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As filed with the Securities and Exchange Commission on July 5, 2000
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
16-1491253
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1500 BROADWAY, 3RD FLOOR, NEW YORK, NY 10036
(212) 398-7070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT F. MECHUR, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
APPLIEDTHEORY CORPORATION
224 HARRISON ST., SYRACUSE, NY 13202
(315) 453-2912
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DEWEY BALLANTINE LLP
ATTENTION: FRANK E. MORGAN II, ESQ.
1301 AVENUE OF THE AMERICAS, NEW YORK, NY 10019-6092
(212) 259-8000
From time to time after the effective date of this registration statement.
(Approximate date of commencement of proposed sale to the public)
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If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of securities Amount to be offering price per aggregate offering registration
to be registered registered unit price fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share, in respect of :
5% Convertible Debentures 3,950,000 (1) $12.282 (3) $48,513,900 (3) $12,808
Common Stock warrants 1,650,000 (1) $12.282 (3) $20,265,300 (3) $ 5,351
Common Stock warrants from put
and call options 3,300,000 (1) $12.282 (3) $40,530,600 (3) $10,701
Common stock for Lillian
Capital, LLC 64,100 (2) $12.282 (3) $ 787,276 (3) $ 208
Re-offer prospectus for certain
shareholders 839,881 $12.282 (3) $10,315,418 (3) $ 2,724
-------------- ----------
Total 9,803,981 $31,792
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(1) The amount of common stock to be registered is based upon 200% of shares
issuable at an estimated conversion price of $15.21 per share upon
conversion of 5% Convertible Debentures due June 5, 2003, an estimated
exercise price of $12.17 per share upon the exercise of warrants issued and
to be issued pursuant to a Purchase Agreement we entered into as of June 5,
2000, and an estimated exercise price of 12.17 per share upon the exercise
of warrants to be issued in connection with the exercise of put options and
call options entered into with the purchasers of the Debentures, all of
which are more fully discussed in our current report on Form 8-K filed on
June 20, 2000.
(2) The amount of common stock to be registered is based upon conversion of a
convertible promissory note of $769,955 plus accrued interest, at an
estimated conversion price of $12.282 based upon the average of the high
and low price on June 29, 2000 as reported on the Nasdaq National Market.
(3) Pursuant to Rule 457(c), these prices are estimated solely for the purpose
of calculating the registration fee and are based upon the average of the
high and low price on June 29, 2000 as reported on the Nasdaq National
Market.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED JULY 5, 2000
PRELIMINARY PROSPECTUS
9,803,981 SHARES
COMMON STOCK
APPLIEDTHEORY CORPORATION
1500 BROADWAY, 3RD FLOOR, NEW YORK, NEW YORK 10036
(212) 398-7070
This prospectus relates to the resale of 9,803,981 shares of our common
stock, par value $.01 per share, (i) 3,950,000 of which may be issuable upon
conversion of $30,000,000 aggregate principal value of 5% Convertible Debentures
due June 5, 2003 ("Debentures"), (ii) 1,650,000 of which may be issuable upon
exercise of warrants granted in connection with the Debentures, (iii)
3,300,000 of which may be issuable upon exercise of warrants issued under put
and call options entered into with the purchasers of the debentures, (iv)
839,881 of which were issued to former shareholders of CRL Network Services,
Inc. as partial consideration for our acquisition of CRL Network Services, Inc.
on January 5, 2000, an entity that is now our wholly owned subsidiary and has
been renamed AppliedTheory California Corporation and (v) 64,100 of which may be
issued to Lillian Capital LLC as consideration for conversion of a convertible
promissory note issued as payment of investment banking fees.
