, or any
capital levy imposed on Landlord;
(ii) the cost to Landlord for any work or service or utility
provided exclusively for any tenant (including Tenant) or other occupant
of the Building, at the cost of such tenant or occupant;
(iii) the cost of improvements performed for tenants or other
occupants of the Building as Landlord's work;
(iv) original construction costs of the Building or other buildings
on the Property;
(v) interest and amortization of funds borrowed by Landlord, whether
secured or unsecured;
(vi) costs or expenses associated with
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leasing space in the Building/buildings or the sale of any interest in the
same, including, without limitation, advertising and marketing, and
commissions or fees;
(vii) ground rents;
(viii) salaries, wages, or other compensation paid to:
(A) employees above the level of Building Manager, or
(B) any partner, shareholder, officer or director of
Landlord;
(ix) expenses for repairs, replacement or improvements arising from
the initial construction of the Building/buildings to the extent such
expenses are either (i) reimbursed to Landlord by virtue of warranties
from contractors or suppliers or (ii) result by reason of deficiencies in
design or workmanship except conditions resulting from ordinary wear and
tear;
(x) accounting or legal fees incurred in tenant disputes, or in
procuring tenants, or for fees not reasonably related to the operation and
maintenance of the Building;
(xi) costs for repairs to and/or maintenance of the Building or the
Property to the extent the same are reimbursed to Landlord by proceeds of
insurance (or the amount of reimbursement if Landlord would have
maintained insurance per Landlord's requirements in the Lease),
condemnation awards or other reimbursement received by Landlord;
(xii) interest or penalties arising by reason of Landlord's failure
to timely pay any Operating Costs, Taxes or Building utilities;
(xiii) costs incurred to contain, encapsulate, remove, or remedy any
hazardous or toxic wastes, materials or substances from the Building or
Outside Common Areas and any tests or surveys obtained in connection
therewith;
(xiv) capital improvements to the
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Building or the Property;
(xv) repairs or replacements to the Building or the Property which,
under sound accounting principals and practices consistent with the
operation of commercial office buildings, should be classified as capital
expenditures (except that if any such repair or replacement is of such a
nature that it should be considered under good accounting practices a
deferred expense and spread over a period of not more than ten (10) years,
the Operating Costs for any lease year occurring during the term shall
include only the proportionate share of such deferred expenses
appropriately allocated to such year);
(xvi) costs incurred due to Landlord's violation of or failure to
comply with any term or condition of this Lease or any other lease
relating to the Building or any law, code ordinance or governmental rule
or regulation affecting the Building or Property;
(xvii) reserves for repairs, maintenance or replacements; or
(xviii) the cost of any new services which were not included in the
calculation of Operating Costs as of the first year of the term of the
Lease, excepting that Tenant shall pay increases in the costs of any such
new services over the cost incurred for such service during its first
twelve (12) months of implementation at the Building.
Landlord warrants that (A) any management fee included as part of Operating
Costs shall be reasonable, competitive and consistent with such fees as may be
charged in the town, county and state in which the Building is located for the
management of buildings of a similar nature and operations as the Building
("Management Fee"); and (B) no cost, charge or expense charged to Tenant as part
of Operating Costs is or will be duplicative of any cost, charge or expense
charged to Tenant under any other provision of this Lease or otherwise. Tenant
acknowledges that a Management Fee equal to four percent (4%) of Landlord's
gross revenues received from the operation of the Building is reasonable.
(b) The "Base Amount" for the purposes of determining Tenant's share
of increases in Operating Costs shall be determined by dividing the total
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Operating Costs (including the Management Fee and Taxes for the 1999-2000 tax
years) for the first twelve (12) months of the Lease term ("Base Period") by the
number of rentable square feet of premises contained in the Building. As of the
Commencement Date, the Building contains 139,923 rentable square feet of
premises. If, during any annual period of the term after the expiration of and
corresponding to the Base Period, Operating Costs per rentable square foot in
the Building exceed the Base Amount, Tenant shall pay Landlord, as additional
rent, an amount equal to the product obtained by multiplying the number of
rentable square feet comprising the Premises by the excess Operating Costs per
rentable square foot over the Base Amount. Landlord estimates that the Base
Amount determined for the Base Period will be approximately Six and 40/100
Dollars ($6.40) per square foot. However, Landlord makes no representation or
warranty that the same is accurate, Six and 40/100 Dollars ($6.40) being only an
estimate.
(c) Landlord shall notify Tenant once annually of the amount which
Landlord reasonably estimates will be the amount payable by Tenant in accordance
with paragraph (b), above, for the ensuing year, and Tenant shall pay such
amounts to Landlord in twelve (12) equal monthly installments, in advance, on
the first day of each month, simultaneously with payments of the rent reserved
pursuant to Section I hereof. Within a reasonable period of time following the
end of each annual period of the term, Landlord shall submit to Tenant a
statement showing the actual amounts incurred by Landlord as set forth in
paragraph (b), the amount theretofore paid by Tenant, and the amount of the
resulting balance due thereon, or overpayment thereof, as the case may be. In
the event any balance may be due by Tenant, Tenant shall pay said balance within
thirty (30) days from the date of such statement. In the event Tenant has made
any overpayment, such overpayment shall be credited by Landlord against the next
installment or installments of rent which are due and payable hereunder, or if
the term of this Lease has expired, such overpayment shall be refunded by
Landlord to Tenant, without interest, within five (5) days after the date of
such statement. Each such statement submitted by Landlord shall be final and
conclusive between the parties hereto as to the matters therein set forth, if no
objection is raised with respect thereto within the time period permitted by the
provisions of Section 6(d), below.
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(d) Tenant shall have the right to audit Landlord's books and
records with respect to all items of Operating Costs for which Landlord has
billed Tenant during the preceding calendar year or accounting period, upon ten
(10) business days' advance written notice. Tenant shall have the right to
conduct this audit not more than once each year to determine if the Operating
Costs billed to Tenant are correct, and Landlord shall fully cooperate in such
regard. If Tenant shall not conduct any such audit within twelve (12) months of
the date of Tenant's receipt of the Operating Costs' statement which is the
subject of such audit, then, upon the expiration of such twelve (12) month
period, the respective Operating Costs' statement shall be deemed conclusive and
final. If an audit discloses that Landlord has overcharged Tenant for any charge
included as part of Operating Costs, Landlord shall reimburse Tenant for such
overbilled amount within thirty (30) days of Tenant's written demand therefor.
If the audit discloses that any charge to Tenant which is more than five percent
(5%) in excess of the amount actually owed by Tenant, Landlord shall also
reimburse Tenant for the costs of the audit conducted, plus interest, at the
"Lease Rate" (defined in Section 11(d), below).
(e) If any building other than the Building is now or is hereafter
constructed on the Property, Landlord may operate such the Building and the
other buildings located on the Property as one unit for the purpose of
purchasing and providing energy and water, insurance and the common services
included within Operating Costs ("Common Costs"), but specifically excluding
Taxes and other items of Operating Costs reasonably allocable to a particular
building (including its outside common areas) other than the Building; and
provided, however, that Landlord shall equitably divide such Common Costs
between the Building and the other buildings for each lease year (or partial
lease year) and the allocation of such costs shall be subject to verification by
Tenant at Landlord's offices.
7. Increase in Landlord's Insurance Rates.
Tenant will not knowingly do, or suffer to be done, anything in the
Premises, or keep or suffer to be kept, anything in the Premises which will be
in violation of any policy of insurance against loss by fire or other hazards,
including, but not limited to, public liability, now existing or which the
Landlord may hereafter place thereon, or which will prevent the Landlord from
procuring such policies in companies
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acceptable to Landlord at standard rates. Landlord and Tenant will use
commercially reasonable efforts and take all such commercially reasonable
actions as may be reasonably necessary to minimize the insurance rates for the
Premises and the Building.
8A. Insurance-Indemnity (TENANT).
(a) Tenant covenants and agrees that from and after the date of
delivery of the Premises from Landlord to Tenant, Tenant will carry and
maintain, at its sole cost and expense and in the amounts specified and in the
form hereinafter provided, the following types of insurance:
(i) Public Liability and Property Damage. General Public Liability
insurance covering the Premises and Tenant's use thereof against claims
for personal injury or death and property damage occurring upon, in or
about the Premises, such insurance to afford protection to the limit of
not less than $2,000,000 arising out of any one occurrence, and against
property damage to afford protection to the limit of not less than
$2,000,000; or such insurance may be for a combined single limit of
$2,000,000 per occurrence. The insurance coverage required under this
Section 8-A (a)(i) shall, in addition, extend to any liability of Tenant
arising out of Tenant's indemnities hereinafter provided, as well as
Independent Contractors' Liability, Products/Completed Operations
Liability, Personal Injury Liability and Contractual Liability.
(ii) Boilers. If Tenant's Premises shall contain a boiler or other
pressure vessel, Tenant shall carry Boiler and Machinery Insurance with a
direct damage limit not less than the full value of the Building. Such
insurance shall be written on a "repair and replacement" (i.e.,
replacement cost) basis.
(iii) Tenant Improvements and Property Insurance covering all
leasehold improvements and other improvements installed by Tenant upon the
Premises, trade fixtures and personal property from time to time in, on or
upon the Premises and any alterations, improvements, additions or changes
made by Tenant thereto in an amount not less than one hundred percent
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(100%) of their full replacement cost from time to time during the Lease
term, providing protection against perils included within the standard
Maryland form of fire and extended coverage insurance policy, together
with insurance against sprinkler leakage or other sprinkler damage,
vandalism and malicious mischief. Any policy proceeds from such insurance,
so long as this Lease shall remain in effect, shall be held in trust by
Tenant's insurance company first for the repair, reconstruction,
restoration or replacement of the property damaged or destroyed. Tenant
may self-insure the coverages required to be carried pursuant to this
Section 8-A(a)(iii) or such coverages may be obtained by an endorsement on
a blanket insurance policy covering other of Tenant's offices and/or
stores.
(iv) Plate Glass. Plate glass insurance covering all plate glass in
the Premises. Tenant may elect to self-insure the coverages required to be
carried pursuant to this Section 8-A(a)(iv) or such coverages may be
obtained by an endorsement on a blanket insurance policy covering other of
Tenant's offices and/or stores. Tenant shall be and remain liable for the
repair and restoration of all such plate glass from delivery of the
Premises to Tenant through the Expiration Date or earlier termination of
this Lease; unless any damage or disrepair of the plate glass shall be due
to or has arisen out of any act or omission of Landlord, Landlord's
agents, employees or contractors, in which case(s), Landlord shall be
responsible for the repair and restoration of such plate glass, at
Landlord's expenses.
