<PAGE> 1
SCHEDULE 14A
(SECTION 14(a))
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
</TABLE>
APPLIEDTHEORY CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock (par value $0.01)
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set for the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of this filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[APPLIEDTHEORY LETTERHEAD LOGO]
April 11, 2000
Dear Stockholder:
You are cordially invited to attend the 2000 Annual Meeting of Stockholders
of AppliedTheory Corporation and share in the excitement of our dynamic growth.
We entered the millennium with record-breaking results and are excited about our
opportunities in the year 2000. A 67% increase in our revenue, a doubling of our
customer base in 1999 and a 95% customer satisfaction rating are evidence of our
leadership in providing Internet Business Solutions to the marketplace.
And we keep good company. Our customer list includes such prestigious names
as Time Warner, Citibank, Ziff-Davis, Gabelli Asset Management, Memorial Sloan
Kettering Cancer Center, John Hopkins Medical Center, New York University and
the New York State Department of Labor. Our investor list includes many
prominent names -- most importantly yours. We hope you will join us for our
shareholder meeting and participate further in our future.
The meeting will be held on May 25, 2000 at the New York Marriott Marquis
located at 1535 Broadway in New York City at 8:00 a.m. The enclosed documents
detail two decisions that require your vote. First is the election of one
director to AppliedTheory's Board of Directors for a three-year term expiring at
the 2003 Annual Meeting of Stockholders. Second is to ratify the appointment of
Grant Thornton LLP as our independent certified public accountants. The Board of
Directors has unanimously approved both of these proposals and we urge you to
vote in favor of them.
To ensure your participation in this vote, please mark, sign, date and
return the enclosed proxy card promptly, even if you plan on attending the
meeting. At the meeting, you will be entitled to vote in person.
Your participation in AppliedTheory's affairs is valuable and important.
Thank you for your interest in our future and your assistance in returning your
proxy card promptly.
Sincerely,
/s/ Richard Mandelbaum
Richard Mandelbaum
Chairman of the Board and Chief
Executive Officer
AppliedTheory Corporation
<PAGE> 3
[APPLIEDTHEORY LETTERHEAD LOGO]
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of AppliedTheory Corporation:
The 2000 Annual Meeting of Stockholders of AppliedTheory Corporation will
be held at The New York Marriott Marquis, 1535 Broadway, New York, New York on
May 25, 2000 at 8:00 a.m., for the following purposes:
1. To elect one director to AppliedTheory's Board of Directors to hold
office until his successor is elected at the 2003 Annual Meeting of
Stockholders;
2. To ratify the appointment of Grant Thornton LLP as independent certified
public accountants for AppliedTheory; and
3. To transact such other business as may properly come before the meeting
and any adjournment thereof.
A proxy statement with respect to this Annual Meeting accompanies and forms
a part of this Notice. AppliedTheory's Form 10-K Annual Report for the fiscal
year ended December 31, 1999 also accompanies this Notice.
The Board of Directors has fixed the close of business on April 4, 2000 as
the record date for determining stockholders entitled to notice of, and to vote
at, the Annual Meeting.
By Order of the Board of Directors,
/s/ David A. Buckel
David A. Buckel
Asst. Secretary and Treasurer
Senior Vice President, Chief Financial
Officer
AppliedTheory Corporation
New York, NY
April 11, 2000
YOUR VOTE IS IMPORTANT
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE WHETHER OR NOT
YOU EXPECT TO ATTEND THE ANNUAL MEETING.
PLEASE DISREGARD REFERENCES IN APPLIEDTHEORY'S FORM 10-K
TO THE 2000 ANNUAL MEETING BEING HELD ON MAY 16, 2000
AppliedTheory Corporation
1500 Broadway, 3rd Floor
New York, NY 10036
<PAGE> 4
PROXY STATEMENT
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of AppliedTheory Corporation, a Delaware corporation, of
proxies to be voted at the Annual Meeting of stockholders on May 25, 2000. This
proxy statement, the accompanying proxy card and our Form 10-K Annual Report are
first being mailed to stockholders on or about April 11, 2000.