The shares offered through this prospectus may be sold or transferred
from time to time in one or more types of transactions (which may include block
transactions) for value by the selling stockholders, or by pledgees, donees,
transferees or other successors in interest to the selling stockholders, on the
Nasdaq National Market or otherwise in the over-the-counter market, on an
exchange on which these shares may be listed for trading, through options, swaps
or derivatives, in negotiated transactions, through put or call option
transactions relating to the shares, through short sales of shares, delivery of
shares in settlement of option or short sale transactions or a combination of
such methods of sale or in any other manner permitted by law. Further details
regarding the distribution of the shares registered through this prospectus may
be found in "Plan of Distribution", beginning on page 16.
Our common stock is listed for trading on the Nasdaq Stock Market's
National Market under the symbol "ATHY." On June 29, 2000, the last reported
sale price of our common stock was $12.125. You are urged to obtain current
market data before you purchase our stock.
The common stock offered hereby is highly speculative and involves a
high degree of risk. Please see "Risk Factors" beginning on Page 3 to read about
risks you should consider before acquiring shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the related registration statement filed
with the Securities and Exchange Commission is declared effective. This
prospectus is not an offer to sell our shares and is not soliciting an offer to
buy our shares in any state where the offer or sale is prohibited.
The date of this Prospectus is [_______________], 2000
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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Page
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Summary 2
Risk Factors 3
Use of Proceeds 14
Selling Security Holders 14
Plan of Distribution 16
Legal Matters 16
Experts 16
Where You Can Find More Information 17
</TABLE>
You should rely only on the information contained or referred to in
this prospectus. We have not authorized anyone to provide you with information
that is different. You should not assume that the information in this prospectus
or any of its supplements is accurate as of any date other than the date on the
front of these documents.
SUMMARY
You should read and consider the discussion in this prospectus in
conjunction with the discussion in our quarterly reports and annual reports
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, and 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, 1999 which are included in
the Annual Report on Form 10-K (File No. 000-25759), as filed with the
Securities and Exchange Commission.
Unless the context otherwise requires, references in this prospectus to
"AppliedTheory," the "Company," "we," "our" and "us" refer to AppliedTheory
Corporation.
COMPANY OVERVIEW
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 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, co-location, managed application
support and application infrastructure provider services.
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- 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 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.
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, both public and private sector customers 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 added over 8 new sales offices in key cities on the east
coast of the U.S. Already in 2000, we have expanded in the west coast, midwest
and the southern U.S. while continuing our expansion on the east coast. 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.
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 prospectus and in our other filings and reports.
RISK FACTORS
You should consider the following risk factors, as well as any other
information in this prospectus, in evaluating our business and us. Any
investment in our common stock involves a high degree of risk.
WE HAVE A LIMITED OPERATING HISTORY AND MAY 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:
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- 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.
</TABLE>
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If we are not successful in implementing our business plan, our
business or future financial or operating results could suffer.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO INCREASE IN
THE FORESEEABLE FUTURE.
We have incurred significant net losses and negative cash flows from
operations in each quarterly and annual period since inception and expect to
continue to do so for the foreseeable future. At March 31, 2000 and December 31,
1999 and 1998, we had an accumulated deficit of approximately $40.8 million,
$29.8 million and $15.7 million, respectively. We incurred net losses of $11.0
million in the three months ended March 31, 2000 and $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, 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 be significant in the
foreseeable future. Our ability to achieve profitability is dependent in large
part upon the successful implementation of our expansion strategy. We cannot
assure you that we will achieve or sustain revenue growth or profitability on
either a quarterly or annual basis.
PRIOR TO 2000, MOST OF OUR REVENUES HAVE BEEN DERIVED FROM CUSTOMERS LOCATED IN
NEW YORK STATE AND WE MAY NOT SUCCESSFULLY OPERATE ON A NATIONWIDE BASIS.
Prior to 2000, 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 operating on a nationwide basis include
the possibility that:
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- 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; and/or
- we fail to develop a nationally recognized brand.
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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 operating plan to succeed,
we will need:
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- to expand our business with new and current customers;
- to develop and offer successful new products and services;
- to retain key employees and hire new employees; and
to ensure that any future business we may develop or acquire will perform in a satisfactory
manner.
