<PAGE> 1
As filed with the Securities and Exchange Commission on December 29, 2000
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
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)
7373
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE)
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)
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, please check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
<PAGE> 2
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum Amount of
Title of each class of securities to Amount to be offering price per aggregate offering registration
be registered registered unit price fee
------------------------------------ ------------ ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per 1,450,000 (1) 2.187 (2) $3,171,150 (2) $ 793
share
</TABLE>
(1) The shares of common stock set forth in the Calculation of Registration Fee
Table, and which may be offered pursuant to this Registration Statement,
includes, pursuant to Rule 416 of the Securities Act of 1933, as amended,
such additional number of shares of the Registrant's common stock that may
become issuable as a result of any stock splits, stock dividends or similar
event.
(2) 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 prices for our common stock on December 22, 2000, as reported
on the Nasdaq Stock Market.
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.
2
<PAGE> 3
SUBJECT TO COMPLETION, DATED DECEMBER 29, 2000
PROSPECTUS
1,450,000 SHARES
COMMON STOCK
APPLIEDTHEORY CORPORATION
1500 BROADWAY, 3RD FLOOR, NEW YORK, NEW YORK 10036
(212) 398-7070
This prospectus relates to 1,450,000 shares of our common stock, par
value $.01 per share, that may be offered and issued from time to time in
connection with business combination transactions.
The amount and type of consideration we will offer and the other
specific terms of each acquisition will be determined by negotiations with the
owners or controlling persons of the businesses, assets or securities. We may
structure business acquisitions in a variety of ways, including acquiring stock,
other equity interests or assets of the acquired business or merging the
acquired business with us or one of our subsidiaries. We do not expect to
receive any cash proceeds from the sale of shares of common stock issued
pursuant to this prospectus. We may be required to provide further information
by means of a post-effective amendment to the registration statement or a
supplement to this prospectus once we know the actual information concerning a
specific acquisition.
Our common stock is listed for trading on the Nasdaq Stock Market's
National Market under the symbol "ATHY." On December 22, 2000, the last reported
sale price of our common stock was $2.25. 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 5 to read about
risks you should consider before acquiring shares of our common stock.
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.
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 date of this Prospectus is December 29, 2000.
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19
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary 3
Risk Factors 5
Distribution of Securities 16
Selling Security Holders 16
Legal Matters 17
Experts 18
Where You Can Find More Information 18
Forward-Looking Statements 19
</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.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT THE COMPANY THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THAT INFORMATION IS AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL
REQUEST. SEE THE SECTION ENTITLED "WHERE YOU CAN FIND MORE INFORMATION." TO
OBTAIN THAT INFORMATION, CONTACT US AT:
APPLIEDTHEORY CORPORATION
1500 BROADWAY, 3RD FLOOR
NEW YORK, NY 13202
ATTENTION: GENERAL COUNSEL
<PAGE> 5
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
OUR MISSION: TO HELP COMPANIES GAIN COMPETITIVE ADVANTAGES BY
PROVIDING THE EXPERTISE TO BUILD, INTEGRATE AND MANAGE WORLD-CLASS
INTERNET SOLUTIONS.
Since its inception, the Internet has evolved from a data transport
mechanism to a business tool comprised of a set of strategies, technologies,
methodologies and best practices. AppliedTheory Corporation - evolved from one
of the founding institutions of the Internet - combines its unparalleled
knowledge base with the ability to build, integrate and manage Internet business
solutions for hundreds of large corporations seeking to remain competitive in an
increasingly complex online economy.
We help businesses use the Internet to increase profit, decrease costs
and meet business objectives. As one of the industry's most reliable single
sources for large enterprise Internet needs, AppliedTheory possesses the rare
capability to provide customers with a comprehensive and fully-integrated suite
of services for mission-critical Internet applications including; managed
hosting, network, security and software applications development.
WE FOCUS ON INTEGRATED INTERNET BUSINESS SOLUTIONS.
AppliedTheory's suite of Internet solutions is based on the strong
foundation of our e-Business solutions. We use a phased approach designed to
develop and implement a comprehensive Internet strategy for our customers. Our
core expertise is derived from our experience in developing business-to-business
and business-to-consumer Web-centric solutions.
