<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25759
APPLIEDTHEORY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1491253
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1500 BROADWAY, 3RD FLOOR 10036
NEW YORK, N.Y. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(212) 398-7070
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of May 2, 2000, there were 23,360,629 shares of AppliedTheory Corporation
common stock, par value $.01, outstanding.
The Index of Exhibits appears on page 33
<PAGE> 2
APPLIEDTHEORY CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and March 31, 2000 .................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 2000 .................................... 5
Notes to Consolidated Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 17
Item 2. Changes in Securities and Use of Proceeds ............................ 17
Item 3. Defaults Upon Senior Securities ...................................... 18
Item 4. Submission of Matters to a Vote of Security Holders .................. 18
Item 5. Other Information .................................................... 19
Item 6. Exhibits and Reports on Form 8K ...................................... 31
Signatures .................................................................... 32
Exhibit Index ................................................................. 33
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December, 31 March 31,
1999 2000
--------------------- -----------
(Derived from Audited (Unaudited)
Financial Statements)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 14,834 $ 5,203
Marketable securities 32,727 17,053
Accounts receivable, net of allowance of $231 and $649, respectively 6,714 9,244
Due from related parties 59 1,011
Prepaid expenses and other assets 2,133 2,458
--------- ---------
Total current assets 56,467 34,969
Property and equipment, net 13,881 25,167
Investment, at cost 5,000 5,000
Goodwill 43,496
Other assets 1,587 1,320
--------- ---------
Total assets $ 76,935 $ 109,952
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,025 $ 6,302
Line of credit 5,500
Accrued payroll 2,012 3,081
Accrued expenses 4,794 5,942
Deferred revenue 2,476 2,652
Current portion of long-term debt and capital lease obligations 1,215 3,329
--------- ---------
Total current liabilities 15,522 26,806
Long-term debt and capital lease obligations 6,783 4,979
Other liabilities 421 418
Stockholders' equity:
Common stock, $.01 par value; 90,000,000 shares authorized; issued and
outstanding 21,413,362 shares at December 31, 1999
and 23,282,631 shares at March 31, 2000 214 233
Additional paid-in capital 84,052 118,393
Accumulated deficit (29,806) (40,794)
Accumulated other comprehensive loss (251) (83)
--------- ---------
Total stockholders' equity 54,209 77,749
--------- ---------
Total liabilities and stockholders' equity $ 76,935 $ 109,952
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Net revenues
Third-party customers $ 4,833 $ 13,099
NYSERNet.org, Inc. customers and services 2,034 2,724
------------ ------------
Total net revenues 6,867 15,823
------------ ------------
Costs and expenses
Cost of revenues 4,103 11,043
Sales and marketing 1,764 6,711
General and administrative 1,814 4,909
Research and development 63 167
Depreciation and amortization 616 4,117
Other expenses (income) 3 (21)
------------ ------------
Total costs and expenses 8,363 26,926
------------ ------------
Loss from operations (1,496) (11,103)
Interest income (18) (393)
Interest expense 180 278
------------ ------------
NET LOSS (1,658) (10,988)
Preferred stock dividends 52 0
------------ ------------
Net loss attributable to common stockholders $ (1,710) $ (10,988)
============ ============
Basic and diluted loss per common share $ (0.11) $ (0.48)
============ ============
Shares used in computing basic and diluted loss per share 15,930,258 23,105,302
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASHFLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,658) $(10,988)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 616 1,839
Amortization of goodwill 2,278
Provision for bad debts 23 110
Deferred payment of interest expense to NYSERNet.net, Inc. 52
Loss on sale of property and equipment 3
Non-cash compensation expense 313 309
Changes in assets and liabilities, net of effects of business
acquisitions
Accounts receivable, net (326) (1,796)
Due to (from) related parties 18 (952)
Prepaid expenses and other assets (284) 592
Accounts payable 840 58
Accrued payroll 284 1,069
Accrued expenses and other liabilities 89 (1,517)
Deferred revenue (59) (41)
-------- --------
Net cash used in operating activities (89) (9,039)
-------- --------
Cash flows from investing activities
Purchases of property and equipment (889) (5,690)
Investment in certain businesses, net of cash acquired (9,653)
Proceeds from sale of marketable securities 15,842
Payments received on notes receivable 1 1
-------- --------
Net cash provided by (used in) investing activities (888) 500
-------- --------
Cash flows from financing activities
Issuance of common stock, net of issuance costs 121 90
Borrowings from NYSERNet.net, Inc. 800
Proceeds from line of credit borrowings, net 70
Principal payments on capital leases (205) (290)
Principal payments on long-term debt (892)
Security deposit on equipment financing (782)
-------- --------
Net cash provided by (used in) financing activities 4 (1,092)
-------- --------
Net decrease in cash and cash equivalents (973) (9,631)
Cash and cash equivalents, beginning of period 1,786 14,834
-------- --------
Cash and cash equivalents, end of period $ 813 $ 5,203
======== ========
Supplemental disclosures of noncash investing transactions:
Issuance of common stock for investment in certain businesses $ 33,961
Fixed asset acquisitions financed through capital lease obligations $ 1,149 5,029
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
AppliedTheory Corporation (formerly AppliedTheory Communications, Inc.) was
incorporated in the State of New York in November 1995 as a wholly-owned
subsidiary of NYSERNet.net, Inc. ("NET"), a not-for profit corporation. NET
is also the sole member of NYSERNet.org, Inc. ("ORG"), a not-for-profit
corporation (in effect, ORG is a wholly-owned subsidiary of NET). As a result
of certain transactions completed during 1998 (the exercise of 3,559,335
stock options, the private placement of 1,725,000 shares and NET's direct
sale of 4,875,000 shares it owned of AppliedTheory), and the effect of the
Company's initial public offering ("IPO") in April 1999, Net's ownership
percentage declined to less than 50%. In conjunction with the IPO,
AppliedTheory Communications, Inc. reorganized as a Delaware corporation. On
January 28, 1999, the Company established its wholly owned subsidiary,
AppliedTheory Corporation. The Company merged into AppliedTheory Corporation,
which is the surviving entity.
As of January 1, 2000, the consolidated financial statements include the
accounts of AppliedTheory Corporation and its wholly owned subsidiary
AppliedTheory California Corporation (See Note B). All significant
intercompany transactions have been eliminated in consolidation. These
financial statements for the three months ended March 31, 2000 and 1999 and
the related footnote information are unaudited and have been prepared on a
basis substantially consistent with the audited financial statements of
AppliedTheory Corporation (the "Company") as of and for the year ended
December 31, 1999 included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission (SEC). The accompanying unaudited
financial statements of AppliedTheory Corporation have been prepared in
accordance with generally accepted accounting principles for interim
financial information, with the instructions to Form 10-Q and Article 10 of
Regulation S-X. All material adjustments, consisting of only normal and
recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the results for the interim periods have been reflected.
Operating results for the three month periods ended March 31, 2000 and 1999
are not necessarily indicative of the results that may be expected for any
succeeding quarters or for the full year. The financial statements and notes
thereto should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1999.
NOTE B - ACQUISITIONS
On January 5, 2000, the Company's newly formed wholly owned subsidiary,
AppliedTheory Reef Acquisition Corp., ("Merger Sub."), a Delaware
corporation, purchased all of the capital stock of CRL Networks, Inc. ("CRL")
for $9,939,000 in cash and up to approximately 2,022,291 shares of common
stock, par value $.01 per share of the Company. Also the Merger Sub. changed
its name to AppliedTheory California Corporation. The Company owns all
capital stock of AppliedTheory California Corporation. CRL provides high
speed Internet access and data networking solutions across the United States
and owns and operates a Tier 1 network backbone.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net
tangible assets acquired based on the estimated fair values. The balance of
the purchase price was recorded as goodwill and is being
6
<PAGE> 7
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amortized over 5 years. The acquisition was financed using a portion of the
net proceeds of the IPO.
The Company has retained 285,507 shares of AppliedTheory common stock valued
at $19.16 per share payable to CRL's former owners under escrow provisions of
the Merger Agreement to cover various contingencies. Such amounts will be
recorded as additional cost of the acquired company when the amount to be
paid, if any, becomes probable. At March 31, 2000, no amount had been
recorded since the outcome of the contingencies was not determinable. In
connection with the acquisition of CRL the Company entered into a put option
agreement requiring the Company to re-purchase a total of 625,000 shares of
AppliedTheory common stock on the first and second anniversary of the
acquisition. The financial statements reflect the preliminary allocation of
the purchase price and are subject to revision upon final settlement of all
purchase price adjustments and the completion of evaluations and other
studies of the fair value of all assets acquired and liabilities assumed.
Following is the Company's unaudited proforma results for the quarters ending
March 31, 1999 and 2000 as if the acquisition of CRL occurred on January 1,
1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 2000
-------- --------
(in thousands, except per share amounts)
<S> <C> <C>
Net revenues $ 9,870 $ 15,823
Net loss (10,979) (10,988)
Net loss per share $ (0.48) $ (0.48)
</TABLE>
NOTE C - COMPREHENSIVE LOSS
Comprehensive loss for the quarter ended March 31, 1999 and 2000, was as
follows:
<TABLE>
<CAPTION>
1999 2000
-------- --------
(in thousands)
<S> <C> <C>
Net loss attributable to
common stockholders $ (1,710) $(10,988)
Other comprehensive
income(loss):
Unrealized gain on
marketable securities,
net of income tax -- (168)
-------- --------
Comprehensive loss $ (1,710) $(10,820)
======== ========
</TABLE>
NOTE D - LOSS PER SHARE
Basic loss per share is computed using the weighted average number of shares
of common stock outstanding during the period. Diluted loss per share is
computed using the weighted
7
<PAGE> 8
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
average number of shares of common stock outstanding, adjusted for the
dilutive effect of potential common shares issued or issuable pursuant to
stock options and stock appreciation rights. Potential common shares issued
are calculated using the treasury method. All potential common shares have
been excluded from the computation of diluted loss per share as their effect
would be antidilutive and accordingly, there is no reconciliation of basic
and diluted loss per share for the periods presented.
NOTE E - SEGMENT AND RELATED INFORMATION
The Company operates as one business segment, as a provider of Internet
solutions. The Company had revenues from its major service offerings as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 2000
------- -------
(in thousands)
<S> <C> <C>
Net revenues
Internet connectivity $ 4,161 $ 7,466
e-Business solutions 2,095 6,627
Web hosting 611 1,730
------- -------
Total net revenues $ 6,867 $15,823
======= =======
</TABLE>
NOTE F - PROPERTY AND EQUIPMENT
On December 21, 1998, the Company adopted a plan, which was approved by its
Board of Directors, to close a leased facility, which principally is used as
a Web-hosting data center. The facility has experienced operational
difficulties which limited its usability as a Web-hosting site and its
ability to generate sufficient revenues. In connection with the plan of
abandonment, the Company recorded a $900,000 charge to operations for the
year ended December 31, 1998 consisting of (i) a $486,000 write-down of
equipment and leasehold improvements to management's estimate of their fair
value, based on the anticipated discounted future cash flows through the date
of abandonment, of approximately $70,000 in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" and (ii) a $414,000 accrued liability,
included in Accrued Expenses at December 31, 1998, 1999 and at March 31,
2000, relating to equipment leases and facility operating leases, (net of
anticipated subrental income) expiring in October 2001 and May 2006,
respectively, in accordance with the provisions of EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." This accrued liability provides for only those costs subsequent
to exiting the facility, that was expected to occur in September 1999, and
costs prior thereto will be recognized during the period they are incurred.
The plan calls for the Web-hosting customer base served from this abandoned
facility and the related revenues, which are not significant, to be
transitioned to another facility. As of March 31, 2000, no amounts have been
charged against this liability. The closure date has been delayed pending
completion of additional data centers.
8
<PAGE> 9
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - LONG-TERM DEBT
Line of Credit
On January 20, 1998, the Company entered into a credit agreement with a bank
for an aggregate amount of $7,500,000, which expires on January 19, 2001. The
agreement provides for the payment of the unpaid principal balance of all
amounts advanced on January 19, 2001. Interest is charged and payable on a
monthly basis as determined by the Company, either on a LIBOR plus 50 basis
points or a prime rate basis less 200 basis points. The credit facility is
collateralized by substantially all assets of the Company and by a maximum of
$5,500,000 of cash and cash equivalents, government securities, corporate
securities or corporate equities pledged by NET.
In accordance with the terms of the credit agreement, as amended on August 3,
1999, the bank issued a standby letter of credit in the Company's name for
$650,000, expiring July 30, 2000, pursuant to the amended agreement,
collateralizing the Company's obligation to a third party for a real property
lease. The Company's available credit under its line of credit agreement is
effectively reduced by the outstanding amount of the letter of credit.
At March 31, 2000 the Company had $5,500,000 outstanding under the line of
credit and, as a result of certain restrictions, had no additional
availability as of March 31, 2000. The average interest rate on outstanding
borrowings was 5.6% at March 31, 2000.
Borrowings from NYSERNet.net, Inc.
The Company has an unsecured borrowing facility with NET, which provides for
borrowings to a maximum amount of $6,187,000, less any preferred stock issued
to NET, for working capital requirements. This borrowing facility expires on
January 1, 2002. Interest on the loans accrues at the prime rate (9.0% at
March 31, 2000) and payments are deferred for five years from the date of
each advance or January 1, 2002, whichever is earlier. All principal
borrowings under this agreement are due and payable on January 1, 2002. The
Company had no principal borrowings under this facility at December 31, 1999
or at March 31, 2000.
Lease Obligations
During the three months ended March 31, 2000, the Company leased
approximately $5,029,000 of equipment under three agreements accounted for as
capital leases. These obligations require the Company to make monthly
payments of approximately $30,000 through September 2002, $43,000 through
December 2002, and $107,000 through April 2003.
9
<PAGE> 10
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of future minimum lease payments under capital
leases as of March 31, 2000.
<TABLE>
<CAPTION>
Capital
--------------
(in thousands)
Year ending December 31,
<S> <C>
2000 $ 2,000
2001 2,631
2002 2,157
2003
429
--------
Total minimum lease payments 7,217
Less amounts representing interest 1,002
--------
Present value of minimum lease obligation $ 6,215
========
</TABLE>
NOTE H - REDEEMABLE PREFERRED STOCK
Holders of shares of the redeemable preferred stock were entitled to receive
payment for cumulative dividends at the annual rate of $14.00 per share (14%)
beginning January 1, 1999, based upon a liquidation value of $100 per share,
payable quarterly. On May 5, 1999, the Company paid $1,993,000 to fully
redeem the preferred stock and accrued dividends in full with the proceeds
from the IPO.
NOTE I - STOCK OPTIONS
Certain options and stock appreciation rights were granted in 1998 and 1999
at exercise prices below the fair market value of the Company's stock. The
Company recorded $313,000 and $309,000 of compensation expense associated
with these options and stock appreciation rights for the three months ended
March 31, 1999 and 2000 respectively.
NOTE J - RELATED PARTY TRANSACTIONS
Transactions with NET and ORG
The Company has entered into an Internet service provider agreement with ORG
to serve as ORG's sole source provider for Internet solutions to ORG's
customer base under contractual arrangements. ORG's customers consist of (i)
unrelated customers for which ORG serves as a conduit to the sales
transactions between the Company and these customers and (ii) member
institutions of ORG for which ORG provides pricing terms below that charged
by the Company to ORG. The Company's revenues from ORG's customer base for
the following periods are:
10
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APPLIEDTHEORY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 2000
------ ------
(in thousands)
<S> <C> <C>
Unrelated customers $ 699 $ 752
Member institutions 1,119 1,265
Services to ORG 216 707
------ ------
$2,034 $2,724
====== ======
</TABLE>
During each of the three months ended March 31, 1999 and 2000, the Company
charged NET approximately $8,000 and ORG approximately $25,000, respectively,
in management fees.
The excess of the Company's revenues over amounts charged by ORG to its
member institutions was approximately $698,000 and $781,000 for the three
months ended March 31, 1999 and 2000, respectively.
NOTE K - INVESTMENT IN PLANNING TECHNOLOGIES, INC.
On June 22, 1999, the Company entered into a stock purchase agreement (the
"Stock Purchase Agreement") with Planning Technologies, Inc. ("PTI"), a
Georgia corporation, which provides consulting and network engineering
services, along with Grumman Hill Investments III, L.P., ("Grumman Hill") and
certain shareholders of PTI. Pursuant to the Stock Purchase Agreement, the
Company acquired approximately 10% of the capital stock of PTI on a fully
diluted basis, as defined in the Stock Purchase Agreement, for $5 million.
The Company's 10% ownership interest in PTI is represented by 2,976,190
shares of PTI's Convertible Preferred Stock, which represents approximately
50% of PTI's outstanding Convertible Preferred Stock. The investment is being
accounted for under the cost method.
The Stock Purchase Agreement provides a definition of service revenues for
PTI for the year ending December 31, 1999. In the event that PTI's service
revenues for that period are below thresholds which are described in the
Stock Purchase Agreement, the Company will receive additional shares of PTI
Convertible Preferred Stock representing up to 5% of the fully diluted
capital stock of PTI.
On April 4, 2000, the Company converted 2,976,190 shares of PTI's Convertible
Preferred Stock into common shares and received 1,816,173 additional shares
of common stock in exchange for the termination of the Stock Purchase
Agreement. This increased the Company's ownership percentage to 15% of PTI's
common stock on a fully diluted basis. The Company also invested an
additional $250,000 in PTI in connection with the reorganization of PTI in
exchange for 564,498 shares of common stock. After the reorganization the
Company owns approximately 8.5% of PTI's outstanding common stock.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read and consider the following discussion in conjunction with
our audited financial statements and notes thereto and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as of
and for the year ended December 31, 1999 which is included in Form 10-K (File
No. 000-25759), as filed with the SEC.
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or those of the industry in which we operate, to be materially
different from any expected future results, performance or achievements
expressed or implied by these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed in Part II, Item 5 of this Form 10-Q
and in the Registration Statement of our initial public offering of common
stock.
Unless the context otherwise requires, references in this Form 10-Q to
"AppliedTheory", the "Company, "we", "our" and "us" refer to AppliedTheory
Corporation.
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 - (formerly Internet integration and enterprise portal
development services) Internet business strategy consulting, solution
integration and enterprise portal development, including custom software
application development, interactive marketing design, Web site
implementation and deployment and integration of legacy systems to
Internet-based applications.
- - Web Hosting Solutions - Customized suite of Unix, NT and Linux Web-hosting
solutions supported by redundant data centers and unmatched customer care
services. Our services include custom offerings of shared, dedicated and
co-location services.
- - Security Solutions - Security consulting services, managed firewalls, virtual
private networks and intrusion detection systems are a few of our offering to
ensure the integrity of a customers network.
- - Access Solutions - Internet connectivity, including tiered dedicated,
burstable dedicated, national dial, DSL services and Domain Name Services.
We target mid-sized businesses and mid-sized departments of larger
businesses within the commercial markets and the public sector. Additionally, we
focus on a number of strategic vertical markets including higher education, the
federal government, state & local governments, healthcare and automotive
industries. We integrate our solutions to enable customers to extend their
businesses, leverage their legacy databases and systems, and take advantage of
Internet-based marketing opportunities. Driven by competition and governmental
mandates, public and private sector customers both benefit by making greater use
of the Internet to serve their constituencies more
12
<PAGE> 13
cost-effectively with greater returns. Increasingly, these businesses and
institutions are demanding "one-stop-shop" solutions for Internet services due
to the risk, difficulty and expense associated with managing and integrating the
products and services of multiple vendors.
We are rapidly strengthening our sales and marketing efforts nationally to
more aggressively pursue customers. This represents a change from our historic
approach of generating our revenues using a small sales force and growing our
customer base primarily through word of mouth. In 1999, we tripled our sales
force and now operate 13 sales offices in key cities throughout the east coast
of the U.S. Already in 2000, we have expanded into northern California and began
our Midwest presence with a new office opening in Detroit, Michigan. In
addition, as previously discussed we have launched a vertical sales effort to
focus on markets such as higher education, the federal government, state and
local governments, healthcare and automotive. We have also targeted
approximately 20 metropolitan areas throughout the United States with high
concentrations of businesses and intend to grow our direct and indirect sales
force to between 125 - 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.
As part of our expansion strategy we purchased all of the capital stock of
CRL Networks, Inc. ("CRL") on January 5, 2000. CRL 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 increase our sales presence on the west coast. The acquisition of CRL
results in additional revenue and costs in the first quarter of 2000 that affect
the comparability to the first quarter of 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUE. Total net revenues increased approximately $8.9 million from $6.9
million in the three months ended March 31, 1999 to $15.8 million in the three
months ended March 31, 2000. Approximately $3.3 million of this growth was from
Internet connectivity revenue, which resulted primarily from the acquired
business contributing $1.9 million in new Internet connectivity revenue during
the first quarter. The remainder of the increase is due to an expansion of
connectivity provided for NYSERNet 2000 of $.5 million and the expansion and
upgrade of service levels for the existing customer base. Web hosting revenue
increased by approximately $1.1 million during the same period. This increase
includes $.4 million in new web hosting revenue from the acquired business. The
remainder of the increase resulted from a $.5 million increase in Web
monitoring, management and hosting services dedicated web hosting customers
including $.2 million for the New York State Department of Labor in connection
with America's Job Bank. The remaining increase in total net revenues of
approximately $4.5 million was derived from e-Business solutions. These services
include:
- linking existing databases and legacy systems with the Web; and
- creating open, universal interfaces to business-critical information
and standards-based software used to link with the systems of
suppliers, partners and customers.
The majority of the increase in e-Business solutions was derived from an
additional $4 million in services to the New York State Department of Labor in
connection with America's Job Bank. Additionally, during the same period our
revenue from other e-Business solutions customers increased by 730% to $.6
million reflecting the continued expansion of this solution.
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For the quarter ended March 31, 2000, as a percentage of total net
revenues, Internet connectivity represented 47%, e-Business solutions
represented 42% and Web hosting represented 11%. For the quarter ended March 31,
1999, as a percentage of total net revenues, Internet connectivity represented
61%, e-Business solutions represented 31% and Web hosting represented 8%.
COST OF REVENUE. Cost of revenue for the three months ended March 31,
2000 totaled approximately $11.0 million compared with approximately $4.1
million for the three months ended March 31, 1999. The increase in cost of
revenue of $6.9 million was primarily attributable to the factors below.
- - $2.8 million of the increase is attributable to the labor and connection
charges to upgrade our network infrastructure to establish our nationwide
Tier 1 presence and to provide additional capacity to support continued
customer growth;
- - the acquired business increased first quarter Internet connectivity costs of
revenue by $1.6 million;
- - approximately $1.4 million of the increase was from increased labor and other
professional service costs associated with the expansion of e-Business
solutions provided to the New York State Department of Labor in connection
with America's Job Bank and services provided to other customers; and
- - increased labor costs of $.6 million support the expansion of web hosting
design and support services.
As a percentage of revenue, cost of revenue increased to 70% of revenue in the
three months ended March 31, 2000 from 60% of revenue in the three months ended
March 31, 1999.
SALES AND MARKETING. For the three months ended March 31, 2000 and 1999,
sales and marketing expense was approximately $6.7 million and $1.8 million,
respectively. The $4.9 million increase reflects a substantial investment in the
sales and marketing organizations necessary to support our expanded customer
base and our efforts to establish a national sales and marketing program. The
largest components of the increase were $3 million in additional salary,
commission and related benefit costs and $.3 million in increased occupancy
costs to support the nationwide sales presence. Our aggressive product
management efforts increased costs by $.4 million and our direct and indirect
marketing program incurred $.5 million in additional costs. The acquisition of a
business also contributed an additional $.3 million in costs. Sales and
marketing expense, as a percentage of revenue, increased to approximately 42%
for the three months ended March 31, 2000 from 26% for the three months ended
March 31, 1999.
GENERAL AND ADMINISTRATIVE. For the quarters ended March 31, 2000 and
1999, general and administrative expenses were approximately $4.9 million and
$1.8 million, respectively. The increase in general and administrative expenses
of approximately $3.1 million was primarily attributable to:
- $1.9 million in costs related to salaries and recruiting new personnel;
- $.3 million in additional audit, legal and other professional service
costs;
- $.2 million in increased real estate occupancy costs;
- $.2 million in additional general and administrative costs associated with
the acquisition of businesses; and
- other increases necessary to manage the financial, legal and
administrative aspects of our business.
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For the quarter ended March 31, 2000, general and administrative expense
increased as a percent of revenue to 31% from 26% for the quarter ended March
31, 1999.
RESEARCH AND DEVELOPMENT. Research and development costs are principally
focused in our e-Business solutions and web hosting service offerings. For the
three months ended March 31, 2000 and 1999, research and development expenses
have not significantly fluctuated.
DEPRECIATION AND AMORTIZATION. For the three months ended March 31, 2000
and 1999, depreciation and amortization expense was approximately $4.1 million
and $.6 million, respectively. Goodwill amortization expense from the business
acquired on January 5, 2000 accounts for $2.3 million of the increase and is
expected to continue for the next five years. Depreciation expense accounts for
the remaining $1.2 million increase primarily attributable to the acquisition of
computer equipment used to support the continued expansion of our Internet
Connectivity, Web hosting and e-Business solutions. A portion of the
depreciation expense increase also resulted from additional office furniture and
equipment necessary to support our expanding customer base.
INTEREST INCOME AND EXPENSE. Interest expense remained relatively
consistent at approximately $0.3 million for the three months ended March 31,
2000 and 1999. However an increase in interest income of $.4 million occurred
from the investment of proceeds from the IPO.
NET LOSS. Net loss attributable to common stockholders for the quarter
ended March 31, 2000 was approximately $11.0 million, or $0.48 per share,
compared with approximately $1.7 million or $0.11 per share for the quarter
ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On May 5, 1999, we completed our IPO of 5,175,000 shares of common stock
sold at an initial public offering price of $16.00 per share. Gross proceeds
from the offering were $82.8 million, $5.8 million of which was applied to the
underwriting discount and approximately $1.8 million was applied to expenses
related to our offering. As a result, net proceeds from the offering are
approximately $75.2 million.
At March 31, 2000, we had $5.2 million in cash and cash equivalents, $17.1
million in marketable securities and an $8.1 million working capital surplus.
This represents a $25.3 million decrease in available cash and securities from
December 31, 1999. Of the decrease, $9.7 million was used to acquire businesses
and $5.7 million was used to purchase equipment. These expenditures were
necessary to continue the expansion of our operations and available solutions.
The remaining decrease includes $9 million used to fund operations and $1.2
million to repay debt. Although we have utilized a portion of the available
proceeds from our IPO we have several sources of additional funds at our
disposal. These include liquidation of marketable securities and drawing from
two available lines of credit. Our marketable securities are generally fixed
rate short-term investment grade corporate bonds and notes. At March 31, 2000,
all of our investments are due to mature within fourteen months but could be
sold prior to maturity to provide working capital or finance future
acquisitions.
At March 31, 2000 we have two lines of credit available to provide working
capital.
- - The first is a secured revolving line of credit with Fleet National Bank for
$7.5 million which expires on January 19, 2001. Borrowings under this line
are secured by substantially all our assets and by a maximum of $5.5 million
of assets pledged by NYSERNet.net. At March 31,
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2000, borrowings under this line amounted to $5.5 million. As of March 31,
2000, as a result of restrictions under the line of credit, no additional
credit was available under this agreement.
- - We also have an unsecured revolving borrowing facility with NYSERNet.net,
which provides for borrowings up to a maximum amount of approximately $6.2
million, less any preferred stock issued to NYSERNet.net. As of March 31,
2000, $6.2 million was available under this borrowing facility.
Our principal uses of cash are to fund operations, working capital
requirements and capital expenditures. We had an accumulated deficit of $40.8
million at March 31, 2000, and have used $9 million in cash in the aggregate to
fund operations since January 1, 2000 through March 31, 2000. Until the
successful completion of our initial public offering, we had satisfied our cash
requirements primarily through the sale of common and preferred stock and
borrowings under credit agreements and equipment financing arrangements.
Net cash used in operating activities for the quarter ended March 31, 2000
and 1999 was approximately $9.0 million and $.1 million. The increase of $8.9
million is a result of increased net losses from operations in the quarter
offset by amortization of goodwill and depreciation expense. Net cash provided
by investing activities for the quarter ended March 31, 2000 was approximately
$.5 million and net cash used in investing activities for the quarter ended
March 31, 1999 was approximately $.9 million. The increase of approximately $1.2
million is associated with the sale of $15.8 million in marketable securities to
fund the cash portion of the first quarter acquisitions as well as $5.7 million
in fixed asset purchases to support our expanding revenue. For the quarter ended
March 31, 2000 cash of approximately $1 million was used in financing activities
and for the quarter ended March 31, 1999 cash of approximately $4,000 was
provided by financing activities. This increase of approximately $1 million
consists principally of the repayment of long-term debt assumed in connection
with the business acquired in the first quarter of 2000.
We have made capital investments in our network operations center, data
center and other capital assets totaling $5.7 million and $.9 million in the
quarter ended March 31, 2000 and 1999, respectively. We acquired assets under
capital leases for $5.0 million in the quarter ended March 31, 2000.
At March 31, 2000 we had $17.1 million in marketable securities, $5.2
million in cash and $6.2 million in availability under the aforementioned
financing agreements. We may need to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that additional financing, if needed, will be available on terms
acceptable to us, or at all. If additional financing is unavailable or delayed
we have developed contingency plans to reduce costs and expenses. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants and significant
interest expense. Strategic arrangements, if necessary to raise additional
funds, may require us to relinquish rights to some of our technologies.