</TABLE>
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 operating
plan.
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:
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<TABLE>
<S> <C>
- demand for and market acceptance of our services;
- customer retention;
- the timing and success of our marketing efforts;
- the timing and magnitude of capital expenditures, including costs relating to the expansion of
operations;
- the timely expansion of existing facilities and completion of new facilities;
- the ability to increase bandwidth as necessary;
- fluctuations in bandwidth used by customers;
- introductions of new services or enhancements by us and our competitors;
- increased competition in our markets;
- 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.
</TABLE>
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,
amortization, 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:
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- the reluctance of businesses to outsource their e-Business, 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.
</TABLE>
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:
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- 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.
</TABLE>
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could, in the future,
grow more slowly or decline. This could hurt our business.
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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:
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- 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.
</TABLE>
Our current and prospective competitors, both in New York State and
nationally, generally may be divided into the following three groups:
<TABLE>
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- 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, 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.
</TABLE>
We believe that we may also face competition from other large computer
hardware and software companies and other media, technology and
telecommunications companies.
The number of businesses providing Internet-related services is rapidly
growing. We are aware of other companies, in addition to those named above, that
have entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
WE COULD ENCOUNTER SIGNIFICANT PRICING PRESSURE AS A RESULT OF INCREASED
COMPETITION AND INDUSTRY CONSOLIDATION.
As a result of increased competition and consolidation in the industry,
we could encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of our services. We may not
be able to offset such price reductions even if we obtain an increase in the
number of our customers, derive higher revenue from enhanced services or manage
to reduce our costs. Increased price or other competition could erode our market
share and could significantly hurt our business. We cannot assure you that we
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully in that environment.
OUR REVENUES ARE HEAVILY DEPENDENT ON TWO CUSTOMERS. IF WE LOSE EITHER OF THESE
CUSTOMERS, IF EITHER OF THEM REDUCES THE AMOUNT OF WORK IT DOES WITH US, OR IF
WE FAIL TO DIVERSIFY OUR CUSTOMER BASE, OUR BUSINESS WILL SUFFER.
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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 three months ended March 31, 2000,
revenue from NYSERNet.org, Inc. represented approximately 17% of our total
revenue. 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 three months ended March 31, 2000 represented 41% of
our total revenue. 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 48 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.
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
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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:
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<S> <C>
- 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.
</TABLE>
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 coverage, 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, Inc. Our expansion plans
require additional network resources. Without these resources, 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 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
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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 timely and cost-effective manner, all while continuing to develop
our business model and rolling-out our services on a national level:
<TABLE>
<S> <C>
- 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.
</TABLE>
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
solutions, 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
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<PAGE> 12
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 and 50% in the three months
ended March 31, 2000. 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.
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 June 30, 2000 we have
acquired or invested in several companies. In the future, we intend to acquire
additional companies that complement our existing business model and growth
strategies. Any future acquisitions would be accompanied by the risks commonly
encountered in acquisitions, including:
<TABLE>
<S> <C>
- 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.
</TABLE>
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<PAGE> 13
We cannot assure you that any completed acquisition will enhance our
business. If we consummate one or more acquisitions in which any significant
portion of the consideration consists of cash, a significant portion of our
available cash could be used to consummate the acquisitions. If we consummate
one or more acquisitions in which any significant portion of the consideration
consists 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.
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,
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<PAGE> 14
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.
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 and the proceeds from the sale of the 5% Convertible Debentures
due June 5, 2003 to fund the expansion of our sales and marketing efforts, to
expand our customer support services, for making investments or acquisitions and
for general corporate and working capital 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 remaining
proceeds from our initial public offering and sale of Debentures will be
sufficient for these purposes, we may need to raise additional funds through
public or private debt or equity financing in order to:
<TABLE>
<S> <C>
- take advantage of anticipated opportunities or acquisitions of complementary assets,
technologies or businesses;
- develop new products; or
- respond to unanticipated competitive pressures.