(b) All policies of insurance to be provided by Tenant under Section
8-A(a)(i), above, shall be issued in form reasonably acceptable to Landlord by
insurance companies with general policyholder's rating of not less than (A-) and
a financial rating of class IX or greater, as rated in the most current
available "Best's" Insurance Reports, and qualified to do business in Maryland.
Each such policy shall be issued in the names of Landlord and Tenant. Said
policies shall be for the mutual and joint benefit and protection of each of
said parties and executed copies of each such policy of insurance or a
certificate thereof shall be delivered to Landlord within ten (10) days after
delivery of possession of the Premises to Tenant and thereafter at least fifteen
(15) days prior to the expiration of each such policy. As often as any such
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policy shall expire or terminate, renewal or additional policies shall be
procured and maintained by Tenant in like manner and to like extent. All such
policies of insurance shall contain a provision that the company writing said
policy will give to Landlord at least thirty (30) days' notice in writing in
advance of any cancellations, or lapse, or the effective date of any reduction
in the amounts of insurance. In the event Tenant shall fail to promptly furnish
any insurance herein required, and such failure shall continue for more than ten
(10) days following Tenant's receipt of written notice from Landlord of such
failure, then Landlord may effect the same for a period not exceeding one (1)
year and Tenant shall promptly reimburse Landlord within ten (10) days of
written invoice, including supporting documentation and a copy of the policy so
purchased by Landlord, as additional rent, the premium so paid by Landlord. All
such public liability, property damage and other casualty policies shall be
written as primary policies which do not contribute to and are not in excess of
coverage which Landlord may carry. All such public liability and property damage
policies shall contain a provision that Landlord shall nevertheless be entitled
to recover under said policies for any loss occasioned to it, its servants,
agents and employees by reason of negligence of Tenant. Any insurance provided
for may be affected by a policy or policies of blanket insurance, covering
additional items or locations; provided, however, that (i) Landlord shall be
named as an additional insured thereunder, as its interests may appear; (ii) the
coverage afforded Landlord will not be reduced or diminished by reason of the
use of such blanket policy of insurance; (iii) any such policy or policies
(except any covering the risks referred to in paragraph (a) (i) above), shall
specify therein (or Tenant shall furnish Landlord with a written statement from
the insurers under such policy specifying) the amount of the total insurance
allocated to the "Tenant Improvements and Property" more specifically detailed
in paragraph (iii), above; and (iv) the requirements set forth herein are
otherwise satisfied. Any insurance policies herein required to be procured by
Tenants shall contain an express waiver of any right of subrogation by the
insurance company against the Landlord.
(c) Tenant shall, and does hereby, indemnify and hold harmless
Landlord from and against any and all liabilities, fines, claims, damages and
actions, costs and expenses of any kind or nature (including reasonable
attorneys' fees)
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and of anyone whatsoever (i) relating to or arising from the use and occupancy
of the Premises by Tenant; (ii) due to or arising out of any mechanic's lien
filed against the Premises, the Building, or any part thereof, for labor
performed or for materials furnished to Tenant, or (iii) due to or arising out
of any breach, violation or nonperformance of any covenant, condition or
agreement in this Lease set forth and contained on the part of Tenant to be
fulfilled, kept, observed or performed by Tenant, unless such damage or injury
shall be occasioned by the negligence or willful act or omission of the
Landlord, Landlord's agents, employees, or contractors, in which event, Landlord
shall indemnify, defend and hold harmless Tenant to the extent of such
negligence or willful act or omission.
8B. Insurance-Indemnity (LANDLORD).
(a) Landlord covenants and agrees that at all times during the term
of this Lease and any and all extensions and renewals thereof, Landlord will
carry and maintain the following types of insurance:
(i) a policy or policies of commercial general liability insurance
in the amount of not less than Two Million Dollars ($2,000,000) combined
single limit in any one accident. Landlord's insurance shall name Tenant
as an additional insured against any and all damages and liability on
account of or arising out of injuries to or the death of persons, or for
property damage, occurring in the Building or at the Property, outside of
the Premises. Said policy shall include contractual liability insurance
recognizing the liability assumed in Section 8-B(d) hereof, contain a
cross-liability endorsement. The insurer of such insurance shall be
licensed to do business within the state in which the Premises are
located, and be rated at least (A-), with a financial rating of class IX
or greater, as rated in the most current available Best's Insurance
Reports, or equivalent.
(ii) an "all risk" (or special form causes of loss) policy of
insurance, insuring all improvements in the Building and on or at the
Property. Such insurance shall be in the amount of the full replacement
cost (excluding foundations), and shall provide that the proceeds of any
loss shall be payable in the manner provided for in this Lease. The
insurer of such
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insurance shall be licensed to do business within the state in which the
Premises are located, and be rated at least (A-), with a financial rating
of class IX or greater, as rated in the most current available Best's
Insurance Reports, or equivalent.
(b) Landlord shall deliver to Tenant certificates of insurance
evidencing the existence in force of the policies of insurance described in this
Section 8-B. Each of the certificates shall provide that such insurance shall
not be canceled or materially amended unless thirty (30) days' prior written
notice of such cancellation or amendment is given to the party designated on
such certificate as the holder thereof.
(c) Landlord shall indemnify, defend, protect and hold Tenant
harmless from and against any and all liabilities, fines, claims, damages,
losses and actions, costs and expenses of any kind or nature (including
reasonable attorneys' fees) and of anyone whatsoever, resulting from the injury
to or death of any person or the loss or damage to any merchandise or property
arising out of (a) Landlord's breach of this Lease or (b) the acts, omissions or
negligence of Landlord, or of Landlord's agents, employees or contractors,
except to the extent such damage, liability, loss or expenses are the result of
negligence or willful misconduct of Tenant or its authorized agents, employees
or contractors.
8C. Miscellaneous Insurance and Indemnity Clauses
(a) The parties release each other, and their respective authorized
representatives, from any claims for loss of or damage to the Building or to any
property in or about the Building and/or the Property to the extent covered by
the insurance required to be carried by Tenant and Landlord pursuant to Sections
8-A and 8-B, above, respectively. Landlord and Tenant shall each have their
insurance policies issued in such form as to waive any right of subrogation
which might otherwise exist.
(b) In case either Landlord or Tenant shall, without fault on its
part, be made a party to any litigation commenced by or against the other, then
such each party agrees to protect and hold the party without fault harmless and
to pay all costs, expenses and reasonable attorney's fees incurred or paid by
such party in connection with such litigation. The prevailing party shall be
entitled to recover all
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costs, expenses and reasonable attorney's fees that may be incurred or paid
thereby in enforcing the covenants and agreements in this Lease, regardless of
whether the action or proceeding is prosecuted to judgment.
9. Alterations.
Tenant shall not make any alterations to the Premises, or any part
thereof, other than interior, non-structural alterations costing less than ten
thousand dollars ($10,000) in each instance, without prior written consent of
Landlord in each instance first has and obtained, which consent shall not be
unreasonably withheld, conditioned or delayed. If Tenant shall desire to make
alterations requiring Landlord's consent, plans for the same shall first be
submitted to and approved by Landlord (which approval shall not be unreasonably
withheld, conditioned or delayed), and all work and installations shall be
performed by Tenant at its own expense in accordance with approved plans. Tenant
agrees that all such work shall be done in a good and workmanlike manner, that
the structural integrity of the Building shall not be impaired, and that no
liens shall attach to the Premises by reason thereof. Tenant agrees to obtain,
at Tenant's expense, all permits required for such alterations.
10. Ownership of Alterations.
Upon the Expiration Date or earlier termination date of this Lease,
all permanently attached alterations, additions and improvements (excepting
Tenant's Personal Property, hereinafter defined) installed in, on or about the
Premises (collectively, "Permanent Leasehold Improvements") shall become part of
the Building and the property of Landlord; provided, however, that the foregoing
shall not apply to Tenant's equipment, furniture and trade fixtures, nor to any
items of personal property (all of the foregoing, collectively, "Tenant's
Personal Property"), which Tenant may, and, if Landlord so requires, shall, at
Tenant's expense, remove from the Premises no matter how attached, so long as
Tenant shall any damage to the Premises caused by said removal. Tenant shall
promptly pay any franchise, minor privilege or other tax or assessment resulting
directly or indirectly from any alterations or improvements made by Tenant to
the Premises. Tenant shall repair promptly, at its own expense, any damage to
the Premises or Building caused by bringing into the Premises any property for
Tenant's use, or by the installation of removal of such property, unless such
damage shall be
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caused by or shall have arisen out of the negligence or willful misconduct of
Landlord or Landlord's agents, employees or contractors.
11. Repairs and Maintenance.
(a) Except as expressly provided in Exhibits B and B-1, or otherwise
by the provisions of this Lease, Landlord shall be under no liability, nor have
any obligation to do any work or make any repairs in or to the Premises, and any
work which may be necessary to outfit the Premises for Tenant's occupancy or for
the operation of Tenant's business therein is the sole responsibility of Tenant
and shall be performed by Tenant at its own cost and expense. Tenant
acknowledges that it has fully inspected the Premises prior to the execution of
this Lease, and Tenant further acknowledges that Landlord has made no warranties
or representations with respect to the condition or state of repairs of the
Premises except as may be expressly contained in this Lease.
(b) Tenant, at Tenant's sole expense, shall except for services
furnished by Landlord pursuant to Section 3 hereof and repairs as may be
necessitated by the negligence or willful misconduct of Landlord, Landlord's
agents, employees or contractors, maintain the Premises in good order,
condition, and repair, including the interior surfaces of the ceilings, walls
and floors, all doors, all interior windows, all exposed plumbing fixtures,
exposed electrical wiring, switches and fixtures, building standard furnishings
and special items and equipment installed in the Premises by or at the expense
of Tenant.
(c) Tenant shall be responsible for all repairs and alterations in
and to the Premises and Building and the facilities and systems thereof, the
need for which arises out of (i) Tenant's use or occupancy of the Premises; (ii)
the installation, removal, use or operation of Tenant's property in the
Premises; (iii) the moving of Tenant's property into or out of the Building; or
(iv) any act, omission, misuse or negligence of Tenants, its agents, contractors
or employees; provided, however, that Tenant shall be under no obligation to
make any repair or alteration requiring any capital improvements,
modification(s) to or change(s) in the Buildings Systems or any structural
alteration of or in connection with the Premises, such repair or alteration is
required by reason of a condition which has been created by, or at the
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instance of, Tenant.