COMMITMENTS
Annual maturities of our debt obligations are as follows: $2.6 million in
2000, $8.8 million in 2001, $2.2 million in 2002 and $.2 million in 2003. Debt
maturing in 2001 includes $5.5 million borrowed under the Fleet National Bank
line of credit that expires January 19, 2001.We also had purchase commitments at
March 31, 2000 totaling approximately $2.1 million for various property, plant
and equipment associated with the expansion of our Syracuse data center.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At March 31, 2000, we had various financial instruments consisting of
variable rate debt and short-term investments entered into for purposes other
than trading. The substantial majority of our outstanding debt obligations have
variable interest rates of LIBOR plus 50 basis points or prime rate less 200
basis points. Annual maturities of our debt obligations are as follows: $2.6
million in 2000, $8.8 million in 2001, $2.2 million in 2002 and $.2 million in
2003. At March 31, 2000, the carrying value of our debt obligations approximate
the fair value due to the short maturity and variable interest rates of a
majority of these instruments. The weighted average interest rate of our debt
obligations at March 31, 2000 was 9.0%.
Our investments are generally fixed rate short-term investment grade
corporate bonds and notes. At March 31, 2000, all of our investments are due to
mature within fourteen months and are carried at fair value of $17.1 million.
These investments are subject to interest rate risk, market risk and in some
cases foreign currency risk. Market risk is estimated as the potential loss in
fair value resulting from a hypothetical 10% adverse change in the securities'
quoted market prices, and amounted to $1.7 million at March 31, 2000. We
actively monitor the capital and investing markets in analyzing our capital
raising and investing decisions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the status of legal proceedings
previously reported in our annual report on Form 10-K filed with the SEC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 5, 1999, we completed our initial public offering, or IPO, of
5,175,000 shares of our common stock. The offering was made pursuant to a
registration statement on Form S-1 (File No. 333-72133) which registered up to
5,175,000 shares of our common stock and was declared effective on April 29,
1999. The offering commenced on April 30, 1999 and all 5,175,000 shares
registered in our offering were sold at an initial public offering price of
$16.00 per share. The managing underwriters were Bear, Stearns & Co. Inc., CIBC
World Markets Corp., Lehman Brothers Inc. and Wit Capital Corporation. Gross
proceeds from the offering were $82.8 million, $5.8 million of which was applied
to the underwriting discount. As of December 31, 1999, approximately $1.8
million was applied to expenses incurred for our offering. As a result, net
proceeds from the offering are approximately $75.2 million. Except as discussed
herein with respect to our repayment of a revolving line of credit and
redemption of our preferred stock to NYSERNet.net, none of the net proceeds of
our offering were paid by us, directly or indirectly, to any of our directors,
officers or any of their associates, or to any person or entity owning 10
percent or more of our equity securities or the equity securities of any of our
affiliates.
On May 5, 1999, we paid approximately $3.8 million to repay outstanding
borrowings under our revolving line of credit with NYSERNet.net, including
accrued interest. We also paid approximately $2.0 million to redeem our
outstanding preferred stock, including accrued dividends, all of which was held
by NYSERNet.net. NYSERNet.net owns approximately 20.0% of our common stock and
has one representative on our board of directors.
On June 22, 1999, the Company purchased 10% of the ownership interests of
Planning Technologies, Inc., or PTI, for $5.0 million, by purchasing
approximately 2,976,190 shares of
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convertible preferred stock of PTI. For additional information about this
investment, please see our current report on Form 8-K (File No. 000-25749),
filed with the SEC on July 7, 1999.
On January 5, 2000, the Company acquired CRL Network Services, Inc. for up
to approximately $9.9 million in cash and up to approximately 2,022,287
unregistered shares of our common stock. For additional information about this
acquisition, please see our current report on Form 8-K (File No. 000-25749),
filed with the SEC on January 20, 2000. On February 2, 2000, the Company
acquired Y.C. Inc., a Michigan corporation doing business as Customnet for up to
$.6 million in cash and 24,605 unregistered shares of our common stock.
A portion of the IPO proceeds has been used to fund the Company's
operations and we intend to use the remaining $17.1 million of the net proceeds
from the offering for general corporate purposes and working capital
requirements, including the following:
- - to expand our sales and marketing efforts in approximately 20 metropolitan
areas;
- - to continue to increase the size of our sales force;
- - to expand our customer support services;
- - for working capital requirements and other general corporate purposes; and
- - for possible acquisitions.
No portion of the proceeds has been allocated for any specific purpose
referred to above. We have discretionary authority over the use of net proceeds
from the offering. In addition, we intend to use a portion of the net proceeds
from this offering to add additional data center capacity.
Pending the above uses, we have invested the proceeds of the offering in
short-term, interest bearing investment grade securities.
During the quarter ended March 31, 2000, proceeds of approximately $89,000
were generated from the exercise of options for 106,383 shares of our common
stock. There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. These options had been granted under our 1996
Incentive Stock Option Plan and were exercised by certain employees and
directors. The shares issued pursuant to our 1996 Option Plan were registered
through our registration statement on Form S-8 (File No.
333-83177), which we filed with the SEC on July 19, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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ITEM 5. OTHER INFORMATION
RISK FACTORS
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 our annual report on Form 10-K (Commission File No. 000-25759) filed with the
SEC and in our other filings and reports. In addition, you should consider the
following risk factors, as well as any other information in this Quarterly
Report 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;
- - 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 March 31, 2000 and December 31,
1999, we had an accumulated deficit of approximately $40.8 million and $29.8
million, respectively. We incurred net losses of $11.0 million for the quarter
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 regional and nationwide expansion strategy. We cannot
assure you that we will achieve or sustain revenue growth or profitability on
either a quarterly or annual basis.
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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 national 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;
- - we fail to develop a nationally recognized brand.
OUR RAPID GROWTH STRATEGY IS LIKELY TO PLACE A SIGNIFICANT STRAIN ON OUR
RESOURCES.
Our future success depends in large part on our ability to manage any
achieved growth in our business. For our nationwide growth strategy to succeed,
we will need:
- - to expand our business with new and current customers;
- - to develop and offer successful new products and services;
- - to retain key employees and hire new employees; and
- - to ensure that any future business we may develop or acquire will perform in
a satisfactory manner.
These activities are expected to place a significant strain on our
resources. Also, we cannot guarantee that any of these will occur or that we
will succeed in managing the results of any success in our nationwide growth
strategy.
OUR ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF
OPERATIONS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS
INDICATIONS OF FUTURE PERFORMANCE.
We have experienced significant fluctuations in our results of operations
on a quarterly and annual basis. We expect to continue to experience significant
fluctuations in our future quarterly and annual results of operations due to a
variety of factors, many of which are outside of our control, including:
- - demand for and market acceptance of our services;
- - customer retention;
- - the timing and success of our marketing efforts;
- - 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.
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A RELATIVELY LARGE PORTION OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM. AS A
RESULT, OUR RESULTS OF OPERATIONS WILL BE PARTICULARLY SENSITIVE TO FLUCTUATIONS
IN REVENUE.
A relatively large portion of our expenses are fixed in the short-term,
particularly in respect of data and telecommunications costs, depreciation, real
estate occupancy costs, interest expense and personnel. Because we will be
required to incur these fixed expenses, irrespective of our revenue, our future
results of operations are particularly sensitive to fluctuations in revenue.
THE EXPECTED CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES MAY
NOT MATERIALIZE OR MAY MATERIALIZE IN A MANNER WE HAVE NOT ANTICIPATED.
Our market is new and rapidly evolving. Whether, and the manner in which,
the market for our products and services will continue to grow is uncertain. The
market for our products and services may be inhibited for a number of reasons,
including:
- - the reluctance of businesses to outsource their Internet integration,
enterprise portal development, Web hosting and Internet connectivity needs;
- - our failure to successfully market our products and services to new
customers; and
- - the inability to maintain and strengthen our brand awareness.
OUR SUCCESS DEPENDS IN LARGE PART ON THE CONTINUED GROWTH OF THE INTERNET
MARKET.
Our business will be hurt if Internet usage does not continue to grow.
Internet usage may be inhibited for a number of reasons, including:
- - access costs;
- - inadequate network infrastructure;
- - security concerns;
- - uncertainty of legal and regulatory issues concerning use of the Internet;
- - inconsistent quality of service; and
- - lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it or the Internet's performance and reliability
may decline. Similarly, Web sites have experienced interruptions in their
service as a result of outages and other delays occurring throughout the
Internet network 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
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- - more effectively leverage existing relationships with customers or exploit a
more recognized brand name to market and sell their services.
Our current and prospective competitors, both in New York State and
nationally, generally may be divided into the following three groups:
- - Internet access, VPNs and security providers including GTE Internetworking,
Verio Inc., Qwest Communications International Inc., Sprint Corporation, AT&T
Corp., UUNET Technologies, Inc., Concentric Network Corp., Cable & Wireless
plc, MCI WorldCom, Inc. and other national and regional providers;
- - Web and application hosting companies including Digex, Inc., Frontier Global
Center, GTE Internetworking, Globix Corporation, PSINet Inc., Exodus
Communications, Inc. and other companies; and
- - e-Business solution companies including Razorfish Inc., IBM Global Services,
Andersen Consulting, US Internetworking Inc., Scient Corp., Cambridge
Technology Partners, Inc., Whittman-Hart Inc., Oracle Corporation, the Big 5
accounting firms, EDS Corporation and other companies.
We believe that we may also face competition from other large computer
hardware and software companies and other media, technology and
telecommunications companies.
The number of businesses providing Internet-related services is rapidly
growing. We are aware of other companies, in addition to those named above, that
have entered into or are forming joint ventures or consortia to provide services
similar to those provided by us. Others may acquire the capabilities necessary
to compete with us through acquisitions.
WE COULD ENCOUNTER SIGNIFICANT PRICING PRESSURE AS A RESULT OF INCREASED
COMPETITION AND INDUSTRY CONSOLIDATION.
As a result of increased competition and consolidation in the industry, we
could encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of our services. We may not
be able to offset such price reductions even if we obtain an increase in the
number of our customers, derive higher revenue from enhanced services or manage
to reduce our costs. Increased price or other competition could erode our market
share and could significantly hurt our business. We cannot assure you that we
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully in that environment.
OUR REVENUES ARE HEAVILY DEPENDENT ON TWO CUSTOMERS. IF WE LOSE EITHER OF THESE
CUSTOMERS, IF EITHER OF THEM REDUCES THE AMOUNT OF WORK IT DOES WITH US, OR IF
WE FAIL TO DIVERSIFY OUR CUSTOMER BASE, OUR BUSINESS WILL SUFFER.
We currently derive a substantial portion of our total revenue from
contracts with two customers - NYSERNet.org, Inc., a not-for-profit corporation
that is also affiliated with one of our major stockholders, and the New York
State Department of Labor. The loss of either of these customers could
significantly hurt our business. For the three months ended March 31, 2000 and
1999, revenue from NYSERNet.org, Inc. represented approximately 17% and 30% 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 and 1999
represented 41% and 34% 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
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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.
OUR BUSINESS MODEL ASSUMES THAT WE WILL USE THE GEMINI2000 NETWORK FOR THE
DELIVERY OF SOME OF OUR SERVICES. IF PROBLEMS OCCUR AS A RESULT OF THE CHANGE OF
OWNERSHIP OF BROADWING INTERNET SERVICES, INC. AND THE GEMINI2000 NETWORK, OUR
BUSINESS COULD SUFFER.
Our business model assumes we will use the Gemini2000 network for delivery
of some of our services. As noted above, any failure by Broadwing to maintain
the Gemini2000 Network could hurt our business.
OUR BUSINESS AND EXPANSION MODELS ASSUME THAT WE WILL BE ABLE TO EASILY SCALE
THE NETWORK INFRASTRUCTURE WE USE TO ACCOMMODATE INCREASING NUMBERS OF CUSTOMERS
AND INCREASED TRAFFIC. HOWEVER, THE SCALABILITY OF THE GEMINI2000 NETWORK IS
UNPROVEN.
The ability of the Gemini2000 Network to connect and manage a large number
of customers or a large quantity of traffic at high transmission speeds is
unproven. This network's ability to be scaled up to meet our expected customer
usage levels while maintaining superior performance is also unproven. As the
number of our customers grows or as network usage increases, we may need to make
additional investments to expand and adapt our network infrastructure and
maintain adequate data transmission speeds. Any future expansion and adaptation
of our telecommunications and hosting facility infrastructure could require
substantial financial, operational, technical and management resources.
Furthermore, additional network capacity may not be available from Broadwing or
other third-party suppliers as we need it. As a result, our network may not be
able to achieve or maintain a sufficiently high capacity for data transmission.
Any failure on our part to achieve or maintain high data transmission capacity
could significantly reduce customer demand for
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our services and hurt our business. If we are required to expand our network
significantly and rapidly due to increased usage, additional stress will be
placed upon our network hardware, traffic management systems and hosting
facilities.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH WOULD AFFECT
OUR ABILITY TO COMPETE.
Interruptions in service to our customers could hurt our business. To
succeed, we must be able to operate our network management infrastructure 24
hours per day, seven days per week, without interruption. Our operations depend
upon our ability to protect our network infrastructure, our equipment and
customer data against damage from human error or "acts of God." Even if we take
precautions, the occurrence of a natural disaster or other unanticipated
problems could result in interruptions in the services we provide to our
customers.
At this time, we do not have a formal disaster recovery plan. Although we
have attempted to build redundancy into our network and hosting facilities by
establishing a fully redundant, rigorously engineered national Tier 1 backbone
connected to three different data centers, our network is currently subject to
various single points of failure. For example, a problem with one of our routers
or switches could cause an interruption in the services we provide to some of
our customers. Any interruptions in service could:
- - cause end users to seek damages for losses incurred;
- - require us to spend more money and dedicate more resources to replacing
existing equipment, expanding facilities or adding redundant facilities;
- - cause us to spend money on existing or new equipment and infrastructure
earlier than we plan;
- - damage our reputation for reliable service;
- - cause existing end-users and resellers to cancel our contracts; or
- - make it more difficult for us to attract new end-users and partners.
Any of these results could hurt our business.
Failure of the national telecommunications network and Internet
infrastructure to continue to grow in an orderly manner could result in service
interruptions. While the national telecommunications network and Internet
infrastructure have historically developed in an orderly manner, there is no
guarantee that this will continue as the network expands and more services,
users and equipment connect to the network. Failure by our telecommunications
providers to provide us with the data communications capacity we require could
cause service interruptions, which could hurt our business.
WE ARE DEPENDENT ON NETWORKS BUILT AND OPERATED BY OTHERS. IF WE DO NOT HAVE
CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER.
In delivering our services, we rely on networks, which are built and
operated by others. We do not have control over these networks, nor can we
guarantee that we will continue to have access on terms that fit our business
needs.
Our use of the infrastructure of other communications carriers presents
risks. Our success partly depends upon the capacity, scalability, reliability
and security of the network infrastructure provided to us by telecommunications
network suppliers, including AT&T Corp., Sprint Corporation, Bell Atlantic
Corp., Pacific Bell and Broadwing. Our nationwide expansion plans require rapid
expansion of network capacity, which we expect will be satisfied through our
internal network and use of the Gemini2000 Network. Without this expanded
capacity, our ability to execute our business strategy could be hurt. In
addition, future expansion and adaptation of our network
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<PAGE> 25
infrastructure may require substantial financial, operational and management
resources. We may not be able to expand or adapt our network infrastructure on a
timely basis and at a commercially reasonable cost to meet additional demand,
changing customer requirements or evolving industry standards. In addition, if
demand for usage of our network were to increase faster than projected or were
to exceed our current forecasts, the network could experience capacity
constraints which would hurt its performance.
The current consolidation of network providers similar to the proposed
merger of MCI WorldCom and Sprint could adversely affect our peering and transit
arrangements with Sprint and UUNet if peering criteria becomes more restrictive
or cost prohibitive. We also depend on our telecommunications suppliers to
provide uninterrupted and error-free service through their telecommunications
networks. If these suppliers greatly increased the prices for their services or
if the telecommunications capacity available to us was insufficient for our
business purposes, and we were unable to use alternative networks or pass along
any increased costs to our customers, our business could suffer.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS
WHICH COULD RESULT IN OUR BEING LIABLE FOR DAMAGES AND HARM OUR REPUTATION.
Despite the implementation of network security measures, the core of our
network infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by Internet users. This could result in our being
liable for damages, and our reputation could suffer, thereby deterring potential
customers from working with us. Security problems caused by third parties could
lead to interruptions and delays or to the cessation of service to our
customers. Furthermore, inappropriate use of the network by third parties could
also jeopardize the security of confidential information stored in our computer
systems and in those of our customers.
We rely upon encryption and authentication technology purchased from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. Although we intend to continue to
implement industry-standard security measures, in the past some of these
standards have occasionally been circumvented by third parties. Therefore, we
cannot assure you that the measures we implement will not be circumvented. The
costs and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service to
our customers, which could hurt our business.
OUR BRAND IS NOT AS WELL KNOWN AS SOME OF OUR COMPETITORS, AND FAILURE TO
DEVELOP BRAND RECOGNITION COULD HURT OUR BUSINESS.
To successfully execute our strategy, we must strengthen our brand
awareness. While many of our competitors have well-established brands in
Internet services, to date, our market presence has been limited principally to
New York State. We have generated our existing revenue primarily through a small
sales force and word of mouth. In order to build our brand awareness, our
marketing efforts must succeed, and we must provide high quality services. We
expect to increase our marketing budget substantially as part of our brand
building efforts. We cannot assure you that these investments will succeed as
planned. If we do not build our brand awareness, our ability to realize our
strategic and financial objectives could be hurt.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD SUFFER.
If we do not successfully use or develop new technologies, introduce new
services or enhance our existing services on a timely basis, or new technologies
or enhancements used or developed by us do not gain market acceptance, our
business could be hurt. The Internet industry is
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characterized by rapidly changing technology, industry standards, customer needs
and competition, as well as by frequent new product and service introductions.
Our future success will depend, in part, on our ability to accomplish all of the
following in a timely and cost-effective manner, all while continuing to develop
our business model and rolling-out our services on a national level:
- - effectively use and integrate leading technologies;
- - continue to develop our technical expertise;
- - enhance our products and current networking services;
- - develop new products and services that meet changing customer needs;
- - have the market accept our services;
- - advertise and market our products and services; and
- - influence and respond to emerging industry standards and other changes.
We cannot assure you that we will successfully use or develop new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies or enhancements used or developed by us
will achieve market acceptance. Our pursuit of necessary technological advances
may require substantial time and expense. In addition, we cannot assure you
that, if required, we will successfully adapt our network and services to
alternate access devices and conduits.
If our services do not continue to be compatible and interoperable with
products and architectures offered by other industry members, our ability to
compete could be impaired. Our ability to compete successfully is dependent, in
part, upon the continued compatibility and interoperability of our services with
products and architectures offered by various other members of the industry.
Although we intend to support emerging standards in the market for Internet
access, we cannot assure you that we will be able to conform to new standards in
a timely fashion and maintain a competitive position in the market. Our services
rely on the continued widespread commercial use of Transmission Control
Protocol/Internetwork Protocol, commonly known as TCP/IP, which is an industry
standard to facilitate the transfer of data. Alternative open protocol and
proprietary protocol standards could emerge and become widely adopted. A
resulting reduction in the use of TCP/IP could render our services obsolete and
unmarketable. Our failure to anticipate the prevailing standard or the failure
of a common standard to emerge could hurt our business.
WE DERIVE SIGNIFICANT REVENUE FROM CONTRACTS WITH GOVERNMENT AGENCIES. THESE
CONTRACTS OFTEN ARE SUBJECT TO A COMPLEX PROCUREMENT PROCESS, REQUIRE COMPLIANCE
WITH VARIOUS GOVERNMENT REGULATIONS AND POLICIES AND MAY BE SUBJECT TO
UNILATERAL TERMINATION OR MODIFICATION BY THE GOVERNMENT. IN ADDITION, CHANGES
IN GOVERNMENT FUNDING AND OTHER POLICY DECISIONS COULD JEOPARDIZE OUR CONTRACTS
WITH GOVERNMENT AGENCIES.
Contracts with various government agencies accounted for approximately 50%
of our revenues in quarter 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.
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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 12 months ending March 31, 2000 we have acquired or invested
in several companies. In the future, we intend to acquire additional Internet
companies that complement our existing business model and growth strategies. Any
future acquisitions would be accompanied by the risks commonly encountered in
acquisitions, including:
- - the difficulty of assimilating the operations and personnel of acquired
companies;
- - the potential disruption of our business;
- - our management's inability to maximize our financial and strategic position
through the incorporation of an acquired technology or business into our
service offerings;
- - the difficulty of maintaining uniform standards, controls, procedures and
policies;
- - the potential loss of key employees from acquired businesses, and the
impairment of relationships with the employees and customers of an acquired
business as a result of changes in management; and
- - the inaccuracy of financial data of acquired companies.
We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more acquisitions in which the consideration
consists of cash, a significant portion of our available cash, including
proceeds of our initial public offering, could be used to consummate the
acquisitions. If we were to consummate one or more acquisitions in which the
consideration consisted of stock, our stockholders could suffer significant
dilution of their interest in us. In addition, we could incur or assume
significant amounts of indebtedness in connection with acquisitions. The
purchase price of future acquisitions will most likely be significantly greater
than the fair value of the acquired net assets. Acquisitions required to be
accounted for under the purchase method could result in significant goodwill
and/or amortization charges for acquired technology.
WE ARE DEPENDENT ON OUR HARDWARE AND SOFTWARE SUPPLIERS TO PROVIDE US WITH THE
PRODUCTS AND SERVICES WE NEED TO SERVE OUR CUSTOMERS.
We rely on outside vendors to supply us with computer hardware, software
and networking equipment. These products are available from only a few sources.
We purchase virtually all of these products from Sun Microsystems, Inc., Compaq
Computer Corporation and Cisco Systems, Inc. We cannot assure you that we will
be able to obtain the products and services that we need on a timely basis and
at affordable prices.
We have in the past experienced delays in receiving shipments of equipment
purchased for resale. To date, these delays have not adversely affected us, but
we cannot guarantee that we will not be adversely affected by delays in the
future. We may not be able to obtain computer equipment
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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, 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 the IPO to fund the
expansion of our sales and marketing efforts, expand our customer support
services and for working capital, making investments or acquisitions and general
corporate purposes. Our business plan includes aggressive expansion through
acquisitions funded mostly with stock but requiring some cash expenses and
consideration. While we believe that the proceeds from this offering will be
sufficient for these purposes, we may need to raise additional funds through
public or private debt or equity financing in order to:
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- - take advantage of anticipated opportunities or acquisitions of complementary
assets, technologies or businesses;
- - develop new products; or
- - respond to unanticipated competitive pressures.
If additional funds become necessary, additional financing may not be
available on terms favorable to us or available at all. If adequate funds are
not available or are not available on acceptable terms when needed, our business
could be hurt.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our then current stockholders may be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. If additional funds are raised through
the issuance of debt securities, these securities would have some rights,
preferences and privileges senior to those of the holders of our common stock,
and the terms of this debt could impose restrictions on our operations and
result in significant interest expense to us.
SIGNIFICANT STOCKHOLDERS AND CURRENT MANAGEMENT CONTROL APPROXIMATELY 71% OF OUR
COMMON STOCK, AND THESE PARTIES MAY HAVE CONFLICTS OF INTEREST.
Broadwing, NYSERNet.net, Inc. and Grumman Hill control approximately
24.1%, 20.1% and 12.0%, respectively, of our outstanding common stock at March
24, 2000. In addition, our executive officers and directors may be deemed to
beneficially own in the aggregate approximately 71% of our outstanding common
stock, including shares of our common stock owned by Broadwing, NYSERNet.net and
Grumman Hill that may be deemed to be owned by some of our officers and
directors as a result of their relationships with these entities. Accordingly,
Broadwing, NYSERNet.net, Grumman Hill and our officers and directors, whether
acting alone or together, are able to exert considerable influence over any
stockholder vote, including any vote on the election or removal of directors and
any merger, consolidation or sale of all or substantially all of our assets, and
control our management and affairs. Such control could discourage others from
initiating potential merger, takeover or other change in control transactions.
As a consequence, our business could be hurt. Broadwing, Grumman Hill and
NYSERNet.net each have one representative on our board of directors. In
addition, two of our directors and/or executive officers are also directors of
NYSERNet.net and NYSERNet.org, Inc., a not-for-profit corporation that is also
affiliated with NYSERNet.net. Two of our executive officers are executive
officers of NYSERNet.net and/or NYSERNet.org. Grumman Hill has a significant
equity interest in Broadwing. NYSERNet.net, NYSERNet.org, Broadwing, Grumman
Hill and our officers and directors may have conflicts of interest among
themselves, and their interests could conflict with the interests of our other
stockholders.
WE ARE DEPENDENT ON KEY PERSONNEL AND OPERATE IN AN INDUSTRY WHERE IT IS
DIFFICULT TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
We expect that we will need to hire additional personnel in all areas of
our business. The competition for personnel throughout our industry is intense.
At times, we have experienced difficulty in attracting qualified new personnel.
If we do not succeed in attracting new, qualified personnel or retaining and
motivating our current personnel, our business could suffer. We are also
dependent on the continued services of our key personnel, including our senior
management. We have entered into employment agreements with Richard Mandelbaum,
Lawrence B. Helft, Denis J. Martin, and David A. Buckel. We have also secured
key man insurance policies on the lives of Messrs. Mandelbaum and Martin.
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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.
Also, a substantial number of shares of common stock issuable upon
exercise of outstanding stock options are available for resale in the public
market as a result of our registering a registration statement on Form S-8 with
the SEC on July 19, 1999 (File No. 333-83177) in order to register the shares
issued and issuable upon the exercise of options granted under our 1996
Incentive Stock Option Plan, or granted and to be granted under our 1999 Stock
Option Plan and our 1999 Employee Stock Purchase Plan.
OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR FUTURE SALE.
THE FUTURE SALE OF A LARGE AMOUNT OF OUR STOCK, OR THE PERCEPTION THAT THESE
SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could drop as a result of future
sales of a large number of shares of for common stock in the market after our
initial public offering.
As a result of our re-offer prospectus filed on Form S-8 with the SEC on
July 19, 1999, approximately 19.2% of the shares of our outstanding common stock
no longer qualify as "restricted securities" under Rule 144 of the Securities
Act and, under the Securities Act, these shares may be freely re-offered and
re-sold. However, stockholders who sell shares of our common stock under this
re-offer prospectus must comply with the volume of sale limitations imposed
under Rule 144(e) of the Securities Act.
As of March 24, 2000, 56.7% of the shares of our common stock continue to
be restricted securities. The holders of these restricted securities have
registration rights with respect to these restricted shares and with respect to
any after-acquired shares. Also, under Rule 144 these shares become freely
tradable in the future.
Therefore, through the re-offer prospectus, as a result of registration
rights and under Rule 144, a large number of shares of our common stock may
become freely tradable and affect the market for our stock.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a.) EXHIBITS.
The following Exhibits are filed or incorporated by reference herewith:
Exhibit 10.43 Amendment No. 9 to Agreement between AppliedTheory
Corporation and the New York State Department of
Labor, dated December 6, 1999.
Exhibit 10.44 Lease Agreement between BNY Leasing Edge Corporation
and AppliedTheory Corporation dated September 8,
1999.
Exhibit 10.45 Lease Agreement between National Leasing, Inc. and
AppliedTheory Corporation dated January 18, 2000.
Exhibit 10.46 Lease Agreement between Compaq Financial Services and
AppliedTheory Corporation dated November 1, 1999.
Exhibit 10.47 Amendment No. 1 to Resale Agreement between
AppliedTheory Corporation and NYSERNet.org, Inc.
dated April 18, 2000
Exhibit 10.48 Amendment No. 1 to Resource Sharing Agreement
between AppliedTheory Corporation and NYSERNet.org,
Inc. dated April 7, 2000
Exhibit 11.1 Calculation of Basic and diluted loss per share and
weighted average shares used in calculation for the
three months ended March 31, 2000.
Exhibit 27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
(b.) REPORTS ON FORM 8K.
On January 20, 2000 and March 20, 2000, we filed a current report on
Form 8-K and a current report on Form 8-K/A that included information
relating to an agreement and plan of merger dated December 3, 1999 to
purchase CRL Network Services, Inc. The current report on Form 8-K/A
included CRL's financial statements and pro forma financial information.
AppliedTheory agreed to acquire all of the capital stock of CRL for up to
$10 million in cash and up to 2,031,250 shares in AppliedTheory common
stock. The acquisition was consummated on January 5, 2000.
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<PAGE> 32
APPLIEDTHEORY CORPORATION
FORM 10-Q
MARCH 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AppliedTheory Corporation
Date: May 12, 2000 by: /s/ Richard Mandelbaum
------------------------------------
Richard Mandelbaum
Chairman of the Board,
Chief Executive Officer, and Director
(Principal Executive Officer)
Date: May 12, 2000 and: /s/ David Buckel
------------------------------------
David Buckel
Sr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 33
EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference herewith:
Exhibit 10.43 Amendment No. 9 to Agreement between AppliedTheory Corporation
and the New York State Department of Labor, dated December 6,
1999.
Exhibit 10.44 Lease Agreement between BNY Leasing Edge Corporation and
AppliedTheory Corporation dated September 8, 1999.
Exhibit 10.45 Lease Agreement between National Leasing, Inc. and
AppliedTheory Corporation dated January 18, 2000.
Exhibit 10.46 Lease Agreement between Compaq Financial Services and
AppliedTheory Corporation dated November 1, 1999.
Exhibit 10.47 Amendment No. 1 to Resale Agreement between AppliedTheory
Corporation and NYSERNet.org, Inc. dated April 18, 2000
Exhibit 10.48 Amendment No. 1 to Resource Sharing Agreement between
AppliedTheory Corporation and NYSERNet.org, Inc. dated
April 7, 2000.
Exhibit 11.1. Calculation of Basic and diluted loss per share and weighted
average shares used in calculation for the three months ended
March 31, 2000.
Exhibit 27.1. Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only.