VOTING SECURITIES
The Board of Directors has fixed the close of business on April 4, 2000 as
the record date for the determination of stockholders who are entitled to notice
of, and to vote at, the 2000 Annual Meeting. As of the record date, there were
23,542,234 shares of our common stock, $0.01 par value per share. Holders of our
common stock on the record date are entitled to notice of the 2000 Annual
Meeting and to one vote per share of our common stock owned by each of them.
PROXIES
Dr. Richard Mandelbaum, Lawrence B. Helft and David A. Buckel, the persons
named as proxies on the proxy card accompanying this proxy statement, were
selected to serve in such capacity. Dr. Mandelbaum is our Chairman of the Board
and Chief Executive Officer, Mr. Helft is our President and Chief Operating
Officer and Mr. Buckel is our Senior Vice President and Chief Financial Officer.
Each stockholder giving a proxy has the power to revoke it at any time before
the shares it represents are voted. Revocation of a proxy is effective upon
receipt by our Secretary of either (i) an instrument revoking the proxy or (ii)
a duly executed proxy bearing a later date. Additionally, a stockholder may
change or revoke a previously executed proxy by voting in person at the 2000
Annual Meeting.
VOTING OF PROXIES
Because many of our stockholders are unable to attend the 2000 Annual
Meeting, the Board of Directors solicits proxies to give each stockholder an
opportunity to vote on all matters scheduled to come before the meeting and set
forth in this proxy statement. Stockholders are urged to carefully read the
material in this proxy statement, specify their choice on each matter by marking
the appropriate boxes on the enclosed proxy card, and then sign, date and return
the card in the enclosed stamped envelope.
If no choice is specified and the card is properly signed and returned, the
shares will be voted by the persons named as proxies in accordance with the
recommendations of the Board of Directors contained in this proxy statement.
QUORUM; METHOD OF TABULATION
The holders of at least a majority of the shares of our common stock issued
and outstanding and entitled to vote at the Annual Meeting, if represented in
person or by proxy, will constitute a quorum at the 2000 Annual Meeting. Under
applicable law, our Certificate of Incorporation and our By-laws, and assuming
that a quorum is present, in the election of directors, the persons elected will
be the persons receiving the greatest number of votes. At the 2000 Annual
Meeting, the vote of a majority of the shares of our common stock is required to
ratify the appointment of Grant Thornton LLP as the independent certified public
accountants of our financial statements for the fiscal year ending December 31,
2000.
One or more inspectors of election appointed for the meeting will tabulate
the votes cast in person or by proxy at the 2000 Annual Meeting and will
determine whether or not a quorum is present. The inspectors of election will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the stockholders for a vote.
If a broker indicates on a proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
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<PAGE> 5
PROPOSAL 1 -- ELECTION OF DIRECTOR
Our Board of Directors consists of five (5) directors, one of which is a
Class I director, two of which are Class II directors, and two of which are
Class III directors. Our Certificate of Incorporation authorizes the Board of
Directors from time to time to determine the number of its members. Vacancies in
unexpired terms and any additional positions created by board action may be
filled by action of the existing Board of Directors at that time and any
director who is appointed in this fashion will serve until the expiration of the
term of the directors being replaced or until a successor is duly elected and
qualified.
The terms of each of the current Class II directors, Dominick J. DeAngelo,
and Shelley A. Harrison expire at the 2001 annual meeting of stockholders. The
terms of each of the current Class III directors, James T. Kelsey and Richard
Mandelbaum expire at the 2002 annual meeting of stockholders.
The Class I director will be elected at the 2000 Annual Meeting. The term
of office for the Class I director will expire at the 2003 annual meeting of
stockholders or until a successor is duly elected and qualified. The person
named below, for whom the enclosed proxy is intended to be voted, currently
serves as the Class I director. It is contemplated that this nominee will be
available for election, but if such nominee is not available, the proxy will be
voted in accordance with the best judgment of the proxyholder for such person as
may be designated by the Board of Directors, unless the stockholder has directed
otherwise.
NOMINEE FOR ELECTION AS CLASS I DIRECTOR BY HOLDERS OF COMMON STOCK:
GEORGE SADOWSKY
Dr. Sadowsky, 63, has been a director of AppliedTheory since September of
1996 and chairs the Audit and Finance Committee of our Board of Directors. Dr.