We believe that no business-critical Internet solution is viable
without a completely integrated hosting solution; therefore, we offer parallel
lines of hosting services to our customers. Our Web hosting solutions include
Web site and network operation and, when appropriate, application support. Our
application infrastructure provider (AIP) hosting solutions are designed for
application service providers (ASPs) who want to use our network infrastructure.
Each line of hosting services offers managed application hosting as a
fully outsourced, upgradeable solution - saving time and greatly reducing
capital expenditures, risk of obsolescence and internal management
responsibilities. Our hosting services give customers a dedicated server while
they maintain their own software management.
In addition, we provide security consulting services, virtual private
networks (VPNs) and managed firewalls for network security. We also provide
direct connectivity to the global Internet via a fully redundant, rigorously
engineered, high-speed network backbone.
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We continuously look for opportunities to help our customers implement
high impact, critical business applications. In August 2000, we launched Delta
Edge(TM), a proprietary technology designed to accelerate the delivery of
dynamic Web content by as much as 700 percent.
OUR EXPERTISE IS EVIDENT IN OUR HANDS-ON EXPERIENCE.
AppliedTheory deploys Internet solutions to more than 1,500 customers.
Our exceptionally high customer satisfaction is reflected in our unprecedented
low churn rate of less than 1/2% per month and reflects the dedication of our
more than 600 employees nationwide.
We have developed business-to-business extranets, portals and
e-business strategies; built corporate intranets; migrated legacy systems to the
Internet; designed Web site user interfaces; and constructed e-commerce sites
from the ground up for major businesses, mid-sized companies and start-up
companies nationwide.
AppliedTheory provides Internet solutions to some of America's leading
companies, including AOL, Eddie Bauer, Carrier and Time Warner. We provide Web
hosting, Internet access, and customized Internet-enabled solutions to America's
Job Bank, the world's largest online employment database.
We built a custom solution for Hedgeworld Ltd. - which serves the hedge
fund industry by linking fund managers to site members and integrating future
product offerings - by leveraging their legacy systems and databases with online
capabilities.
By integrating numerous technologies, AppliedTheory created a Web-based
solution for the Boston Marathon that enabled event coordinators to gather,
process and present data online - a feat that eliminated concerns raised by
connectivity limitations experienced in previous years.
OUR EXPERTISE SPANS MANY INDUSTRIES.
AppliedTheory's concentration on providing mission-critical
applications to key industries makes us an expert in numerous vertical markets,
including:
- EDUCATION - We provide Internet solutions to many of the nation's 3,700
colleges and universities.
- HEALTHCARE - We develop healthcare applications for medical
professionals, supplying technology to address and meet the demand for
online healthcare delivery systems.
- AUTOMOTIVE - We assist automotive manufacturers, suppliers and
dealerships in creating Web sites and other Web-based capabilities.
- GOVERNMENT - We have worked to develop teams with the experience and
expertise to efficiently fulfill the special requirements that
government institutions face.
WE PARTNER WITH THE BEST.
To ensure our customers have access to today's leading technology, we have
developed various business relationships with major Internet technology
companies, including:
- Cisco - Their high-end routers serve as the core of our network
backbone.
- Sun Microsystems - Their development, Web and file servers are the
foundation for our UNIX hosting.
- Microsoft - We are a Microsoft Certified Solutions provider.
- Veritect - They supply network security integration expertise and
firewall support.
- Covad Communications - They provide high-speed DSL services.
- Concentric Network - They supply access to more than 150
points-of-presence that bolster our dial-in service offerings.
- IDS Scheer - They assist us in business process reengineering.
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- Planning Technologies Inc. - They provide our customers with business
consulting services.
- EDS - They supply high-end and large-scale technology project
management support.
- Sprint - Our access services use Sprint's network, data-engineering,
national IP infrastructure and support resources.
WE ARE CONTINUING TO EXPAND AND EXECUTE OUR BUSINESS PLAN.
In 1999, we tripled our sales force and added more than eight new sales
offices in key east coast cities from Massachusetts to Florida. In 2000, we
expanded to the west coast in Los Angeles, San Francisco and Seattle, the
midwest in Detroit and the southwest in Austin, Texas, while continuing our
expansion in the east. 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.