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<PAGE> 1
AMENDMENT NO. 9 TO CONTRACT C000525
THIS AMENDMENT, made this Seventeenth day of November in the One
thousand nine hundred and ninety-nine serves to increases the contract amount to
$36,137,237.12 as per the October 1999 Scope of Work.
WITNESSETH, that AppliedTheory Corporation and the Department of Labor, in
consideration of the agreements incorporated herein, do hereby agree as follows:
ARTICLE I.
The party of the first part shall provide Consulting, Applications
Development, Systems Integration and Help Desk Services as per the October 1999
Scope of Work and the Software Licensing Agreement attached, which together with
all appendices is hereby made a part of this agreement.
ARTICLE II. It is hereby mutually agreed between the parties hereto
that the sum to be paid by the party of the second part to the party of the
first part for said services shall be as follows:
This amendment increases the Contract amount by $14,250,000.00.
All other terms and conditions remain the same.
IN WITNESS WHEREOF, the parties hereto, have set their hand and seals,
the day and year written above.
STATE OF NEW YORK, COUNTY OF ONONDAGA SS:
On the 6th Day of December, Nineteen Hundred and Ninety-nine before me
personally came Angelo A. Gencarelli III to me know, who being by me duly sworn,
did depose and say that he resides at: 4007 Arrowhead Lane, Liverpool NY, and
that he is the Vice President of AppliedTheory Corporation, the corporation
described in and which executed the foregoing instrument, and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Margaret A. Smallman
--------------------------------------------
NOTARY PUBLIC (affix stamp)
Stamp:
MARGARET A. SMALLMAN
NOTARY PUBLIC, State of New York
Qualified in Onon. Co. No. 01SM6017390
My Commission Expires Dec. 14, 2000
<PAGE> 2
C000525
PAGE 2 OF 2
Agency Certification
"In addition to the acceptance of this contract, I also certify that
original copies of this signature page will be attached to all other exact
copies of this contract."
VENDOR NYS DEPARTMENT OF LABOR
/s/ Angelo A. Gencarelli III /s/ Laurel Dawson
- --------------------------------------- ------------------------------------
Authorized Signature Authorized Signature
Angelo A. Gencarelli III Laurel Dawson
- --------------------------------------- ------------------------------------
Printed Name Printed Name
Vice President Purchasing Agent
- --------------------------------------- ------------------------------------
Title Title
12/3/99 December 14, 1999
- --------------------------------------- ------------------------------------
Date Date
STATE ATTORNEY GENERAL STATE COMPTROLLER
/s/ Peter Favretto, Associate Attorney /s/ illegible
- --------------------------------------- ------------------------------------
Jan. 25, 2000 Mar 06, 2000
- --------------------------------------- ------------------------------------
Date Date
<PAGE> 1
Full Legal Name Phone Number
Applied Theory Corporation 516-466-8422/315-453-2912
Carrying on Business as (If Any) Fax Number
315-461-8010
Billing Address Send Invoice to Attention of:
125 Elwood Davis Road, Syracuse, NY 13212 Peg Smallman
TERMS AND CONDITIONS
This MASTER LEASE AGREEMENT ("Agreement") is dated as of September 8,
1999 and is by and between BNY Leasing Edge Corporation with offices located at
One Wall Street, New York, NY, its successors and assigns ("Lessor") and the
above referenced lessee ("Lessee"). The parties hereto for good and valuable
consideration and intending to be legally bound hereby agree as follows:
1. LEASE OF EQUIPMENT. This Agreement establishes the general terms and
conditions under which Lessor may, from time to time, lease Equipment (as
hereinafter defined) to Lessee. The terms hereof shall be deemed to form a part
of each Master Lease Schedule ("Lease") executed by the parties which references
this Agreement. "Equipment" shall mean all items of equipment, software and
maintenance set out in any Lease. Lessee hereby requests Lessor to purchase the
Equipment from the supplier(s) thereof (hereinafter called "Vendor" and/or
"Manufacturer" as applicable) and to lease the Equipment to Lessee on the terms
and conditions contained herein. Each Lease shall constitute a separate lease
agreement incorporating all the terms hereof. In the event of a conflict between
the provisions of any Lease and the provisions hereof, the provisions of the
lease shall prevail.
The amount of the lease payments on each Lease ("Lease Payments") is
based upon the estimated total cost of the Equipment on the applicable Lease.
The Lease Payments shall be adjusted proportionately upward or downward if the
actual total cost of the Equipment on the applicable Lease exceeds or is less
than the estimate and Lessee authorizes Lessor to adjust the Lease Payments by
up to fifteen percent (15%) in that event.
Unless Lessor has provided Lessee with a written commitment to the
contrary, Lessee authorizes Lessor to adjust the Lease Payment on each Lease to
increase or decrease the implicit rate of the Lease Payment to Lessor by an
amount equal to any increase or decrease in the rate of United States Treasury
Notes with a comparable term to the term of the Lease from the date the Lessor
quoted the Lease rate to the date lessor accepts the Lease.
2. TERM AND RENT. This Agreement shall become effective upon its
acceptance and execution by Lessor, and shall remain effective at least until
the expiration of the term of the last Lease hereunder. Each Lease shall become
effective upon acceptance and execution by Lessor and shall be for the term
provided therein. The term of each Lease shall commence on the Commencement
Date, as defined in the Lease with an interim term and Base Term Commencement
Date as set forth therein and shall thereafter continue until all obligations of
Lessee under the Lease shall have been fully performed ("Lease Term"). Interim
Rent and Base Term Rent shall be due and payable as set forth in the Lease. All
payments made by or on behalf of Lessee hereunder shall be non-refundable.
LESSEE'S OBLIGATION TO PAY SUCH LEASE PAYMENTS SHALL BE ABSOLUTE AND
UNCONDITIONAL AND IS NOT SUBJECT TO ANY ABATEMENT SET-OFF, DEFENSE OR
COUNTER-CLAIM FOR ANY REASON WHATSOEVER. All payments hereunder shall be made to
lessor at its address specified above (or such other place as Lessor, in
writing, directs) without notice or demand therefor. If the term of a Lease is
extended, "Lease Term" shall be deemed to refer to all extensions thereof. All
provisions of this Agreement shall apply during any extended term except as may
be otherwise specifically provided in the Lease, or in any subsequent written
agreement of the parties.
3. DELIVERY AND ACCEPTANCE. Delivery and installation arrangements and
costs, unless included in the cost of the Equipment to Lessor and upon which the
Lease Payments were computed, are the sole responsibility of Lessee. Lessee
agrees to accept the Equipment when delivered, installed and operating to
Manufacturer's specifications and to execute the Delivery and Acceptance
Certificate supplied by Lessor as evidence thereof. Lessee agrees to hold Lessor
harmless from specific performance of this Agreement and any Lease and from
damages, if for any reason, Vendor fails to deliver, or delays in delivery of
the Equipment so ordered or if the Equipment is unsatisfactory for any reason
whatsoever. Lessee agrees that any delay in delivery of the Equipment shall not
affect the validity of this Agreement, any Lease or the obligation to make Lease
Payments thereunder. Lessee's execution of the Delivery and Acceptance
Certificate shall conclusively establish that the Equipment covered thereby is
acceptable to Lessee for all purposes of the Lease related thereto.
Lessee agrees to provide a suitable installment environment for the
Equipment as specified in the applicable Manufacturer's manual, if any, and
except as otherwise specified by Manufacturer, to furnish all labor required for
unpacking and placing each item of Equipment in the desired location. Without
limiting the generality of the foregoing, the foundation or floor on which the
Equipment is to be installed, shall be in accordance with the builder's
specifications and the power for the Equipment shall be in accordance with the
builder's specifications and the local electrical code.
If Lessee has entered into any purchase, licensing or maintenance
agreements with Vendor and/or Manufacturer ("Acquisition Agreement") covering
the Equipment or any portion thereof, Lessee transfers and assigns to Lessor all
of Lessee's rights, but none of its obligations (except for Lessee's obligation
to pay for the Equipment upon Lessor's acceptance of the Lease) in and to the
Acquisition Agreement, including, without limitation, the right to take title to
the Equipment.
If Lessee cancels or terminates a Lease prior to delivery of the
Equipment or if Lessee fails or refuses to sign the Delivery and Acceptance
Certificate within a reasonable time, not to exceed five (5) business days,
after the Equipment has been delivered, installed and is operating to
Manufacturer's specifications, Lessor shall have the option of treating the
Lease as cancelled by Lessee and Lessee shall automatically assume all of
Lessor's rights and obligations as purchaser of the Equipment, whether under an
Acquisition Agreement or otherwise.
IT IS HEREBY AGREED THAT LESSOR IS NOT RESPONSIBLE FOR THE PERFORMANCE,
MAINTENANCE OR SERVICING OF THE EQUIPMENT AND LEASES SAME "AS-IS."
4. SELECTION OF EQUIPMENT AND DISCLAIMER OF WARRANTY. Lessee has
selected both the Equipment and Vendor and/or Manufacturer from whom Lessor
covenants to purchase the Equipment at Lessee's request. LESSEE ACKNOWLEDGES
THAT LESSOR HAS NO EXPERTISE OR SPECIAL FAMILIARITY ABOUT OR WITH RESPECT TO THE
EQUIPMENT. LESSEE AGREES THAT THE EQUIPMENT LEASED HEREUNDER IS LEASED "AS-IS"
AND IS OF A SIZE, DESIGN AND CAPACITY SELECTED BY LESSEE AND THAT LESSEE IS
SATISFIED THAT THE SAME IS SUITABLE FOR LESSEE'S PURPOSES AND THAT LESSOR HAS
MADE NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE SUITABILITY OR DURABILITY
OF SAID EQUIPMENT FOR THE PURPOSES AND USES OF LESSEE OR ANY OTHER
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT THERETO, INCLUDING
THE IMPLIED WARRANTIES OR MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
YEAR 2000 COMPLIANCE. LESSOR FURTHER DISCLAIMS ANY LIABILITY FOR LOSS, DAMAGE OR
INJURY TO LESSEE OR THIRD PARTIES AS A RESULT OF ANY DEFECTS, LATENT OR
OTHERWISE, IN THE EQUIPMENT WHETHER ARISING FROM THE APPLICATION OF THE LAWS OF
STRICT LIABILITY OR OTHERWISE. If the Equipment is not properly installed, does
not operate as represented or warranted by Vendor and/or Manufacturer, or is
unsatisfactory for any reason, Lessee shall make any claim on account thereof
solely against Vendor and/or Manufacturer and shall, nevertheless, pay Lessor
all Lease Payments under the Lease and shall not set off against Lessee's
obligations any such claims as a defense, counterclaim, set-off or otherwise. So
long as Lessee is not in breach or default of this Agreement or any Lease
hereunder, Lessor hereby assigns to Lessee, solely for the purpose of making and
prosecuting any such claim (solely in Lessee's name), any rights which lessor
may have against Vendor and/or Manufacturer for breach of warranty or other
representation respecting any item of the Equipment. All proceeds of any
warranty recovery by Lessee from Vendor and/or
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Manufacturer of any item of the Equipment shall first be used to repair or
replace the affected item.
LESSEE ACKNOWLEDGES THAT NEITHER VENDOR NOR ANY SALESPERSON, EMPLOYEE,
REPRESENTATIVE OR AGENT OF VENDOR AND/OR MANUFACTURER IS AN AGENT OR
REPRESENTATIVE OF LESSOR, AND THAT NONE OF THE ABOVE IS AUTHORIZED TO WAIVE OR
ALTER ANY TERM, PROVISION OR CONDITION OF THIS AGREEMENT OR ANY LEASE HEREUNDER,
OR MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THIS AGREEMENT, ANY LEASE
HEREUNDER OR THE EQUIPMENT LEASED HEREUNDER. Lessee further acknowledges and
agrees that Lessee in executing this Agreement and each Lease hereunder, has
relied solely upon the terms, provisions and conditions contained herein and
therein, and any other statements, warranties or representations, if any, by
Vendor and/or Manufacturer, or any salesperson, employee, representative or
agent of Vendor and/or Manufacturer, have not been relied upon, and shall not in
any way affect Lessee's obligation to make the Lease Payments and otherwise
perform as set forth in this Agreement and each Lease.
REGARDLESS OF CAUSE, LESSEE WILL NOT ASSERT ANY CLAIM WHATSOEVER
AGAINST LESSOR FOR LOSS OF ANTICIPATORY PROFITS OR ANY OTHER INDIRECT, SPECIAL
OR CONSEQUENTIAL DAMAGES, NOR SHALL LESSOR BE RESPONSIBLE FOR ANY DAMAGES OR
COSTS WHICH MAY BE ASSESSED AGAINST LESSEE IN ANY ACTION FOR INFRINGEMENT OF ANY
UNITED STATES LETTERS PATENT OR COPYRIGHT. LESSOR MAKES NO WARRANTY AS TO THE
TREATMENT OF THIS AGREEMENT OR ANY LEASE HEREUNDER FOR TAX OR ACCOUNTING
PURPOSES.
NOTWITHSTANDING ANY PROVISION CONTAINED HEREIN TO THE CONTRARY, LESSEE
DOES NOT WAIVE ANY RIGHTS OR REMEDIES IT MAY HAVE AGAINST VENDOR AND/OR
MANUFACTURER OF THE EQUIPMENT.
5. TITLE, PERSONAL PROPERTY AND LOCATION. The Equipment is, and shall
at all times be and remain the sole and exclusive property of Lessor, and
Lessee, notwithstanding any trade-in or down payment made by Lessee or on its
behalf with respect to the Equipment, shall have no right, title or interest
therein or thereto, except as to the use thereof subject to the terms and
conditions of this Agreement and the related Lease hereunder. To the extent that
the license for the Software ("License") allows title to Software to pass to
Lessee, such title shall vest and remain in Lessor. To the extent such vesting
requires a specific written conveyance, Lessee hereby conveys to Lessor any
title it has or may hereafter acquire in the Software and relinquishes any
subsequent claim of title to the Software, including any rights to purchase the
Software and to retain rights to use the same beyond the Lease Term. If any
provision of this paragraph requires for its effectiveness Licensor's prior
written consent because the License limits transfers, encumbrance or assignment
of the Software, then Lessee shall assist Lessor, if so requested, in obtaining
such consent.
Lessee will not directly or indirectly create, incur, assume or suffer
to exist any lien on or with respect to the Equipment or Lessor's title thereto,
except such liens as may arise through the independent acts or omissions of the
Lessor. Lessee, at its own expense, will promptly pay, satisfy or otherwise take
such actions as may be necessary to keep the Equipment free and clear of any and
all such liens. The Equipment is, and at all times shall remain, personal
property notwithstanding that the Equipment or any item thereof may now be, or
hereafter become, in any manner affixed or attached to, or imbedded in, or
permanently resting upon real property or any improvement thereof or attached in
any manner to what is permanent. If requested by Lessor prior to or at any time
during the Lease Term, Lessee will obtain and deliver to Lessor waivers of
interest or liens in recordable form, satisfactory to Lessor, from all persons
claiming any interest in the real property on which an item of the Equipment is
installed or located.
The Equipment shall be kept at the address designated in each Lease and
shall not be removed therefrom without the prior written consent of the Lessor,
which consent shall not be unreasonably withheld.
6. USE AND MAINTENANCE. Lessee shall use the Equipment solely in the
conduct of its business and in a careful and proper manner consistent with the
requirements of all applicable insurance policies shall only permit qualified
personnel to operate the Equipment and shall not discontinue the use of the
Equipment during the Lease Term. Lessee will not modify the Equipment in any way
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld. Lessee shall not attach or incorporate the Equipment to
or in any other item of equipment or software in such a manner that the
Equipment becomes or may be deemed to have become an accession to or a part of
such other item of equipment or software.
At its own expense, Lessee will cause the Equipment to be kept, used
and maintained as recommended by Manufacturer and Manufacturer's maintenance
manuals and plans by competent and duly qualified personnel only approved by
Manufacturer in accordance with applicable governmental regulations, if any, and
for business purposes only and in as good operating condition as when delivered
to Lessee hereunder, ordinary wear and tear resulting from proper use alone
excepted and will provide all maintenance and service and make all repairs or
replacements reasonably necessary for such purpose. Lessee shall record in a log
book all maintenance and repair performed on the Equipment and deliver the same
to Lessor from time to time as requested by Lessor and upon termination of the
Lease.
If any parts or accessories forming part of the Equipment become worn
out, lost, destroyed, damaged beyond repair or otherwise permanently rendered
unfit for use, Lessee, at its own expense, shall within a reasonable time cause
such parts or accessories to be replaced by replacement parts or accessories
which are free and clear of all liens, encumbrances or rights of others and have
a utility at least equal to the parts or accessories replaced. All equipment,
software accessories, upgrades, parts and replacements for or which are added to
or become attached to the Equipment, which are essential to the operation of the
Equipment or which cannot be detached from the Equipment without materially
interfering with the operation of the Equipment or adversely affecting the value
and utility which the Equipment would have had without the addition thereof,
shall immediately become the property of Lessor, and shall be deemed
incorporated in the Equipment and subject to the items of this Agreement and the
related Lease as if originally leased hereunder. Lessee shall not make any
material alterations to the Equipment without the prior written consent of
Lessor, which consent shall not be unreasonably withheld.
Upon reasonable advance notice, Lessor shall have the right to inspect
the Equipment, log book and all other maintenance records with respect thereto,
if any, at any reasonable time during normal business hours.
In the event the Lease Payments include the cost of maintenance and/or
service being provided by Vendor and/or Manufacturer, Lessee acknowledges that
Lessor is not responsible for providing any required maintenance and/or service
for the Equipment. Lessee shall make all claims for service and/or maintenance
solely to Vendor and/or Manufacturer and Lessee's obligation to make all
required Lease Payments shall remain unconditional.
7. ASSIGNMENT. LESSEE MAY NOT ASSIGN THIS AGREEMENT, ANY LEASE OR THE
RIGHTS HEREUNDER NOR SHALL THE LESSEE SUBLEASE OR LEND THE EQUIPMENT OR PERMIT
TO BE USED BY ANYONE OTHER THAN LESSEE'S EMPLOYEES WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD. Lessor may
at any time assign all or part of any interest in this Agreement or any Lease
and in each item of the Equipment and monies to become due to Lessor hereunder;
and, Lessor may at any time grant security interests in the Equipment, subject
to Lessee's rights therein, in each case without notice to or consent of Lessee.
In such events, all the provisions of this Agreement or any Lease hereunder for
the benefit of Lessor shall inure to the benefit of and be exercised by or on
behalf of such assignee. The Lessor may, direct that all Lease Payments due and
to become due under this Agreement or any Lease hereunder and assigned by Lessor
shall be paid directly to assignee, upon notice of such assignment to Lessee.
The right of the assignee to the payment of the assigned Lease Payments, the
performance of all Lessee's obligations and to exercise any other of Lessor's
rights hereunder shall not be subject to any defense, counterclaim or set-off
which Lessee may have or assert against Lessor, and Lessee hereby agrees that it
will not assert any such defenses, set-offs, counterclaims and claims against
any assignee. No such assignment by Lessor shall relieve Lessor of its
obligations (unless consented to by Lessee (which consent shall not be
unreasonably
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withheld)), or limit or otherwise affect Lessee's rights and/or obligations
hereunder.
8. RETURN OF EQUIPMENT STORAGE. Lessee shall, at is sole expense,
surrender the Equipment then subject to any Lease hereunder at the expiration or
earlier termination of the Lease Term by delivering the Equipment to Lessor at a
location accessible by common carrier and designated by Lessor within the
continental United States, or, if specified by Lessor, into the custody of a
carrier designated by Lessor. In the case of Software, Lessee shall destroy all
intangible items constituting such Software and shall deliver to Lessor all
tangible items constituting such Software. At Lessor's request, Lessee shall
also certify in a form acceptable to Lessor that: (i) Lessee has complied with
the Software return provisions, (ii) Lessee will not use the Software after the
expiration or earlier termination of the Lease Term; and (iii) Lessee shall
permit Lessor and/or the Vendor of the Software to inspect Lessee's locations to
verify compliance with the terms hereof.
If the item of the Equipment is delivered into the custody of a
carrier, Lessee shall arrange for the shipping of the item and its insurance in
transit in accordance with Lessor's instructions and at Lessee's sole expense.
Lessee, at its sole expense, shall completely sever and disconnect the Equipment
from Lessee's property, all without liability of Lessor to Lessee, or to any
person claiming through or under Lessee, for damage or loss caused by such
severance and disconnection. Lessee, at its sole expense, shall pack or crate
the Equipment or its component parts carefully and in accordance with any
recommendations of Manufacturer with respect to similar new software and
equipment before surrendering the Equipment to Lessor. Lessee shall deliver to
Lessor the plans, specifications, operation manuals and other warranties and
documents furnished by Manufacturer or Vendor of the Equipment and such other
documents in Lessee's possession relating to the maintenance and methods of
operation of such Equipment.
When the Equipment is surrendered to Lessor it shall be in the
condition and repair required to be maintained under this Agreement. It will
also be free of all evidence of advertising or insignia placed on it by Lessee
and meet all legal and regulatory conditions necessary for Lessor to sell or
lease it to a third party and be free of all liens. If Lessor reasonably
determines that the Equipment, once it is returned, is not in the condition
required hereby, Lessor may cause the repair, service, upgrade, modification or
overhaul the Equipment to achieve such condition and upon demand, Lessee shall
promptly reimburse Lessor for all amounts reasonably expended in connection with
the foregoing, provided Lessee has not exercised its purchase option as provided
under this Lease.
Should Lessee not return the Equipment at the end of the Lease Term,
Lessee shall continue to make Lease Payments to Lessor in the sum equal to the
last Lease Payment and at the same intervals as set out in the Lease as a
month-to-month lease term (or other term as designated by Lessor) until returned
by Lessee or until returned upon demand therefor by Lessor. The acceptance of
said Lease Payments by Lessor shall not waive Lessor's right to have the
Equipment promptly returned to Lessor pursuant to the provisions hereof, nor
shall the acceptance of said Lease Payments be deemed to be an extension of the
Lease Term.
Upon written request of Lessor, Lessee shall provide free storage for
any item of Equipment for a period not to exceed 60 days after expiration of its
Lease Term before returning it to Lessor. Lessee shall arrange for the insurance
described in Section 10 to continue in full force and effect with respect to
such item during its storage period and Lessor shall reimburse Lessee on demand
for the incremental premium cost of providing such insurance.
9. LOSS OR DAMAGE. Lessee hereby assumes and shall bear the entire risk
of loss (including theft, requisition of use, erasure or inoperability) or
destruction of or damage to the Equipment from any and every cause whatsoever,
whether or not insured, until the Equipment is returned to Lessor. No such loss
or damage shall relieve Lessee from any obligation under this Agreement or any
Lease hereunder, which shall continue in full force and effect. In the event of
damage to or loss or destruction of the Equipment (or any part thereof), Lessee
shall promptly notify Lessor in writing of such fact and shall, at the option of
Lessor, (a) restore the same to good repair, condition and working order, (b)
replace the Equipment with like equipment in good repair, condition and working
order, acceptable to Lessor and transfer clear title to or a right to use, as
appropriate, such replacement Equipment to Lessor, whereupon such Equipment
shall be subject to the Lease and be deemed the Equipment for purposes hereof,
or (c) on the due date for the next Lease Payment or upon the expiration of the
Lease, whichever first occurs, pay to Lessor: (i) the stipulated loss value
therefor as may be specified in the Lease ("Stipulated Loss Value") plus all
Lease Payments then due, or (ii) if the Lease does not provide for Stipulated
Loss Value, the present value of the total of all unpaid Lease Payments for the
entire Lease Term plus the estimated fair market value of the Equipment at the
end of the originally scheduled Lease Term or the agreed upon purchase option
price, if any, all of which shall be discounted to the date of payment by Lessee
at an annual rate equal to the lesser of six percent (6%) or the rate then
available for United States Treasury obligations having an average life equal to
the remaining Lease Term ("Present Value Rate"), whereupon the Lease shall
terminate with respect thereto. All proceeds of insurance received by Lessor as
a result of such loss or damage shall, where applicable, be applied toward the
replacement or repair of the Equipment or the payment of the obligations of
Lessee hereunder.
10. INSURANCE. Prior to the Lease Commencement Date, Lessee shall
obtain, maintain and keep the Equipment insured against all risks of loss or
damage from every cause whatsoever, including, without limitation, loss by fire,
theft, "mysterious disappearance", collision, earthquake, flood and such other
risks of loss as are customarily insured against on the type of Equipment leased
hereunder by businesses of the type in which Lessee is engaged, in an amount not
less than the replacement cost or Stipulated Loss Value of the Equipment,
whichever is greater, without deductible and without co-insurance. Lessee shall
maintain such insurance coverage for the entire Lease Term. Lessee shall also
obtain and maintain for the entire Lease Term, comprehensive public liability
insurance covering liability for bodily injury, including death, and property
damage resulting from the purchase, ownership, leasing, maintenance, use,
operation or return of the Equipment with a combined single limit of not less
than Two Million Dollars ($2,000,000.00) per occurrence. If Lessee is a doctor,
hospital or other health care provider, Lessee shall furnish Lessor with
evidence of sufficient professional liability insurance. All said insurance
shall be in a form and an amount and with companies reasonably satisfactory to
Lessor. Lessor, (including its successors or assigns,) shall be the sole named
loss payee with respect to insurance for damage to or loss of the Equipment and
shall be named as an additional insured on the public liability insurance.
Lessee shall pay all premiums for such insurance and shall deliver to Lessor the
original policy or policies of insurance, certificates of insurance, or other
evidence satisfactory to Lessor evidencing the insurance required thereby, along
with proof, satisfactory to Lessor, of the payment of the premiums for such
insurance policies. All insurance shall provide for at least sixty (60)' days
advance written notice to Lessor before any cancellation, expiration or material
modification thereof and also provide that no act or default of any person other
than Lessor, its agent or those claiming under Lessor, will affect Lessor's
right to recover under such policy or policies in case of loss. Lessee hereby
irrevocably appoints Lessor as Lessee's attorney-in-fact (which power shall be
deemed coupled with an interest) to make claim for, receive payment of, and
execute and endorse all documents, checks or drafts received in payment for loss
or damage under any such insurance policy in the name of Lessee. Unless Lessee
is in default, Lessee may with the prior written approval of Lessor, settle and
adjust all such claims. Lessee agrees if Lessee shall fail to procure, maintain,
and pay for such insurance. Lessor shall have the right, but not the obligation,
to obtain such insurance on behalf of and at the expense of Lessee. In the event
Lessor does obtain such insurance, Lessee agrees to pay all costs thereof with
the next Lease Payment or as specified by Lessor.
11. WAIVER AND INDEMNITY. Lessee assumes and agrees to indemnify,
defend and keep harmless Lessor, its agents and employees, from and against any
and losses, damages, injuries, claims, demands and expenses, including legal,
consulting and expert expenses (other than such as may directly and proximately
result from the gross negligence or willful misconduct of Lessor, its agent or
employees), arising on account of the ordering (whether by Acquisition Agreement
or otherwise), acquisition, delivery, installation or rejection of the
Equipment, the possession, maintenance, use, condition (including, without
limitation, latent and other defects and whether or not discoverable by Lessor
or Lessee, any claim in tort for strict liability, and any claim for patent,
trademark or copyright
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infringement) or operation of any item of the Equipment, and by whomsoever used
or operated, during the Lease Term with respect to that item of the Equipment,
the loss, damage, destruction, environmental impact, removal, return, surrender,
sale or other disposition of the Equipment, or any item thereof. Lessor shall
give Lessee prompt notice of any claim or liability hereby indemnified against.
Lessee shall be entitled to control the defense thereof, so long as Lessee is
not in default hereunder; provided, however, that Lessor shall have the right
approve defense counsel selected by Lessee. The obligations contained in this
paragraph continue beyond the termination of the Lease if the liability occurred
during the Lease Term.
12. TAX TREATMENT AND INDEMNIFICATION (a) Unless otherwise provided for
in the related Lease, it is acknowledged and agreed by the parties that they are
entering into this Agreement with the assumption that Lessor and the
consolidated group of which Lessor is a member (all references to Lessor in this
Section include such consolidated group) will be treated for federal income tax
purposes (and to the extent allowable, for state and local tax purposes) as the
owner of all Equipment leased hereunder and will have the maximum federal income
tax rate applicable to corporations during the term hereof (which maximum
federal income tax rate shall remain constant during the term hereof).
(b) Lessee acknowledges and agrees that each Lease has been executed by
Lessor based upon the following representations and warranties of Lessee: (i)
each item of Equipment has been placed in service on the Lease Commencement Date
(as defined in each Lease); (ii) Lessor will not under the Internal Revenue Code
of 1965, as amended, and the regulations promulgated thereunder (the "Code"), be
required to include in its gross income, for federal income tax purposes, any
amount with respect to any improvement, modification or addition made by Lessee
to any item of Equipment; (iii) Lessor shall be entitled to accelerated cost
recovery deductions ("Recovery Deductions") for the cost of each item of
Equipment by using the 200% declining balance method permitted under Code
Section 168 and the half year convention, unless otherwise required by operation
of Code Section 168(d)(3)(A); (iv) no item of Equipment is limited use property
within the meaning of Rev. Proc. 76-30; and (v) for federal income tax purposes,
all amounts included in the gross income of lessor with respect to each item of
Equipment will be treated as derived from or allocable to sources within the
United States.