</TABLE>
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 63% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
Broadwing, NYSERNet.net, Inc. and Grumman Hill control approximately
24.0%, 19.5% and 12.0%, respectively, of our outstanding common stock at May 31,
2000 (without taking into account the shares of all parties except those CRL
Network Services, Inc. shareholders that are registered for resale through
this prospectus). In addition, our executive officers and directors may be
deemed to beneficially own in the aggregate approximately 63% of our outstanding
common stock (without taking into account the shares of all parties except those
CRL Network Services, Inc. shareholders that are registered for resale through
this prospectus), 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, one of our directors and executive officers
is also a director of NYSERNet.net and NYSERNet.org, Inc., a not-for-profit
corporation that is also affiliated with NYSERNet.net. Grumman Hill
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<PAGE> 15
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 personnel, including our
senior management. We have entered into employment agreements with certain
executive officers. 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:
<TABLE>
<S> <C>
- 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.
</TABLE>
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,
recent events have adversely affected the 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 filing a registration statement on Form S-8 with the
Securities and Exchange Commission on July 19, 1999 (File No. 333-83177) in
order to register the shares issued and issuable upon the exercise of options
granted under 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 our common stock in the market.
As a result of our re-offer prospectus filed on Form S-8 with the
Securities and Exchange Commission on July 19, 1999, approximately 4,500,000
shares of our outstanding common stock no longer qualify as "restricted
securities" under Rule 144 of the Securities Act of 1933 and, under the
Securities Act, these shares may be freely re-offered and re-sold. However,
stockholders who sell shares of our common
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<PAGE> 16
stock under this re-offer prospectus must comply with the volume of sale
limitations imposed under Rule 144(e) of the Securities Act.
As a result of the filing with the Securities and Exchange Commission
and subsequent effectiveness of the registration statement of which this
prospectus is a part, approximately 839,881 shares of our outstanding common
stock will 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. In addition, if certain parties convert the 5%
Convertible Debentures into common stock or exercise warrants to purchase common
stock, or the Company or holder exercise their option to convert a promissory
note for common stock up to an additional 8,964,100 shares of our common stock
would be registered and freely tradable.
Therefore, through the S-8 re-offer prospectus and this offering, 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.
As of May 31, 2000, an additional 52.8% of the shares of our common
stock continue to be restricted securities. Certain of 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.
USE OF PROCEEDS
The primary purpose of this prospectus is to register shares of our
common stock that may be issuable upon (i) conversion of the 5% Convertible
Debentures, (ii) exercise of warrants issued to the purchasers of the
Debentures, and (iii) exercise of warrants arising under the put and call
options entered into with the purchasers of the Debentures. The net proceeds of
$29,100,000 from the issuance of the Debentures has been received and invested
in short-term, interest bearing investment grade securities.
This prospectus also registers shares of our common stock that (i) were
issued in connection with our acquisition of CRL Network Services, Inc. on
January 5, 2000 to the parties who owned shares of CRL Network Services, Inc.
prior to our acquisition of that entity and (ii) common shares which may be
issued to Lillian Capital LLC upon conversion of a convertible promissory note
issued as payment for investment banking fees. For more information regarding
our acquisition of CRL Network Services, Inc., an entity that is now a wholly
owned subsidiary of us and has been renamed AppliedTheory California
Corporation, please see our current report on Form 8-K/A dated March 20, 2000.
We will not receive any of the proceeds from the sale of the shares
issued or issuable upon (i) conversion of the 5% Convertible Debentures, (ii)
exercise of warrants issued to the purchasers of the Debentures, (iii) exercise
of warrants arising under the put and call options entered into with the
purchasers of the Debentures, (iv) from the sale of shares by shareholders
identified as former shareholders of CRL Network Services, Inc. in this
prospectus, and (v) common shares which may be issued to Lillian Capital LLC
upon conversion of a convertible promissory note issued as payment for
investment banking fees.