As part of our expansion strategy, we purchased several businesses
through November 30, 2000. On Jan. 5, 2000 we acquired CRL Network Services Inc.
("CRL"), a company that provides high-speed Internet access and data networking
solutions across the United States and owns and operates a Tier 1 network
backbone. This acquisition allowed us to extend our network footprint, link the
company's data centers on the east and west coasts, and increased our sales
presence on the west coast. It also expanded our peering arrangements to full
Tier 1 status, allowed us to receive certification to be a competitive local
exchange carrier (CLEC) in California and acquire an interconnection agreement
with SBC Communications, Inc.
On May 23, 2000 we acquired The Cordada Group Inc. ("Cordada"), and on
July 1, 2000 we acquired Team Tech International Inc. ("Team Tech"). Cordada and
Team Tech now provide the full suite of AppliedTheory's solutions including
managed web hosting, e-Business consulting and Internet connectivity to
customers primarily located in Seattle, Washington and Austin, Texas,
respectively. During the fourth quarter of 2000, we expanded our presence in the
e-Business and web hosting markets in Atlanta, Georgia and Denver, Colorado.
These e-Business acquisitions and expansions enabled us to increase our presence
in four additional high-tech corridors in the United States and further leverage
our professional service expertise.
The acquisitions of CRL, Cordada and Team Tech have resulted in
additional revenue and costs in 2000 that affect the comparability to the same
periods in 1999.
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:
- building out our operations infrastructure;
- expanding our sales structure and marketing programs;
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- increasing awareness of our brand;
- providing services to our customers that are reliable and
cost-effective;
- responding to technological development or service offerings by
competitors; and
- attracting and retaining qualified personnel.
If we are not successful in implementing our business plan, our
business or future financial or operating results could suffer.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO INCREASE IN
THE FORESEEABLE FUTURE.
We have incurred significant net losses and negative cash flows from
operations in each quarterly and annual period since inception and expect to
continue to do so for the foreseeable future. At September 30, 2000 and December
31, 1999 and 1998, we had an accumulated deficit of approximately $67.9 million,
$29.8 million and $15.7 million, respectively. We incurred net losses of $38.1
million in the nine months ended September 30, 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.
WE MAY NEED ADDITIONAL FUNDS WHICH, IF AVAILABLE, COULD RESULT IN DILUTION OF
YOUR SHAREHOLDINGS OR AN INCREASE IN OUR INTEREST EXPENSE. IF THESE FUNDS ARE
NOT AVAILABLE, OUR BUSINESS COULD BE HURT.
We intend to use the remaining proceeds from the sale of $30,000,000 in
5% convertible debentures on June 5, 2000 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. See our current report on Form 8-K filed June 20, 2000 for additional
information. 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 the sale of
debentures and existing financing arrangements 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.
WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
EXISTING FINANCIAL OBLIGATIONS.
In addition to the 5% convertible debentures due June 5, 2003, we also
have financial obligations to certain former shareholders of CRL Network
Services, Inc., pursuant to a Put Option Agreement entered into between the
Company and those shareholders as part of the consideration for the Company's
acquisition of CRL Network Services, Inc. We cannot assure you that our
business will generate sufficient cash flow from operations or that additional
equity or debt financing will be available on commercially reasonable terms or
at all to enable us to fulfill our financial obligations or fund our other
liquidity needs. If we are unable to generate sufficient cash flow, we may be
unable to meet our obligations under the 5% convertible debentures due June 5,
2003, or the Put Option Agreement and may need to renegotiate or refinance all
or a portion of our obligations under those agreements. We cannot assure you
that we would be able to renegotiate or refinance our obligations under those
agreements on commercially reasonable terms or at all, which could cause us to
default on our obligations and impair our liquidity.
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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:
- 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.
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:
- 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 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:
- 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.
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.
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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:
- 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.
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 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:
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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.
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 CONTRACTS. IF WE LOSE EITHER OF THESE
CONTRACTS, 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. ("NYSERNet"), 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 contracts could significantly hurt our business. For the nine months ended
September 30, 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 nine months ended September 30, 2000
represented 29% 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
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party under special circumstances, it is still possible that NYSERNet could
terminate the agreement or cease working with us.