(d) If Tenant fails to maintain the Premises in good order,
condition and repair, Landlord may give Tenant notice to do such acts as are
reasonably required to so maintain the Premises. If Tenant fails to promptly
commence such work (within thirty (30) days of Tenant's receipt of Landlord's
notice, except in the event of an emergency, in which case Landlord or its
designated agents, may enter the Premises at any time, notwithstanding the
notice provisions of this Section, to perform such work as Landlord deems
reasonably necessary to alleviate any immediate danger to persons or property)
and diligently prosecute it to completion, then Landlord shall have the right to
do such acts and expend such funds at the expense of Tenant as are reasonably
required to perform such work. Any reasonable amount so expended by Landlord
shall be paid by Tenant within thirty (30) days after written demand therefor,
including reasonable supporting evidence of the expenses, with interest from the
date of such work, at a rate equal to four percentage points (4%) above the
prime commercial rate of interest then being charged by First National Bank of
Maryland (herein, "Lease Rate"). Landlord shall have no liability to Tenant for
any damage, inconvenience, or interference with the use of the Premises by
Tenant as a result of performing any such work, except to the extent of damage
resulting from the negligence or willful misconduct of Landlord or of Landlord's
agents, employees or contractors.
(e) Tenant shall not knowingly place a load upon any floor of the
Premises which exceeds the load per square foot which such floor was designed to
carry, as determined by Landlord's structural engineer. The maximum load per
square foot of the Premises is eighty (80) pounds. Landlord reserves the right
to consult with its structural engineer if necessary, in Landlord's reasonable
opinion, to resolve any questions concerning this matter, in which event the
written determination of the engineer, certified to Tenant as true and correct,
shall be conclusive and the cost of any such determination shall be paid for by
Landlord, unless the load placed on the floor of the Premises is shown to exceed
any permitted floor load of which Tenant has received actual written notice from
Landlord, in which case Tenant shall pay the reasonable cost of the engineer's
inspection of the Premises. Landlord may not conduct any such inspection more
than once during any twenty-four (24) month period except upon a good
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faith belief that the load placed upon the Premises' floor by Tenant exceeds the
maximum floor load. Tenant shall not install business machines or mechanical
equipment which cause noise or vibration to such a degree so as to create a
nuisance to other Building tenants.
(f) Except as otherwise expressly provided in this Lease, Landlord
shall have no liability to Tenant nor shall Tenant's obligations under this
Lease be reduced or abated in any manner whatsoever by reason of any
inconvenience, annoyance, interruption or injury to business arising from
Landlord's making any repairs or changes which Landlord is required or permitted
by this Lease or required by law to make in or to any portion of the Building or
the Premises, unless such inconvenience, annoyance, interruption or injury is
the result of or arises out of (i) Landlord's negligence or willful misconduct,
or that of Landlord's agents, employees or contractors, or (ii) Landlord's or
its agents' employees' or contractors' failure to perform the repairs or changes
in a careful and workmanlike manner, diligently and continuously prosecuted to
completion once commenced. Landlord shall, nevertheless, use reasonable efforts
to minimize any interference with Tenant's business in and reasonable access to
and from the Premises.
(g) Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Building's mechanical,
electrical, plumbing, HVAC or other systems serving, located in, or passing
through the Premises, and of which Tenant has notice.
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(h) Upon the expiration or earlier termination of this Lease, Tenant
shall return the Premises to Landlord clean and in good condition, except for
normal wear and tear and casualty. Any damage to the Premises, including any
structural damage, resulting from Tenant's use or from the removal of Tenant's
fixtures, furnishings and equipment shall be repaired by Tenant at Tenant's
expense. Landlord shall bill Tenant, as promptly as is practicable, for the
reasonable and actual costs paid by Landlord of any cleanup and/or repairs to
the Premises necessitated by Tenant's failure to comply with the provisions of
this Section 11(h), and such costs shall constitute additional rental due and
payable hereunder notwithstanding any expiration or termination of this Lease.
12. Default.
(a) Any of the following events shall constitute an Event of Default
by Tenant:
(i) If the rent (basic or additional) shall be in arrears, in whole
or in part, and the same shall continue for more than five (5) business
days following written notice thereof from Landlord; or
(ii) If Tenant shall have failed to perform or comply with any other
term, condition, or covenant of this Lease on its part to be performed or
complied with, for a period of thirty (30) days after notice of such
failure from Landlord; provided, however, that if the cure of Tenant's
failure shall be of such a nature so as to reasonably require more than
thirty (30) days to complete, Tenant shall not be deemed in default of
this Section 12(a)(ii) of the Lease if Tenant commences the cure within
such thirty (30) day period, and shall thereafter diligently prosecute the
cure to completion within a reasonable time; or
(iii) INTENTIONALLY DELETED;
(iv) If there shall occur an Act of Bankruptcy, as defined in
Section 38 hereof; or
(v) If Tenant's leasehold interest under this Lease is sold under
execution, attachment or decree of court to satisfy any debt of Tenant and
the same is not discharged or dismissed within ten (10) days of Tenant's
receipt of notice thereof, or if any lien (including a mechanic's lien) is
filed against Tenant's leasehold interest and is not discharged within ten
(10) days after Tenant's receipt of notice thereof.
(b) In the event of an Event of Default as defined in paragraph (a)
hereof, Landlord, in addition to any and all legal and equitable remedies it may
have, shall have the following remedies:
(i) INTENTIONALLY DELETED;
(ii) At any time after an Event of Default, upon ten (10) days'
written notice, to declare this Lease terminated and re-enter the Premises
with legal process; and in such event Landlord shall have
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the benefit of all provisions of law now or hereafter in force respecting
the speedy recovery of possession from Tenant's holding over or other
legal proceedings giving Landlord the right of re-entry.
Notwithstanding such reentry and/or termination, Tenant shall
immediately be liable to Landlord for the sum of the following: (a) all rent and
additional rent then in arrears, without apportionment to the termination date;
(b) all other liabilities of Tenant and actual damages sustained by Landlord as
a result of the Event of Default, including, but not limited to, the reasonable
costs of reletting the Premises and any broker's commissions payable as a result
thereof; provided, however, that (i) Landlord's recovery of costs hereunder with
respect to and incurred in connection with altering and otherwise preparing the
Premises for reletting shall not be greater than the actual cost to Landlord of
restoring the Premises to good order and condition and making improvements in
accordance with Landlord's standard building improvements, but shall not include
the cost of any specialized improvements or alterations for a specific tenant's
use or business operations, and (ii) Tenant shall be obligated to pay only that
portion of any broker's commission equal to the product of the reasonable,
market broker's commission multiplied by a fraction, the numerator of which is
equal to the number of months which would have remained in the term of the Lease
had the Lease not been terminated by Landlord (excluding any renewal terms not
yet exercised by Tenant), and the denominator of which is equal to the total
number of months of the term of the Lease, including only those renewal term(s)
exercised by Tenant as of the date of termination by Landlord; (c) all of
Landlord's costs and expenses (including reasonable court fees) in connection
with such Event of Default and recovery of possession; (d) present value
(calculated using a discounted rate of ten percent) of the difference between
the rent reserved under this Lease for the balance of the term and the fair
rental value of the Premises for the balance of the term to be determined as of
the date of reentry; or at Landlord's option in lieu thereof, Tenant shall pay
the amount of the rent and additional rent reserved under this Lease at the
times herein stipulated for payment of rent and additional rent for the balance
of the term, less any amount received or receivable by Landlord during such
period from others to whom the Premises may be rented on such terms and
conditions and at such rentals as Landlord, in its business
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judgment, shall deem proper; and (e) any other damages recoverable by law. In
the event Landlord brings any action against Tenant to enforce compliance by
Tenant with any covenant or condition of this Lease, including the covenant to
pay rent, and it is judicially determined that Tenant has defaulted in
performing or complying with any such covenant or condition, then and in such
event, Tenant shall pay to Landlord all costs and expenses incurred by Landlord
in bringing and prosecuting such action against Tenant, including Landlord's
reasonable attorney's fees.
(c) In the event Tenant fails to pay Landlord any rental payment or
other charge due hereunder within five (5) days from the date any such payment
was due, Landlord may, at its option, charge Tenant a late charge equal to ten
percent (10%) of the rental payment or other such charge, which late charge
shall be collectible as additional rent and shall be payable by Tenant to
Landlord within five (5) business days after written notice from Landlord to
Tenant assessing the same. In addition, any such rental payment or other charge
which is delinquent for five (5) days or more, shall bear annual interest from
the date on which same was due at the Lease Rate. Anything contained in the
foregoing to the contrary notwithstanding, Tenant shall not be obligated to pay
the foregoing late charge or interest with respect to the first late payment
hereunder occurring during the initial term and during any Renewal Term;
provided, however, that Landlord receives said payments within five (5)business
days of Tenant's receipt of written notice from Landlord that the same are past
due.
13. Damage or Destruction.
(a) If, during the Lease term, the Premises are damaged by fire or
other casualty, but not to the extent that Tenant is prevented reasonable access
to and from the Premises, or from carrying on its normal business operations in
the Premises, Landlord shall promptly cause such damage to be repaired; if such
damage renders a substantial portion of the Premises untenantable, the rent
reserved hereunder shall be reduced during the period of its untenantability
proportionately to the amount by which the area so rendered untenantable bears
to the entire gross rentable area of the Premises, and such reduction shall be
apportioned from the date of the casualty to the date when the Premise are
rendered fully tenantable. Landlord shall promptly commence repairs to and/or
restoration and rebuilding of the Premises, and thereafter
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diligently and continuously prosecute the same to completion within a reasonable
period of time. Notwithstanding the foregoing, in the event such fire or other
casualty damages or destroys any of Tenant's leasehold improvements,
alterations, betterments, fixtures or equipment other than those which comprised
any part of Landlord's Work, Tenant shall cause the same to be repaired or
restored at Tenant's sole cost and expense and Landlord shall have no liability
for the restoration or repair thereof.
(b) If, during the Lease term, the Premises or a substantial portion
of the Building are rendered wholly untenantable as the result of fire, the
elements, unavoidable accident or other casualty, Landlord shall have the option
either to restore the Premises to their condition immediately prior to the
casualty or to terminate this Lease, such option shall be exercised by Landlord
by written notice to Tenant within thirty (30) days after the fire, accident or
casualty. If Landlord elects to restore the Premises, such restoration shall be
completed as promptly as reasonably possible and the rent reserved hereunder
shall abate until the Premises are again rendered tenantable.