SELLING SECURITY HOLDERS
The shares of our common stock to which this prospectus relates are
being registered for re-offers and resales by selling stockholders who (i) will
acquire the relevant shares upon the conversion of the 5% Convertible
Debentures, (ii) will acquire the relevant shares upon the exercise of warrants
by the purchasers of those Debentures, (iii) will acquire the relevant shares
upon the exercise of warrants issued under put and call options entered into
with the purchasers of the Debentures, (iv) have acquired the relevant shares in
connection with our acquisition of CRL Network Services, Inc. (now AppliedTheory
California Corporation) on January 5, 2000 (please see our current report on
Form 8-K/A dated March 20, 2000), and (v) common shares which may be issued to
Lillian Capital LLC upon conversion of a convertible promissory note issued as
payment for investment banking fees. The selling stockholders named below may
resell all, a portion or none of the relevant shares at any time.
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<PAGE> 17
The table below sets forth, with respect to each selling stockholder
and based upon the information available to us as of June 30, 2000, the selling
stockholders' relationship, if any, with us within the past three years, the
number of shares owned by each selling stockholder and the number of shares of
our common stock that may be sold pursuant to this prospectus. In addition to
the shares of our common stock which are made available for resale pursuant to
this prospectus, various selling stockholders hold options to purchase
additional common stock from us. We cannot assure you that any of the selling
stockholders will sell any or all of the shares of common stock to which this
prospectus relates.
<TABLE>
<CAPTION>
Number of Number of Percentage of
shares of shares of shares of
Number of AppliedTheory AppliedTheory AppliedTheory
shares common stock common stock common stock
AppliedTheory beneficially owned owned
common stock owned that may beneficially beneficially
Relationship with beneficially be sold after the after the sale
Name AppliedTheory owned hereunder (1) sale hereunder hereunder
--------------------- ----------------------------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
James G. Couch Former shareholder of CRL 1,905,414 810,528 1,094,886 4.50%
Network Services, Inc.
Robert L. Ross Former shareholder of CRL 43,392 21,696 21,696 .08%
Network Services, Inc.
James and Judy Former shareholder of CRL 2,284 1,142 1,142 .004%
Linstruth Network Services, Inc
Robyn Raschke Former shareholder of CRL 2,522 1,261 1,261 .005%
Network Services, Inc
Gary A. Angel Former shareholder of CRL 1,752 876 876 .003%
Network Services, Inc
Olivia Han Former shareholder of CRL 7,004 3,502 3,502 .01%
Network Services, Inc
Joseph M. Breall Former shareholder of CRL 1,752 876 876 .003%
Network Services, Inc
Lillian Capital LLC Investment capital services 64,100 64,100 0 0
provider
Halifax Fund, L.P. Holder of 5% Convertible 4,450,000 4,450,000 0 0
Debentures
Palladin Partners I, Holder of 5% Convertible 356,000 356,000 0 0
L.P. Debentures
Palladin Overseas Holder of 5% Convertible 445,000 445,000 0 0
Fund Ltd. Debentures
The Gleneagles Fund Holder of 5% Convertible 801,000 801,000 0 0
Company Debentures
Lancer Securities Holder of 5% Convertible 623,000 623,000 0 0
(Cayman) Ltd. Debentures
Elliott Associates, Holder of 5% Convertible 1,112,500 1,112,500 0 0
L.P. Debentures
Westgate Holder of 5% Convertible 1,112,500 1,112,500 0 0
International, L.P. Debentures
</TABLE>
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<PAGE> 18
(1) This number reflects only the number of shares of common stock
beneficially owned by each selling stockholder that is eligible for
demand registration rights and available for resale hereunder.
PLAN OF DISTRIBUTION
In selling their shares in reliance upon this prospectus, the parties
identified as selling stockholders in the table of Selling Security Holders will
be acting as principals for their own account. We will not receive any proceeds
from sales of any of those shares.