(c) If by reason of (1) the inaccuracy in law or in any of any of the
assumptions or representations or warranties set forth in Subsections (a) of (b)
of this Section; (2) the inaccuracy of any statement or any letter or document
furnished to Lessor by or on behalf of Lessee in connection with the
transactions contemplated under the Lease, or (3) the act, failure to act or
omission of or by Lessee or (4) any change in the Code occurring after the date
hereof, Lessor will (i) lose, will not have the right to claim or if there will
be disallowed with respect to lessor all or any portion of the Recovery
Deduction as to any item of the Equipment, (ii) be required to include in its
gross income any amount in respect to any alteration, modification or addition,
any item, other than an alteration, modification or addition which is permitted
without adverse tax consequences to Lessor under Rev. Procs. 75-21, 76-30 or
79-48 (an "Improvement Loss"), or (iii) suffer a decrease in Lessor's net return
over the then remaining portion of the Lease Term (any such occurrence referred
to hereinafter a "Loss"), then at lessor's option either (x) the rent will, on
and after the next succeeding date for the payment thereof upon notice to Lessee
by Lessor that a Loss has occurred, and describing the amount as to which Lessor
intends to claim indemnification and the reason for such adjustment in
reasonable detail, be increased by such amount which will cause Lessor's net
return over the then remaining portion of the Lease Term (taking into account
the effect from deferred utilization of tax basis resulting from changes in the
method of calculating Recovery Deductions) to equal the net return that would
have been available such loss had not occurred, or (Y) in lieu of a rent
increase, Lessee shall pay to Lessor on such next succeeding date for the
payment of rent such sum as will cause Lessor's net return over the terms of the
Lease in respect of the Equipment to equal to the net return that would have
been available if such Loss had not occurred. If such Loss occurs after the
expiration or termination of the Lease, Lessor will notify Lessee of such Loss
and Lessee will, within sixty (60) days after such notice, pay to Lessor such
sum as required by the preceding clause (Y). Lessee will forthwith pay on demand
to Lessor an amount on an after-tax basis which will be equal to the amount of
any interest and/or penalties which may be assessed by the United States or any
state against Lessor as a result of the loss.
(d) For purposes of this Section, a Loss will occur upon the earliest
of (1) the happening of any event which may cause such Loss, (2) the payment by
Lessor to the Internal Revenue Service of the tax increase resulting from such
Loss, or (3) the adjustment of the tax return of Lessor to reflect such Loss.
Lessor will be responsible for, and will not be entitled to a payment under this
Section on account of any Loss due solely to one or more of the following
events: (i) the failure of Lessor to have sufficient taxable income to benefit
from the Recovery Deduction; (ii) any disposition of the Equipment by Lessor
prior to an Event of Default which has occurred and is continuing under the
Lease; or (iii) the failure of Lessor to properly claim the Recovery Deduction.
(e) The indemnities and assumptions of liability provided herein and
all Lessor's rights and privileges herein will continue in full force and effect
notwithstanding the expiration or termination of the Lease.
13. EVENTS OF DEFAULT. The term "Event of Default" shall mean any one
or more of the following:
(a) Lessee shall fail to make any Lease Payment, or any other payment,
as it becomes due and such failure is not cured within 10 days; or
(b) Lessee shall fail to perform or observe any of the covenants set
forth in Paragraph 10; or
(c) Lessee shall fall to perform or observe any other covenant,
condition or agreement to be performed or observed by it hereunder or in any Law
or any other agreement delivered in connection with any Lease and such failure
is not cured within 30 days after the date of notice thereof by Lessor to
lessee; or
(d) Lessee or any Guarantor of Lessee's obligations hereunder
("Guarantor") shall enter into any transaction of merger or consolidation in
which it is not the surviving entity or sell, transfer, pledge or otherwise
dispose of all or substantially all of its assets ("Assets") unless the
surviving entity or the entity acquiring such Assets assumes all the duties and
obligations of Lessee hereunder or such Guarantor under its guaranty and which
merger consolidation, sale, transfer or disposition must be approved in writing
by Lessor; or
(e) (i) Lessee or any Guarantor shall liquidate, dissolve or otherwise
cease to do business as a going concern or shall commence any action (A) for
relief under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, or (B) seeking appointment of a receiver, custodian or other similar
official for it or for its Assets or making a general assignment for the bereft
of its creditors; or (ii) there shall be commenced against lessee or any
Guarantor, any action (A) of a nature referred to in clause (i) which results in
the entry of an order for relief or any arch other relict and remains
undismissed or undischarged for a period 30 days, or (B) seeking attachment,
execution or similar process against its assets which results in the entry of an
order for any such relief which shall not be vacated or discharged within 30
days from the entry thereof; or (iii) Lessee or any Guarantor shall generally
not, or be unable to, pay its debts as they come due; or
(f) Lessee or any Guarantor shall die or become incompetent. or
(g) Any representation or warranty made by Lessee or any Guarantor, or
any financial or other statement Lessee or any Guarantor, furnished Lessor in
connection with this Agreement or any Lease hereunder shall prove at any time to
have been untrue or misleading in any material respect; or
(h) Lessee or any Guarantor defaults on any indebtedness for borrowed
money, lease, or installment sale obligation, m each case when any applicable
grace period for such obligation has expired and the lender, lessor or creditor
has commenced to exorcise any remedy, but only if the indebtedness or other
obligation is in an amount equal to or in excess of $50,000; or
(i) Lessor shall reasonably deem itself insecure as a result of a
material adverse change in Lessee's or any Guarantor's financial condition or
operations: or
(j) Lessee shall default in its obligations under a License; or
(k) The validity of this Agreement, any Lease or any guarantee thereof
or any other agreement delivered in connection with any Lease shall be contested
or declared null and void or Lessee or any Guarantor shall deny it has any
liability or obligation under or with respect to this Agreement. any
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Lease or any guarantee thereof; or any other agreement delivered in connection
with any Lease; or
(l) the financial condition of Lessee or any Guarantor shall change
such that in the judgment of Lessor, Lessor's risk is materially adversely
affected; or
(m) any Guarantor shall fail to perform or observe any covenant, term
or condition of its Guaranty and such failure shall continue unremedied for a
period of 15 days after the date of notice thereof by Lessor to such Guarantor.
14. REMEDIES. Upon the occurrence of any Event of Default, Lessor may
declare this Agreement or any Lease hereunder to be in default and exercise any
one or more of the following remedies:
(a) Declare the entire unpaid balance of Lease Payments for the
unexpired term of the Lease hereunder immediately due and payable and similarly
accelerate the balances due under any other Leases between Lessor and Lessee
without notice or demand. (b) Sue for and recover all Lax Payments and other
movies due and to become due under the Lease or hereunder, plus the estimated
fair market value of the Equipment at the end of the originally scheduled Lease
Term or any agreed upon Purchase Option, all of which shall be discounted to the
date of default at the Present Value Rate (defined in Section 9 hereof), but
only to the extent permitted by law. (c) Charge Lessee interest on all monies
due Lessor at the rate of eighteen percent (18%) per annum from the date of
default until paid but in no event more than the maximum rate permitted by law;
(d) Charge Lessee a returned-check or non-sufficient funds charge ("NSF Charge")
to reimburse Lessor for the time and expense incurred with respect to each check
that is returned for any reason including non-sufficient or uncollected funds,
such NSF Charge is stipulated and liquidated at $25.00; (e) Require Lessee to
assemble all Equipment at Lessee's expense, at a place reasonably designated by
Lessor; (f) Remove any physical obstructions for removal of the Equipment from
the place where the Equipment is located and take possession of any or all items
of Equipment, without demand, or notice. wherever same may be located,
disconnecting and separating all such items of the Equipment from any other
property, with or without any court order or pre-taking hearing or other process
of law, it being understood that such remedy of repossession upon an Event of
Default is a basis for the financial accommodation reflected by this Agreement
or any Lease hereunder. Lessee hereby waives any and all damages occasioned by
such retaking except such damages as may be caused by Lessor's gross negligence
or willful misconduct. Lessor may, at its option, use, ship, store or repair any
or all items of the Equipment so removed and shall sell, lease or otherwise
dispose of any such Equipment at a private or public sale. Lessor may show the
Equipment and resell or lease the Equipment at Lessee's premises at reasonable
business hours without being required to remove the Equipment. In the event
Lessor disposes of the Equipment, Lessor shall give Lessee credit for any sums
received by Lessor from the sale or lease of the Equipment after deduction of
the expenses of sale or lease. The credit for any sums to be received by Lessor
from such lease during the remaining portion of the Lease Term shall be
discounted to the commencement date of such lease at an annual rate equal to the
implicit rate of interest of such lease. Lessee shall also be liable for and
shall pay to Lessor (i) all expenses incurred by Lessor in connection with the
enforcement of any of Lessor's remedies, including all expenses of repossessing,
storing, shipping, repairing and selling the Equipment, and (ii) Lessor's
reasonable attorney's fees and expenses. Lessor and Lessee acknowledge the
difficulty in establishing a value for the unexpired Lease Term and owing to
such difficulty agree that the provisions of this paragraph represent an agreed
measure of damages and are not to be deemed a forfeiture or penalty.
In the case of Software, it is acknowledged and agreed that the
unauthorized use, disclosure or transfer of the Software could cause Lessor
incalculable and irreparable harm. Therefore, if Lessee is found to be using (in
whatever manner) any portion of the Software after the applicable Lease Term or
after an Event of Default and Lessor's written demand for Lessee to return the
Software or if the licensor of the Software terminates a License or Lessees
right to use the Software thereunder, then liquidated damages shall immediately
be payable to Lessor in an amount equal to two (2) times the license fees paid
or payable with respect to the Software being used.
Whenever any payment is not made by Lessee when due hereunder, Lessee
agrees to pay to Lessor, not later than one month thereafter, an amount
calculated at the rate of five cents per one dollar for each such delayed
payment as compensation for Lessor's internal operating expenses arising as a
result of such delayed payment, but only to the extent permitted by law. Such
amount shall be payable in addition to all amounts payable by Lessee as a result
of the exercise of any of the remedies herein provided. All rights and remedies
of Lessor hereunder are cumulative, are in addition to any other rights and
remedies provided for by law, and may, to the extent permitted by law, be
exercised concurrently or separately. The exercise of any one right or remedy
shall not be deemed to be an election of such right or remedy or to preclude the
exercise of any other right or remedy. No failure on the part of Lessor to
exercise and no delay in exercising any right or remedy shall operate as a
waiver thereof or modify the terms of this Agreement or any Lease hereunder. A
waiver of default shall not be a waiver of any other or subsequent default,
Lessor's recovery hereunder shall in no event exceed the maximum recovery
permitted by law.
15. LAWS, REGULATIONS AND TAXES. Lessee shall comply with all laws,
regulations and orders relating or pertaining to the Equipment, this Agreement
or any Lease hereunder and Lessee shall be responsible for, as and when due, and
shall indemnify and hold Lessor harmless from and against all present and future
taxes and other governmental charges, or any increases therein (including,
without limitation, sales, use, leasing and stamp taxes and license and
registration fees) and amounts in lieu of such taxes and charges and any
penalties or interest on any of the foregoing, imposed, levied upon, in
connection with, or as a result of the purchase, ownership, delivery, leasing,
possession or use of the Equipment, or based upon or measured by the Lease
Payments or receipt with respect to this Agreement or any Lease hereunder.
Lessee shall not, however, be obligated to pay any taxes on or measured by
Lessor's net income. Lessee authorizes Lessor to add to the amount of each Lease
Payment any sales, use or leasing tax that may be imposed on or measured by such
Lease Payment. Lessee shall pay Lessor on demand, as additional rent, the amount
of the personal property tax required to be paid by Lessor as owner of the
Equipment, plus reasonable costs incurred in collecting and administering any
taxes, assessments or fees and remitting them to the appropriate authorities and
interest thereon at the highest legal rate allowed, from the date due until
fully paid. In the event Lessee does not pay all sums specified above, Lessor
has the right, but not the obligation, to pay the same. If Lessor shall so pay
any of the aforementioned, then Lessee shall remit such amount with the next
Lease Payment plus Lessor's reasonable costs incurred in collecting and
administering any taxes, assessments or fees and remitting them to the
appropriate authorities.
16. UCC FILINGS AND FINANCIAL STATEMENTS Lessee authorizes Lessor to
file one or more financing statement(s) with respect to the Equipment signed
only by Lessor where permitted by the Uniform Commercial Code or other
applicable law. Lessee hereby appoints Lessor as Lessee's attorney-in-fact
(which power shall be deemed coupled with an interest) to execute in the name of
the lessee, financing statements) on Lessee's behalf and to do all acts or
things in the name of Lessee or under any Lease thereunder which Lessor may deem
necessary to protect Lessor's title and interest hereunder or under any lease.
Lessor and Lessee further agree that a carbon, photographic or other
reproduction of this Agreement or any Lease hereunder may be filed as a
financing statement and shall be sufficient as a financing statement under the
Uniform Commercial Code or other applicable law. It is the intent of the parties
that this is a true lease, and the filing of a financing statement under the
Uniform Commercial Code or other applicable law shall not be construed as
evidence that any security interest was intended to be created, but only to give
public notice of Lessor's ownership of the Equipment. If this Agreement or any
Lease hereunder is deemed at any time to be one intended as security then Lessee
grants Lessor a security interest in the Equipment and the proceeds from the
sale, lease or other disposition of the Equipment. Lessee agrees to pay Lessor a
fee to reimburse Lessor for Lessor's expenses for the preparation and filing of
all such financing statements as Lessor may reasonably deem necessary and for
Lessor's other documentation costs.
Lessee agrees to submit financial statements and, if its financial
statements are unaudited tax returns, within 90 days from the end of its fiscal
year and Lessee warrants to Lessor that all financial statements furnished and
to be furnished have been and will be prepared in accordance with generally
accepted accounting principles, are an accurate reflection of Lessee's financial
condition and that there has been no material adverse change in the financial
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condition of Lessee or any Guarantor since the dates of preparation and
submission of the financial statements submitted to Lessor. Lessee agrees to
deliver to Lessor at any time or times hereafter such information or documents,
including, without limitation, certified resolutions, financial statements and
legal opinions. as Lessor may request.
17. SECURITY DEPOSIT. Lessor shall retain any security deposit set
forth on each Lease as security for the performance by Lessee of its obligations
hereunder and under such Lease. Any security deposit so taken shall be
non-interest bearing. Lessor may, but shall not be obligated to, apply any
security deposit to cure any Event of Default hereunder in which event Lessee
shall promptly restore any amount so applied. If Lessee is not in default in any
of Lessee's obligations hereunder or under the Lease related to such deposit,
any security deposit will be returned to Lessee at the termination of the Lease
related thereto. Lessee hereby grants to Lessor a security interest in the cash
comprising the security deposit from time to time together with the proceeds
thereof to secure the prompt performance as and when due of all obligations of
Lessee hereunder.
18. WARRANTY OF BUSINESS PURPOSE. Lessee hereby warrants and represents
that the Equipment will be used for business purposes, and not for personal,
family or household purposes. Lessee acknowledges that Lessor has relied upon
this representation in entering into this Agreement and each Lease hereunder.
19. LESSEE REPRESENTATIONS AND WARRANTIES. Lessee hereby represents,
warrants and covenants to Lessor the following with respect to each Lease as of
the date lessee executes the Delivery and Acceptance Receipt related thereto:
(a) Lessee is organized and validly existing under the laws of the state of its
organization, with adequate power and capacity to enter into the Lease, all
documents related to the purchase of the Equipment and any other documents
required to be delivered in connection with the Lease or the Equipment
(hereinafter "Documents') and is duly qualified to do business wherever
necessary to carry on its present business, including all states where the
Equipment is to be located: (b) the Documents have been duly authorized,
executed and delivered by Lessee and constitute valid, legal and binding
agreements, enforceable in accordance with their terms, except to the extent
that the enforcement of remedies therein provided may be limited under
applicable bankruptcy and insolvency laws: (c) no approval, consent or
withholding of objections is required from any federal, state or local
governmental authority or instrumentality with respect to the entry into or
performance by Lessee of the Documents, except such as have already been
obtained; (d) the entry into and performance by Lessee of its obligations under
the Documents will not (i) violate any judgment, order, law or regulation
applicable to Lessee or (ii) result in any breach of, constitute a default under
or result in the creation of any lien, charge, security interest or other
encumbrance upon any item of the Equipment pursuant to any indenture, mortgage,
deed of trust, bank loan or credit agreement or other instrument (other than the
Lease or any purchase money security interest retained by any supplier) to which
Lessee is a party: (e) there are no suits or proceedings pending or threatened
in court or before any regulatory commission, board or other administrative
governmental agency against or affecting Lessee, which will have a material
adverse effect on the ability of Lessee to fulfill its obligations under the
Lease; (f) the balance sheet and statement of income of Lessee, or of any
consolidated group of which Lessee is a member, heretofore delivered to lessor
have been prepared in accordance with generally accepted accounting principles
and fairly present the financial position of Lessee or the consolidated group of
companies of which Lessee is a member on and as of the date thereof and the
results of its or their operations for the period or periods covered thereby and
(g) since the date of such balance sheet and statement of income there has been
no material adverse change in the financial or operating condition of Lessee or
of its consolidated group and (h) Lessee has conducted a review of its and its
significant vendors' computer systems to identify those areas that could be
affected by the Year 2000 issue and has developed and implemented a plan to
resolve the issue and make its operations Year 2000 compliant prior to January
1, 2000 and the Year 2000 issue and the costs of resolving such issue will not
materially adversely affect its financial condition, business or operations
prior to January 1, 2000. Year 2000 issue shall mean the failure of computer
systems to in any way utilize data and information due to the occurrence of the
Year 2000 or the inclusion of dates on or after January 1, 2000.
20. JOINT AND SEVERAL. All obligations of Lessee, if more than one,
shall be joint and several.
21. HEADINGS. All paragraph hearings are inserted for reference
purposes only and stall not affect the interpretation or meaning of this
Agreement or any Lease hereunder.
22. FURTHER ASSURANCES. Lessee agrees to execute or obtain and deliver
to Lessor at Lessor's request such additional documents as Lessor may reasonably
deem necessary to protect Lessor's interest in the Equipment, this Agreement and
any Lease.
23. NOTICE. Written notices to be given hereunder shall be deemed to
have been given when delivered personally or deposited in the United States
mails, postage prepaid, addressed to such party at its address set forth above
or at such other address as such party may have subsequently provided in
writing.
24. SUPPLIER'S CONTRACT. Lessor and Lessee agree that this Agreement
and each Lease is a Finance Lease as that term is defined in Article 2A of the
Uniform Commercial Code. Lessee acknowledges that Lessor has apprised Lessee of
the identity of the Vendor, Lessor hereby notifies Lessee that Lessee may have
rights pursuant to the contract with the Vendor and/or Manufacturer and Lessee
may contact the supplier for a description of any rights or warranties that
Lessee may have under this contract.
25. LESSEE'S WAIVERS. Lessee hereby waives am and all rights and
remedies granted Lease by Sections 508 through 522 of Article 2A of the Uniform
Commercial Code including, by way of example only end not as a limitation, the
right to repudiate any Lease and reject the Equipment; the right to cancel any
Lease; the right to invoke acceptance of the Equipment; the right to grant a
security interest in the Equipment in Lessee's possession and control for any
reason; the right to recover damages thereunder for any breach of warranty or
for any other reason deduct all or any part of the claimed damages resulting
from Lessor's default, if any, under any Lease; the right to accept partial
delivery of the Equipment; the right to "cover" by making any purchase or lease
of or contact to purchase or lease Equipment in substitution for those due from
Lessor; the right to recover any general, special, incidental or consequential
damage: for any reason whatsoever; and the right to specific performance,
replevin, detinue, sequestration, claim and delivery and the like for the
Equipment. The waivers contained herein shall not constitute a waiver by Losses
of any of its rights or remedies against Vendor and/or Manufacturer of the
Equipment.
26. CHOICE OF LAW/JURISDICTION AND PROCESS. This Agreement and each
Lease hereunder, shall be deemed to have been made in Berwyn, Pennsylvania and,
except for local filing requirements and laws relating to conflict of laws shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania. Lessee hereby consents to and agree that personal jurisdiction
over losses and subject matter jurisdiction over the Equipment shall be with the
courts of the Commonwealth of Pennsylvania or the Federal District Court for the
Eastern District of Pennsylvania, solely at Lessor's option, with aspect to any
provision of this Agreement or any Lease hereunder. Lessee agrees that service
of process in any action or proceeding may be duly effected upon Lessee by
mailing such process via certified mail, return receipt requested.
27. ENTIRE AGREEMENT, NON-WAIVER AND SEVERABILITY. This Agreement and
each Lease hereunder contain the entire agreement and understanding between
Lessee and Lessor relating to the subject matter of each Lease. No agreements or
understandings shall be binding on the parties hereto unless set forth in
writing and signed by the parties. Time is of the essence in this Agreement and
each Lease hereunder. No waives by Lessor of any breach or default shall
constitute a waiver of any additional or subsequent breach or default by Lessor
nor shall it be a waiver of any of Lessor's rights. Any provision of this
Agreement or any Lease
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hereunder which for any reason may be held unenforceable in any one jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
unenforceability without invalidating the remaining provisions of this Agreement
or any Lease hereunder, and any such unenforceability in any one jurisdiction
shall not render such provision unenforceable in any other jurisdiction.
28. WAIVER OF JURY TRIAL. EACH OF LESSOR AND LESSEE WAIVES AND AGREES
TO WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BETWEEN LESSOR
AND LESSEE BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS AGREEMENT,
ANY LEASE OR ANY TRANSACTION CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their authorized representatives as of the date first above
written.
LESSEE SIGNATURE
SIGNATURE
You agree to all of the Terms and Conditions contained in this Agreement, and in
any attachments to same (all of which are included by reference) and become part
of this Agreement. You acknowledge to have read and agreed to all the Terms and
Conditions and understand that the Leases are non-cancelable for the full terms
show therein. This Agreement shall not be binding upon the Lessor or become
effective unless and until Lessor executes the Agreement.
/s/ Angelo A. Gencarelli III
- ---------------------------------------
Signature
10/4/99
- ---------------------------------------
Date
Angelo A. Gencarelli III
- ---------------------------------------
Print Name
Vice President
- ---------------------------------------
Title
AppliedTheory Corporation
- ---------------------------------------
For Legal Name of Corporation, Partnership, Limited Liability Company
(AGREEMENT MUST BE SIGNED BY AUTHORIZED
OFFICER, PARTNER, MEMBER OR PROPRIETOR)
LESSOR
/s/ Andy Rosenberg 3/31/00
- --------------------------------------
Lessor Signature Date
Andy Rosenberg
- --------------------------------------
Print Name
Director of Operations
- --------------------------------------
Title
- --------------------------------------
For
BNY LEASING EDGE CORPORATION
- --------------------------------------
Lease Number
- --------------------------------------
Vendor ID Number
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<PAGE> 1
NATIONAL LEASING, INC. National Leasing, Inc.
MASTER LEASE AGREEMENT 60 Broad Street, 34th Floor
New York, NY 10004
(212) 683-4111
LESSEE: APPLIED THEORY CORPORATION Master Lease Agreement No. 7386
ADDRESS: 40 CUTTER MILL ROAD, SUITE 405, Date: December 15, 1999
GREAT NECK, NY 11021
NATIONAL LEASING, INC. ("Lessor") hereby leases to Lessee and Lessee leases from
Lessor, in accordance with the terms and conditions hereinafter set forth, the
equipment and property purchased by Lessor for lease to the Lessee hereunder
together with all replacement parts, additions, accessories, alterations and
repairs incorporated therein or now hereafter affixed thereto Add-on Items (as
defined herein) (herein collectively referred to as the "Equipment") described
in each Schedule which may be executed by Lessor and Lessee from time to time
(individually a "Schedule" and collectively, the "Schedules"), each of which is
made a part hereof. For all purposes of this Master Lease Agreement ("Lease"),
each Schedule relating to one or more items of Equipment shall be deemed a
separate lease incorporating all of the terms and provisions of this Lease. In
the event of a conflict between the terms of this Lease and the terms and
conditions of any Schedule, the terms and conditions of the Schedule shall
govern and control that Schedule.
1. TERM AND RENTAL. The term of this Lease (the "Initial Lease Term") for any
item Equipment shall be set forth in the Schedule relating to such item of
Equipment and shall commence (the "Commencement Date") on the Acceptance Date.
The "Acceptance Date" with respect to each Schedule shall be the applicable of
either: (1) the date of delivery to Lessee of all of the Equipment to be leased
thereunder; (2) in the case of Equipment which is the subject of a sale and
leaseback between Lessor and Lessee, the date upon which Lessor purchases such
Equipment from Lessee; or (3) in the case of Equipment requiring installation,
the date of installation of the Equipment. If the Acceptance Date is other than
the first day of a calendar quarter, then the Commencement Date of the Initial
Lease Term set forth in any Schedule shall be the first day of the calendar
quarter following the month which includes the Acceptance Date and Lessee shall
pay to Lessor, in addition to all other sums due hereunder, an amount equal to
one-thirtieth of the amount of the average monthly rental payment due or to
become due hereunder multiplied by the number of days from and including the
Acceptance Date to the Commencement Date of the Initial Lease Term set forth in
the Schedule. During the entire Initial Lease Term and any extension or renewal
of the term of this Lease, Lessee agrees to pay the total rental due hereunder
which shall be the total amount of all rental payments set forth in the Schedule
plus such additional amounts as may become due hereunder or pursuant to any
written modification hereof or additional written agreement hereto. Except as
otherwise specified in the Schedule, rental payments payable hereunder shall be
due monthly and shall be payable in advance on the first day of each month
during the term of this Lease beginning with the Commencement Date of the
Initial Lease Term. All rental payments due hereunder shall be sent to the
address of the Lessor specified in this Lease or in the Schedule or as otherwise
directed by the Lessor in writing. Rental payments or any other payments due
hereunder not made by their schedule due date shall be overdue and shall be
subject to a service charge in an amount equal to two percent (2%) per month or
the maximum rate permitted by law whichever is less (the "Service Charge Rate")
applied to amount of the overdue payments from the date due until paid. If
Lessor shall at any time accept a rental payment after it shall become due, such
acceptance shall not constitute or be construed as a waver of any or all of
Lessor's rights hereunder, including without limitation those rights of Lessor
set forth in Sections 12 and 13 hereof.
2. TITLE. This is an agreement of lease only. Except as otherwise provided in
any applicable Schedule, Lessee shall have no right, title or interest in or to
the Equipment leased hereunder, except as to the lawful use thereof subject to
the terms and conditions of this Lease. All of the Equipment shall remain
personal property (whether or not the Equipment may at any time become attached
or affixed to real property). The Equipment is and shall remain the sole and
exclusive property of Lessor or its assignees. All replacement parts,
modifications, repairs, alterations, additions and accessories now or hereafter
incorporated in or affixed to the Equipment whether before or after the
Commencement Date (herein collectively called "Add-on Items") are hereby
included in the definition of "Equipment." All Add-on Items shall become the
property of Lessor upon being so incorporated or affixed to the Equipment and
shall be returned to Lessor as provided in Section 3 (other than alterations,
additions and accessions that are attached or affixed by Lessee with notice to
Lessor after the Commencement Date for which the Lessor has not given value or
purchased and which are readily removable by Lessee from the Equipment without
any value or functionality to the Equipment). Upon the request of Lessor, Lessee
will affix to the Equipment labels or other markings supplied by Lessor
indicating its ownership of the Equipment and shall keep the same affixed for
the entire term of this Lease. Lessee agrees to promptly execute and deliver or
cause to be executed and delivered to Lessor and Lessor is hereby authorized to
record or file, any statement and/or instrument reasonably requested by Lessor
for the purpose of showing Lessor's interest in the Equipment, including without
limitation, financing statements, security agreements and waivers with respect
to rights in the Equipment form any owners of mortgagees of any real estate
where the Equipment may be located. In the event that Lessee fails or refuses to
execute and/or file Uniform Commercial Code financing statements or other
instruments or recordings which Lessor or its assignee reasonably deems
necessary to perfect or maintain perfection of Lessor's or its assignee's
interests hereunder, Lessee hereby appoints Lessor as Lessee's limited
attorney-in-fact to execute and record all documents necessary to perfect or
maintain the
1
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perfection of Lessor's interests hereunder. Lessee shall pay Lessor for any
costs or fees relating to any filings hereunder including, but not limited to
actual out of pocket costs, fees, searches, documentation preparation,
documentary stamps, privilege taxes and reasonably attorneys' fees. If any item
of Equipment includes computer software purchased by Lessor for which Lessor has
given Lessee value, Lessee shall upon request made by Lessor, execute and
deliver and shall cause Seller (as hereinafter defined) to deliver all such
documents as are necessary to effectuate assignment of all software licenses to
Lessor.
3. ACCEPTANCE AND RETURN OF EQUIPMENT. Lessor shall, at any time prior to
unconditional acceptance of all Equipment by Lessee, have the right to cancel
this Lease with respect to such Equipment (and if the Equipment or any portion
thereof has not previously been delivered, Lessor may refuse to pay for the
Equipment or any portion thereof or refuse to cause the same to be delivered)
if: (a) the Acceptance Date with respect to any item of Equipment to be leased
pursuant to any Schedule has not occurred within ninety (90) days of the
estimated Acceptance Date set forth in such Schedule or (b) there shall be, in
the reasonable judgement of Lessor, a material adverse change in the financial
condition or credit standing of Lessee or of any guarantor of Lessee's
performance under this Lease since the date of the most recent financial
statements of Lessee or of such guarantor submitted to Lessor. Upon any
cancellation by Lessor pursuant to this Section or the provisions of any
Schedule, Lessee shall forthwith reimburse to Lessor all sums paid by Lessor
with respect to such Equipment plus all costs and expenses of Lessor incurred in
connection with such Equipment and any interest or rentals due hereunder in
connection with such Equipment and shall pay to Lessor all other sums then due
hereunder, whereupon if Lessee is not then in default and has fully performed
all of its obligations hereunder, Lessor will, upon request of Lessee, transfer
to Lessee without warranty or recourse any rights that Lessor may then have with
respect to such Equipment.