(c) The foregoing notwithstanding, Tenant shall have the right to
terminate this Lease (i) if Landlord shall not have Substantially Completed
restoration of the Premises, and reasonable access thereto, within one-hundred
and fifty (150) days of the date of damage, such termination to be upon written
notice to Landlord following the expiration of said one hundred and fifty (150)
days, but prior to Substantial Completion, or (ii) in the case of damage or
casualty to the Premises or any portion of the Building or Property which either
renders a substantial portion of the Premises untenantable or which materially
impairs Tenant's use of or access to the Premises, such damage or casualty
occurring during the final twelve (12) months of the term of this Lease, as
extended, such termination to be upon written notice to Landlord and effective
as of the date which is the later to occur of (A) the date of damage and (B) the
date set forth in Tenant's notice as the effective date of the termination.
14. Possession.
In case this Lease provides for a specifically designated
commencement date, and if possession of the Premises, in whole or in part,
cannot be given to Tenant on or before such commencement date, Landlord agrees
to abate the rent proportionately until possession is given to Tenant, and
Tenant agrees to accept such pro rata abatement
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as liquidated damages for the failure to obtain possession on the commencement
date herein specified. The parties hereto covenant and agree that if the term of
this Lease commences on a date other than the date herein specified, they will,
upon the request of either of them, execute an agreement in recordable form
setting forth the new commencement and termination dates of the Lease term.
Landlord, at its sole cost and expense, shall undertake and diligently prosecute
to completion, subject to delays as hereinafter provided, leasehold improvements
in accordance with plans and specifications attached hereto and made a part
hereof as Exhibit B-1. All such work shall be performed in a workmanlike manner
and shall conform to all applicable governmental codes, laws and regulations in
force at the time such work is completed. Under no circumstances shall Landlord
be under any liability for failure to deliver possession of the Premises to
Tenant on the date herein specified, except as specifically hereinafter
provided: If Landlord's Work is not Substantially Complete, or if Tenant has not
received Landlord's Notice of Substantial Completion, by the expiration of one
hundred and fifty (150) days following the Lease Date, then, until Tenant shall
receive notice from Landlord that Landlord's Work is Substantially Complete,
Tenant shall have the option to terminate this Lease upon written notice to
Landlord. Upon Landlord's receipt of any such notice of termination from Tenant,
this Lease shall terminate and be of no further force or effect, and Landlord
and Tenant shall thereupon be automatically released from any and all liability
to the other under and/or in connection with this Lease.
15. Exterior of Premises - Signs.
(a) Landlord, at Landlord's sole cost and expense, shall provide
Tenant with identification signage to be located adjacent to or on the exterior
of the door at the main entrance to the Premises in accordance with Tenant's
plans and specifications, as approved by Landlord, and on the Building directory
in the main lobby or entrance thereof. Tenant shall further have the right to
place identity signage inside the Premises, visible from the Common Areas of the
Building, consistent with that of other tenants of the Building. Except as
heretofore permitted, Tenant covenants and agrees that it will not place or
permit any window display, sign, billboard, marquee, lights, awning, poles,
placard, advertising matter, or other thing of any kind, in or about
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the exterior of the Premises or the Building, nor paint or make any change in,
to or on the exterior of said Premises to change the uniform architecture, paint
or appearance of the Building, without in each such instance obtaining the prior
written consent of Landlord and, if applicable and required, of any owners'
association or similar entity which may govern the use of Columbia Corporate
Park. In the event such consent is given, Tenant agrees to pay any minor
privilege or other tax levied by a governmental agency or body with appropriate
jurisdiction as a result of any such installation immediately when due. Tenant
shall obtain, at Tenant's expense, all permits required for such installation.
Tenant further agrees to maintain any sign, billboard, marquee, awning,
decoration, placard, or advertising matter or other thing of any kind as may be
approved by Landlord in good condition and repair at all times.
(b) Tenant further covenants and agrees not to pile or place
anything on the sidewalk, parking lot or other exterior portion of the Premises
or Building in the front, rear or sides of the Building, not block any sidewalk,
parking lot or other exterior portion of the Premises or Building, not do
anything that directly or indirectly will interfere with any of the rights of
ingress or egress from any other tenant, not do anything which will, in any way,
change the uniform and general design of the Building or the Property. Landlord
covenants that it will not discriminate against Tenant in the enforcement of the
foregoing provisions of this Section 15.
16. Relocation.
Landlord reserves the right at its option and at Landlord's sole
cost and expense, to relocate the Premises hereby leased to another area within
the Building or group of buildings in the Columbia Corporate Park, provided: (i)
such new location shall be located in the Building, or a building in the Park of
similar quality, age and with similar amenities; (ii) the new premises shall be
comparable to the Premises hereby leased with respect to access, size (and in no
event smaller than the Premises), design, quality and leasehold improvements
(including any upgraded improvements in or at the Premises as of the date
Tenant's receipt of Landlord's notice of relocation) (collectively, all
improvements, finishings, fixtures, etc. existing in or at the Premises as of
such date are herein called "Required Relocation Improvements"); (iii) Landlord
gives Tenant three (3) full calendar months' prior written notice of such
relocation; and (iv) Landlord
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shall prepare the new premises for Tenant's occupancy at Landlord's sole cost
and expense by performing all items of Landlord's Work as set forth in Exhibit
"B-1" hereof, as well as making Required Relocation Improvements to the new
premises; (v) Landlord pays the expenses of moving Tenant's furnishings,
fixtures and equipment, including Tenant's telephone and computer systems, as
well as the reasonable cost to Tenant of new business letterhead and stationary
and reasonable advertising required due to Tenant's change of address; and (vi)
the leasing of the new premises shall be upon all the same terms and conditions
of this Lease and shall not in any way affect the obligations or duties of
either party hereunder, including the fact that Tenant's minimum rent or share
of Operating Costs may not be increased, even if the new premises contained more
rentable square feet than the Premises.
17. For Rent Signs.
Landlord shall have the right to place one (1) "For Rent" sign of
reasonable size, on any portion of said Premises (excepting on or otherwise
obstructing Tenant's signage) for six (6) months prior to termination of this
Lease (as extended). During such six-month period, Landlord may show the
Premises and all parts thereof to prospective tenants upon twenty-four (24)
hours prior notice to Tenant, and then on business days between the hours of
8:00 a.m. and 6:00 p.m. Tenant reserves the right to require that Landlord and
the prospective tenants) be accompanied by Tenant's designated representatives
at all times during any showing.
18. Water and Other Damage.
Except as herein provided, Landlord shall not be liable for, and
Landlord is hereby released and relieved from all claims and demands of any kind
by reason of or resulting from damage or injury to person or property of Tenant
or any other party, directly or indirectly caused by (a) dampness, water, rain
or snow, in any party of the Premises or in any part of any other property of
Landlord or of others, and/or (b) falling plaster, steam, gas, electricity or
any leak or break in any part of the Premises or from any pipes, appliances or
plumbing or from sewers or the street or subsurface or from any other place or
any part of any other property of Landlord or in the pipes of the plumbing or
heating facilities thereof, unless the damage or injury (i) result from or out
of, or have arisen out of (A) Landlord's failure to maintain the Property, the
Building, the Building
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Systems, or any portions thereof as required by the terms of this Lease, (B)
Landlord's negligence or willful misconduct, or the negligence or willful
misconduct of Landlord's agents, employees or contractors, or (ii) are covered
by the insurance required to be carried by Landlord by the terms of this Lease.
19. Right of Entry.
Landlord and its agents, servants, employees, including any builder
or contractor employed by Landlord shall have the right, upon two (2) business
days prior notice to Tenant, at reasonable times on business days during
Tenant's normal hours of operation, to enter and inspect the Premise or any part
thereof, and at the option of Landlord, upon at least five (5) business days
prior notice, to make such reasonable repairs in the Premises as Landlord may
deem reasonably necessary, except in the event of an emergency, in which case
Landlord or its designated agents, may enter the Premises at any time,
notwithstanding the notice provisions of this Section, to perform such work as
Landlord deems reasonably necessary to alleviate any immediate danger to persons
or property.
20. Termination of Term.
It is agreed that the term of this Lease shall expire and terminate
at the end of the original term hereof (or at the expiration of the last renewal
term, if this Lease contains a renewal option and the same is properly
exercised), without the necessity of any notice by or to any of the parties
hereto, unless otherwise provided herein. If Tenant shall occupy the Premises
after such expiration or termination, it is understood that Tenant shall hold
the Premises as a tenant from month-to-month, subject to all the other terms and
conditions of this lease, at an amount equal to one and one-half times the
highest monthly rental installment reserved in this Lease. Landlord shall, upon
such expiration or termination of this Lease, be entitled to the benefit of all
public general or local laws relating to the speedy recovery of possession of
lands and tenements held over by tenants that may be now in force or may
hereafter be enacted, subject to all the terms and conditions of this Lease.
21. Condemnation.
(a) If, during the term of this Lease, all or a substantial part of
the Premises shall be taken by police power or under power of eminent domain,
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this Lease shall terminate as of, and the rent (basic and additional) shall be
apportioned to and abate from and after, the effective date of taking. Except as
hereinafter set forth, Tenant shall have no right to participate in any award or
damages for such taking and hereby assigns all of its right, title and interest
therein to Landlord. For the purposes of this paragraph, "a substantial part of
the Premises" shall mean such part that the remainder thereof is rendered
inadequate for Tenant's business and that such remainder cannot practicably be
repaired and improved so alto be rendered adequate to permit Tenant to carry on
its business with substantially the same efficiency as before the taking.
(b) If, during the Lease term, less than a substantial part of the
Premises (as hereinabove defined) is taken by police power or under power of
eminent domain, this Lease shall remain in full force and effect according to
its terms; and Tenant shall have no right to participate in any award or damages
for such taking and tenant hereby assigns all of its right, title and interest
in and to the award to Landlord. In such event Landlord shall, at its expense,
promptly make such repairs and improvements as shall be necessary to make the
remainder of the Premises adequate to permit Tenant to carry on its business to
substantially the same extent and with substantially the same efficiency as
before the taking; provided that in no event shall Landlord be required to
expend an amount in excess of the award received by Landlord for such taking.
If, as a result of such taking, any part of the Premises is rendered permanently
unusable, the basic annual rent reserved hereunder shall be reduced in such
amount as may be fair and reasonable, which amount shall not exceed the
proportion which the area so taken or made unusable bears to the total area
which was usable by Tenant prior to the taking. If the taking does not render
any part of the Premises unusable, there shall be no abatement of rent.
(c) For purposes of this section, "taking" shall include a
negotiated sale or lease and transfer of possession to a condemning authority
under bona fide threat of condemnation for public use, and Landlord alone shall
have the right to negotiate with the condemning authority and conduct and settle
all litigation connected with the condemnation. As hereinabove used, the words
"award or damages" shall, in the event of such sale or settlement, include the
purchase or settlement price.