The shares offered through this prospectus may be sold or transferred
from time to time in one or more types of transactions (which may include block
transactions) for value by the selling stockholders, or by pledgees, donees,
transferees or other successors in interest to the selling stockholders, on the
Nasdaq National Market or otherwise in the over-the-counter market, on an
exchange on which these shares may be listed for trading, through options, swaps
or derivatives, in negotiated transactions, through put or call option
transactions relating to the shares, through short sales of shares, delivery of
shares in settlement of option or short sale transactions or a combination of
such methods of sale or in any other manner permitted by law. The sale of shares
pursuant to this prospectus shall be at market prices prevailing at the time of
sale, at prices related to the prevailing market prices or at prices otherwise
negotiated. The selling stockholders may sell the shares to or through
broker-dealers, and broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling stockholders
and/or the purchasers of the shares for whom the broker-dealers may act as
agent, and the compensation received by broker-dealers may be less than, or in
excess of, customary commissions.
The selling stockholders and any broker-dealers participating in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commissions received by them and any profit on
the resale of the shares sold by them may be deemed to be underwriting discounts
and commissions under the Securities Act. All selling expenses incurred by
individual selling stockholders will be borne by them.
In addition to the shares sold hereunder, a selling stockholder may, at
the same time, sell any shares of common stock, including the shares to be
offered through this prospectus, owned by him or her in compliance with all of
the requirements of Rule 144 under the Securities Act, regardless of whether
such shares are covered by this prospectus.
There is no assurance that any of the selling stockholders will sell
all or any portion of the shares offered hereby.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for us by Dewey Ballantine LLP, New York, New
York.
EXPERTS
The financial statements and the related financial statement schedule
of AppliedTheory Corporation, incorporated in this Prospectus by reference from
the December 31, 1999 Annual Report on Form 10-K have been audited by Grant
Thornton LLP, independent certified public accountants, as stated in their
reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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<PAGE> 19
WHERE YOU CAN FIND MORE 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 Securities and Exchange Commission (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 of which this prospectus is a part, are also available to
you on the SEC's Web site (http://www.sec.gov). Other information about the
Company may be obtained from our Web site at http://www.appliedtheory.com.
The SEC allows us to "incorporate by reference" in this prospectus the
information contained in other documents that we file with them, which means
that we can disclose important information to you by referring to those filed
documents. The information incorporated by reference is considered to be a part
of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), until the selling stockholders sell all the shares
offered by this prospectus or until we decide to terminate this offering before
all shares offered by this prospectus are sold.
The following documents filed with the SEC are hereby incorporated by
reference:
<TABLE>
<S> <C>
a) Our annual report on Form 10-K for the fiscal year ended December 31, 1999
which includes audited financial statements for our latest fiscal year;
b) Our quarterly report on Form 10-Q for the quarter ended March 31, 2000
which was filed on May 15, 2000;
c) Our current report on Form 8-K filed January 20, 2000 and amended as filed on
March 20, 2000;
d) Our current report on Form 8-K filed June 1, 2000;
e) Our current report on Form 8-K filed June 20, 2000;
f) Our definitive proxy statement filed on April 17, 2000; and
g) The description of our common stock contained in our registration statement on
Form S-1 dated April 30, 1999 (No. 333-72133) including any amendment or
report filed for the purpose of updating that description.
</TABLE>
All other documents subsequently filed by us pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a
post-effective amendment which indicates that all securities offered hereunder
have been sold or which deregisters all securities then remaining unsold, shall
be deemed to be incorporated by reference in this prospectus and to be a part
hereof from the date of filing of those documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained herein or in any other subsequently filed document, which also is, or
is deemed to be, incorporated by reference herein modifies or supersedes such
earlier statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
17
<PAGE> 20
We will provide without charge to each person to whom this prospectus
is delivered, upon written or oral request, a copy of any or all of the
documents incorporated by reference in this prospectus (excluding exhibits to
those documents unless the exhibits are specifically incorporated by reference
into those documents). Written or telephonic requests should be directed to
David A. Buckel, Senior Vice President and Chief Financial Officer,
AppliedTheory Corporation, 1500 Broadway, 3rd Floor, NY, NY 10036, telephone
(212) 398-7070.