Lessee agrees to promptly execute and deliver to Lessor (in no event later than
15 days after the Acceptance Date) a confirmation by Lessee of unconditional
acceptance of the Equipment in the form supplied by Lessor (the "Equipment
Acceptance"). Lessee agrees, before execution of the aforesaid Equipment
Acceptance, to inform Lessor in writing of any defects in the Equipment, or in
the installation thereof, which have come to the attention of Lessee or its
agents and which might give rise to a claim by Lessee against the Seller or any
other person. If Lessee fails to give notice to Lessor of any such defects or
fails to deliver to Lessor the Equipment Acceptance as provided herein, it shall
be deemed an acknowledgement by Lessee (for purposes of this Lease only) that no
such defects in the Equipment or its installation exist and it shall be
conclusively presumed, solely as between Lessor and its assignees and Lessee,
that such Equipment has been unconditionally accepted by Lessee for lease
hereunder.
Except as otherwise provided in any Schedule, upon expiration or the
cancellation or termination of the Lease with respect to any Equipment, Lessee
shall return the Equipment to Lessor as provided herein. Lessee shall provide
Lessor with not less than ninety (90) days prior written notice of its intention
to return the Equipment upon expiration of the Initial Lease Term. Upon
expiration or the cancellation or termination of the Lease with respect to any
Equipment, Lessee shall, at its own expense, assemble, crate, insure and deliver
all of the Equipment and all of the service records and all software and
software documentation subject to this Lease and any Schedules hereto to Lessor
in the same good condition and repair as when received, reasonable wear and tear
resulting only from proper use thereof excepted, to such reasonable destination
within the continental United States as Lessor shall designate with all packing,
drayage and freight charges to the return destination designated by Lessor
prepaid by Lessee with evidence of transit insurance on all items of Equipment
at no less than their estimated fair market value as specified by Lessor. Lessee
shall, immediately prior to such return of each item of Equipment or commercial
unit of Equipment, provide to Lessor a letter from the manufacturer of the
equipment or another service organization reasonably acceptable to Lessor
certifying that said items is in good working order, with reasonable wear and
tear resulting from proper use thereof excepted, whether such item is eligible
for a maintenance agreement by such manufacturer, and all software and related
attachments are included thereon. If any computer software requires relicensing
when removed from Lessee's premises, Lessee shall bear all costs of such
relicensing. Except as otherwise expressly provided in the Schedule, if Lessee
fails for any reason to provide the notice set forth above or Lessee fails to
redeliver the Equipment back to Lessor accordance with the terms set forth
above, Lessee shall pay to Lessor, at Lessor's election, an amount equal to the
highest monthly payment set forth in the Schedule for a period of not less than
three (3) months and at the end of such period of time ("Holdover Period").
Except as otherwise expressly provided in the Schedule, if Lessee fails or
refuses to return the Equipment as provided herein at the end of any Holdover
Period, Lessee shall pay to Lessor, at Lessor's option, an amount equal to the
highest monthly rental payment set forth in the Schedule for each month or
portion thereof, until Lessee so returns the Equipment to Lessor. Should Lessor
permit use by Lessee of any Equipment beyond the Initial Lease Term, or, if
applicable, any exercised extension or renewal term, the lease obligations of
Lessee shall continue and such permissive use shall not be construed as a
renewal of the term thereof, or as a waver of any right or continuation of any
obligation of Lessor hereunder, and Lessor may take possession of any such
Equipment at any time upon demand.
4. DISCLAIMER OF WARRANTIES. LESSEE HAS EXCLUSIVELY SELECTED AND CHOSEN THE
TYPE, DESIGN, CONFIGURATION, SPECIFICATION AND QUALITY OF THE EQUIPMENT HEREIN
LEASED AND THE VENDOR, DEALER, SELLER, MANUFACTURER OR SUPPLIER THEREOF (HEREIN
COLLECTIVELY CALLED "SELLER"), AS SET FORTH IN THE SCHEDULES, LESSOR MAKES NO
REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE CONDITION OF THE
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EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS, ADAPTABILITY, ANY IMPLIED
WARRANTY OR QUIET ENJOYMENT OR NON-INTERFERENCE OR SUITABILITY FOR ANY
PARTICULAR PURPOSE, AND, LESSEE LEASES, HIRES AND RENTS THE EQUIPMENT "AS IS,
WHERE IS." Lessee understands and agrees that neither Seller, nor any agent of
Seller, is an agent of Lessor or is in any manner authorized to waive or alter
any term or condition of this Lease. Lessor shall not be liable for any loss or
damage suffered by Lessee or by any other person or entity, direct or indirect
or consequential, including, but not limited to, business interruption and
injury to persons or property, resulting from non-delivery or late delivery,
installation, failure or faulty operation, condition, suitability or use of the
Equipment leased by Lessee hereunder, or for any failure of any representations,
warranties or covenants made by the Seller. Any claims of Lessee, with respect
to claims discussed in the preceding sentences, shall be made against Lessor but
shall be made, if at all, solely and exclusively against Seller, or any persons
other than the lessor. Lessor hereby authorizes Lessee to enforce during the
term of this Lease, in its name, but at Lessee's sole effort and expense, all
warranties, agreements or representations, if any, which may have been made by
Seller to Lessor or to Lessee, and Lessor hereby assigns to Lessee solely for
the limited purpose of making and prosecuting any such claim, all rights which
Lessor may have against Seller for breach of warranty or other representation
respecting the Equipment.
5. CARE, TRANSFER AND USE OF EQUIPMENT. Lessee, at its own expense, shall
maintain the Equipment in good operating condition, repair and appearance in
accordance with all Seller's specifications and in compliance with all laws and
regulations applicable to the Equipment, Lessee and its business and shall
protect the Equipment from deterioration except for reasonable wear and tear
resulting only from proper use thereof. When generally offered with respect to
the Equipment, Lessee shall, at its expense, keep a maintenance contract in full
force and effect, throughout the term of this Lease and any Schedule hereto
unless otherwise agreed on the Schedule. The disrepair or inoperability of the
Equipment regardless of the cause thereof shall not relieve Lessee of the
obligation to pay rental hereunder. Lessee shall not make any modification,
alteration or addition to the Equipment (other than normal operating accessories
or controls). Lessee will not, and will not permit anyone other than the
authorized field engineering representatives of Seller or other maintenance
organization reasonably acceptable to Lessor to effect any inspection,
adjustment, preventative or remedial maintenance or repair to the Equipment.
LESSEE MAY NOT (A) RELOCATE OR OPERATE THE EQUIPMENT AT LOCATIONS OTHER THAN THE
PREMISES OF LESSEE SPECIFIED IN THE APPLICABLE SCHEDULE (THE "PREMISES"), EXCEPT
WITH LESSOR'S PRIOR WRITTEN CONSENT, WHICH SHALL NOT BE UNREASONABLY WITHHELD IF
SUCH OTHER LOCATION WITHIN THE CONTINENTAL UNITED STATES, OR (B) SELL, CONVEY,
TRANSFER, ENCUMBER, PART WITH POSSESSION OF, OR ASSIGN ANY ITEM OF EQUIPMENT OR
ANY OF ITS RIGHTS HEREUNDER, AND ANY SUCH PURPORTED TRANSACTION SHALL BE NULL
AND VOID AND OF NO FORCE OR EFFECT. In the event of a relocation of the
Equipment or any item thereof to which Lessor consents, all costs (including any
additional property taxes or other taxes and any additional expense of insurance
coverage) resulting from any such relocation, shall be promptly pad by Lessee
upon presentation to Lessee of evidence supporting such cost. Lessor shall have
the right during normal hour upon reasonable notice to Lessee, subject to
applicable laws and regulations, to enter Lessee's Premises in order to inspect,
observe, affix labels or other markings, or to exhibit the Equipment to
prospective purchasers or future lessees thereof, or to otherwise protect
Lessor's interest therein.
6. NET LEASE. THIS LEASE AND ANY SCHEDULE HERETO IS A NET LEASE, AND ALL
PAYMENTS HEREUNDER ARE NET TO LESSOR. All taxes, assessments, licenses, and
other charges (including, without limitation personal property taxes and sales
taxes, use taxes, leasing taxes and all other taxes based on gross receipts) and
penalties and interest on such taxes imposed, levied or assessed on the
ownership, possession, rental or use of the Equipment after delivery of the
Equipment to Lessee and thereafter dung the term of this Lease and any Schedule
hereto (except for Lessor's federal or state net income taxes) shall be paid by
Lessee when due and before the same shall become delinquent, whether such taxes
are assessed or would ordinarily be assessed against Lessor or Lessee. To the
extent possible under applicable law, for persons property or ad valorem tax
return purposes only. Lessee shall include the Equipment on such reports and
returns as may be required by local law, which returns shall be timely filed by
it. Lessee shall provide Lessor with evidence that Lessee has complied with the
foregoing provisions. In any event, Lessee shall file all tax returns required
for itself or Lessor with respect to the Equipment and this Lease and Lessor
hereby appoints Lessee as its attorney-in-fact for such purpose. In case of
failure by Lessee to so pay said taxes, assessments, licenses or other charges,
Lessor may pay all or any part of such items, in which event the amount so paid
by Lessor including any interest or penalties thereon and reasonable attorneys'
fees incurred by Lessor in pursuing its fights against Lessee or defending
against any claims or defenses asserted by or through Lessee shall be
immediately paid by Lessee to Lessor as additional rental hereunder. Lessee
shall promptly pay all costs, expenses and obligations of every kind and nature
incurred in connection with the use or operation of the Equipment which may
arise or become due during the term of this Lease and any Schedule hereto,
whether or not specifically mentioned herein. In case of failure by Lessee to
comply with any provision of this Lease and any Schedule hereto, Lessor shall
have the right, but not the obligation, to effect such compliance on behalf of
Lessee. In such event, all costs and expenses incurred by Lessor in effecting
such compliance shall be immediately payable by Lessee to Lessor as additional
rental hereunder.
7. INDEMNITY. Lessee shall at its expense: (i) indemnify, protect and defend
Lessor's title to the Equipment from and against all persons claiming against or
through Lessee; (ii) at all times keep the Equipment then subject to this Lease
free from any and all liens, encumbrances, attachments, levies,
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executions, burdens, charges or legal process of any and every type whatsoever;
(iii) give Lessor immediate written notice of any breach of this Lease described
in clause (ii); and (iv) indemnify, protect and save Lessor harmless from any
loss, cost or expense (including reasonable attorneys' fees) caused by the
Lessee's breach of any of the provisions of this Lease, whether incurred by
Lessor in pursuing its rights against Lessee or defending against any claims or
defenses asserted by or through Lessee. Lessee shall and does hereby agree to
indemnify, defend and hold Lessor and its assigns harmless from and against any
and all liability, loss, costs, injury, damage, penalties, suits, judgements,
demands, claims, expenses and disbursements (including without limitation,
reasonable attorneys' fees incurred by Lessor in pursuing its rights against
Lessee or defending against any claims or defenses asserted by or through
Lessee) of any kind whatsoever arising out of, on account of, or in connection
with this Lease and the Equipment leased hereunder, including, without
limitation, its manufacture, selection, purchase, delivery, rejection,
installation, ownership, possession, leasing, renting, operation, control, use,
maintenance and the return thereof except for any such claims or damages from
Lessor's gross negligence or wilful misconduct. This indemnity shall survive the
Initial Lease Term or earlier cancellation or termination of this Lease and any
Schedule hereto.
8. INSURANCE. Commencing on the date that risk of loss or damage passes to
lessor from the Seller of any Equipment covered under this Lease and continuing
until Lessee has re-delivered possession of the Equipment to lessor, Lessee
shall, at its own expense, keep the Equipment (including all Add-on Items
thereto) insured against all risks of loss or damage from every and any cause
whatsoever in such amounts (but in no event less than the greater of the
replacement value thereof or the amount set forth in any applicable Casualty
Schedule, whichever is higher) with such deductibles and exclusions as approved
by Lessor and in such form as is reasonably satisfactory to Lessor. All such
insurance policies shall protect Lessor and Lessor's assignee(s) as loss payees
as their interests may appear. Lessee shall also, at its own expense, carry
public liability insurance, with Lessor and Lessor's assignee(s) as an
additional insured, in such amounts with such companies and in such forms as is
reasonably satisfactory to Lessor, with respect to injury to person or property
resulting from or based in way upon or in any way connected with or relating to
the installation, use or alleged use, or operation of any or all of the
Equipment, or its location or condition.
Not less than ten days prior to the Acceptance Date, Lessee shall deliver to
Lessor satisfactory evidence of such insurance and shall further deliver
evidence of renewal of each policy not less than thirty (30) days prior to
expiration thereof. If the Lessee fails to provide evidence of such insurance or
to deliver evidence of renewal of each such policy then Lessee agrees to pay
Lessor a non-compliance fee equal to 1% of the Equipment Cost for all Equipment
covered under this Lease each month until such evidence is provided to Lessor.
Each such policy shall contain an endorsement providing that the insurer will
give Lessor not less than thirty (30) days prior written notice of the effective
date of any alteration, change, cancellation, or modification of such policy or
the failure by Lessee to timely pay all required premiums, costs or charges with
respect thereto. Upon Lessor's request, Lessee shall cause its insurance
agent(s) to execute and deliver to Lessor Loss Payable Clause Endorsement and
Additional Insured Endorsement (bodily injury and property damage liability
insurance) forms provided to Lessee by Lessor. In case of the failure to procure
or maintain such insurance, Lessor shall have the right, but not the obligation,
to obtain such insurance and any premium paid by Lessor shall be immediately due
and payable by Lessee to Lessor as additional rent hereunder. The maintenance of
any policy or policies of insurance pursuant to this Section shall not limit any
obligation or liability of Lessee pursuant to Sections 7 or 9 or any other
provision of this Lease and any Schedule hereto.
9. RISK OF LOSS. Until such time as the Equipment is returned and delivered to
and accepted by Lessor at the expiration of this Lease, pursuant to the terms of
this Lease and any Schedule hereto, Lessee hereby assumes and shall bear the
entire risk of loss, damage, theft and destruction of the Equipment, or any
portion thereof, from any cause whatsoever ("Equipment Loss"). Without
limitation of the foregoing, no Equipment Loss shall relieve Lessee in any way
from its obligations hereunder. Lessee shall promptly notify Lessor in writing
of any Equipment Loss. In the event of any such Equipment Loss, Lessee shall:
(a) in the event Lessor determines such Equipment to be repairable, promptly
place, at Lessee's expense, the Equipment in good repair, condition and working
order in accordance with Seller's specifications and to the satisfaction of
Lessor, or (b) in the event an actual or constructive total loss of any item of
Equipment, at lessor's option: (i) promptly replace, at Lessee's expense, the
Equipment with like equipment of the same or a later model with the same Add-on
Items as the Equipment, and in good repair, condition and working order in
accordance with the Seller's specifications and to the satisfaction of Lessor;
or (ii) immediately pay to Lessor the sum of (a) any accrued and unpaid rental
or any amounts due hereunder plus (b) an amount equal to the present value of
the total amount of unpaid rentals and all other amounts due and to become due
under any applicable Schedule during the term thereof as of the date of any
payment, discounted at a rate equal to discount rate of the Federal Reserve Bank
of Chicago as of the Commencement Date of the Lease with respect to each
applicable Schedule shall be paid to Lessor by Lessee, plus (c) an additional
amount equal to the present value of the estimated fair market value of the
Equipment at the end of the Initial Lease Term applicable to such Equipment (the
"End of Term Value"). In no event shall the amount of such End of Term Value for
the Equipment be less than twenty percent (20%) of the actual cost of the
Equipment unless a lesser amount is actually specified as the purchase option
price, if any, in the applicable Schedule. If a Casualty Schedule has been made
a part of any applicable Schedule, then in lieu of the amounts specified in
subparagraphs (b)(ii)(b) and (c) Lessee shall pay Lessor the amounts obtained by
multiplying the actual Equipment Cost as specified in the applicable Schedule by
the percentage contained in any applicable Casualty Schedule for the date of
such Equipment Loss.
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If no Casualty Schedule has been made a part of any applicable Schedule, an
amount equal to the present value of the total amount of unpaid rentals and all
other amounts due and to become due under any applicable Schedule during the
term thereof as of the date of any payment, discounted at a rate equal to
discount rate of the Federal Reserve Bank of Chicago as of the Commencement Date
of the Lease with respect to each applicable Schedule shall be paid to Lessor by
Lessee, plus an additional amount equal to the estimated fair market value of
die Equipment at the end of the initial Lease Term applicable to such Equipment
(the "End of Term Value"). In no event shall the amount of such End of Term
Value for the Equipment be less than twenty percent (20%) of the actual cost of
the Equipment unless a purchase option is granted (or other end of term payment
is required) under this Lease for other there the fair market value of the
Equipment then the actual amount of such Purchase Option Price (or other end of
term payment) specified in the applicable Equipment Schedule shall be due and
payable to Lessor as the End of Term Value undo the section or such lesser or
greater amount specified in the applicable Schedule.
In the event Lessee is required to repair or replace any such item of Equipment
pursuant to Subsections (a) or (b)(i) of the preceding sentence, the insurance
proceeds received 6t' Lessor, if any, pursuant to Section 8, after the use of
such funds to pay any unpaid amounts then due hereunder, shall be paid to Lessee
or, if applicable, to a third party repairing or replacing the Equipment upon
Lessee's furnishing proof reasonably satisfactory to Lessor that such repair or
replacement has been completed in a reasonably satisfactory manner. In the event
Lessor elects option (b)(ii), Lessee shall be entitled to a credit against the
payment required by said Subsection in an amount equal to such insurance
proceeds actually received by Lessor pursuant to Section 8 on account of such
Equipment, and, upon payment by Lessee to Lessor of all of the sums required
pursuant to Subsection (b)(ii), the applicable Schedule shall terminate with
respect to such item of Equipment and Lessee shall be entitled to whatever
interest Lessor may have in such item AS IS, WHERE IS AND WITH ALL FAULTS in its
then condition and location without warranties of any type whatsoever, express
or implied.
10. COVENANTS OF LESSEE. Lessee agrees that its obligations under this Lease and
any Schedule hereto, including without limitation, the obligation to pay rental,
are irrevocable and absolute, shall not abate for any reason whatsoever
(including any claims against Lessor), and shall continue in full force and
effect regardless of say inability of Lessee to use the Equipment or arty part
thereof for any reason whatsoever including, without limitation, war, act of
God, storms, governmental regulations, strike or other labor troubles, loss,
damage, destruction, disrepair, obsolescence, failure of or delay in delivery of
the Equipment or failure of the Equipment to properly operate for any cause. In
the event of any alleged claim (including a claim which would otherwise be in
the nature of a set-off) against Lessor, Lessee shall fully perform and pay its
obligations hereunder (including the payment of all tarts, without set-off or
defense of any kind) and its only exclusive recourse against Lessor shall be by
a separate action. Lessee agrees to furnish promptly to Lessor the annual
financial statements of Lessee (and of any guarantors of Lessee's performance
trader this Lease and any Schedule hereto), prepared in accordance with
generally accepted accounting principles and such interim financial statements
of Lessee as Lessor may reasonably require during the entire term of the Lease
and any Schedule hereto. Either independent certified public accountants or the
Lessee's chief financial officer as requested by Lessor shall certify all such
annual financial statements. Lessee, if requested by Lessor prior to the initial
purchase by Lessor of Equipment for lease hereunder, shall provide at Lessee's
expense an opinion of its counsel acceptable to Lessor affirming the covenants,
representations and warranties of Lessee under this Lease and any Schedule
hereto. So long as there are amounts due Lessor under this Lease, Lessee shall
supply Lessor with such other financial and operating performance data as is
provided to its outside investors or commercial lenders and, if applicable,
required to be provided to shareholder by the Security and Exchange Commission,
and Lessee shall immediately notify Lessor of any material adverse change in its
financial condition or business prospects.
11. REPRESENTATIONS AND WARRANTIES. In order to induce Lessor to enter into this
Lease and any Schedule hereto and to lease the Equipment to Lessee hereunder,
Lessee represents and warrants that: (a) FINANCIAL STATEMENTS. (i) applications,
financial statements, and reports which have been submitted by Lessee and any
Obligors (as hereinafter defined) to Lessor are, and all information hereafter
furnished by Lessee and Obligors to Lessor will be, true and correct in all
material respects as of the date submitted; (ii) as of the date hereof, the date
of any Schedule and any Acceptance Date, there has been no material adverse
change in any matter stated in such applications, financial statements and
reports; and, (iii) none of the foregoing omit or omitted to state any material
fact which would make any of the foregoing false or misleading. (b)
ORGANIZATION. Lessee is an organizational entity described on the signature page
hereof and is duly organized, validly existing and is duly qualified to do
business and is in good standing or subsisting or in other similar active status
in each State in which the Equipment will be located. (c) AUTHORITY. Lessee has
full power, authority and right to execute, deliver and perform this Lease and
any Schedule hereto, and the execution, delivery and performance hereof has been
authorized by all necessary action of Lessee. (d) ENFORCEABILITY. This Lease and
any Schedule or other document executed in connection therewith has been duly
executed and delivered by Lessee and any Obligor and constitutes a legal, valid
and binding obligation of Lessee and any Obligor enforceable in accordance with
its terms. (e) CONSENTS. The execution, delivery and performance of this Lease
and any Schedule hereto does not require any approval of consent of any
stockholders, partners or proprietors or of any trustee or holders of any
indebtedness or obligations of Lessee, and will not contravene any law,
regulation, judgment or decree applicable to Lessee, or the certificate or
articles of incorporation, partnership agreement, by-laws or other governing
documents of Lessee, or contravene the provisions of, or constitute a default
under, or result in the creation of any lien upon any property of Lessee under
any mortgage, instrument or other agreement to which
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Lessee is a party by which Lessee or its assets may be bound or affected. Except
as disclosed, no authorization, approval, license, filing or registration with
any court or governmental agency or instrumentality is necessary in connection
with the execution, delivery, performance, validity and enforceability of this
Lease and any Schedule hereto. (f) TITLE. On each Commencement Date, Lessor
shall have good and marketable title to the items of Equipment which is subject
to this Lease and any Schedule hereto on such date, free and clear of all liens,
except the lien of Seller which will be released upon receipt of payment. Lessee
warrants that no party has a security interest in the Equipment which will not
be released on or before payment by Lessor to Seller of the Equipment and that
the Equipment is and shall at all times remain personal property regardless of
how it may be affixed to any real property. (g) LITIGATION. There is no action,
suit, investigation or proceeding by or before any court, arbitrator, agency or
governmental authority pending or threatened against or affecting Lessee: (i)
which involves the Equipment or the transactions contemplated by this Lease and
any Schedule hereto; or (ii) which, if adversely determined, could have a
material adverse effect on the financial condition. business or operation of
Lessee.
12. EVENTS OF DEFAULT. An event of default ("Event of Default") shall occur
hereunder if Lessee or any Obligor ("Obligor" shall include any guarantor or
surety of any obligations of Lessee to Lessor under this Lease and any Schedule
hereto): (i) fails to pay any installment of rent or other payment required
hereunder within five (5) days after its due date; or (ii) attempts to or does
remove from the Premises (except a relocation with Lessor's consent as provided
in Section 5), sell, transfer, encumber, part with possession of, or sublet any
item of the Equipment; or (iii) shall suffer or have suffered, in the reasonable
judgement of Lessor, a material adverse change in its financial condition since
the date of the last financial statements submitted to Lessor, and as a result
thereof Lessor in good faith deems itself to be insecure; or (iv) breaches or
shall have breached any representation or warranty made or given by Lessee or
Obligor in this Lease or in any other document furnished to Lessor in connection
herewith, or any such representation or warranty shall be untrue or, by reason
of failure to state a material fact or otherwise, shall be misleading or any of
the statements or other documents or information submitted at any time
heretofore or hereafter by Lessee or Obligor to Lessor shall be untrue or, by
reason of failure to state a material fact or otherwise, shall be misleading or
(v) fails to perform or observe any other covenant, condition or agreement to be
performed or observed by it hereunder, and such failure or breach shall continue
unremedied for a period of ten days after the date on which notice thereof shall
be given by Lessor to Lessee (unless such remedial action cannot be completed
within such ten day period but Lessee has in good faith commenced to remedy such
breach or failure and such remedy is in fact achieved within a time period
agreed to by Lessor); or (vi) shall become insolvent or bankrupt or make an
assignment of the benefit of creditors or consent to the appointment of a
trustee or receiver, or a trustee or receiver shall be appointed for a
substantial part of its property without its consent, or bankruptcy or
reorganization or insolvency proceeding shall be instituted by or against Lessee
or Obligor and Lessee fails to continue to pay all rentals becoming due
hereunder during the pendency of such proceedings and fails to assume this Lease
within sixty (60) days after the commencement of such proceedings; or (vii)
conveys, sells, transfers or assigns substantially all of Lessee's or Obligor's
assets or ceases doing business as a going concern, or, if a corporation, ceases
to be in good standing or files a statement of intent to dissolve, or abandons
any or all of the Equipment; or (viii) shall be in breach of or default under
any lease or other agreement at any time executed with Lessor or any other
lessor or with any lender to Lessee or Obligor such that Lessee's obligations
thereunder have been or are being accelerated.
13. REMEDIES. Upon the occurrence and during any continuance of any Event of
Default (the "Default Date") set forth in Section 12, Lessor may, in its sole
and absolute discretion, do any one or more of the following: (a) upon notice to
Lessee cancel all or any portion of this Lease or any Schedules executed
pursuant thereto; (b) enter Lessee's Premises and without removal of the
Equipment, render the Equipment unusable or, require Lessee to assemble the
Equipment and make it available to Lessor at a place designated by lessor,
and/or dispose of the Equipment by sale or otherwise (all of which
determinations may be made by Lessor in its sole and absolute discretion); (c)
declare immediately due and payable all sums due and to become due hereunder for
the full term of the Lease (including any renewal or purchase obligations which
Lessee has contracted to pay); (d) with or without canceling this Lease, recover
from Lessee damages, in an amount equal to the sum of: (i) all unpaid rent and
other amounts that became due and payable on, or prior to, the Default Date,
(ii) the present value of all future rentals and other amounts described in the
Lease and not included in the above discounted to the Default Date at a rate
equal to the discount rate of the Federal Reserve Bank of Chicago as of the
Commencement Date of the Lease with respect to each Schedule (which discount
rate, Lessee agrees is a commercially reasonable rate which takes into account
the facts and circumstances at the time such Schedule commenced), (iii) all
commercially reasonable costs and expenses incurred by Lessor in enforcing
Lessor's rights under this Lease, or defending against any claims or defenses
asserted by or through Lessee, including but not limited to, costs of
repossession, recovery, storage, repair, sale, re-lease and reasonable
attorneys' fees, (iv) the estimated residual value of the Equipment as of the
expiration of the Lease, (v) any indemnity amount payable to Lessor hereunder;
and (vi) interest on all of the foregoing from the Default Date until the date
payment is received by lessor at 2% per month or the highest rate permitted by
law, whichever is less; (e) exercise any other right or remedy which may be
available to it under the Uniform Commercial Code or any other applicable law.
If Lessor elects to dispose of any Equipment recovered from the possession of
Lessee after an Event of Default, Lessor shall dispose of such Equipment in a
commercially reasonable manner, Lessor reserves the right, in its sole and
absolute discretion, to control the timing and negotiate the terms of any
re-leasing or re-sale of any or all of the Equipment at a public
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auction or in a private sale, at such time, on such terms and with such notice
as Lessor shall in its sole and absolute discretion deem commercially
reasonable. In such event, without any duty on Lessor's part to effect any such
re-lease or sale of the Equipment, Lessor will credit the present value of any
proceeds from such sale or re-lease actually received and retainable by it (net
of any and all costs or expenses) discounted from the date of Lessor's receipt
thereof to the Default Date at 2 1/2% in excess of the Prime Rate (or its
equivalent) per annum in effect at the First National Bank of Chicago on the
date of such payment to the amounts due to Lessor from Lessee under the
provisions of (c), (d) and/or (e) above. A cancellation of this Lease shall
occur only upon notice by Lessor and only as to such items of Equipment as
Lessor specifically elects to cancel and this Lease shall continue in full force
and effect as to the remaining items of Equipment, if any. If this Lease and/or
any Schedule is deemed at any time to be one intended as security, Lessee agrees
that the Equipment shall secure, in addition to the indebtedness set forth
herein, any other indebtedness at any time owing by Lessee to Lessor. No remedy
referred to in this Section is intended to be exclusive, but shall be cumulative
and in addition to any other remedy referred to above or otherwise available to
Lessor at law or in equity. No express or implied waiver by Lessor of any
default shall constitute a waiver of any other default by Lessee or a waiver of
any of Lessor's rights.
14. ASSIGNMENT BY LESSOR. LESSOR MAY, (WITH OR WITHOUT NOTICE TO LESSEE) SELL,
TRANSFER, ASSIGN OR GRANT A SECURITY INTEREST IN ALL OR ANY PART OF ITS INTEREST
IN THIS LEASE, ANY SCHEDULE, ANY ITEMS OF EQUIPMENT OR ANY AMOUNT PAYABLE
HEREUNDER. In such an event, Lessee shall, upon receipt of written notice,
acknowledge any such sale, transfer, assignment or grant of a security interest
and shall pay its obligations hereunder or amounts equal thereto to the
respective transferee, assignee or secured party in the manner specified in any
instructions received from Lessor. Notwithstanding any such sale, transfer,
assignment or grant of a security interest by Lessor and so long as no Event of
Default shall have occurred hereunder, neither Lessor nor any transferee,
assignee or secured party shall interfere with Lessee's right of use or quiet
enjoyment of the Equipment. In the event of such sale, transfer, assignment or
grant of a security interest in all or any part of this Lease and any Schedule
hereto, or in the Equipment or in sums payable hereunder, as aforesaid, Lessee
agrees to execute such documents as may be reasonably necessary to evidence,
secure and complete such sale, transfer, assignment or grant of a security
interest and to perfect the transferee's assignee's or secured party's interest
therein (with any filing fees at Lessor's expense) and Lessee further agrees
that the rights of any transferee, assignee or secured party shall not be
subject to any defense, set-off or counterclaim that Lessee may have against
Lessor or any other party, including the Seller, which defenses, set-offs and
counterclaims shall be asserted only against such party, and that any such
transferee, assignee or secured party shall have all or Lessor's rights
hereunder, but shall assume none of Lessor's obligations hereunder. Lessee
acknowledges that any assignment or transfer by Lessor shall not materially
change Lessee's duties or obligations under this Lease and shall not materially
increase the burdens and risks imposed upon Lessee.