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(d) Nothing herein shall be deemed to prevent Tenant from claiming
and receiving from the condemning authority, if legally payable, compensation
for the taking of Tenant's own tangible property, equipment and/or trade
fixtures, any leasehold improvements constructed by Tenant, and such amount as
may be payable by statute or ordinance or otherwise recoverable by Tenant toward
Tenant's damages for Tenant's loss of or interruption and/or damage to business,
removal and relocation expenses.
22. Subordination.
This Lease shall be subject to and subordinate at all times to the
lien of any existing mortgages and/or deeds of trust upon the Building and/or
the Property, unless the mortgagee or holder of the deed of trust elects to have
Tenant's interest hereunder superior to the interest of the mortgagee or holder
of such deed of trust. This subordination provision shall be self-operative and
no further instrument of subordination shall be required. Tenant agrees to
execute any documents reasonably necessary, subsequent to the execution of this
Lease, which are required to effect such subordination. Landlord covenants to
use its best efforts to obtain from each of such parties (and each lessor or
other person whose interest in the Building and/or the Property is paramount to
Landlord's, if any) (each a "Security Holder") within sixty (60) days of the
date of execution hereof, an agreement executed and acknowledged by the Security
Holder, and otherwise in form reasonably acceptable to Tenant, wherein the
Security Holder (i) acknowledges this Lease and Tenant's rights hereunder, and
(ii) agrees that so long as no Event of Default shall occur and continue, such
Security Holder shall not disturb the tenancy hereby created (any such agreement
herein called a "Non-Disturbance Agreement"). The Non-Disturbance Agreement
shall be delivered to Tenant and, at Tenant's option, duly recorded in the
appropriate public office. Tenant shall, upon Landlord's request, subordinate
this Lease to any future lien placed by Landlord upon the Building and/or the
Property, provided that such lien holder executes, acknowledges and delivers to
Tenant a Non-Disturbance Agreement in form reasonably acceptable to Tenant.
23A. Landlord's Right to Perform Tenant's Covenants.
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If Tenant shall fail to perform any covenant or duty required of it
by this Lease or by law, and such failure shall continue for more than thirty
(30) days following written notice from Landlord detailing the nature of such
failure (or, if the cure of Tenant's failure shall be of such nature so as to
reasonably require more than thirty (30) days, then such reasonably extended
period of time, so long as the cure has been commenced within such thirty-day
period, and is being diligently prosecuted as herein required), then, upon a
final notice to Tenant (which may be via telefacsimile to Tenant's
representative pursuant to Section 42-A, below) given after the expiration of
such thirty-day period, as extended, Landlord shad have the right (but not the
obligation) to perform the same, and if reasonably necessary to enter the
Premises for such purposes. The foregoing notwithstanding, if the nature of
Tenant's failure to perform is, in Landlord's reasonable judgment, of such
nature that its continuation without repair will create an immediate danger to
the health or safety of individuals and/or create an immediate danger of
additional damage to and/or waste of the Premises and/or other property,
Landlord shall have the right to immediately take whatever actions are
reasonably necessary to alleviate such danger, the notice requirements of this
Section notwithstanding. The reasonable and out-of-pocket cost to Landlord of
any repairs or other work performed pursuant to the provisions of this Section
shall be deemed to be additional rent hereunder payable by Tenant, shall be due
and payable by Tenant within thirty (30) days after written demand, including
reasonably supporting documentation, and Landlord shall have the same rights and
remedies with respect to such additional rent as Landlord has with respect to
the rental reserved hereunder.
23B. Tenant's Right to Perform Landlord's Covenants.
If Landlord fails to perform any of Landlord's obligations pursuant
to this Lease, Tenant shall give Landlord notice specifying in what manner
Landlord has so failed (any such failure a "Landlord Default") and, if such
Landlord Default shall continue for more than thirty (30) days after Landlord's
receipt of Tenant's notice thereof, or to thereafter diligently and continuously
pursue the cure to completion within thirty (30) days (or, if the nature of the
Landlord Default shall be of such nature so as to reasonably require more than
thirty (30) days, then within such reasonably extended period of time, so long
as the cure is commenced within such thirty day period, and is
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being diligently prosecuted as herein required), then, upon a final notice to
Landlord (which may be given to Landlord's representative via facsimile pursuant
to the provisions of Section 42-B, below), Tenant may cure such Landlord
Default. If Tenant cures the Landlord Default as permitted hereby, Landlord
shall reimburse Tenant for the reasonable, out of pocket expenses incurred by
Tenant in completing such cure within thirty (30) days following Landlord's
receipt of Tenant's invoice, including reasonable supporting documentation of
all amounts. If Landlord fails to timely pay Tenant the invoiced amounts, the
unpaid amount shall accrue interest at the Lease Rate from and after the
expiration of the thirty (30) day period until paid in full. The foregoing
notwithstanding, if the Landlord Default is, in Tenant's reasonable judgment, of
such nature that its continuation without repair will create an immediate danger
to the health or safety of individuals and/or create an immediate danger of
additional damage to and/or waste of the Premises and/or other property, Tenant
shall have the right to immediately take whatever actions reasonably necessary
to alleviate such danger, the notice requirements of this Section
notwithstanding.
24. Attornment.
(a) If Landlord assigns this Lease or the rents hereunder to a
creditor as security for a debt, Tenant shall, after notice of such assignment
and upon demand by Landlord or the assignee, pay all sums thereafter becoming
due to Landlord hereunder either to Landlord or to such assignee, as required by
such notice. Tenant shall and hereby is released from all liability to Landlord
for any sums paid to any such assignee. Tenant shall also, upon receipt of such
notice, have all policies of insurance required hereunder endorsed so as to
protect the assignee's interest as it may appear and shall deliver such
policies, or certificates thereof, to the assignee.
(b) In the event the Premises are sold at any foreclosure sale or
sales, by virtue of any judicial proceedings or otherwise, this Lease shall
continue in full force and effect and Tenant agrees, upon receipt by Tenant of
an express written assumption of all of the obligations of "Landlord" hereunder
by all such purchaser(s), to attorn to and acknowledge the foreclosure purchaser
or purchasers at such sale as the landlord hereunder.
25. Non-Waiver of Future Enforcement.
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The receipt of rent by Landlord, with knowledge of any breach of
this Lease by Tenant or of any default on the part of Tenant in the observance
of performance of any of the conditions or covenants of this Lease, shall not be
deemed to be a waiver of any provision of this Lease, including the provision
breached. No failure on the part of Landlord or of the Tenant to enforce any
covenant or provision herein contained nor any waiver of any right hereunder by
Landlord or Tenant shall discharge or invalidate such covenant or provision or
shall affect the right of Landlord or Tenant to enforce the same in the event of
any subsequent default. The receipt by Landlord of any rent or any sum of money
or any other consideration hereunder paid by Tenant after the termination, in
any manner, of the term herein demised, or after the giving by Landlord of any
notice hereunder to effect such termination, shall not reinstate, continue or
extend the term herein demised, or destroy, or in any manner impair the efficacy
of any such notice of termination as may have been given hereunder by Landlord
to Tenant prior to the receipt of any such sum of money or other consideration,
unless so agreed to in writing and signed by Landlord. Neither acceptance of the
keys nor any other act or thing done by Landlord or any agent or employee during
the term herein demised shall be deemed to be an acceptance of a surrender of
the Premises, excepting only an agreement in writing signed by Landlord
accepting or agreeing to accept such surrender.
26. Personal Property Taxes.
Tenant shall be responsible for and shall pay any taxes or
assessments levied or assessed during the term of this Lease against any
leasehold interest of Tenant or personal property or trade fixtures of Tenant of
any kind, owned by Tenant or placed in, upon or about the Premises by Tenant.
27. Recordation of Lease.
This Lease shall not be recorded. However, both parties hereto agree
that it will, upon request by the other, execute a memorandum of this Lease in a
form suitable for recording under applicable Maryland law. The party requesting
such Memorandum of Lease shall pay all costs of recordation, including any
transfer or recordation taxes thereon.
28. Notices.
Any notice required by this Lease shall be sent by certified mail,
postage
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prepaid, return receipt requested, or via a nationally recognized courier
service (against a signed receipt) to Landlord at:
MERRITT-CCP III, LLC
c/o Merritt
2066 Lord Baltimore Drive
Baltimore, Maryland 21244.
Any notice required by this Lease shall be sent by certified mail,
postage prepaid, return receipt requested, or via a nationally recognized
courier service (against a signed receipt) to Tenant at:
APPLIED THEORY CORPORATION
125 Elwood Davis Road
Liverpool, New York 13088
Attention: Terri Kennett
With a copy to:
--------------
APPLIED THEORY CORPORATION
1500 Broadway, Suite 300
New York, New York 10036
Attention: Diane Barker
and to Tenant at the Premises:
-----------------------------
8830 Stanford Blvd. Suite 402
Columbia, MD 21045
Either party may, at any time, and from time to time, designate in
writing a substitute address for that set forth above, and thereafter all
notices to such party shall be sent by to such substitute address.
29. Waiver of Jury Trial.
LANDLORD AND TENANT WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY
ACTION, COUNTERCLAIM, OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT
MATTER OF THIS LEASE. THIS WAIVER APPLIES TO ALL CLAIMS AGAINST ALL PARTIES TO
SUCH ACTIONS AND PROCEEDINGS, INCLUDING PARTIES WHO ARE NOT PARTIES TO THIS
LEASE. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY LANDLORD
AND TENANT AND BOTH PARTIES ACKNOWLEDGES THAT NEITHER PARTY, NOR ANY PERSON
ACTING ON
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BEHALF OF THEREOF, HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF
TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. LANDLORD AND TENANT
FURTHER ACKNOWLEDGE THAT EACH HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY
TO BE REPRESENTED) IN THE SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER
BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, IN THAT IT HAS HAD
THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. LANDLORD AND TENANT EACH
FURTHER ACKNOWLEDGE THAT IT HAS READ AND UNDERSTANDS THE MEANING AND
RAMIFICATIONS OF THIS WAIVER.
30. Severability.
If any term, clause or provision of this Lease is declared invalid
by a court of competent jurisdiction, the validity for the remainder of this
Lease shall not be affected thereby but shall remain in full force and effect.
31. Non-Waiver.
It is understood and agreed that nothing herein shall be construed
to be a waiver of any of the terms, covenants or conditions herein contained,
unless the same shall be in writing, signed by the party to be charged with such
waiver, and no waiver of the breach of any covenant herein shall be construed as
a waiver of such covenant or any subsequent breach thereof. No mention in this
Lease of any specific right or remedy shall preclude either party from
exercising any other right or from having any other remedy or from maintaining
any action to which it may be otherwise entitled either at law or in equity.