18
<PAGE> 21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an estimate, subject to future contingencies, of the
expenses to be incurred by us in connection with the issuance and distribution
of the securities being registered:
<TABLE>
<S> <C>
Registration Fee 31,792
Legal Fees and Expenses* 80,000
Accounting Fees and Expenses* 5,000
Printing and Engraving Fees* 5,000
Listing Fees 0
Finder fees 900,000
Miscellaneous 0
Total 1,021,792
</TABLE>
* Estimated pursuant to instruction to Item 511 of Regulation S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL") empowers a corporation to indemnify any person
who was or is a party or who is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person acted in any of the capacities set forth above, against expenses
(including attorney's fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a present or former
director or officer of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
the
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<PAGE> 22
indemnification provided for by Section 145 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person; and empowers the
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the corporation would have the power to indemnify such
person against such liabilities under Section 145.
The Company provides liability insurance for its directors and officers
which provides for coverage against loss from claims made against directors and
officers in their capacity as such, including liabilities under Securities Act
of 1933.
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's certificate of incorporation contains such a provision.
The Company's certificate of incorporation and bylaws provide that the
Company shall indemnify officers and directors and, to the extent permitted by
the board of directors, employees and agents of the Company, to the full extent
permitted by and in the manner permissible under the laws of the State of
Delaware. In addition, the bylaws permit the board of directors to authorize the
Company to purchase and maintain insurance against any liability asserted
against any director, officer, employee or agent of the Company arising out of
his capacity as such.
The Company has offered to enter into an indemnification agreement with
each of its directors. The indemnification agreements provide that the Company
will indemnify the directors to the full extent permitted by, and in the manner
permissible under, the laws of the State of Delaware and by the certificate of
incorporation and the bylaws.
The employment agreements of the Company's executive officers provide
that the Company shall indemnify the officers to the fullest extent permitted by
law and by the certificate of incorporation and bylaws.
ITEM 16. EXHIBITS
The following documents are filed as Exhibits hereto:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.49 Purchase Agreement, dated June 5, 2000, by and among AppliedTheory
Corporation, a Delaware corporation, and Halifax Fund L.P.,
Palladin Partners I, L.P., Palladin Overseas Fund Ltd., The
Gleneagles Fund Company, Lancer Securities (Cayman) Ltd., Elliott
Associates, L.P. and Westgate International, L.P. (incorporated by
reference to Exhibit 2.10 from our current report on Form 8-K
filed, June 20, 2000).
</TABLE>
II-2
<PAGE> 23
<TABLE>
<S> <C>
10.50 Form of 5% Convertible Debenture due June 5, 2003, dated June 5,
2000, as issued to the purchasers thereof (incorporated by
reference to Exhibit 2.11 from our current report on Form 8-K
filed, June 20, 2000).
10.51 Form of Common Stock Purchase Warrant, dated June 5, 2000, as
issued to the holders thereof (incorporated by reference to
Exhibit 2.12 from our current report on Form 8-K filed, June 20,
2000).
10.52 Registration Rights Agreement dated June 5, 2000, by and among
AppliedTheory Corporation and Halifax Fund L.P., Palladin Partners
I, L.P., Palladin Overseas Fund Ltd., The Gleneagles Fund Company,
Lancer Securities (Cayman) Ltd., Elliott Associates, L.P. and
Westgate International, L.P. (incorporated by reference to Exhibit
2.13 from our current report on Form 8-K, filed June 20, 2000).
10.53 Form of Common Stock Purchase Warrant, $.01 Purchase Price, for
issuance in connection with put and call options arising under the
Purchase Agreement, dated June 5, 2000, by and among AppliedTheory
Corporation and Halifax Fund L.P., Palladin Partners I, L.P.,
Palladin Overseas Fund Ltd., The Gleneagles Fund Company, Lancer
Securities (Cayman) Ltd., Elliott Associates, L.P. and Westgate
International, L.P. (incorporated by reference to Exhibit 2.14
from our current report on Form 8-K, filed June 20, 2000).