On June 14, 1999, we signed 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.
On November 30, 2000, we completed negotiations on a five year $82
million contract with the New York State Department of Labor 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 50 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
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.
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WE ARE DEPENDENT ON NETWORKS BUILT AND OPERATED BY OTHERS. IF WE DO NOT HAVE
CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER.
In delivering our services, we rely on networks, which are built and
operated by others. We do not have control over these networks, nor can we
guarantee that we will continue to have access on terms that fit our business
needs.
Our use of the infrastructure of other communications carriers presents
risks. Our success partly depends upon the coverage, capacity, scalability,
reliability and security of the network infrastructure provided to us by
telecommunications network suppliers, including AT&T Corp., Sprint Corporation,
Verizon Communications, 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 consolidation of network providers could adversely affect our
peering and transit arrangements 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, prior to 2000, our market presence was limited principally to
New York State. In order to build our brand awareness, our marketing efforts
must succeed, and we must provide high quality services. We cannot assure you
that these investments will succeed as planned. If we do not build our brand
awareness, our ability to realize our strategic and financial objectives could
be hurt.
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IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD SUFFER.
If we do not successfully use or develop new technologies, introduce
new services or enhance our existing services on a timely basis, or new
technologies or enhancements used or developed by us do not gain market
acceptance, our business could be hurt. The Internet industry is characterized
by rapidly changing technology, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
future success will depend, in part, on our ability to accomplish all of the
following in a timely and cost-effective manner, all while continuing to develop
our business model and rolling-out our services on a national level:
- effectively use and integrate leading technologies;
- continue to develop our technical expertise;
- enhance our products and current networking services;
- develop new products and services that meet changing customer needs;
- have the market accept our services;
- advertise and market our products and services; and
- influence and respond to emerging industry standards and other changes.
We cannot assure you that we will successfully use or develop new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies or enhancements used or developed by us
will achieve market acceptance. Our pursuit of necessary technological advances
may require substantial time and expense. In addition, we cannot assure you
that, if required, we will successfully adapt our network and services to
alternate access devices and conduits.
If our services do not continue to be compatible and interoperable with
products and architectures offered by other industry members, our ability to
compete could be impaired. Our ability to compete successfully is dependent, in
part, upon the continued compatibility and interoperability of our services with
products and architectures offered by various other members of the industry.
Although we intend to support emerging standards in the market for Internet
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
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 39% in the nine months
ended September 30, 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
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face sanctions, including substantial fines and disqualification from being
awarded government contracts in the future.
Contracts with governmental agencies are subject to the risk of
unilateral termination by the government for its convenience and reductions in
services, or modifications in contractual terms, due to changes in the
government's requirements or 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 18 months ending November 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:
- 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 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
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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, 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.
SIGNIFICANT STOCKHOLDERS AND CURRENT MANAGEMENT CONTROL APPROXIMATELY 61% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
Broadwing Communications, Inc. ("Broadwing"), NYSERNet.net, Inc. and
Grumman Hill Investments III, L.P.("Grumman Hill") control approximately 23.5%,
18.4% and 11.8%, respectively, of our outstanding common stock at November 30,
2000. In addition, our executive officers may be deemed to beneficially own in
the aggregate approximately 7.1% of our outstanding common stock. 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 and Grumman Hill each
have one representative on our board of directors. 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.
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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:
- 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,
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.
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.
On May 5, 1999, we completed our initial public offering, or IPO, of
5,175,000 shares of our common stock pursuant to a registration statement on
Form S-1 (File No. 333-72133). In addition to our IPO as a result of our
re-offer prospectus filed on Form S-8 with the Securities and Exchange
Commission on July 19, 1999 (File No. 333-83177), 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 stock under this re-offer prospectus must comply with
the volume of sale limitations imposed under Rule 144(e) of the Securities Act.
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 and our 1999 Stock Option
Plan as well as shares issued under our 1999 Employee Stock Purchase Plan.
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As a result of filing of a registration statement on Form S-3 with the
Securities and Exchange Commission on October 25, 2000 (File No. 333-48578),
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.