15. MISCELLANEOUS. All notices and demands relating hereto shall be in writing
and sent by either any nationally recognized overnight air courier or by
certified mail, return receipt requested, to Lessor or Lessee at their
respective addresses above or shown in the Schedule, or at any other address
designated by notice served in accordance herewith. Notice by overnight air
courier shall be effective one (1) business day after delivery. Notice by
certified mail shall become effective five (5) business days after deposit in
the United States mail, with proper postage prepaid, to the party intended to be
served at the address designated herein. All obligations of Lessee shall survive
the termination or expiration of this Lease and any Schedule hereto. If more
than one Lessee is named in this Lease, the liability of each hereunder to
Lessor shall be joint and several. Any general partner executing this Lease on
behalf of the Lessee agrees that its liability to Lessor hereunder shall be
absolute, primary and direct, and that Lessor shall not be required to pursue
any right or remedy it may have against the Lessee under the Lease (and shall
not be required to first commence any action or obtain any judgment against
Lessee) before enforcing this liability against such general partner, and that
such general partner will, upon demand, pay Lessor the amount of all sums then
due under the Lease, the payment of which, by Lessee, is in default under the
Lease, and will, upon demand, perform all other obligations of Lessee, the
performance of which, by Lessee, is in default under the Lease. Lessee shall,
upon request of Lessor from time to time, perform all acts and execute and
deliver to Lessor all documents which Lessor deems reasonably necessary to
implement this Lease and any Schedule hereto, including, without limitation,
certificates addresses to such persons as Lessor may direct stating that this
Lease and the Schedule hereto is in full force and effect, that there are no
amendments or modifications thereto, that Lessor is not in default hereof or
breach hereunder, setting forth the date to which rentals due hereunder have
been paid, and stating such other matters as Lessor may reasonably request. This
Lease and any Schedule hereto shall be binding upon the parties and their
successors, legal representatives and assigns. Lessee's successor and assigns
shall include, without limitation, a receiver, debtor-in-possession, or trustee
of or for Lessee. If any person, firm, corporation or other entity shall
guarantee this Lease and the performance by Lessee of its obligations hereunder,
all of the terms and provisions hereof shall be duly applicable to such Obligor.
16. CONDITIONS PRECEDENT TO LEASING. (i) Lessor shall have no obligation to
purchase any Equipment for lease to Lessee under any Schedule hereunder unless
or until acceptable documentation, the form of which will be provided by Lessor
has been executed by Lessee and delivered to Lessor; (ii) Lessor has confirmed
with Lessee that no material adverse change in Lessee's financial condition and
business prospects has occurred prior to each purchase of Equipment.
17. INVALIDITY. In the event that any provision of this Lease and any Schedule
hereto shall be unenforceable in whole or in
7
<PAGE> 8
party, such provision shall be limited to the extent necessary to render the
same valid, or shall be excised from this Lease or any Schedule hereto, as
circumstances may require, and this Lease and the applicable Schedule shall be
construed as if said provision had been incorporated herein as so limited, or as
if said provision had not been included herein, as the case may be without
invalidating any of the remaining provisions hereof.
18. END OF TERM OPTIONS. Provided that the Lease has not been terminated and
that no Event of Default or event which, with notice or lapse of time or both,
would become an Event of Default shall have occurred and shall be continuing,
Lessee shall at the end of the Initial Lease Term of the first Schedule be
entitled to elect and to exercise one of the options, if any, indicated in the
applicable Schedule which election shall be binding on Lessee with respect to
all Schedules entered into between Lessor and Lessee under this Lease. The
foregoing options granted hereunder shall be exercised by written notice
delivered to Lessor by Lessee not more than 180 days and not less than ninety
(90) days prior to the expiration of the Initial Lease Term of the Equipment,
subject to Schedule No. 001.
19. PROGRESS PAYMENTS. If requested by Lessee, progress payments will be made
for any amount over the Minimum Invoice Amount specified on each Progress
Payment Authorization per invoice to vendors in accordance with Lessor's
standard procedures. Unless otherwise agreed by Lessor the minimum progress
payment amount shall not be less than the Minimum Progress Payment Amount
specified on the Progress Payment Authorization. Interim rent, on progress
payments, shall be payable from the date progress payments are made by Lessor to
the Commencement Date of the corresponding Schedule. Interim rent shall be
calculated at the daily equivalent of the Monthly Lease Rate Factor. Lessee
shall deliver to Lessor a Progress Payment Authorization, not less than 30 days
prior to the due date thereof and in a form acceptable to Lessor, to make a
progress payment and, provided on such due date no Events of Default have
occurred and be continuing hereunder or under the Lease, Lessor shall make the
progress payment set forth to the manufacturer(s) or supplier(s) as set forth in
such authorization.
20. LAW. This Lease and any Schedule hereto shall be binding only when accepted
by Lessor and shall in all respects be governed and construed, and the rights
and the liabilities of the parties hereto determined, except for local filing
requirements, in accordance with the laws of the State of Illinois, the
principle place of business of LINC Capital, Inc., the intended assignee of this
lease. LESSEE WAIVES TRIAL BY JURY AND SUBMITS TO THE JURISDICTION OF THE
FEDERAL DISTRICT COURT OR ANY STATE COURT LOCATED WITHIN COOK COUNTY IN THE
STATE OF ILLINOIS AND WAIVES ANY RIGHT TO ASSERT THAT ANY ACTION INSTITUTED BY
LESSOR IN ANY SUCH COURT IS IN THE IMPROPER VENUE OR SHOULD BE TRANSFERRED TO A
MORE CONVENIENT FORUM.
LESSEE'S INITIALS _________
21. AMENDMENTS. This Lease and any Schedule hereto contain the entire agreement
between the parties with respect to the Equipment, this Lease and any Schedule
hereto and there is not agreement or understanding oral or written, which is not
set forth herein. This Lease and any Schedule hereto may not be altered,
modified, terminated or discharged except by a writing signed by the party
against whom such alteration, modification, termination or discharge is sought.
LESSEE'S INITIALS _________
22. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee hereby
waives any and all rights and remedies conferred upon a Lessee by Article 2A of
the Uniform Commercial Code as adopted in any jurisdiction, including but not
limited to Lessee's rights to: (i) cancel this Lease; (ii) repudiate this Lease;
(iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover
damages from Lessor for any breaches of warranty or for any other reason related
to the Equipment; (vi) claim a security interest in the Equipment in Lessee's
possession or control for any reason (vii) deduct all or any part of any claimed
damages resulting from Lessor's default, if any, under this Lease; (viii) accept
partial delivery of the Equipment; (ix) "cover" by making any purchase or lease
of or contract to purchase or lease Equipment in substitution for those due from
Lessor; (x) recover any general, special, incidental, or consequential damages
for any reason whatsoever; and (xi) specific performance, replevin, detinue,
sequestration, claim, and delivery of the like for any Equipment identified to
this Lease. To the extent permitted by applicable law (unless expressly
otherwise agreed hereunder), Lessee also hereby waives any rights now or
hereafter conferred by statute or otherwise which may require Lessor to sell,
lease or otherwise use any Equipment in mitigation of Lessor's damages as set
forth in Paragraph 13 or which may otherwise limit or modify any of Lessor's
rights or remedies under Paragraph 13. Any action by Lessee against Lessor for
any default by Lessor under this Lease, including breach of warranty or
indemnify, shall be commenced within one (1) year after any such cause of action
accrues.
LESSEE'S INITIALS _________
23. COUNTERPARTS. This Lease may be executed in any number of counterparts, each
of which shall be deemed an original. Each Schedule shall be executed in three
(3) serially numbered counterparts each of which shall be deemed an original but
only counterpart number 1 shall constitute "chattel paper" or "collateral"
within the meaning of the Uniform Commercial Code in any jurisdiction.
24. ADDENDUM. ("X" if applicable) [__] See Addendum(s) attached hereto and made
a part hereof.
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THE PERSON EXECUTING THIS LEASE FOR AND ON BEHALF OF LESSEE WARRANTS AND
REPRESENTS, WHICH WARRANTY AND REPRESENTATION SHALL SURVIVE THE EXPIRATION OR
TERMINATION OF THIS LEASE, THAT THIS LEASE AND THE EXECUTION HEREOF HAS BEEN
DULY AND VALIDLY AUTHORIZED BY LESSEE, CONSTITUTES A VALID AND BINDING
OBLIGATION OF LESSEE AND THAT HE HAS AUTHORITY TO MAKE SUCH EXECUTION FOR AND ON
BEHALF OF LESSEE.
IN WITNESS WHEREOF, this Lease has been executed by Lessee as of the date first
stated above.
APPLIEDTHEORY CORPORATION ACCEPTED BY:
Lessee NATIONAL LEASING, INC.
Lessor
By: /s/ Angelo A. Gencarelli III By: /s/ Illegible
--------------------------------- ---------------------------------
Title: Vice President Title: VP Operations
------------------------------ ------------------------------
Date: 01/20/00
-------------------------------
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<PAGE> 1
COMPAQ FINANCIAL SERVICES
MASTER LEASE AND FINANCING AGREEMENT
This Master Lease and Financing Agreement (together with Exhibits A through E
attached hereto and hereby made a part hereof, this "Master Agreement"), dated
as of November 1, 1999, is entered into by and between Compaq Financial Services
Corporation, a Delaware corporation ("Lessor"), and AppliedTheory Corporation, a
Delaware ("Lessee"). Capitalized terms used in this Master Agreement without
definition have the meanings ascribed to them in Section 31.
1. PURPOSE OF MASTER AGREEMENT. The purpose of this Master Agreement is to set
forth the general terms and conditions upon which (a) Lessor shall lease to
Lessee and Lessee shall lease from Lessor items of Hardware, Software or both
(such Hardware and Software being collectively referred to as "Equipment", and
each such lease of Equipment being referred to as a "Lease"), and (b) Lessor
shall provide financing to Lessee (each such financing transaction being
referred to as a "Financing") for software program license fees, maintenance
fees, fees for other services and other one-time charges ("Financed Items")
Lessee desires to finance hereunder. In connection with its execution of this
Master Agreement, Lessee shall deliver to Lessor an Officer's Certificate in
form and substance acceptable to Lessor, executed by a duly authorized officer
of Lessee and certifying as to, among other things, Lessee's authority to enter
into this Master Agreement and Leases and Financings hereunder and the authority
of Lessee's officers or representatives specified therein to execute this Master
Agreement and all other Fundamental Agreements.
2. ALTERNATIVE COMMENCEMENT PROCEDURES. Subject to the other terms and
conditions contained in this Master Agreement and the applicable Schedule or
Advance Pricing Agreement, Lessee may, at its option, enter into individual
Leases and Financings with Lessor under either or both of the following
procedures:
A. TRADITIONAL PROCEDURE. (a) Execution of Schedule. Lessor and Lessee
mutually agree to enter into a Lease, a Financing or both by executing a
Schedule in the form of Exhibit A with such changes as Lessor and Lessee shall
have agreed to as conclusively evidenced by their execution thereof. Each such
Schedule shall specifically identify (by serial number or other identifying
characteristics) the items of Equipment to be leased under such Schedule (other
than items of System Software, which shall be deemed to be items of Software
leased under the Schedule pursuant to which the related items of Hardware are
leased), and the Financed Items to be financed under such Schedule. Each
Schedule, when executed by both Lessee and Lessor, together with this Master
Agreement, shall constitute a separate and distinct Lease, a separate and
distinct Financing, or a separate and distinct Lease and a separate and distinct
Financing, as the case may be, enforceable according to its terms. In the event
of any conflict between the terms of this Master Agreement and such Schedule,
the provisions of the Schedule shall govern.
(b) Acceptance; Initial Term of Leases and Term of Financings. Lessee
shall accept the Equipment subject to a Lease and the Financed Items subject to
a Financing in accordance with Section 3. The Initial Term of each Lease and, if
applicable, the Term of any related Financing evidenced by a Schedule executed
pursuant to this Section 2.A shall begin on the Acceptance Date of the Equipment
subject to such Lease and shall continue for the period described in the
applicable Schedule. The Term of each Financing evidenced by a Schedule executed
pursuant to this Section 2.A that is unrelated to any Lease shall begin on the
Acceptance Date for the related Financed Items and shall continue for the period
described in the applicable Schedule.
(c) Adjustments to Schedule. Lessee acknowledges that the Total Cost of
Equipment and Financed Items and the related Rent payments set forth in any
Schedule executed pursuant to this Section 2.A may be estimates, and if the
final invoice from the Seller specifies a Total Cost that is more or less than
the estimated Total Cost set forth in the Schedule, Lessee hereby authorizes
Lessor to adjust the applicable Total Cost and Rent payment on the Schedule to
reflect the final invoice amount (the "Final Invoice Amount"). However, if the
Final Invoice Amount exceeds the estimated Total Cost by more than 5%, Lessor
will notify Lessee and obtain Lessee's prior written approval of the
aforementioned adjustments. If Lessee fails to so approve any such adjustments
within 15 days of Lessor's request, then the affected Schedule shall terminate
without penalty to either Lessor or Lessee and Lessee shall be solely
responsible for all obligations arising under the applicable Purchase Documents,
including, without limitation, the obligation to purchase equipment and pay
Financed Items. All references in this Master Agreement and any Schedule to
Total Cost and Rent shall mean the amounts thereof specified in the applicable
Schedule, as adjusted pursuant to this paragraph. Lessee also acknowledges that
the Equipment and Financed Items described in a Schedule may differ from the
description of the Equipment and Financed Items set forth in the related
Acceptance Certificate and actually accepted by Lessee. Lessee hereby authorizes
Lessor to conform the description of the Equipment and Financed Items set forth
in any Schedule to the description thereof in the related Acceptance
Certificate. All references in the Master Agreement and any Schedule to the
Equipment subject to a Lease and the Financed Items subject to a Financing shall
mean the Equipment and Financed Items described in the applicable Schedule, as
conformed to the related Acceptance Certificate pursuant to this paragraph.
B. FUNDING CONSOLIDATION PROCEDURE. (a) Execution of Advance Pricing
Agreement. Lessor and Lessee mutually agree to enter into one or more Leases,
Financings or both by executing, from time to time, an Advance Pricing Agreement
in the form of Exhibit B with such changes as Lessor and Lessee shall have
agreed to as conclusively evidenced by their execution thereof. Subject to the
following provisions of this Section 2.B, such Advance Pricing Agreement shall
constitute a commitment on the part of Lessor, during the Commitment Period
specified therein (i) to purchase Equipment of the type(s) described therein and
enter into one or more Leases of the same with Lessee at the lease rates set
forth therein, and (ii) to fund Financed Items of the type(s) described therein
and enter into one or more Financings of the same with Lessee at the financing
rates set forth therein; provided, however, that Lessor shall under no
circumstances be obligated to purchase Equipment or fund Financed Items if (x)
such purchase or funding would require Lessor to expend moneys in excess of the
Amount Available specified in the Advance Pricing Agreement less the aggregate
amount previously paid or committed to be paid by Lessor to acquire Equipment or
fund Financed Items during such Commitment Period, or (y) any Lessee Default
shall have occurred and be continuing under any Lease or Financing or any event
shall have occurred and be continuing which, with the giving of notice or the
passage of time or both, would constitute a Lessee Default under any Lease or
Financing, or (z) Lessee shall have failed to deliver to Lessor any financial
statements in accordance with the provisions of paragraph (f) below or any
material adverse change shall have occurred in Lessee's financial or operating
condition, as determined by Lessor in its sole discretion, after the date of the
last financial statements of Lessee delivered to Lessor prior to the execution
and delivery of such Advance Pricing Agreement.
(b) Lessor's Purchase of Equipment and Funding of Financed Items. Subject
to the provisions of this Section 2.B and the applicable Advance Pricing
Agreement, Lessor shall, at Lessee's request made during the Commitment Period
specified in such Advance Pricing Agreement (i) purchase Equipment of the
type(s) described therein and enter into a Lease of such Equipment with Lessee,
and (ii) fund Financed Items of the type(s) described therein and enter into a
Financing with Lessee relating to such Financed Items. Until such time as Lessee
shall have executed and delivered to Lessor a Consolidating Schedule in
accordance with paragraph (d) below, each such Lease or Financing shall be
governed by the terms of this Master Agreement, the applicable Advance Pricing
Agreement and the Acceptance Certificate executed and delivered to Lessor by
Lessee pursuant to paragraph (c) below. Each such Acceptance Certificate shall
specifically identify (by serial number or other identifying characteristics)
the items of Equipment to be leased thereunder (other than items of System
Software, which shall be deemed to be items of Software leased together with the
related items of Hardware) and the Financed Items to be financed thereunder.
Until Lessee shall have executed and delivered to Lessor a Consolidating
Schedule, each such Acceptance Certificate, when executed and delivered by
Lessee and accepted by Lessor, together with this Master Agreement and the
applicable Advance Pricing Agreement, shall constitute a separate and distinct
Lease, a separate and distinct Financing, or a separate and distinct Lease and a
separate and distinct Financing, as the case may be, enforceable according to
its terms. In the event of any conflict among the terms of such documents, the
provisions of such Acceptance Certificate shall control over conflicting
provisions in such Advance Pricing Agreement or this Master Agreement and the
provisions of such Advance Pricing Agreement shall control over conflicting
provisions in this Master Agreement.
(c) Acceptance; Initial Term of Leases and Term of Financing.
<PAGE> 2
Lessee shall accept the Equipment subject to a Lease and the Financed Items
subject to a Financing in accordance with Section 3. The Initial Term of each
Lease and, if applicable, the Term of any related Financing evidenced by an
Advance Pricing Agreement and an Acceptance Certificate shall begin on the
Acceptance Date of the Equipment subject to such Lease and shall continue for
the period determined pursuant to such Advance Pricing Agreement. The Term of
each Financing evidenced by an Advance Pricing Agreement and an Acceptance
Certificate that is unrelated to any Lease shall begin on the Acceptance Date
for the related Financed Items and shall continue for the period determined
pursuant to such Advance Pricing Agreement.
(d) Periodic Consolidation of Leases and Financings. All Leases and
Financings commenced during a Consolidation Period (as specified in the
applicable Advance Pricing Agreement) pursuant to this Section 2.B shall be
consolidated into a single Schedule (a "Consolidating Schedule") in the form of
Exhibit C with such changes as Lessor and Lessee shall have agreed to as
conclusively evidenced by their execution thereof. Lessor shall prepare and
deliver to Lessee a Consolidating Schedule as of the close of each applicable
Consolidation Period. Lessee agrees to execute and deliver each Consolidating
Schedule to Lessor within 10 days after its receipt thereof from Lessor. From
and after Lessee's execution and delivery to Lessor of a Consolidating Schedule,
the Consolidating Schedule shall supersede the applicable Acceptance
Certificates and the Advance Pricing Agreement with respect to all Leases and
Financings commenced during the Consolidation Period to which such Consolidating
Schedule relates, and all such Leases shall be deemed to be a single, separate
and distinct Lease and all such Financings shall be deemed to be a single,
separate and distinct Financing, in each case governed by such Consolidating
Schedule and this Master Agreement and enforceable in accordance with its terms.
In the event of any conflict between the terms of this Master Agreement and such
Consolidating Schedule, the provisions of the Consolidating Schedule shall
govern.
(e) Failure of Lessee to Deliver Consolidating Schedule. If Lessee fails
to execute and deliver to Lessor any Consolidating Schedule within 10 days after
its receipt thereof, Lessor may exercise its rights and remedies under Section
21 and 22 of this Master Agreement arising as a result of such failure, either
immediately or at any time during the Initial Term of the Leases or the Term of
the Financings to which such Consolidating Schedule relates. No delay in
exercising such rights or remedies shall operate as a waiver thereof. Lessee
acknowledges and agrees that Rent with respect to such Leases and Financings
shall be payable in the amounts and at the times determined pursuant to the
applicable Advance Pricing Agreement and Acceptance Certificates, regardless of
whether Lessee shall have received such Consolidating Schedule from Lessor or
executed and delivered the same to Lessor as of the time any such payment is
due.
(f) Financial Statements. Lessee shall, at all times during which any
Advance Pricing Agreement is effective, deliver to Lessor its quarterly and
annual financial statements no later then 45 days after the end of each of
Lessee's fiscal quarters or 90 days after the end of each of Lessee's fiscal
years, as applicable. Such annual financial statements shall be audited and
certified by Lessee's independent certified public accountants.
3. ACCEPTANCE OF EQUIPMENT AND FINANCED ITEMS. (a) General. Lessee shall
unconditionally and irrevocably accept all Equipment under a Lease and, if
applicable, all related Financed Items subject to a Financing as soon as such
Equipment is delivered and inspected by Lessee or, if acceptance requirements
for such Equipment, related Financed Items or both are specified in the
applicable Purchase Documents, as soon as such requirements are met. Lessee
shall evidence such acceptance by executing and delivering to Lessor a properly
completed Acceptance Certificate in substantially the form of (i) Exhibit D if
the Lease or the Lease and the related Financing, as the case may be, is
evidenced by a Schedule executed pursuant to Section 2.A, or (ii) Exhibit E if
the Lease or the Lease and the related Financing, as the case may be, is being
commenced pursuant to an Advance Pricing Agreement executed pursuant to Section
2.B. Lessee agrees (y) to inspect all Equipment as soon as reasonably
practicable after the delivery thereof to Lessee or, if acceptance requirements
for such Equipment or any related Financed Items are specified in the applicable
Purchase Documents, as soon as reasonably practicable after being advised by the
Supplier that such requirements have been met, and (z) to complete, execute and
deliver to Lessor such Acceptance Certificate as soon as reasonably practicable
after its satisfactory completion of such inspection. In the case of a Financing
of Financed Items unrelated to any Equipment subject to a Lease, Lessee shall
unconditionally and irrevocably accept such Financed Items as soon as it shall
have become liable to pay for such Financed Items, and shall complete, execute
and deliver to Lessor an Acceptance Certificate in substantially the form of
Exhibit D or Exhibit E (as applicable) as soon as reasonably practicable
thereafter.
(b) E-mail Acceptance. For its convenience and at its option, Lessee may
accept Equipment and Financed Items by electronic mail in accordance with this
paragraph, in lieu of the execution and physical delivery of Acceptance
Certificates provided for in paragraph (a) above. Subject to the terms and
conditions set forth below, a Valid E-mail Acceptance Certificate shall
constitute an original and authentic written Acceptance Certificate, duly
executed and delivered by an authorized representative of Lessee. A "Valid
E-mail Acceptance Certificate" means an electronic facsimile of an Acceptance
Certificate in substantially the form of Exhibit D or Exhibit E (as applicable)
properly completed and sent by an Authorized Lessee Representative from his or
her Authorized Lessee E-mail Address to an Authorized Lessor E-mail Address by
an electronic mail message confirming Lessee's acceptance of the Equipment or
Financed Items described therein. Upon request, Lessor shall provide to Lessee
electronic file copies of Exhibits D and E for Lessee's use under this
paragraph. The Authorized Lessee Representatives and their corresponding
Authorized Lessee E-mail Addresses and the Lessee Acceptance Confirmation Fax
Number are as specified in Section 29 or as designated by Lessee in a written
notice executed by a duly authorized officer of Lessee and delivered to Lessor
in accordance with Section 29. The Authorized Lessor E-mail Address(es) are
specified in Section 29. Lessee may unilaterally modify any of the Authorized
Lessee Representatives and Authorized Lessee E-mail Addresses and the Lessee
Acceptance Confirmation Fax Number by written notice of the modification
executed by a duly authorized officer of Lessee and delivered to Lessor in
accordance with Section 29. Lessor may unilaterally modify any Authorized Lessor
E-mail Address by written notice of the modification executed by a duly
authorized officer of Lessor and delivered to Lessee in accordance with Section
29. Upon Lessor's receipt of a Valid E-mail Acceptance Certificate from Lessee,
Lessor shall transmit to Lessee by confirmed facsimile transmission to the
Lessee Acceptance Confirmation Fax Number, a notice acknowledging Lessor's
receipt of the Valid E-mail Acceptance Certificate from Lessee. A Valid E-mail
Acceptance Certificate shall become effective and constitute Lessee's
unconditional and irrevocable acceptance of the Equipment or Financed Items
described therein, as of the Acceptance Date specified therein, at the end of
the second business day following the day on which Lessor shall have transmitted
such notice unless Lessee shall have delivered a written notice to Lessor in
accordance with Section 29 revoking such Valid E-mail Acceptance Certificate
prior to the end of such second business day. Lessor's transmission of such
notice shall constitute Lessor's acknowledgement and acceptance of the Valid
E-mail Acceptance Certificate. Lessee expressly waives any claim or defense that
any Valid E-mail Acceptance Certificate which was sent and became effective in
accordance with the above procedures does not constitute an original and
authentic written Acceptance Certificate, duly executed and delivered by Lessee.
4. LESSEE'S END-OF-LEASE-TERM OPTIONS; AUTOMATIC EXTENSION. Lessee shall have
the following options in respect of each Lease at the end of each of the Initial
Term, any Renewal Term and any optional extension of the Initial Term or any
Renewal Term:
A. PURCHASE OPTION. Lessee may elect, by delivering to Lessor an
End-of-Term Notice at least 90 days prior to the expiration of the Initial Term,
any Renewal Term or any optional extension of the Initial Term or any Renewal
Term, to purchase any or all Units of Equipment then subject to such Lease
(other than items of Software that may not be sold by Lessor under the terms of
any applicable License Agreement) for an amount equal to the Fair Market Value
of such Units of Equipment as of the end of the Then Applicable Term, provided
no Lessee Default shall have occurred and be continuing. In the event of such an
election, Lessee shall pay such amount to Lessor, in immediately available
funds, on or before the last day of the Then Applicable Term. If Lessee shall
have so elected to purchase any of the Units of Equipment, shall have so paid
the applicable purchase price and shall have fulfilled the terms and conditions
of this Master Agreement, then on the last day of the Then Applicable Term (i)
the Lease with respect to such Units of Equipment shall terminate and, except as
provided in Section 27, Lessee shall be relieved of all of its obligations in
favor of Lessor with respect to such Units of Equipment, and (ii) Lessor shall
transfer all of its interest in such Units of Equipment to Lessee "AS IS, WHERE
IS," without any warranty, express or implied, from Lessor, other than the
absence of any liens or claims by or through Lessor. In the event Lessor and
Lessee are unable to agree on
2
<PAGE> 3
the Fair Market Value of any Units of Equipment, Lessor and Lessee shall, at
Lessee's expense, select an independent appraiser to conclusively determine such
amount.
B. RENEWAL OPTION. Lessee may elect, by delivering to Lessor an
End-of-Term Notice at least 90 days prior to the expiration of the Initial Term,
any Renewal Term, or any optional extension of the Initial Term or any Renewal
Term, to renew the Lease with respect to any or all Units of Equipment then
subject to such Lease (other than items of Software that may not be re-released
by Lessor under the terms of any applicable License Agreement) for an amount
equal to the Fair Rental Value of such Units of Equipment as of the end of the
Then Applicable Term. In the event of such an election, Lessee shall enter into
a mutually agreeable renewal agreement with Lessor ("Renewal Agreement") on or
before the last day of the Then Applicable Term confirming the Units of
Equipment as to which the Lease is to be renewed, the period for which the Lease
is to be renewed (the "Renewal Term"), and the amount of Rent and the times at
which such Rent is to be payable during the Renewal Term. In the event Lessor
and Lessee are unable to agree on the Fair Rental Value of any Units of
Equipment, Lessor and Lessee shall, at Lessee's expense, select an independent
appraiser to conclusively determine such amount.
C. RETURN. Lessee may elect, by delivering to Lessor an End-of-Term Notice
at least 90 days prior to the expiration of the Initial Term, any Renewal Term
or any optional extension of the Initial Term or any Renewal Term, to return any
or all of the Units of Equipment then subject to such Lease in accordance with
Section 9 of this Master Agreement.
D. OPTIONAL EXTENSION. Lessee may elect, by omitting to deliver to Lessor
an End-of-Term Notice at least 90 days prior to the expiration of the Initial
Term or any Renewal Term, to extend the Initial Term or such Renewal Term, as
the case may be. In that event, the Initial Term or such Renewal Term shall,
without any additional notice or documentation, be automatically extended for
successive calendar months with respect to all items of Equipment then subject
to such Lease through the end of the calendar month falling at least 90 days
after the date Lessee shall have delivered to Lessor an End-of-Term Notice with
respect to such Lease. For each calendar month that the Then Applicable Term of
such Lease is so extended, Lessee shall pay to Lessor Rent in an amount equal to
the monthly Rent payment in effect immediately prior to such extension (or the
appropriate pro rata portion of the Rent payment then in effect in the case of
Rent payable other than on a monthly basis), and all other provisions of this
Master Agreement and the applicable Schedule shall continue to apply.