32. Successors and Assigns.
(a) Except as herein provided, this Lease and the covenants and
conditions herein contained shall inure to the benefit of and be binding upon
Landlord its successors and assigns; shall be binding upon Tenant, its
successors and assigns (including without limitation any trustee in bankruptcy
or debtor-in-possession, and any assignee of the same); and shall inure to the
benefit of Tenant and only such assignees of Tenant to whom an assignment by
Tenant has been consented to in writing by Landlord, to the extent such consent
is specifically herein required.
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In the event more than one person, firm or corporation is named
herein as Tenant, the liability of all parties named herein as Tenant shall be
joint and several.
(b) In the event Landlord's interest under this Lease is transferred
or assigned and written notice thereof is given to Tenant, then, upon Tenant's
receipt of an express written assumption of all of the obligations of "Landlord"
hereunder by the said assignee or transferee, Landlord (or any subsequent
assignee or transferee of Landlord's interest under this Lease who gives such
notice to Tenant) shall be relieved and released from and after the effective
date of such assumption by the transferee of Landlord's interest under this
Lease, subject to appropriate notice to Tenant as herein required) shall be
relieved and released from and after the date of such transfer or conveyance
from all liability hereunder.
(c) Further, the liability of Landlord, its successors and assigns,
under this Lease shall at all times be limited solely to Landlord's interest in
the land and improvements comprising the Building and the Property, together
with the Proceeds (as hereinafter defined), and in the event the owner of
Landlord's interest in this Lease is at any time an individual, partnership,
joint venture or unincorporated association, Tenant agrees that such individual
or the members or partners of such partnership, joint venture or unincorporated
association shall not be personally or individually liable or responsible for
the performance of any of Landlord's obligations hereunder. For purposes of this
Section 32, "Proceeds" shall mean:
(i) proceeds of sale by Landlord of its interest in the Building
and/or Property (or portions thereof), to the extent such sums are in
excess of sums necessary to discharge or pay-off any third party
outstanding loan, including reasonable expenses paid by Landlord in
connection with the sale;
(ii) condemnation awards received by Landlord in connection with the
taking the Building and/or Property (or portions thereof), to the extent
said proceeds are either made available to Landlord by its Security Holder
and/or are not used for the repair the Building or Property so taken; and
(iii) insurance proceeds received by
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Landlord in connection with any damage or destruction to the Building
and/or Property (or portions thereof), to the extent said proceeds are
either made available to Landlord by its Security Holder and/or are not
used for the repair or restoration of the Building or Property so damaged.
33. Security Deposit.
Landlord hereby acknowledges receipt from Tenant of the sum of
Twelve Thousand Twelve Dollars ($12,012.00), which sum represents a security
deposit for the faithful performance of Tenant's obligations under this Lease
("Security Deposit"). The foregoing notwithstanding, Landlord shall execute and
deliver a receipt for the Security Deposit in the form attached hereto and made
a part hereof as Exhibit E within five (5) business days of receipt of the
Security Deposit. Tenant agrees that Landlord shall have the right, but not the
obligation, in its sole discretion, upon the expiration of any applicable period
of notice or cure as may be afforded Tenant by the terms of this Lease, to apply
said Security Deposit or any portion thereof, as may be reasonably required to
cure or remedy any Event of Default by Tenant hereunder, including an Event of
Default in payment of rent. If Landlord so applies the Security Deposit or any
portion thereof Tenant shall, within thirty (30) days of written demand,
including reasonable supporting documentation of sums expended by Landlord in
curing the Event of Default, reimburse Landlord for the portion of the Security
Deposit so applied; and any failure of Tenant to do so within the stated time
period therefor shall constitute an Event of Default hereunder. Said sum, if not
sooner applied, shall be returned to Tenant within thirty (30) days after
vacating of the Premises by Tenant and termination of this Lease (or upon
termination of the last renewal term of this Lease if this Lease contains a
renewal option and Tenant properly exercises said option), provided: (i) Tenant
is not then in default under any of the provisions of this Lease beyond any
applicable period of notice or cure; (ii) that Tenant has surrendered the
Premises to Landlord in the condition required by this Lease; and (iii) all keys
to the Premises then in Tenant's possession have been returned to the Landlord;
provided that if the keys have been lost, Landlord may offset the actual cost of
replacement keys and/or changing exterior door locks affected as against the
Security Deposit, and the failure to return the keys shall not prevent Landlord
from returning the balance of the Security Deposit to Tenant. Tenant further
agrees that
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Landlord shall be entitled to commingle said Security Deposit with its own
funds, and that no mortgagee or holder of a deed of trust on the Premises and no
purchaser of said Premises at any foreclosure sale shall have any liability to
Tenant for Tenant's Security Deposit unless actually received thereby from
Landlord. If Landlord does not deliver the Security Deposit to any such
mortgagee or holder of a deed of trust on the Premises or any purchaser of the
Premises (by foreclosure or otherwise) (each, herein, a "Transferee of
Landlord's Interest"), Landlord shall remain liable to Tenant for the return of
the full Security Deposit within thirty (30) days of the transfer of Landlord's
interest in the Premises to any such Transferee of Landlord's Interest, any
conditions in this Section 33 to the contrary notwithstanding. If the Security
Deposit, or any portion thereof, is not returned within the time period herein
stated, whether at termination of the term of the Lease or upon transfer of any
interest of Landlord in the Premises to a Transferee of Landlord's Interest,
such unreturned portion shall accrue interest at the Lease Rate from the due
date until paid in full.
34. Notices to Mortgagee.
Tenant agrees that a copy of any notice of default from Tenant to
Landlord shall also be sent to the holder of any mortgage or deed of trust on
the Premises, provided Tenant has been given written notice of the fact that
such mortgage or deed of trust has been made, including (i) the address of the
respective mortgagee or deed holder and (ii) name or title of person to whom
such notice is to be directed; and Tenant shall allow said mortgagee or holder
of the deed of trust the opportunity, to cure, or cause to be cured, any such
default on Landlord's behalf, within a reasonable time period, not to exceed the
time period herein permitted Landlord, plus sixty (60) days; provided that
Tenant shall have received notice from the respective Security Holder of its
intention to cure Landlord's default within ten (10) business days of such
Security Holder's receipt of Tenant's notice thereof. If such default cannot
reasonably be cured within the time specified herein, then such additional time
as may be reasonably necessary shall be allowed, provided the curing of such
default is timely commenced and diligently and continuously pursued to
completion (including, but not limited to, commencement of foreclosure
proceedings if necessary to effect such cure), in which event this Lease shall
not be terminated by Tenant while such remedies are being thus
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diligently pursued.
35. Estoppel Certificate.
(a) Estoppel by Tenant. Tenant shall, at any time and from time to
time during the term of this Lease or any renewal thereof, upon request of
Landlord, execute, acknowledge, and deliver to Landlord (or its designee) a
statement in writing, certifying that this Lease is unmodified and in full force
and effect if such is the fact (or if there have been any modifications thereof,
that the same is in full force as modified and stating the modifications) and
the dates to which the rents and other charges have been paid in advance, if
any. Any such statement delivered pursuant to this paragraph may be relied upon
by any prospective purchaser of the estate of Landlord or by the mortgagee or
any assignee of any mortgagee or the trustee or beneficiary of any deed of trust
constituting a lien on the Premises or the Building.
(b) Estoppel by Landlord. Landlord shall, at any time and from time
to time during the term of this Lease or any renewal thereof, upon request of
Tenant, execute, acknowledge, and deliver to Landlord (or its designee) a
statement in writing, certifying that this Lease is unmodified and in full force
and effect if such is the fact (or if there have been any modifications thereof,
that the same is in full force as modified and stating the modifications) and
the dates to which the rents and other charges have been paid in advance, if
any, and whether or not any defaults exist hereunder. Any such statement
delivered pursuant to this paragraph may be relied upon by any holder of any
security interest in Tenant's Personal Property, leasehold interest in the
Premises, or otherwise in connection with this Lease.
36. Bankruptcy.
(a) An "Act of Bankruptcy" shall mean:
(i) the application by Tenant or any guarantor of Tenant or its or
their consent to the appointment of a receiver, trustee or liquidator of
Tenant or any guarantor of the Tenant or a substantial part of its or
their assets;
(ii) the filing of voluntary petition in bankruptcy or the admission
in writing by Tenant or any guarantor of Tenant of its inability to pay
its debts as they become due;
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(iii) the making by Tenant or any guarantor of Tenant of an
assignment for the benefit of its creditors;
(iv) the filing of a petition or an answer seeking a reorganization
or an arrangement with its creditors or an attempt to take advantage of
any insolvency law;
(v) the filing of an answer admitting the material allegations of a
petition filed against Tenant or any guarantor of Tenant in any
bankruptcy, reorganization or insolvency proceeding;
(vi) the entering of an order, judgment or decree by any court of
competent jurisdiction adjudicating Tenant or any guarantor of Tenant a
bankrupt or an insolvent, approving a petition seeking such a
reorganization, or appointing a receiver, trustee or liquidator of Tenant
or any guarantor of Tenant or of all or a substantial part of its or their
assets; or
(vii) the commencing of any proceeding under any bankruptcy,
reorganization, arrangement, insolvency, readjustment, receivership or
similar law, and the continuation of such order, judgment, decree or
proceeding unstayed for a period of sixty (60) days.
(b) Upon the occurrence of an Act of Bankruptcy, this Lease and all
rights of Tenant hereunder shall automatically terminate, at Landlord's option,
upon written notice to Tenant, with the same force and effect, effective as of
the date of the Act of Bankruptcy as if the date of any such event were the date
stated herein for the expiration of the term, and Tenant shall vacate and
surrender the Premises, but shall remain liable as herein provided. Landlord
reserves any and all remedies provided herein or at law or in equity.