Also, as a result of filing of a registration statement on Form S-3 with the
Securities and Exchange Commission on October 24, 2000 (File No. 333-48518),
211,000 shares of our common stock were issued and these shares may be freely
re-offered and re-sold. In addition, we are obligated to file a registration
statement so that if certain parties convert the 5% Convertible Debentures into
common stock or exercise warrants to purchase common stock, up to an additional
22,333,334 shares of our common stock would be registered and freely tradable.
Therefore, through the S-8 re-offer prospectus, the S-3 registration
statements, 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 November 30, 2000, an additional 52% 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.
DISTRIBUTION OF SECURITIES
The 1,450,000 shares of AppliedTheory Common Stock covered by this
prospectus are available for use in connection with acquisitions by us of other
businesses, assets or securities. The consideration offered by us in such
acquisitions, in addition to any shares of common stock offered by this
prospectus, may include cash, certain assets and/or assumption by AppliedTheory
of liabilities of the businesses, assets or securities being acquired. The
amount and type of consideration we will offer and the other specific terms of
each acquisition will be determined by negotiations with the owners or
controlling persons of the businesses, assets or securities to be acquired after
taking into account the current and anticipated future value of such businesses,
assets or securities, along with all other relevant factors. The shares of
common stock issued to the owners of the businesses, assets or securities to be
acquired normally are valued at a price reasonably related to the market value
of such common stock either at the time an agreement is reached regarding the
terms of the acquisition or upon delivery of the shares.
We may also permit individuals or entities who have received or will
receive shares of our common stock in connection with the acquisitions described
above, or their transferees or successors-in-interest, to use this prospectus to
cover their resale of such shares. See "Selling Security Holders," as it may be
amended or supplemented from time to time, for a list of those individuals or
entities who are authorized to use this prospectus to sell their shares of
AppliedTheory Common Stock.
SELLING SECURITY HOLDERS
The selling security holders listed in any supplement to this
prospectus, and any transferees or successors-in-interest to those persons, may
from time to time offer and sell, pursuant to this prospectus, some or all of
the shares covered by this prospectus.
Resales by selling security holders may be made directly to investors
or through a securities firm acting as an underwriter, broker or dealer. When
resales are to be made through a securities firm, such securities firm may be
engaged to act as the selling security holder's agent in the sale of the shares
by such selling security holder, or the securities firm may purchase shares from
the selling security holders as
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principal and thereafter resell such shares from time to time. The fees earned
by or paid to such securities firm may be the normal stock exchange commission
or negotiated commissions or underwriting discounts to the extent permissible.
In addition, such securities firm may effect resales through other securities
dealers, and customary commissions or concessions to such other dealers may be
allowed. Sales of shares may be at negotiated prices, at fixed prices, at market
prices or at prices related to market prices then prevailing. Any such sales may
be made on The Nasdaq National Market, in the over-the-counter market, by block
trade, in special or other offerings, directly to investors or through a
securities firm acting as agent or principal, or a combination of such methods.
Any participating securities firm may be indemnified against certain
liabilities, including liabilities under the Securities Act. Any participating
securities firm may be deemed to be an underwriter within the meaning of the
Securities Act, and any commission earned by such firm may be deemed to be
underwriting discounts or commissions under the Securities Act.
In connection with resales of the shares sold hereunder, a prospectus
supplement, if required, will be filed under Rule 424(b) under the Securities
Act, disclosing the name of the selling security holder, the participating
securities firm, if any, the number of shares involved, any material
relationship the selling security holder may have with us or our affiliates, and
other details of such resale to the extent appropriate. Information concerning
the selling stockholders will be obtained from the selling security holders.
Security holders may also offer shares of stock issued in past and
future acquisitions by means of prospectuses under other available registration
statements or pursuant to exemptions from the registration requirements of the
Securities Act, including sales which meet the requirements of Rule 145(d) under
that Act, and security holders should seek the advice of their own counsel with
respect to the legal requirements for such sales.
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.