5.1 Opinion of Dewey Ballantine LLP with respect to the legality of
the securities being registered.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
99.4 Press release issued by AppliedTheory Corporation on June 6, 2000
(incorporated by reference from our current report on Form 8-K,
filed June 20, 2000).
</TABLE>
ITEM 17. UNDERTAKINGS
a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply
if the information required to be included in a
post-effective amendment by those paragraphs is contained
in periodic reports filed with or
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<PAGE> 24
furnished to the SEC by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
c) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities and Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X is
not set forth in the prospectus, to deliver, or cause to be delivered
to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
e) The undersigned registrant hereby undertakes that, (1) for purposes of
determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on July 5, 2000.
AppliedTheory Corporation
by: /s/ Richard Mandelbaum
----------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacities
and on the dates indicated.
<TABLE>
<S> <C>
Date: July 5, 2000 /s/ Richard Mandelbaum
----------------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: July 5, 2000 /s/ David Buckel
----------------------------------------------
David Buckel
Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 5, 2000 /s/ Dominick DeAngelo
----------------------------------------------
Dominick DeAngelo
Director
Date: July 5, 2000 /s/ Shelley Harrison
----------------------------------------------
Shelley Harrison
Director
Date: July 5, 2000 /s/ James Kelsey
----------------------------------------------
James Kelsey
Director
Date: July 5, 2000 /s/ George Sadowsky
----------------------------------------------
George Sadowsky
Director
</TABLE>
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<PAGE> 26
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.49 Purchase Agreement, dated June 5, 2000, by and among AppliedTheory
Corporation, a Delaware corporation, and Halifax Fund L.P.,
Palladin Partners I, L.P., Palladin Overseas Fund Ltd., The
Gleneagles Fund Company, Lancer Securities (Cayman) Ltd., Elliott
Associates, L.P. and Westgate International, L.P. (incorporated by
reference to Exhibit 2.10 from our current report on Form 8-K,
filed June 20, 2000).
10.50 Form of 5% Convertible Debenture due June 5, 2003, dated June 5,
2000, as issued to the purchasers thereof (incorporated by
reference to Exhibit 2.11 from our current report on Form 8-K
filed, June 20, 2000).
10.51 Form of Common Stock Purchase Warrant, dated June 5, 2000, as
issued to the holders thereof (incorporated by reference to
Exhibit 2.12 from our current report on Form 8-K, filed June 20,
2000).
10.52 Registration Rights Agreement dated June 5, 2000, by and among
AppliedTheory Corporation and Halifax Fund L.P., Palladin Partners
I, L.P., Palladin Overseas Fund Ltd., The Gleneagles Fund Company,
Lancer Securities (Cayman) Ltd., Elliott Associates, L.P. and
Westgate International, L.P. (incorporated by reference to Exhibit
2.13 from our current report on Form 8-K, filed June 20, 2000).
10.53 Form of Common Stock Purchase Warrant, $.01 Purchase Price, for
issuance in connection with put and call options arising under the
Purchase Agreement, dated June 5, 2000, by and among AppliedTheory
Corporation and Halifax Fund L.P., Palladin Partners I, L.P.,
Palladin Overseas Fund Ltd., The Gleneagles Fund Company, Lancer
Securities (Cayman) Ltd., Elliott Associates, L.P. and Westgate
International, L.P. (incorporated by reference to Exhibit 2.14
from our current report on Form 8-K, filed June 20, 2000).
5.1 Opinion of Dewey Ballantine LLP with respect to the legality of
the securities being registered.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
99.4 Press release issued by AppliedTheory Corporation on June 6, 2000
(incorporated by reference to Exhibit 99.1 from our current report
on Form 8-K, filed June 20, 2000).
</TABLE>
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