(c) If this Lease is not terminated in accordance with subsection
(b) above because such termination is not permitted under the Bankruptcy Code,
11 U.S.C. 101 et seq. (the "Bankruptcy Code"), then upon the filing of a
petition by or against Tenant under the Bankruptcy Code, Tenant, as debtor and
as debtor in possession, and any trustee who may be appointed, agree:
(i) To perform each and every obligation of Tenant under this Lease
until such time as this Lease is either
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rejected or assumed by order of the United States Bankruptcy Court;
(ii) To pay monthly in advance on the first day of each month as
reasonable compensation for use and occupancy of the Premises an amount
equal to all basic rent and all additional rent reserved hereunder;
(iii) To reject or assume this Lease within sixty (60) days of the
filing of such petition under Chapter 7 of the Bankruptcy Code or within
thirty (30) days of the filing of a petition under any other Chapter;
(iv) To give Landlord at least forty-five (45) days prior written
notice of any proceeding relating to any assumption of this Lease;
(v) To give Landlord at least thirty (30) days prior written notice
of any abandonment to be deemed conclusively a rejection of this Lease;
(vi) To be deemed conclusively to have rejected this Lease in the
event of the failure to comply with any of the above; and
(vii) To be deemed to have consented to the entry of an order by an
appropriate United States Bankruptcy Court providing all of the above,
waiving notice and hearing of the entry of same.
(d) Not withstanding anything in this Lease to the contrary, all
amounts payable by Tenant to or on behalf of Landlord hereunder, whether or not
expressly denominated as rent, shall constitute "rent" for the purposes of
Section 502(b) (7) of the Bankruptcy Code, including, without limitation,
reasonable attorney's fees incurred by Landlord by reason of Tenant's
bankruptcy.
(e) In the event that this Lease is assigned to any person or entity
pursuant to the provisions of the Bankruptcy Code, any and all monies or other
consideration payable or otherwise to be delivered in connection with such
assignment shall be paid or delivered to Landlord, shall be and remain the
exclusive property of Landlord, and shall not constitute property of Tenant or
of the estate of Tenant within the
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meaning of the Bankruptcy Code. Any and all monies or other consideration
constituting Landlord's property under the preceding sentence not directly paid
or delivered to Landlord shall be held in trust for the benefit of Landlord by
the recipient thereof and be promptly paid to or turned over to Landlord. If
Tenant assumes this Lease and proposes to assign the same pursuant to the
provisions of the Bankruptcy Code to any person or entity who shall have made a
bona fide offer to accept an assignment of this Lease on terms acceptable to
Tenant, the notice of such proposed assignment setting forth (i) the name and
address of such person; (ii) all of the terms and conditions of such offer; and
(iii) adequate assurance to be provided to Landlord to assure such assignee's
future performance under the Lease, including, without limitation, the assurance
referred to in Section 365(b) (3) of the Bankruptcy Code, or any such successor
or substitute legislation or rule thereto, shall be given to Landlord by Tenant,
but in any event no later than ten (10) days prior to the date that Tenant shall
make application to a court of competent jurisdiction for authority and approval
to enter into such assignment and assumption, and Landlord shall thereupon have
the prior right and option, to be exercised by notice to Tenant given at any
time prior to the effective date of such proposed assignment, to accept an
assignment of this Lease upon the same terms and conditions and for the same
consideration, if any, as the bona fide offer made by such person, less any
brokerage commission which may be payable out of the consideration to be paid by
such person for the assignment of this Lease. Any person or entity to which this
Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed without further act or deed to have assumed all of the obligations
arising under this Lease on and after the date of such assignment. Any such
assignee shall, upon demand, execute and deliver to Landlord an instrument
confirming such assumption.
(f) Nothing contained in this Section 35 shall be deemed in any
manner to limit Landlord's rights and remedies under the Bankruptcy Code, as
presently existing or as may hereafter be amended.
(g) No default under this Lease by Tenant, either prior to or
subsequent to any Act of Bankruptcy, shall be deemed to have been waived unless
expressly done so in writing by Landlord.
(h) Neither Tenant's interest in this Lease, nor any estate
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created hereby in Tenant nor any interest herein or therein, shall pass to any
trustee or receiver or assignee for the benefit of creditors or otherwise by
operation of law except as may specifically be provided by the Bankruptcy Code.
37. Lender's Approval.
INTENTIONALLY DELETED.
38. Broker's Commission.
Tenant and Landlord warrant that they have dealt with no broker in
connection with this Lease, except The Widewaters Group, Inc. ("Widewaters"),
and agree to indemnify and save the other harmless from all claims, actions,
damages, costs and expenses and liability whatsoever, including reasonable
attorney's fees, that may arise from any breach of this warranty. Landlord
hereby covenants and warrants that it will be responsible for the payment of all
brokerage commissions due to Widewaters in connection with this Lease, and
hereby agrees to indemnify and save Tenant harmless from all claims, actions
damages, costs and expenses and liability whatsoever, including reasonable
attorney's fees, that may arise from any breach of this warranty.
39. Rules and Regulations.
Tenant shall faithfully observe and comply with the rules and
regulations attached hereto as Exhibit "C", and with any reasonable amendments
or modifications thereto that Landlord shall, from time to time, promulgate with
respect to the Building. Any such amendments or modifications to the rules and
regulation shall be binding upon Tenant upon Tenant's receipt of written notice
of the same. Landlord shall not be responsible to Tenant for the nonperformance
of any said rules and regulations by any other tenants or occupants; provided,
however, that Landlord shall use commercially reasonable efforts to enforce such
rule and regulations in a uniform and non-discriminatory manner. In the event of
any conflict between the rules and regulations herein described and the terms
and conditions of this Lease, the terms and conditions of this Lease shall
prevail.
40. Captions.
The captions of the various sections of this Leas are for
convenience only and are not a part of this Lease. Such captions shall not be
construed to define or limit any of the provisions of this Lease.
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41. Final and Entire Agreement.
This Lease contains the final and entire agreement between the
parties hereto, and neither they nor their agents shall be bound by any terms,
conditions or representations not herein written.
42A. Tenant Representative.
The name, address and telephone and telefacsimile numbers of Tenant
representative to be contacted in event of emergency are as follows:
Terri Kennett
Applied Theory Corporation
125 Elwood Davis Road
Liverpool, New York 13088
Telephone #: 315-453-2912
Telefax #: 315-461-8010
42B. Landlord Representative.
The name, address and telephone and telefacsimile numbers of the
Landlord representative to be contacted in event of emergency are as follows:
Steven Shaw
c/o Merritt
2066 Lord Baltimore Drive
Baltimore, Maryland 21244
Telephone #: 410-298-2600
Telefax #: 410-298-9644
43. Renewal Options.
(a) It Tenant is not then in default under this Lease or any of the
provisions hereof beyond any applicable period of notice or cure, Tenant may
extend the term of this Lease for two (2) additional successive periods) of
three (3) years) each (each a "Renewal Term"), by notifying Landlord in writing
of its intention to do so at least one hundred eighty (180) days prior to the
expiration of the then current term. If Tenant timely exercises its option to
extend, the term shall be deemed extended as of Landlord's receipt thereof, and
each such Renewal Term shall be under the same terms and conditions as are
herein set forth, except that the annual rental for each succeeding Renewal Term
shall be adjusted as follows: the lease fixed minimum rent rate shall be re-set
at the then current market rate for comparable Class "A" office
52
<PAGE> 53
premises in the Columbia, Maryland area as of the date of Tenant's exercise of
the respective renewal term, taking into account that Tenant shall be a renewal
tenant, and Landlord shall not incur expenses for tenant improvements, tenant
allowance, or other landlord costs customarily associated with a new,
non-renewal tenant (the fair market rate so determined is herein referred to as
"Fair Market Rent"). The annual minimum rent for any Renewal Term shall not be
less than the annual minimum rent for the year expiring immediately prior to the
respective Renewal Term. Upon Tenant's exercise of its option hereunder, the
term of the Lease shall be deemed extended without need for further act or
writing by either party. The parties shall, however, execute an amendment to
this Lease to incorporate the adjustment in minimum rent (if any) upon its
determination. There shall be no additional right to renew or extend this Lease
except as provided herein.
(b) If a dispute shall arise between Landlord and Tenant with
respect to the determination of the Fair Market Rate, or if Landlord and Tenant
have not agreed on such amount by the date which is ninety (90) days prior to
the expiration of the then current term, such dispute shall be determined
exclusively by arbitrators which meet the qualifications set forth in Section
43(b)(iii), below, and in accordance with the following:
(i) If the Fair Market Rent is to be determined by arbitrators,
either Landlord or Tenant may give the other party written notice setting
forth the name and address of an arbitrator and requesting that the Fair
Market Rate be arbitrated pursuant to this Section 43(b). The other party
shall, within ten (10) business days after the receipt of a notice to
arbitrate as provided above, appoint an arbitrator and notify the other
party in writing of the name and address of the arbitrator so appointed.
The two (2) arbitrators so selected shall promptly thereafter meet to
discuss and determine the Fair Market Rate in accordance with the
provisions of this Section 43. If, within fifteen (15) business days after
the appointment of the second (2nd) arbitrator, the arbitrators have not
rendered a mutually agreeable decision as to the Fair Market Rent, a third
(3rd) arbitrator shall be appointed by mutual agreement of the arbitrators
previously appointed (or, in default of such appointment, by the President
of the
53
<PAGE> 54
Columbia, Maryland Real Estate Board (or any organization successor
thereto).
(ii) If the first two (2) arbitrators fail to decide within the time
period permitted and the third (3rd) arbitrator is appointed thereby in
accordance with this Section, then the Fair Market Rent shall be deemed to
be the average of the independent determinations of all three (3)
arbitrators. The Fair Market Rent so determined shall be final and binding
upon the parties. Upon determination of the Fair Market Rent, the parties
shall execute and amendment to this Lease setting forth such amount.
(iii) All of the arbitrators, however appointed, shall be real
estate brokers licensed by the State of Maryland having at least three (3)
years experience in commercial real estate office leasing in the Columbia,
Maryland area. Arbitration proceedings shall be conducted in Baltimore,
Maryland in accordance with the rules of the American Arbitration
Association then in effect, but only so far as consistent with the
provisions of this Section. The arbitrators shall be sworn faithfully and
fairly to determine the questions at issue.
(iv) Landlord and Tenant shall each be solely responsible for the
payment of all fees and expenses of the arbitrator it appointed, and shall
share equally the payment of all fees and expenses of the American
Arbitration Association (if any) and of a third arbitrator (if any be
appointed hereunder).
44. MISCELLANEOUS PROVISIONS.
(a) Landlord's Authority. Landlord hereby represents and warrants
that it is the owner of the Property and the Building as of the date of its
execution of this Lease and that it has full power and authority to enter into
to this Lease and to perform its obligations hereunder.
(b) Landlord's Waiver - Fixture Financing. Anything herein contained
to the contrary notwithstanding, Landlord shall, upon request by Tenant, execute
a waiver by Landlord, in form and substance reasonably satisfactory to Tenant
and any lender of Tenant, which waiver shall provide that Landlord shall
subordinate and waive as to said lender any claims, demands or rights with
respect to
54
<PAGE> 55
any equipment, leasehold improvements, trade fixtures, inventory or personal
property financed or to be financed by Tenant. Landlord waives any rights of
distraint that may be available to Landlord.