If Lessee shall have delivered to Lessor an End-of-Term Notice with
respect to a Lease, but shall have subsequently failed to comply with its
obligations arising from its elections specified therein (e.g., Lessee shall
have failed, on or before the last day of the Then Applicable Term (i) to pay
Lessor the purchase price for Equipment to be purchased in accordance with
Section 4.A above (ii) to execute a Renewal Agreement with respect to Equipment
as to which the Lease is to be renewed in accordance with Section 4.B above, or
(iii) to return to Lessor Equipment to be returned in accordance with Section
4.C above), then the Then Applicable Term of such Lease shall, without any
additional notice or documentation, be automatically extended for successive
calendar months with respect to all items of Equipment as to which Lessee shall
have so failed to comply with its obligations through the end of the calendar
month in which Lessee shall have complied with such obligations. For each
calendar month that the Then Applicable Term of any Lease is so extended, Lessee
shall pay to Lessor Rent in an amount equal to the monthly Rent payment in
effect immediately prior to such extension (or the appropriate pro rata portion
of the Rent payment then in effect in the case of Rent payable other than on a
monthly basis), and all other provisions of this Master Agreement and the
applicable Schedule shall continue to apply. Notwithstanding any of the
provisions of this Section 4 to the contrary, if any Lessee Default shall have
occurred and be continuing at any time during the last 90 days of the Then
Applicable Term of any Lease, Lessor may cancel any Renewal Term or optional or
other automatic extension of the Then Applicable Term immediately upon written
notice to Lessee.
5. RENT; LATE CHARGES; ADVANCE RENT. As rent ("Rent") for the Equipment under
any Lease and the Financed Items under any Financing, Lessee agrees to pay the
amounts specified in the applicable Schedule on the due dates specified in the
applicable Schedule. Lessee agrees to pay Lessor interest on any Rent payment or
other amount due hereunder that is not paid within 10 days of its due date, at
the rate of 1-1/2% per month (or such lesser rate as is the maximum rate
allowable under applicable law). Lessee shall pay to Lessor, with respect to
each Lease or Financing, the Advance Rent specified on the applicable Schedule,
if any. Any payment of Advance Rent shall be credited against the first Rent
payment payable by Lessee under the applicable Schedule and any excess Advance
Rent will be credited against the last Rent payment(s) payable by Lessee with
respect to the Initial Term of the applicable Lease or Financing. Advance Rent
shall be refunded to Lessee without interest only if Lessor declines to sign the
applicable Schedule.
6. LEASES AND FINANCINGS NON-CANCELABLE; NET LEASES; WAIVER OF DEFENSES TO
PAYMENT. IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT EACH LEASE AND FINANCING
HEREUNDER SHALL BE NON-CANCELABLE, AND THAT EACH LEASE HEREUNDER IS A NET LEASE.
LESSEE AGREES THAT IT HAS AN ABSOLUTE AND UNCONDITIONAL OBLIGATION TO PAY ALL
RENT AND OTHER AMOUNTS WHEN DUE. LESSEE IS NOT ENTITLED TO ABATE OR REDUCE RENT
OR ANY OTHER AMOUNT DUE, OR TO SET OFF ANY CHARGE AGAINST ANY SUCH AMOUNT.
LESSEE HEREBY WAIVES ANY RECOUPMENT, CROSS-CLAIM, COUNTERCLAIM OR ANY OTHER
DEFENSE AT LAW OR IN EQUITY TO ANY RENT PAYMENT OR OTHER AMOUNT DUE WITH RESPECT
TO ANY LEASE OR FINANCING, WHETHER ANY SUCH DEFENSE ARISES OUT OF THIS MASTER
AGREEMENT, ANY SCHEDULE, ANY CLAIM BY LESSEE AGAINST LESSOR, LESSOR'S ASSIGNEES
OR SUPPLIER, OR OTHERWISE. IF THE EQUIPMENT OR ANY FINANCED ITEM IS NOT PROPERLY
INSTALLED, DOES NOT OPERATE OR INTEGRATE AS REPRESENTED OR WARRANTED BY SUPPLIER
OR IS UNSATISFACTORY FOR ANY REASON WHATSOEVER, LESSEE SHALL MAKE ANY CLAIM ON
ACCOUNT THEREOF SOLELY AGAINST SUPPLIER AND SHALL NEVERTHELESS PAY ALL SUMS DUE
WITH RESPECT TO EACH LEASE AND EACH FINANCING.
7. ASSIGNMENT OF PURCHASE DOCUMENTS. Lessee assigns to Lessor all of Lessee's
right, title and interest in and to (a) the Equipment described in each
Schedule, and (b) the Purchase Documents relating to such Equipment. Such
assignment of the Purchase Documents is an assignment of rights only; nothing in
this Master Agreement shall be deemed to have relieved Lessee of any obligation
or liability under any of the Purchase Documents, except that, as between Lessee
and Lessor, Lessor shall pay for the Equipment within 30 days after Lessee's
delivery to Lessor of a properly completed and executed Acceptance Certificate
and all other documentation necessary to establish Lessee's acceptance of such
Equipment under the related Lease. Lessee represents and warrants that it has
reviewed and approved the Purchase Documents. In addition, if Lessor shall so
request, Lessee shall deliver to Lessor a document acceptable to Lessor whereby
Seller acknowledges and provides any required consent to such assignment. For
the avoidance of doubt, Lessee covenants and agrees that it shall at all times
during the Total Term of each Lease comply in all respects with the terms of any
License Agreement relating to any Equipment leased thereunder. IT IS ALSO
SPECIFICALLY UNDERSTOOD AND AGREED THAT NEITHER SUPPLIER NOR ANY SALESPERSON OF
SUPPLIER IS AN AGENT OF LESSOR, NOR ARE THEY AUTHORIZED TO WAIVE OR ALTER ANY
TERMS OF THIS MASTER AGREEMENT OR ANY SCHEDULE.
8. ASSIGNMENT OF SUPPLIER WARRANTIES. To the extent permitted, Lessor hereby
assigns to Lessee, for the Total Term of any Lease, all Equipment warranties
provided by any Supplier in the applicable Purchase Documents. Lessee shall have
the right to take any action it deems appropriate to enforce such warranties
provided such enforcement is pursued in Lessee's name and at its expense. In the
event Lessee is precluded from enforcing any such warranty in its name, Lessor
shall, upon Lessee's request, take reasonable steps to enforce such warranty. In
such circumstances, Lessee shall, promptly upon demand, reimburse Lessor for all
out-of-pocket expenses incurred by Lessor in enforcing the Supplier warranty.
Any recovery resulting from any such enforcement efforts shall be divided among
Lessor and Lessee as their interests may appear.
9. EQUIPMENT RETURN REQUIREMENTS. On or before the last day of the Total Term of
each Lease (and any other time Lessee is required to return Equipment to Lessor
under the terms of this Master Agreement or any Schedule), Lessee shall pack the
Equipment to be returned to Lessor in
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accordance with the manufacturer's guidelines and deliver such Equipment to
Lessor at any destination within the continental United States designated by
Lessor. In the case of any item of Software to be returned to Lessor, Lessee
shall also deliver to Lessor the original Certificate of Authenticity issued by
the licensor of such Software, if any. Alternatively, Lessee may deliver any
such Certificate of Authenticity to Lessor on or at any time after the
Acceptance Date for such Software. All dismantling, packaging, transportation,
in-transit insurance and shipping charges shall be borne by Lessee. All
Equipment shall be returned to Lessor in the same condition and working order as
when delivered to Lessee, reasonable wear and tear excepted, and shall qualify
for maintenance service by the Supplier at its then standard rates for Equipment
of that age, if available. Lessee shall be responsible for, and shall reimburse
Lessor promptly on demand for, any cost incurred by Lessor to qualify the
Equipment for the Supplier's maintenance service or, if not available, to return
the Equipment to good working condition.
10. EQUIPMENT USE AND MAINTENANCE. Lessee is solely responsible for the
selection, installation, operation and maintenance of the Equipment and all
costs related thereto, including shipping charges. Lessee shall at all times
operate and maintain the Equipment in good working order, repair, condition and
appearance, and in accordance with the manufacturer's specifications and
recommendations. On reasonable prior notice to Lessee, Lessor and Lessors agents
shall have the right, during Lessee's normal business hours, to enter the
premises where the Equipment is located for the purpose of inspecting the
Equipment and observing its use. If Lessor shall have provided to Lessee any
tags or identifying labels, Lessee shall, at its expense, affix and maintain in
a prominent position on each item of Equipment such tags or labels to indicate
Lessor's ownership of the Equipment. Except in the case of PC Equipment and
Software, Lessee shall, at its expense, enter into and maintain and enforce at
all times during the Total Term of each Lease a maintenance agreement to service
and maintain the related Equipment, upon terms and with a provider reasonably
acceptable to Lessor.
11. EQUIPMENT OWNERSHIP; LIENS; LOCATION. As between Lessor and Lessee, Lessor
is the sole owner of the Equipment and has sole title thereto. Lessee shall not
make any representation to any third-party inconsistent with Lessor's sole
ownership of the Equipment. Lessee covenants that it will not pledge or
encumber the Equipment or Lessor's interest in the Equipment in any manner
whatsoever nor create or permit to exist any levy, lien or encumbrance thereof
or thereon except those created by or through Lessor. The Equipment shall remain
Lessor's personal property whether or not affixed to realty and shall not become
a fixture or be made to become a part of any real property on which it is placed
without Lessor's prior written consent. Lessee shall maintain the Equipment so
that it may be removed from any building in which it is placed without any
damage to the building or the Equipment. Lessee may relocate any Equipment from
the Equipment Location specified in the applicable Schedule to another of its
business locations within the United States upon prior written notice to Lessor
specifying the new Equipment Location, provided Lessee remains in possession and
control of the Equipment.
12. ALTERATIONS AND ADDITIONS TO EQUIPMENT. Lessee shall make no alterations or
additions to the Equipment, except those that (a) will not void any warranty
made by the Supplier of the Equipment, result in the creation of any security
interest, lien or encumbrance on the Equipment or impair the value or use of the
Equipment either at the time made or at the end of the Total Term of the
applicable Lease, and that are readily removable without damage to the Equipment
("Optional Additions"), or (b) are required by any applicable law, regulation or
order. All additions to the Equipment or repairs made to the Equipment, except
Optional Additions, become a part thereof and Lessor's property at the time
made; Optional Additions which have not been removed prior to the return of the
Equipment shall become Lessor's property upon such return.
13. INSURANCE. Lessee agrees to keep the Equipment insured at Lessee's expense
against all risks of loss from any cause whatsoever, including without
limitation, theft and damage. Lessee agrees that such insurance shall name
Lessor as a loss payee and cover not less than the Stipulated Loss Value of the
Equipment. Lessee also agrees that it shall carry commercial general liability
insurance in an amount not less than $2,000,000 total liability per occurrence
and cause Lessor and its affiliates to be named additional insureds under such
insurance. Each policy shall provide that the insurance cannot be canceled
without at least 30 days prior written notice to Lessor. Lessee shall provide to
Lessor (a) on or prior to the Acceptance Date for each Lease, and from time to
time thereafter, certificates of insurance evidencing such insurance coverage
throughout the Total Term of each Lease, and (b) upon Lessor's request, copies
of the insurance policies. If Lessee fails to provide Lessor with such evidence,
then Lessor will have the right, but not the obligation, to purchase such
insurance protecting Lessor at Lessee's expense. Lessee's expense shall include
the full premium paid for such insurance and any customary charges, costs or
fees of Lessor. Lessee agrees to pay such amounts in substantially equal
installments allocated to each Rent payment (plus interest on such amounts at
the rate of 1-1/2% per month or such lesser rate as is the maximum rate
allowable under applicable law).
14. RISK OF LOSS. In the event any Casualty Loss shall occur, on the next Rent
payment date Lessee shall, at its option (a) pay Lessor the Stipulated Loss
Value of the Equipment suffering the Casualty Loss, or (b) substitute and
replace each item of Equipment suffering the Casualty Loss with an item of
Substitute Equipment. If Lessee shall elect to pay the Stipulated Loss Value of
the Equipment suffering a Casualty Loss, upon Lessor's receipt in full of such
payment the applicable Lease shall terminate as it relates to such Equipment
and, except as provided in Section 27, Lessee shall be relieved of all
obligations under the applicable Lease as it relates to such Equipment. If
Lessee shall elect to replace Equipment suffering a Casualty Loss with items of
Substitute Equipment (i) the applicable Lease shall continue in full force and
effect without any abatement of Rent with such Substitute Equipment thereafter
being deemed to be Equipment leased thereunder, and (ii) Lessee shall deliver to
Lessor a bill of sale or other documentation, in either case in form and
substance satisfactory to Lessor, in which Lessee shall represent and warrant
that it has transferred to Lessor good and marketable title to all Substitute
Equipment, free and clear of all liens, encumbrances and claims of others. Upon
Lessor's receipt of such payment of Stipulated Loss Value in full, or such bill
of sale or other documentation, as the case may be, Lessor shall transfer to
Lessee all of Lessor's interest in the Equipment suffering the Casualty Loss "AS
IS, WHERE IS," without any warranty, express or implied, from Lessor, other than
the absence of any liens or claims by or through Lessor. In the event of any
repairable damage to any Equipment, the Lease shall continue with respect to
such Equipment without any abatement of Rent and Lessee shall at its expense
promptly cause such Equipment to be repaired to the condition it is required to
be maintained in pursuant to Section 10. Lessee shall notify Lessor of any
Casualty Loss or repairable damage to any Equipment as soon as reasonably
practicable after the date of any such occurrence.
15. TAXES. Lessor shall report and pay all Taxes now or hereafter imposed or
assessed by governmental body, agency or taxing authority upon the purchase,
ownership, delivery, installation, leasing, rental, use or sale of the
Equipment, the Rent or other charges payable hereunder, or otherwise upon or in
connection with any Lease or Financing, whether assessed on Lessor or Lessee,
other than any such Taxes required by-law to be reported and paid by Lessee.
Lessee shall promptly reimburse Lessor for all such Taxes paid by Lessor,
together with any penalties or interest in connection therewith attributable to
Lessee's acts or failure to act, excluding (a) Taxes on or measured by the
overall gross or net income or items of tax preference of Lessor, (b) as to any
Lease or the related Equipment, Taxes attributable to the period after the
return of such Equipment to Lessor, and (c) Taxes imposed as a result of a sale
or other transfer by Lessor of any portion of its interest in any Lease or
Financing or in any Equipment except for a sale or other transfer to Lessee or a
sale or other transfer occurring after and during the continuance of any Lessee
Default.
16. GENERAL INDEMNITY. Lessee shall indemnify and hold harmless Lessor, its
employees, officers, directors, agents and assignees and, if requested by
Lessor, defend Lessor, its employees, officers, directors, agents and assignees,
from and against any and all Claims arising directly or indirectly out of or in
connection with any matter involving this Master Agreement, the Equipment or any
Lease or Financing, including but not limited to (a) the selection, manufacture,
purchase, acceptance, rejection, ownership, delivery, lease, financing,
possession, maintenance, use, condition, return or operation of any Equipment or
Financed Items or the enforcement of Lessor's rights under any Lease or
Financing; (b) any latent defect or other defect in any Equipment or Financed
Item, whether or not discoverable by Lessor or by Lessee; (c) any patent,
trademark or copyright infringement involving any Equipment or Financed Item;
(d) the condition of any Equipment or Financed Item arising or existing at any
time during the Total Term of any Lease or the Term of any Financing; and (e)
any breach by Lessee of any representation, warranty or covenant contained in
any
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Fundamental Agreement. Notwithstanding the foregoing, Lessee shall have no
obligation to indemnify or defend against any Claim arising solely as a result
of Lessor's gross negligence or willful misconduct.
17. TAX BENEFIT INDEMNITY. Each Lease is entered into on the assumption that
Lessor is the owner of the Equipment for tax purposes and is entitled to certain
federal and state tax benefits available to an owner of Equipment (collectively,
"Tax Benefits"), including without limitation, accelerated cost recovery system
deductions for 5-year property and deductions for interest incurred by Lessor to
finance the purchase of Equipment available under the Code. Lessee represents,
warrants and covenants to Lessor that (a) Lessee is not a tax-exempt entity
(as defined in Section 168(h) of the Code), (b) all Equipment will be used
solely within the United States, and (c) Lessee will take no position
inconsistent with the assumption that Lessor is the owner of the Equipment for
federal and state tax purposes. If, due to any act or omission of Lessee or any
party acting through Lessee, or the breach or inaccuracy of any representation,
warranty or covenant of Lessee contained in any Fundamental Agreement, Lessor
reasonably determines that it cannot claim, is not allowed to claim, loses or
must recapture any or all of the Tax Benefits otherwise available with respect
to the Equipment subject to any Lease (a "Tax Loss"), then Lessee shall,
promptly upon demand, pay to Lessor an amount sufficient to provide Lessor the
same after-tax rate of return and aggregate after-tax cash flow through the end
of the Then Applicable Term of such Lease that Lessor would have realized but
for such Tax Loss.
18. COVENANT OF QUIET ENJOYMENT. So long as no Lessee Default exists, and no
event shall have occurred and be continuing which, with the giving of notice or
the passage of time or both, would constitute a Lessee Default, neither Lessor
nor any party acting or claiming through Lessor, by assignment or otherwise,
will disturb Lessee's quiet enjoyment of the Equipment during the Total Term of
the related Lease.
19. DISCLAIMERS AND LESSEE WAIVERS. LESSEE LEASES THE EQUIPMENT FROM LESSOR "AS
IS, WHERE IS". IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT (A) EXCEPT AS
EXPRESSLY SET FORTH IN SECTION 18, LESSOR MAKES ABSOLUTELY NO REPRESENTATIONS OR
WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY
REPRESENTATION OR WARRANTY WITH RESPECT TO THE DESIGN, COMPLIANCE WITH
SPECIFICATIONS, QUALITY, OPERATION, OR CONDITION OF ANY EQUIPMENT OR FINANCED
ITEMS (OR ANY PART THEREOF), THE MERCHANTABILITY OR FITNESS OF EQUIPMENT OR
FINANCED ITEMS FOR A PARTICULAR PURPOSE, OR ISSUES REGARDING PATENT
INFRINGEMENT, TITLE AND THE LIKE; (B) LESSOR SHALL NOT BE DEEMED TO HAVE MADE,
BE BOUND BY OR LIABLE FOR, ANY REPRESENTATION, WARRANTY OR PROMISE MADE BY THE
SUPPLIER OF ANY EQUIPMENT OR FINANCED ITEMS (EVEN IF LESSOR IS AFFILIATED WITH
SUCH SUPPLIER); (C) LESSOR SHALL NOT BE LIABLE FOR ANY FAILURE OF ANY EQUIPMENT
OR FINANCED ITEMS OR ANY DELAY IN THE DELIVERY OR INSTALLATION THEREOF; (D)
LESSEE HAS SELECTED ALL EQUIPMENT AND FINANCED ITEMS WITHOUT LESSOR'S
ASSISTANCE; AND (E) LESSOR IS NOT A MANUFACTURER OF ANY EQUIPMENT. IT IS FURTHER
AGREED THAT LESSOR SHALL HAVE NO LIABILITY TO LESSEE, LESSEE'S CUSTOMERS, OR ANY
THIRD PARTIES FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF THIS MASTER AGREEMENT OR ANY SCHEDULE OR CONCERNING ANY EQUIPMENT
OR FINANCED ITEMS, OR FOR ANY DAMAGES BASED ON STRICT OR ABSOLUTE TORT LIABILITY
OR, EXCEPT TO THE EXTENT CONSTITUTING A LESSOR DEFAULT, LESSOR'S NEGLIGENCE;
PROVIDED, HOWEVER, THAT NOTHING IN THIS MASTER AGREEMENT SHALL DEPRIVE LESSEE OF
ANY RIGHTS IT MAY HAVE AGAINST ANY PERSON OTHER THAN LESSOR. LESSOR AND LESSEE
AGREE THAT THE LEASES AND THE FINANCINGS SHALL BE GOVERNED BY THE EXPRESS
PROVISIONS OF THIS MASTER AGREEMENT AND THE OTHER FUNDAMENTAL AGREEMENTS AND NOT
BY THE CONFLICTING PROVISIONS OF ANY OTHERWISE APPLICABLE LAW. ACCORDINGLY, TO
THE EXTENT PERMITTED BY APPLICABLE LAW, LESSEE WAIVES THE RIGHT TO (1) CANCEL OR
REPUDIATE THIS MASTER AGREEMENT, (2) REVOKE ACCEPTANCE OF OR REJECT THE
EQUIPMENT, (3) CLAIM A SECURITY INTEREST IN THE EQUIPMENT, (4) SELL OR DISPOSE
OF THE EQUIPMENT UPON REJECTION OR REVOCATION, (5) SEEK "COVER" IN SUBSTITUTION
FOR A LEASE FROM LESSOR, AND (6) CLAIM AN AGENCY RELATIONSHIP BETWEEN SUPPLIER
AND LESSOR.
20. LESSEE WARRANTIES. Lessee represents, warrants and covenants to Lessor that:
(a) ALL EQUIPMENT WILL BE USED FOR BUSINESS PURPOSES ONLY AND NOT FOR PERSONAL,
FAMILY OR HOUSEHOLD PURPOSES; (b) Lessee is duly organized, validly existing and
in good standing under applicable law; (c) Lessee has the power and authority to
enter into each of the Fundamental Agreements; (d) all Fundamental Agreements
are enforceable against Lessee in accordance with their terms and do not violate
or create a default under any instrument or agreement binding on Lessee: (e)
there are no pending or threatened actions or proceedings before any court or
administrative agency that could have a material adverse effect on Lessee or any
Fundamental Agreement, unless such actions are disclosed to Lessor and consented
to in writing by Lessor; (x) Lessee shall comply in all material respects with
all laws and regulations the violation of which could have a material adverse
effect upon the Equipment or Lessee's performance of its obligations under any
Fundamental Agreement; (g) each Fundamental Agreement shall be effective against
all creditors of Lessee under applicable law, including fraudulent conveyance
and bulk transfer laws, and shall raise no presumption of fraud; and (h) all
financial statements and other related information furnished by Lessee shall be
prepared in accordance with generally accepted accounting principles and shall
fairly present Lessee's financial position as of the dates given on such
statements.
21. DEFAULT. Any of the following shall constitute a default by Lessee (a
"Lessee Default") under this Master Agreement and all Leases and Financings: (a)
Lessee fails to pay any Rent payment or any other amount payable to Lessor under
this Master Agreement or any Schedule within 10 days after its due date; or (b)
Lessee defaults on or breaches any of the other terms and conditions of any
Material Agreement, and fails to cure such breach within 10 days after written
notice thereof from Lessor; or (c) any representation or warranty made by Lessee
in any Material Agreement proves to be incorrect in any material respect when
made or reaffirmed; or (d) Lessee or Guarantor sells or otherwise disposes
of all or substantially all of its assets, consolidates with or merges with or
into any entity or incurs a substantial amount of indebtedness other than in the
ordinary course of its business (unless consented to in advance by Lessor); or
(e) Lessee or Guarantor dissolves or otherwise terminates its existence, ceases
to do business, or becomes insolvent or fails generally to pay its debts as they
become due; or (x) any Equipment is levied against, seized or attached; or (g)
Lessee or Guarantor makes an assignment for the benefit of creditors; or (h) a
proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency
or receivership law is filed by or against Lessee or Guarantor (and, if such
proceeding is involuntary, it is not dismissed within 60 days after the filing
thereof) or Lessee or Guarantor takes any action to authorize any of the
foregoing matters; or (i) any letter of credit or guaranty issued in support of
a Lease or Financing is revoked, breached, cancelled or terminated (unless
consented to in advance by Lessor); or (j) any Guarantor fails to fulfil its
obligations in favor of Lessor pursuant to its guaranty.
Any of the following shall constitute a default by Lessor (a "Lessor
Default") under this Master Agreement and (i) the applicable Lease(s) or
Financing(s) in the case of a Lessor Default described in clauses (w) or (x)
below, or (ii) all Leases and Financings in the case of a Lessor Default
described in clauses (y) or (z) below: (w) Lessor breaches its covenant of quiet
enjoyment set forth in Section 18 and fails or is unable to cure such breach
within 10 days after written notice thereof from Lessee; or (x) Lessor fails to
pay Seller (or in the case of Financed Items, Lessee or such other party as
Lessee or Seller shall have directed in writing) for any Equipment or Financed
Items within 30 days after Lessor's receipt of a properly completed and executed
Acceptance Certificate and all other documentation necessary to establish
Lessee's acceptance of such Equipment or Financed Items under a Lease or
Financing, respectively, and such failure continues for more than 10 days after
written notice thereof from Lessee; or (y) Lessor makes an assignment for the
benefit of creditors; or (z) a proceeding under any bankruptcy, reorganization,
arrangement of debt, insolvency or receivership law is filed by or against
Lessor (and, if such proceeding is involuntary, it is not dismissed within 60
days after the filing thereof).
22. REMEDIES. If a Lessee Default occurs, Lessor may, in its sole discretion,
exercise one or more of the following remedies: (a) declare all amounts due and
to become due under any or all Leases and Financings to be
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immediately due and payable; or (b) terminate this Master Agreement or any Lease
or Financing; or (c) take possession of, or render unusable, any Equipment
wherever the Equipment may be located, without demand or notice and without any
court order or other process of law, but not in violation of the law, in
accordance with Lessee's reasonable security procedures, and no such action
shall constitute a termination of any Lease; or (d) require Lessee to deliver
the Equipment to a location specified by Lessor; or (e) declare the Stipulated
Loss Value for any or all Equipment to be due and payable as liquidated damages
for loss of a bargain and not as a penalty and in lieu of any further Rent
payments under the applicable Lease or Leases; or (x) proceed by court action to
enforce performance by Lessee of any Lease or Financing and/or to recover all
damages and expenses incurred by Lessor by reason of any Lessee Default; or (g)
terminate any other agreement that Lessor may have with Lessee; or (h) exercise
any other right or remedy available to Lessor at law or in equity. In the event
of a Lessee Default, Lessee shall pay Lessor all reasonable costs and expenses
that Lessor may incur to maintain, safeguard or preserve the Equipment, and
other reasonable expenses incurred by Lessor in enforcing any of the terms,
conditions or provisions of this Master Agreement (including reasonable legal
fees and collection agency costs). Upon repossession or surrender of any
Equipment, Lessor shall lease, sell or otherwise dispose of the Equipment in a
commercially reasonable manner and apply the net proceeds thereof to the amounts
owed to Lessor hereunder, which shall be the Stipulated Loss Value with regard
to such but only after deducting (i) in the case of a sale, the estimated Fair
Market Value of the Equipment sold as of the scheduled expiration of the Then
Applicable Term of the related Lease, (ii) in the case of a lease, the rent due
for any period beyond the scheduled expiration of the Then Applicable Term of
the related Lease, and (iii) in either case, all expenses (including reasonable
legal fees and costs) reasonably incurred by Lessor in connection therewith;
provided, however, that lessee shall remain liable to Lessor for any deficiency
that remains after any sale or lease of such Equipment. Any proceeds of any sale
or lease of such Equipment in excess of the amounts owed to Lessor hereunder
shall be retained by Lessor. Lessee agrees that with respect to any notice of a
sale required by law to be given, 10 days' notice shall constitute reasonable
notice. Upon payment of all past due Rent and the Stipulated Loss Value as
provided in clause (e) above, together with interest at the rate of 1-1/2 % per
month (or such lesser rate as is the maximum rate allowable under applicable
law) from the date declared due until paid, Lessor will transfer to Lessee all
of Lessors interest in the Equipment for which such Rent and Stipulated Loss
Value has been paid, which transfer shall be on an "AS IS, WHERE IS" basis,
without any warranty, express or implied, from Lessor, other than the absence of
any liens or claims by or through Lessor. These remedies are cumulative of every
other right or remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise, and may be enforced concurrently therewith or
from time to time.
If a Lessor Default occurs, Lessee's sole and exclusive remedy shall be to
recover by appropriate legal proceedings any direct damages suffered by Lessee
as a result of such Lessor Default and any reasonable and necessary expenses
(including, without limitation, court costs and reasonable legal fees) incurred
by Lessee in connection therewith.
23. PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to perform any of its
obligations hereunder, Lessor may perform any act or make any payment that
Lessor deems reasonably necessary for the maintenance and preservation of the
Equipment and Lessors interests therein; provided, however, that the performance
of any act or payment by Lessor shall not be deemed a waiver of, or release
Lessee from, the obligation at issue. All sums so paid by Lessor, together with
expenses (including legal fees and costs) incurred by Lessor in connection
therewith, shall be paid to Lessor by Lessee immediately upon demand.
24. TRUE LEASE; SECURITY INTEREST; MAXIMUM RATE. Each Lease is intended to be a
"Finance Lease" as defined in Article 2A of the UCC, and Lessee hereby
authorizes Lessor to file a financing statement to give public notice of
Lessor's ownership of the Equipment. Lessee, by its execution of each Schedule,
acknowledges that Lessor has informed it that (a) the identity of Seller is set
forth in the applicable Schedule, (b) Lessee is entitled under Article 2A to the
promises and warranties, including those of any third party, provided to Lessor
in connection with, or as a part of, the applicable Purchase Documents, and (c)
Lessee may communicate with Seller and receive an accurate and complete
statement of the promises and warranties, including any disclaimers and
limitations of them or of remedies. If (i) notwithstanding the express intention
of Lessor and Lessee to enter into a true lease, any Lease is ever deemed by a
court of competent jurisdiction to be a lease intended for security, or (ii)
Lessor and Lessee enter into a Lease with the intention that it be treated as a
lease intended as security by so providing in the applicable Schedule, or (iii)
Lessor and Lessee enter into a Financing, then to secure payment and performance
of Lessee's obligations under this Master Agreement and all Leases and
Financings, Lessee hereby grants Lessor a purchase money security interest in
the related Equipment and Financed Items and in all attachments, accessories,
additions, substitutions, products, replacements, rentals and proceeds
(including, without limitation, insurance proceeds) thereto as well as a
security interest in any other equipment financed pursuant to this Master
Agreement or any other agreement between Lessor and Lessee (collectively, the
"Collateral"). In any such event, notwithstanding any provisions contained in
this Master Agreement or in any Schedule, neither Lessor nor any Assignee shall
be entitled to receive, collect or apply as interest any amount in excess of the
maximum rate or amount permitted by applicable law. In the event Lessor or any
Assignee ever receives, collects or applies as interest any amount in excess of
the maximum amount permitted by applicable law, such excess amount shall be
applied to the unpaid principal balance and any remaining excess shall be
refunded to Lessee. In determining whether the interest paid or payable under
any specific contingency exceeds the maximum rate or amount permitted by
applicable law, Lessor and Lessee shall, to the maximum extent permitted under
applicable law, characterize any non-principal payment as an expense or fee
rather than as interest, exclude voluntary prepayments and the effect thereof,
and spread the total amount of interest over the entire term of this Master
Agreement and all Leases and Financings.