The Company has been notified by the U.S. Attorney for the Western
District of New York that a relator has filed a qui tam action under seal
against the Corporation and NYSERnet. The complaint alleges that the National
Science Foundation was fraudulently induced to provide a grant of $2.45 million
to NYSERnet, a portion of which was paid by NYSERnet to the Company for services
rendered. The complaint seeks treble damages related to the alleged overpayment
for services provided by the Corporation to NYSERnet, as well as certain other
penalties and forfeitures under the False Claims Act. Although the Department of
Justice has not yet determined whether or not it will join in this action, the
Company believes that these allegations are without merit and intends to contest
them.
On December 13, 2000, James G. Couch filed a complaint in New York
state court seeking approximately $9,650,000 in damages against the Company due
to an alleged anticipatory breach of a Put Option Agreement between the Company,
Mr. Couch and others dated January 5, 2000 pursuant to which Mr. Couch, as part
of the consideration for his sale of the capital stock of CRL Network Services,
Inc. to the Company, was granted two put options, exercisable on January 5, 2001
and January 5, 2002, respectively, pursuant to which Mr. Couch may require the
Company to purchase shares of Company common stock from Mr. Couch at specified
times, specified amounts and in specified circumstances. The Company, which has
not yet answered the complaint, intends to vigorously contest Mr. Couch's claims
and is considering various counterclaims, which, if asserted, could provide a
right of setoff against Mr. Couch.
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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.
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:
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
September 30, 2000 which was filed on November 14, 2000;
c) Our quarterly report on Form 10-Q for the quarter ended
June 30, 2000 which was filed on August 14, 2000;
d) Our registration statement on Form 8-K dated June 30, 2000
(No. 000-25759) for the issuance of $30,000,000 in 5%
convertible debentures due June 5, 2003;
e) Our quarterly report on Form 10-Q for the quarter ended
March 30, 2000 which was filed on May 15, 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.
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.
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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.
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). In order to obtain timely delivery, security holders must
request information no later than five business days before the date they must
make their investment decision. 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.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. Discussions containing forward-looking statements may be
found in the sections "Summary" and "Risk Factors." Forward-looking statements
include statements regarding our, or our directors' or officers', intent, belief
or current expectations with respect to, among other things, trends affecting
our financial condition or results of operations and our business and growth
strategies. Actual events or results could differ materially from those
discussed in this prospectus. Factors that could cause or contribute to
differences include, but are not limited to, those discussed in the section
entitled "Risk Factors" and in the other sections of this prospectus. These
forward-looking statements speak only as of the date of this prospectus, and we
caution potential investors not to place undue reliance on these statements.
This prospectus contains forecasts of estimated future growth in the Internet
industry and in Internet usage as a whole. These market forecasts are reliant
upon assumptions, including assumptions about the growing acceptance of the
Internet as a tool for commercial activity, about continuing advances in
computing and telecommunications technology and about increasing availability of
technology. There can be no assurance that these assumptions will prove to be
correct or, even if they do, that the forecasts will prove to be accurate.
19
<PAGE> 22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
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<PAGE> 23
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 21. EXHIBITS
The following documents are filed as Exhibits hereto:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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)*
</TABLE>
---------------------------
* To be Filed by Amendment.
ITEM 22. 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
II-2
<PAGE> 24
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 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) The undersigned registrant hereby undertakes as follows: (1) that prior
to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issues undertakes that such reoffering
prospectus will contain the information called for by the by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for
by the other items of the applicable form. (2) The registrant
undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes 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.
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
II-3
<PAGE> 25
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.
II-4
<PAGE> 26
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-4 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 December 27, 2000.
AppliedTheory Corporation
by: /s/ Danny E. Stroud
-----------------------------------------------
Danny E. Stroud
President, 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.
Date: December 27, 2000 /s/ Danny E. Stroud
----------------------------------------
Danny E. Stroud
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: December 27, 2000 /s/ David A. Buckel
----------------------------------------
David A. Buckel
Sr. Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Date: December 27, 2000 /s/ Richard Mandelbaum
----------------------------------------
Richard Mandelbaum
Chairman of the Board of Directors
Date: December 27, 2000 /s/ James Kelsey
----------------------------------------
James Kelsey
Director
Date: December 27, 2000 /s/ George Sadowsky
----------------------------------------
George Sadowsky
Director
II-5
<PAGE> 27
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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)*
</TABLE>
---------------------------
* To be Filed by Amendment.
II-6