(c) Landlord's Consent. Whenever Landlord's consent or approval is
required under the terms of this Lease (including, without limitation, as may be
required by any of provisions of the Exhibits attached hereto), Landlord shall
not unreasonably withhold, condition or delay such consent or approval.
(d) Landlord Compliance. Landlord hereby warrants that the Property,
Building and Premises are in compliance with all "Environmental Laws" (as
defined in Section 4(b), above). Landlord further covenants and agrees that it
shall be responsible for the compliance of (i) the Premises prior to the date of
delivery of possession thereof to Tenant ("Delivery Date") and (ii) the
Property, the Building and all Common Areas thereof, and alterations thereto,
with all applicable laws, including, without limitation, with the applicable
requirements of Title III of the Americans with Disabilities Act, and all
similar Federal, State and Local laws and regulations, and all Environmental
Laws. If Tenant discovers a condition(s) of the Premises which is/are shown (a)
to have existed prior to the Delivery Date and (b) to have been in violation of
applicable law as of the Delivery Date, Tenant shall promptly notify Landlord in
writing of such pre-Delivery Date violations, and Landlord, upon verification to
its satisfaction of (a) and (b) of this Paragraph, shall thereafter promptly
bring the such violations into compliance.
(e) Satellite Dish and Emergency Generator
(i) Satellite Dish. Tenant shall have the right to install a
satellite dish, together with all ancillary equipment necessary for
operation thereof (collectively, the "Dish") at the Building or Property
subject to the following conditions: (A) the location of the Dish shall be
on the roof of the Building or on a concrete pad adjacent to the Building
in which the Premises are located, as Landlord may reasonably direct,
provided, however, that the location is reasonably accessible by Tenant
and that the Dish audits ability to transit and receive signals function
properly therefrom; (B) installation, operation and repair of the Dish
shall be at Tenant's sole cost, and shall be done in
55
<PAGE> 56
accordance with all applicable legal and insurance requirements, as well
as the provisions of any easements, benefits and/or restrictions of record
(collectively, herein referred to as "REA(s)") as of the Lease Date; and
(C) if requested by Landlord, Tenant shall screen the Dish in a manner
reasonably satisfactory to Landlord. Any damage caused by the
installation, operation or removal of the Dish shall be repaired by
Tenant, at Tenant's cost.
(ii) Generator. Tenant shall have the right to install an emergency
generator, together with all ancillary equipment necessary for operation
thereof, including, without limitation, a fuel tank (collectively, the
"Generator") on the Property, near the Building or otherwise in the Park,
but reasonably near the Building, subject to the following conditions: (A)
the location of the Generator shall be reasonably selected by Landlord,
provided, however, that the location is reasonably accessible by Tenant
and the Premises, and that the Generator functions properly for its
intended purpose therefrom; (B) installation, operation and repair of the
Generator shall be at Tenant's sole cost, and shall be done in accordance
with all applicable legal and insurance requirements, as well as the
provisions of any REA existing as of the Lease Date; and (C) if requested
by Landlord, Tenant shall screen the Generator in a manner reasonably
satisfactory to Landlord. Any damage caused by the installation, operation
or removal of the Generator shall be repaired by Tenant, at Tenant's cost.
(iii) Satellite and Generator Sites. Landlord shall provide proposed
sites for the Dish and the Generator prior to delivery of the Premises to
Tenant. If it is determined by Tenant, in its reasonable judgment, that
either site is not suitable for its intended purposes, Tenant shall notify
Landlord, and Landlord shall cooperate with Tenant to find a reasonable
alternative location for the Dish and/or the Generator, as the case may
be, within a reasonable period of time. The use of the sites shall be at
no additional charge to Tenant. Tenant acknowledges that the location of
the sites must be approved by the architectural committee of the Property,
to the extent required by any REA existing as of the Lease Date. Landlord
covenants to use
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<PAGE> 57
commercially reasonable efforts to obtain, and to fully cooperate with
Tenant in its efforts to obtain, approval of acceptable sites for the
Satellite and the Generator from the architectural committee prior to the
Commencement Date.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
57
<PAGE> 58
WITNESS the hands and seals of the parties hereto as of the day and
year first above written.
LANDLORD:
WITNESS: MERRITT-CCP III, LLC
/ s / Illegible By: / s / Scott E. Dorsey (SEAL)
- ------------------------------------ ------------------------
Printed Name: Scott E. Dorsey
Printed Name: Title: President
TENANT:
WITNESS: APPLIED THEORY CORPORATION
/ s / Patricia J. Foster By: / s / James D. Luckett (SEAL)
- --------------------------------- -------------------------
Printed Name: James D. Luckett
Title: Sr. V.P.-Business
Printed Name: Patricia J. Foster Development
(Acknowledgement of TENANT)
STATE OF New York )
) SS.:
COUNTY OF Onondaga )
On this 19 day of July , 1999, before me personally came James D.
Luckett, to me personally known, who, being by me duly sworn, did depose and say
that (s)he resides at Syracuse, NY , that (s)he is the Sr. V.P. Business
Development of APPLIED THEORY CORPORATION, the corporation described in, and
which executed the within Lease as "Tenant"; and who further acknowledged to me
that (s)he executed said Lease for, on behalf and in the name of said
corporation by and with the due authorization thereof.
/ s / Patricia J. Foster
------------------------
NOTARY PUBLIC
(Acknowledgement of LANDLORD)
STATE OF Maryland )
) SS.:
COUNTY OF Baltimore )
On this 3 day of July , 1999, before me personally came Scott E.
Dorsey, to me personally known, who, being by me duly sworn, did depose and say
that (s)he resides at Baltimore, MD, that (s)he is the President of the entity
named and described in, and which executed the within Lease as "Landlord"; and
who further acknowledged
58
<PAGE> 59
to me that (s)he executed said Lease for, on behalf and in the name of said
corporation by and with the due authorization thereof.
/ s / Illegible
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 11.1
APPLIEDTHEORY CORPORATION
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE
AND WEIGHTED AVERAGE SHARES USED IN CALCULATION (1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................. 9,750,000
Weighted average shares issued during the year ended
December 31, 1997 (60,000 shares)...................... 6,248
-----------
9,756,248
===========
Net loss available to common stockholders................... $(6,057,000)
===========
Basic and diluted loss per common share..................... $ (0.62)
===========
</TABLE>
- ---------------
(1) For a description of basic and diluted loss per share, See Note B of the
Notes to the Financial Statements included in Part II, Item 8 of this Form
10-K.
<PAGE> 1
EXHIBIT 11.2
APPLIEDTHEORY CORPORATION
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE
AND WEIGHTED AVERAGE SHARES USED IN CALCULATION (1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................. 9,810,000
Weighted average shares issued during the year ended
December 31, 1998
(5,284,336 shares)..................................... 2,855,940
-----------
12,665,940
===========
Net loss available to common stockholders................... $(7,093,000)
===========
Basic and diluted loss per common share..................... $ (0.56)
===========
</TABLE>
- ---------------
(1) For a description of basic and diluted loss per share, See Note B of the
Notes to the Financial Statements included in Part II, Item 8 of this Form
10-K.
<PAGE> 1
EXHIBIT 11.3
APPLIEDTHEORY CORPORATION
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE
AND WEIGHTED AVERAGE SHARES USED IN CALCULATION (1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................. 15,094,336
Weighted average shares issued during the year ended
December 31, 1999
(6,319,026 shares)..................................... 4,397,375
------------
19,491,711
============
Net loss available to common stockholders................... $(14,067,000)
============
Basic and diluted loss per common share..................... $ (0.72)
============
</TABLE>
- ---------------
(1) For a description of basic and diluted loss per share, See Note B of the
Notes to the Financial Statements included in Part II, Item 8 of this Form
10-K.
<PAGE> 1
EXHIBIT 23.1 CONSENT OF GRANT THORNTON LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 4, 2000, accompanying the
financial statements and schedule included in the Annual Report of AppliedTheory
Corporation on Form 10-K for the year ended December 31, 1999. We hereby consent
to the incorporation by reference of said reports in the Registration Statement
of AppliedTheory Corporation on Form S-8 (File No. 333-83177, effective July 19,
1999).
/s/ GRANT THORNTON LLP
--------------------------------------
New York, New York
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,834
<SECURITIES> 32,727
<RECEIVABLES> 6,714
<ALLOWANCES> 231
<INVENTORY> 0
<CURRENT-ASSETS> 56,467
<PP&E> 19,882
<DEPRECIATION> 6,001
<TOTAL-ASSETS> 76,935
<CURRENT-LIABILITIES> 15,522
<BONDS> 0
0
0
<COMMON> 214
<OTHER-SE> 53,995
<TOTAL-LIABILITY-AND-EQUITY> 76,935
<SALES> 37,645
<TOTAL-REVENUES> 37,645
<CGS> 24,988
<TOTAL-COSTS> 24,988
<OTHER-EXPENSES> 26,090
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 561
<INCOME-PRETAX> (13,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,994)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,785
<SECURITIES> 0
<RECEIVABLES> 3,584
<ALLOWANCES> 157
<INVENTORY> 0
<CURRENT-ASSETS> 5,625
<PP&E> 6,812
<DEPRECIATION> 2,609
<TOTAL-ASSETS> 10,518
<CURRENT-LIABILITIES> 8,874
<BONDS> 0
0
1,500
<COMMON> 151
<OTHER-SE> (9,158)
<TOTAL-LIABILITY-AND-EQUITY> 10,518
<SALES> 22,563
<TOTAL-REVENUES> 22,563
<CGS> 13,316
<TOTAL-COSTS> 13,316
<OTHER-EXPENSES> 15,522
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 608
<INCOME-PRETAX> (6,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,883)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 135
<SECURITIES> 0
<RECEIVABLES> 1,211
<ALLOWANCES> 122
<INVENTORY> 0
<CURRENT-ASSETS> 1,534
<PP&E> 5,043
<DEPRECIATION> 1,133
<TOTAL-ASSETS> 5,444
<CURRENT-LIABILITIES> 5,113
<BONDS> 0
0
1,500
<COMMON> 13
<OTHER-SE> (8,639)
<TOTAL-LIABILITY-AND-EQUITY> 5,444
<SALES> 15,172
<TOTAL-REVENUES> 15,172
<CGS> 10,796
<TOTAL-COSTS> 10,796
<OTHER-EXPENSES> 9,876
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 347
<INCOME-PRETAX> (5,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,847)
<EPS-BASIC> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