25. ASSIGNMENT. Lessor shall have the unqualified right to sell, assign, pledge,
transfer, mortgage or otherwise convey any part of its interest in this Master
Agreement, any Schedule or any Equipment, in whole or in part, without prior
notice to or the consent of Lessee. If any Lease is assigned, Lessee shall (a)
unless otherwise specified by Lessor and the Assignee, pay all amounts due under
the applicable Schedule to such Assignee, notwithstanding any defense, setoff or
counterclaim whatsoever that Lessee may have against Lessor or Assignee; (b) not
permit the applicable Schedule to be amended or the terms thereof waived without
the prior written consent of the Assignee; (c) not require the Assignee to
perform any obligations of Lessor, other than those that are expressly assumed
in writing by such Assignee; and (d) execute such acknowledgments thereto as may
be requested by Lessor or the Assignee. It is further agreed that (i) each
Assignee shall be entitled to all of Lessor's rights, powers and privileges
under the applicable Lease or Financing, to the extent assigned; (ii) any
Assignee may reassign its rights and interests under the applicable Lease or
Financing with the same force and effect as the assignment described herein; and
(iii) any payments received by the Assignee from Lessee with respect to the
assigned portion of the Lease or Financing shall, to the extent thereof,
discharge the obligations of Lessee to Lessor with respect to the assigned
portion of the Lease or Financing. Lessee acknowledges that any assignment or
transfer by Lessor or any Assignee shall not materially change Lessee's
obligations under the assigned Lease or Financing.
Upon Lessor's prior written consent, which shall not be unreasonably
withheld, Lessee may sublet the Equipment to another end user other than another
leasing company or other competitor of Lessor. No such sublease shall relieve
Lessee of its obligations under the Lease and Lessee shall be responsible for
all costs and expenses associated with such sublease, including, without
limitation, additional Taxes or any Tax Loss suffered by Lessor. Lessee may
permit use of the Equipment by its affiliates or independent contractors at the
Equipment Location provided it does not relinquish possession and control of the
Equipment. Lessee may not assign, transfer or otherwise dispose of this Master
Agreement, any Lease or Financing, any Equipment or any interest therein.
26. FURTHER ASSURANCES. Lessee agrees to promptly execute and deliver to Lessor
such further documents and take such further action as Lessor may require in
order to more effectively carry out the intent and purpose of this Master
Agreement and any Schedule. Without limiting the generality of the foregoing,
Lessee agrees (a) to furnish to Lessor from time to time, its certified
financial statements, officer's certificates and appropriate resolutions,
opinions of counsel and such other information and documents as Lessor may
reasonably request, and (b) to execute and timely deliver to Lessor any
financing statements or other documents that Lessor deems necessary to perfect
or protect Lessor's security interest in the Collateral or to evidence Lessor's
interest in the Equipment. If Lessee fails to execute any document referred to
in clause (b) of the preceding sentence, Lessor or Lessor's agent is hereby
authorized to sign and file the same as Lessee's agent.
6
<PAGE> 7
It is also agreed that Lessor or Lessor's agent may file as a financing
statement, any lease document (or copy thereof, where permitted by law) that
Lessor deems appropriate to perfect or protect Lessor's security interest in the
Collateral or to evidence Lessor's interest in the Equipment. Upon demand,
Lessee will promptly reimburse Lessor for any filing or recordation fees or
expenses (including legal fees and costs) incurred by Lessor in perfecting or
protecting its interests in the Equipment.
27. TERM OF MASTER AGREEMENT; SURVIVAL. This Master Agreement shall commence and
be effective upon the execution hereof by both parties and shall continue in
effect until terminated by either party by 30 days' prior written notice to the
other. However, no termination of this Master Agreement pursuant to the
preceding sentence shall be effective with respect to any Lease or Financing
that commenced prior to such termination until the expiration or termination of
such Lease or Financing and the satisfaction by Lessee of all of its obligations
hereunder with respect thereto. All representations, warranties and covenants
made by Lessee hereunder shall survive the termination of this Master Agreement
and shall remain in full force and effect. All of Lessor's rights, privileges
and indemnities under this Master Agreement or any Lease or Financing, to the
extent they are fairly attributable to events or conditions occurring or
existing on or prior to the expiration or termination of such Lease or
Financing, shall survive such expiration or termination and be enforceable by
Lessor and Lessor's successors and assigns.
28. WAIVER OF JURY TRIAL. LESSEE AND LESSOR HEREBY EXPRESSLY WAIVE ANY RIGHT TO
DEMAND A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING INSTITUTED BY
LESSOR OR LESSEE IN CONNECTION WITH THIS MASTER AGREEMENT OR ANY FUNDAMENTAL
AGREEMENT.
29. NOTICES. All notices, requests, demands, waivers and other communications
required or permitted to be given under this Master Agreement or any other
Fundamental Agreement shall be in writing and shall be deemed to have been duly
given if delivered personally or mailed via certified mail or a nationally
recognized overnight courier service, or sent by confirmed facsimile
transmission, addressed as follows (or such other address or fax number as
either party shall so notify the other):
If to Lessor:
Compaq Financial Services Corporation
100 Woodbridge Center Drive, Suite 202
Woodbridge, New Jersey 07095
Attn: Vice President, Operations and Credit
Fax: (888) 202-4271
Authorized Lessor E-mail Address: [email protected]
If to Lessee:
Applied Theory Corporation
125 Elwood Davis Road
Syracuse, New York 13212
Attn: Angelo Gencarelli
Fax: 315-461-8010
Authorized Lessee Representatives and Authorized Lessee E-mail Addresses:
_________________________________________________________________________
Lessee Acceptance Confirmation Fax Number:
30. MISCELLANEOUS.
(a) GOVERNING LAW. THIS MASTER AGREEMENT AND EACH LEASE AND FINANCING SHALL BE
GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) OF THE
STATE OF NEW JERSEY.
(b) CONSENT TO JURISDICTION. Lessor and Lessee consent to the jurisdiction of
any local, state or Federal court located within the State of New Jersey, and
waive any objection relating to improper venue or forum non conveniens to the
conduct of any proceeding in any such court.
(c) CREDIT REVIEW. Lessee consents to a reasonable credit review by Lessor for
each Lease and Financing.
(d) CAPTIONS AND REFERENCES. The captions contained in this Master Agreement and
any Schedule are for convenience only and shall not affect the interpretation of
this Master Agreement. All references in this Master Agreement to Sections and
Exhibits refer to Sections hereof and Exhibits hereto unless otherwise
indicated.
(e) ENTIRE AGREEMENT; AMENDMENTS. This Master Agreement and all other
Fundamental Agreements executed by both Lessor and Lessee constitute the entire
agreement between Lessor and Lessee relating to the leasing of the Equipment and
the financing of Financed Items, and supersede all prior agreements relating
thereto, whether written or oral, and may not be amended or modified except in a
writing signed by the parties hereto.
(f) NO WAIVER. Any failure of Lessor to require strict performance by Lessee, or
any written waiver by Lessor of any provision hereof, shall not constitute
consent or waiver of any other breach of the same or any other provision hereof.
(g) LESSOR AFFILIATES. Lessee understands and agrees that Compaq Financial
Services Corporation or any affiliate or subsidiary thereof may, as lessor,
execute Advance Pricing Agreements and Schedules under this Master Agreement, in
which event the terms and conditions of the applicable Advance Pricing Agreement
or Schedule and this Master Agreement as it relates to the lessor under such
Advance Pricing Agreement or Schedule shall be binding upon and shall inure to
the benefit of such entity executing such Advance Pricing Agreement or Schedule
as lessor, as well as any successors or assigns of such entity.
(h) INVALIDITY. If any provision of this Master Agreement or any Schedule shall
be prohibited by or invalid under law, such provision shall be ineffective only
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Master Agreement
or such Schedule.
(i) COUNTERPARTS. This Master Agreement may be executed in counterparts, which
collectively shall constitute one document.
(j) LESSOR RELIANCE. Lessor may act in reliance upon any instruction, instrument
or signature reasonably believed by Lessor in good faith to be genuine. Lessor
may assume that any employee of Lessee who executes any document or gives any
written notice, request or instruction has the authority to do so.
31. DEFINITIONS. All capitalized terms used in this Master Agreement have the
meanings set forth below or in the Sections of this Master Agreement referred to
below:
"ACCEPTANCE DATE" means, as to any Lease or Financing, the date Lessee
shall have accepted the Equipment or Financed Items subject to such Lease or
Financing in accordance with Section 3.
"ADVANCE PRICING AGREEMENT" means an Advance Pricing Agreement executed by
Lessor and Lessee pursuant to Section 2.B.
"ADVANCE RENT" means, as to any Lease, Rent paid by Lessee in advance of
the Acceptance Date for the related Equipment or otherwise intended to be
treated as "Advance Rent" under this Master Agreement and the applicable
Schedule.
"AMOUNT AVAILABLE" has the meaning specified in an Advance Pricing
Agreement.
"ASSIGNEE" means any assignee of all or any portion of Lessor's interest
in this Master Agreement, any Schedule or any Equipment, whether such assignee
received the assignment of such interest from Lessor or a previous assignee of
such interest.
"CASUALTY LOSS" means, with respect to any Equipment, the condemnation,
taking, loss, destruction, theft or damage beyond repair of such
7
<PAGE> 8
Equipment.
"CASUALTY VALUE" means, as to any Equipment, an amount determined as of
the date of the Casualty Loss or Lessee Default in question pursuant to a "Table
of Casualty Values" attached to the applicable Schedule or, if no "Table of
Casualty Values" is attached to the applicable Schedule, an amount equal to the
sum of (i) the present value as of the date of the Casualty Loss or Lessee
Default in question (discounted at 5% per annum, compounded monthly) of all Rent
payments payable after such date through the scheduled date of expiration of the
Then Applicable Term, plus (ii) the present value as of the date of the Casualty
Loss or Lessee Default in question (discounted at 5% per annum, compounded
monthly, from the scheduled date of expiration of the Then Applicable Term) of
an amount determined by multiplying the applicable casualty percentage specified
below by the Total Cost of such Equipment. The applicable casualty percentage
shall be 35% for Equipment having an Initial Term of less than 24 months; 30%
for Equipment having an Initial Term of 24 months or greater, but less than 36
months; 25% for Equipment having an Initial Term of 36 months or greater, but
less than 48 months; and 20% for Equipment having an Initial Term of 48 months
or greater.
"CLAIMS" means all claims, actions, suits, proceedings, costs, expenses
(including, without limitation, court costs, witness fees and attorneys' fees),
damages, obligations, judgments, orders, penalties, fines, injuries, liabilities
and losses, including, without limitation, actions based on Lessor's strict
liability in tort.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL" has the meaning specified in Section 24.
"COMMITMENT PERIOD" means the period during which Lessor will purchase
Equipment and fund Financed Items and enter into a Lease or Financing of the
same with Lessee pursuant to Section 2.B and an Advance Pricing Agreement at the
rates set forth in such Advance Pricing Agreement, which period shall be
specified in such Advance Pricing Agreement.
"CONSOLIDATING SCHEDULE" has the meaning specified in Section 2.B(d).
"CONSOLIDATION PERIOD" has the meaning specified in an Advance Pricing
Agreement.
"DAILY RENT" means, as to any Lease or Financing, an amount equal to the
per diem Rent payable under the applicable Schedule (calculated on the basis of
a 360 day year and 30 day months).
"END-OF-TERM NOTICE" means, as to any Lease, a written notice delivered by
Lessee to Lessor at least 90 days prior to the end of the Initial Term, any
Renewal Term or any optional extension of the Initial Term or any Renewal Term
setting forth Lessee's elections pursuant to Section 4 with respect to the
Equipment subject to such Lease. Each End-of-Term Notice shall specify with
particularity the Units of Equipment to be purchased by Lessee (if any), as to
which the Lease is to be renewed (if any) and that are to be returned to Lessor
(if any).
"EQUIPMENT LOCATION" means, as to any Equipment, the address at which such
Equipment is located from time to time, as originally specified in the
applicable Schedule and as subsequently specified in a notice delivered to
Lessor pursuant to Section 11, if applicable.
"EQUIPMENT" has the meaning specified in Section 1.
"FAIR MARKET VALUE" means the total price that would be paid for any
specified Equipment in an arm's length transaction between an informed and
willing buyer (other than a used equipment dealer) under no compulsion to buy
and an informed and willing seller under no compulsion to sell. Such total price
shall not be reduced by the costs of removing such Equipment from its current
location or moving it to a new location.
"FAIR RENTAL VALUE" means the amount of periodic rent that would be
payable for any specified Equipment in an arm's length transaction between an
informed and willing lessee and an informed and willing lessor, neither under
compulsion to lease. Such amount shall not be reduced by the costs of removing
such Equipment from its current location or moving it to a new location.
"FINAL INVOICE AMOUNT" has the meaning set forth in Section 2.A (c).
"FINANCED ITEM" has the meaning specified in Section 1.
"FINANCING" has the meaning specified Section 1.
"FIRST PAYMENT DATE" means, as to any Lease or Financing, the date the
first Rent payment with respect to the Initial Term of such Lease or the Term of
such Financing (as applicable) is due, as determined pursuant to the terms of
the applicable Schedule.
"FUNDAMENTAL AGREEMENTS" means, collectively, this Master Agreement, each
Advance Pricing Agreement, each Schedule and Acceptance Certificate and all
other related instruments and documents.
"FUNDING DATE" means, with respect to any Financed Item, the date Lessor
makes funds available to the Seller of such Financed Item to pay for the same or
to Lessee to reimburse Lessee for its payment of the same.
"GUARANTOR" means any guarantor of all or any portion of Lessee's
obligations under this Master Agreement or any Lease or Financing.
"HARDWARE" means items of tangible equipment.
"INITIAL TERM" means, as to any Lease, the initial term thereof as
specified in the related Schedule.
"LEASE" has the meaning specified in Section 1.
"LESSEE" has the meaning specified in the preamble hereof.
"LESSEE DEFAULT" has the meaning specified in Section 21.
"LESSOR" has the meaning specified in the preamble hereof.
"LESSOR DEFAULT" has the meaning specified in Section 21.
"LICENSE AGREEMENT" means any license agreement or other document granting
the purchaser the right to use Software or any technical information,
confidential business information or other documentation relating to Hardware or
Software, as amended, modified or supplemented by any other agreement between
the licensor and Lessor.
"MASTER AGREEMENT" has the meaning specified in the preamble hereof.
"MATERIAL AGREEMENTS" means, collectively, all Fundamental Agreements, all
other material agreements by and between Lessor and Lessee, and any application
for credit, financial statement, or financial data required to be provided by
Lessee in connection with any Lease or Financing.
"OPTIONAL ADDITIONS" has the meaning specified in Section 12.
"PC EQUIPMENT" means, collectively, personal computers (e.g.,
workstations, desktops and notebooks) and related items of peripheral equipment
(e.g., monitors, printers and docking stations).
"PURCHASE DOCUMENTS" means, as to any Equipment, any purchase order,
contract, bill of sale, License Agreement, invoice and/or other documents that
Lessee has, at any time, approved, agreed to be bound by or entered into with
any Supplier of such Equipment relating to the purchase, ownership, use or
warranty of such Equipment.
"RENEWAL AGREEMENT" has the meaning specified in Section 4.
8
<PAGE> 9
"RENEWAL TERM" has the meaning specified in Section 4.
"RENT" has the meaning specified in Section 5.
"SCHEDULE" means, unless the context shall otherwise require (a) in the
case of a Lease or Financing commenced pursuant to Section 2.A, a Schedule
executed by Lessor and Lessee pursuant to Section 2.A(a), and (b) in the case of
a Lease or Financing commenced pursuant to Section 2.B, (i) prior to Lessee's
execution and delivery to Lessor of a Consolidating Schedule pursuant to Section
2.B(d) relating to such Lease or Financing, the applicable Certificate of
Acceptance together with the applicable Advance Pricing Agreement, and (ii) from
and after Lessee's execution and delivery to Lessor of a Consolidating Schedule
pursuant to Section 2.B(d) relating to such Lease or Financing, such
Consolidating Schedule.
"SELLER" means, as to any Equipment, the seller of such Equipment, and as
to any Financed Item, the provider thereof, in either case as specified in the
applicable Schedule.
"SOFTWARE" means copies of computer software programs owned or licensed by
Lessor.
"STIPULATED LOSS VALUE" means, as to any Equipment, an amount equal to the
sum of (i) all Rent and other amounts due and owing with respect to such
Equipment as of the date of payment of such amount, plus (ii) the Casualty Value
of such Equipment.
"SUBSTITUTE EQUIPMENT" means, as to any item of Hardware or Software
subject to a Lease, a substantially equivalent or better item of Hardware or
Software having equal or greater capabilities and equal or greater Fair Market
Value manufactured or licensed by the same manufacturer or licensor as such item
of Hardware or Software subject to a Lease. The determination of whether any
item of Equipment is substantially equivalent or better than an item of
Equipment subject to a Lease shall be based on all relevant facts and
circumstances, but shall minimally require, in the case of a computer, that each
of processor, hard-drive, random access memory and CD ROM drive, if applicable,
be equivalent or better.
"SUPPLIER" means (a) as to any Equipment, the Seller and the manufacturer
or licensor of such Equipment collectively, or where the context requires, any
of them, and (b) as to any Financed Item, the Seller thereof.
"SYSTEM SOFTWARE" means an item of Software that is pre-loaded on an item
of Hardware purchased by Lessor for lease hereunder for which the relevant
Purchase Documents specify no purchase price separate from the aggregate
purchase price specified for such items of Hardware and Software.
"TAXES" means all license and registration fees and all taxes, fees,
levies, imposts, duties, assessments, charges and withholding of any nature
whatsoever, however designated (including, without limitation, any value added,
transfer, sales, use, gross receipts, business, occupation, excise, personal
property, real property, stamp or other taxes).
"TAX BENEFITS" has the meaning specified in Section 17.
"TAX LOSS" has the meaning specified in Section 17.
"TERM" means, as to any Financing, the term thereof as specified in the
related Schedule.
"THEN APPLICABLE TERM" means, as to any Lease, the term of the Lease in
effect at the time of determination, whether it be the Initial Term, any Renewal
Term or any optional or other automatic extension of the Initial Term or any
Renewal Term pursuant to Section 4.
"TOTAL COST" means (a) as to any Lease, the total acquisition cost to
Lessor of the Equipment subject to such Lease as set forth in the applicable
Purchase Documents, including related delivery, installation, taxes and other
charges which Lessor has agreed to pay and treat as a portion of such
acquisition cost, if any, and (b) as to any Financing, the total amount of the
Financed Items subject to such Financing.
"TOTAL TERM" means, as to any Lease, the aggregate term of such Lease,
including the Initial Term, any Renewal Term and any optional or other automatic
extension of the Initial Term or any Renewal Term pursuant to Section 4.
"UCC" means the Uniform Commercial Code as enacted and in effect in any
applicable jurisdiction.
"UNIT OF EQUIPMENT" means, as to the Equipment leased pursuant to any
Schedule (a) each individual item of PC Equipment leased pursuant to such
Schedule, and (b) all Equipment leased pursuant to such Schedule other than PC
Equipment taken as a whole.
"VALID E-MAIL ACCEPTANCE CERTIFICATE" has the meaning specified in Section
3(b).
32. LESSEE ACKNOWLEDGES THAT NEITHER THIS MASTER AGREEMENT NOR ANY OTHER
FUNDAMENTAL AGREEMENT MAY BE AMENDED OR MODIFIED EXCEPT BY A WRITING SIGNED BY
LESSOR AND LESSEE.
LESSEE INITIALS: S_________.
IN WITNESS WHEREOF, LESSOR AND LESSEE HAVE EXECUTED THIS MASTER AGREEMENT ON THE
DATES SPECIFIED BELOW.
LESSOR:
COMPAQ FINANCIAL SERVICES CORPORATION
BY: /s/ John Sullivan
-------------------------------------------------------
John Sullivan, Director - Operations
------------------------------------------------------
NAME AND TITLE
12/20/99
------------------------------------------------------
DATE
LESSEE:
APPLIEDTHEORY CORPORATION
BY: /s/ Angelo A. Gencarelli III
------------------------------------------------------
Angelo A. Gencarelli III
------------------------------------------------------
NAME AND TITLE
11/8/00
------------------------------------------------------
DATE
9
<PAGE> 1
AMENDMENT NO. 1
RESALE AGREEMENT
BETWEEN APPLIEDTHEORY CORPORATION AND NYSERNET.ORG
This Amendment No. 1 to the Resale Agreement (this Amendment") is made as
of April 18, 2000 by and between AppliedTheory Corporation, a Delaware
corporation (formerly NYSERNet.Com) ("AppliedTheory") and NYSERNet.org, a New
York corporation ("NYSERNet").
BACKGROUND
This Amendment is made with reference to the following facts:
A. NYSERNet and AppliedTheory are parties to that certain Resale
Agreement dated as of 10/1/96 (the "Agreement").
B. The parties desire to amend the Agreement pursuant to the terms
agreed upon in the Memorandum of Understanding dated 2/14/2000 as set
forth below.
TERMS OF AMENDMENT
Accordingly, in consideration of the mutual promises set forth below, the
parties hereby agree as follows:
1. Paragraph 2.1 of Section 2 APPOINTMENT is deleted effective upon
AppliedTheory's billing of NYSERNet for the 10th full OC-3 site
connection.
2. Paragraph 3.1 of "Section 3 TERM" is replaced with the following:
3.1 This Agreement shall be effective from October 1, 1996 and shall
extend to September 30, 2005. Thereafter, this Agreement will
automatically renew for successive one (1) year terms unless either
party notifies the other party of its intent not to renew at least
sixty (60) days before the end of the term then in effect.
3. Paragraphs 5.3.1 and 5.3.2 of "Section 5 OBLIGATIONS OF COM" are added:
5.3.1 AppliedTheory pricing to NYSERNet for full OC3 ports is $45,000
per month.
5.3.2 Pricing for fractional OC-3 ports are to be determined. NYSERNet
will receive preferential pricing.
4. Paragraph 8.3 and 8.4 are added to Section 8 MISCELLANEOUS:
8.3 NYSERNet commits to purchase a minimum of ten OC3 connections for
its member institutions by 6/30/2001 and will make commercially
reasonable efforts to meet the following schedule: 6 by 9/1/2000, an
additional 2 by 12/31/2000, and an additional 2 by 6/30/2001.
5. Paragraph 9.3 and 9.4 are added to "Section 9 PERIODIC REVIEW":
9.3 AppliedTheory agrees to review pricing for Access Products with
NYSERNet on or about 9/30/2002 and 9/30/2004. These reviews will also
encompass a
<PAGE> 2
comprehensive review of the AppliedTheory NYSERNet relationship
including items listed in paragraph 7, below, and issues of interest to
NYSERNet regarding the NYSERNet 2000 Network.
9.4 AppliedTheory and NYSERNet shall mutually develop and enhance on an
ongoing basis, a program plan for Customer Care which will document all
procedures and processes for managing troubles and escalations within
both organizations (the "Program Plan".) The Program Plan will also
detail all standard and special customer services and service level
agreements provided by AppliedTheory to NYSERNet.
6. Paragraph 12.5 of "Section 12 TERMINATION" is added to the Agreement:
12.5 NYSERNet member institutions may terminate their Access service
agreements at will. The customary three-month penalty fee is reduced to
two months. Termination of a member institutions' service agreement
shall not affect the termination date of this Agreement.
7. The following additional provisions are added:
AppliedTheory and NYSERNet agree to expend mutual best efforts to
develop the NYSERNet-AppliedTheory relationship with focus on areas of
development to be determined and subject to change, per NYSERNet's
priority. NYSERNet and AppliedTheory will establish a mutually agreed
upon process for amending the list of NYSERNet development priorities.
AppliedTheory and NYSERNet agree that either party may propose adding
and/or removing items from the list, but that NYSERNet has the final
authority to determine a project "completed." The list of development
projects will be formalized, from time to time as the parties deem
necessary, as amendments to this Agreement.
The parties agree that the first priority for development projects will
be creation of a mechanism(s) that NYSERNet customers purchasing
services through this Amendment can use to measure the AppliedTheory
service and to verify network performance within the AppliedTheory
network and through egress points. This project will also include the
development of a mutually agreed to set of performance levels, and will
be completed no later than December 31, 2000
AppliedTheory will honor NYSERNet's Downstream Policy as it may change
from time to time during the term of this Agreement.
For as long as NYSERNet buys its Internet access services exclusively
from AppliedTheory, AppliedTheory commits to provide dedicated staff to
NYSERNet in the following areas: account executive focused on
relationship development and new business; and customer support
coordinator. Other AppliedTheory staff will be assigned at reasonable
levels of effort to work on areas of mutual interest from time-to-time
as the list in paragraph 7, above, develops and is amended. Should
NYSERNet acquire Internet access services from a third party,
AppliedTheory will have the right to unilaterally determine levels of
effort for account management and customer care. Levels for these
services will not however be less than those identified in the then
current AppliedTheory Customer Service Agreements for other
AppliedTheory customers.
<PAGE> 3
Authorized Customers (as defined in the Agreement), which are also
Certified(1) NYSERNet Members, purchasing OC-3 Access Services, either
new contracts or extensions to existing contracts have the option of
selecting either an AppliedTheory Service Agreement or a NYSERNet
Service Agreement(2). All terms and conditions of this Agreement apply
regardless of which Service agreement NYSERNet Members choose.
Communications to NYSERNet members about these options will be a
NYSERNet responsibility and will be supported in principle and process
by AppliedTheory sales.
AppliedTheory's standard Service Agreement for Access is incorporated
into this Amendment as Exhibit A. All terms and conditions contained in
Exhibit A apply to NYSERNet's customers with the exception of those
terms that have been modified by this Amendment (Downstreaming, and
Termination Penalties.).
8. This Amendment is effective as of the last signature hereto (the
"Amendment Effective Date")
9. All other terms and conditions of the Agreement not specifically amended
herein shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment.
APPLIEDTHEORY CORPORATION NYSERNET.ORG
By: /s/ Angelo A. Gencarelli III By: /s/ Dr. Timothy Lance
---------------------------- ------------------------------
Name: Angelo A. Gencarelli III Name: Dr. Timothy Lance
-------------------------- -----------------------------
Title: Vice President Title: President & Chairman
-------------------------- ----------------------------
Date: 5/3/00 Date: 4/18/00
-------------------------- ----------------------------
- --------
(1) Certified, for the purposes of this Agreement, means that the customer
understands and agrees that they are members of NYSERNet in good standing.
(2) The process for signing NYSERNet services agreements is to be defined in the
Program Plan.
<PAGE> 1
[GRAPHIC OMITTED]
RESOURCE SHARING AGREEMENT
AMENDMENT NO. 1
This Amendment No. 1 to the Resource Sharing Agreement (this Amendment")
is made as of April 7, 2000 (the "Amendment Effective Date") by and between
AppliedTheory Corporation, formerly NYSERNet.com ("AppliedTheory") and
NYSERNet.org ("NYSERNet").
BACKGROUND
This Amendment is made with reference to the following facts:
A. NYSERNet and AppliedTheory are parties to that certain Resource
Sharing Agreement dated as of October 1, 1996 (the "Agreement").
B. The parties desire to extend the termination date of the Agreement
as set forth below.
TERMS OF AMENDMENT
Accordingly, in consideration of the mutual promises set forth below, the
parties hereby agree as follows:
1. The termination date of the Agreement is extended from December 31,
1999 to December 31, 2000.
2. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment.
<TABLE>
<S> <C>
APPLIEDTHEORY CORPORATION NYSERNET.ORG
By: /s/ Angelo Gencarelli By: /s/ Dr. Timothy Lance
Name: Angelo Gencarelli Name: Dr. Timothy Lance
Title: Vice President Business Integration Title: President
Date: 4/17/2000 Date: 4/13/2000
</TABLE>
<PAGE> 1
EXHIBIT 11.1
APPLIEDTHEORY CORPORATION AND SUBSIDIARY
CALCULATION OF LOSS PER SHARE (UNAUDITED)(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
--------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period 21,413,362
Weighted average shares issued during three months
ended March 31, 2000 (1,869,269 shares) 1,691,940
------------
23,105,302
============
Net loss $(10,988,000)
============
Loss per share attributable to common stockholders $ (0.48)
============
</TABLE>
- -------------
(1)For a discussion of loss per share, see Note D of the Notes to the Financial
Statements provided in Part I, Item 1 of our Form 10-Q for the period ended
March 31, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 5,203
<SECURITIES> 17,053
<RECEIVABLES> 9,244
<ALLOWANCES> 649
<INVENTORY> 0
<CURRENT-ASSETS> 34,969
<PP&E> 33,024
<DEPRECIATION> 7,857
<TOTAL-ASSETS> 109,952
<CURRENT-LIABILITIES> 26,806
<BONDS> 0
0
0
<COMMON> 233
<OTHER-SE> 77,516
<TOTAL-LIABILITY-AND-EQUITY> 109,952
<SALES> 15,823
<TOTAL-REVENUES> 15,823
<CGS> 11,043
<TOTAL-COSTS> 11,043
<OTHER-EXPENSES> 15,883
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> (115)
<INCOME-PRETAX> (10,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,988)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