Sadowsky is currently the Director of Network Services at New York University,
which he joined in 1990. Dr. Sadowsky is currently a director of NYSERNet.org.
Since 1998 he has been the Vice President for Education of the Internet Society,
from 1995 to 1998 he was its Vice President for Conferences and from 1996 to
1999 was a member of its Board of Trustees. From 1996 to the present, Dr.
Sadowsky has been a member of the Technical Advisory Panel of the InfoDev
Program of the World Bank and is presently its Coordinator. He has served as a
Trustee of the Corporation for Research and Educational Networking and of
NYSERNet.net. He has also served as consultant to various institutions,
including the Inter-American Development Bank, the United States Treasury
Department, USAID, the United Nations and the International Science Foundation.
He spent 12 years at the United Nations as a technical adviser engaged in the
transfer of information technology to developing countries. Dr. Sadowsky holds a
Ph.D. and an M.A. in Economics from Yale University and a B.A. in Mathematics
from Harvard University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE ABOVE
NAMED NOMINEE FOR DIRECTOR.
CLASS II DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING OF
STOCKHOLDERS
SHELLEY A. HARRISON
Dr. Harrison, 57, has been a director of AppliedTheory since August 1998,
chairs the Compensation Committee of our Board of Directors and is a member of
the Mergers and Acquisitions Committee of our Board of Directors. Dr. Harrison
has served as Chief Executive Officer of SPACEHAB, Incorporated since April 1996
and as Chairman of its Board since August 1993. SPACEHAB, Incorporated is a
leader in space commerce including research, payload processing, flight
operations and logistics. He co-founded and served as Chairman and Chief
Executive Officer of Symbol Technologies, Inc. from 1973 to 1982. Symbol
Technologies, Inc. is a world leader in laser bar code scanners and wireless
data communications. In addition, Dr. Harrison is a founder and has been the
Managing General Partner since 1985 of PolyVentures I and II, both of which are
high tech venture capital funds. He is also a technology advisor to governments,
an author of books and technical publications and a holder of numerous patents.
He is a member of the boards of directors of NetManage, Inc., Click2Learn, Inc.,
and Information Resource Engineering, Inc. Dr. Harrison holds a
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<PAGE> 6
Ph.D. and an M.S. in Electrophysics from Polytechnic University and a Bachelor's
Degree in Electrical Engineering from New York University.
DOMINICK J. DEANGELO
Mr. DeAngelo, 56, has been a director of AppliedTheory since September 1999
and is a member of the Audit and Finance Committee of our Board of Directors.
Mr. DeAngelo is president of Internet and Data Services for Broadwing
Communications, a wholly-owned subsidiary of Broadwing, Inc. Broadwing is the
surviving company after the merger of Cincinnati Bell, Inc. and IXC
Communications, Inc. and owner of one of the largest fiber optic networks in the
country. Prior to his current position, Mr. DeAngelo served as senior vice
president of marketing products and services at IXC Communications. Previously,
Mr. DeAngelo served as Asst. Vice President of Voice and Data Network Services
for Sprint Internet/Intranet business services and was responsible for the
development of the data strategy for the integration of voice, data, video and
imaging on future broadband networks. Mr. DeAngelo also held various marketing,
engineering and operational positions at NYNEX, developing and implementing the
voice and data VPN service for IntraLATA customers. Mr. DeAngelo earned a B.A.
in Foreign Service from Georgetown University's School of Foreign Service in
Washington, DC, and is an active member of the Society for Information
Management
CLASS III DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING OF
STOCKHOLDERS
RICHARD MANDELBAUM
Dr. Richard Mandelbaum, 53, Chairman of the Board and Chief Executive
Officer of AppliedTheory, has been with us since our start of operations in
1996. He is a non-voting member of the Compensation Committee of our Board of
Directors and is a member of the Mergers and Acquisitions Committee. Dr.
Mandelbaum is one of the four computing and communications experts who founded
NYSERNet, Inc. in 1985. NYSERNet is essentially comprised of two not-for-profit
corporations: NYSERNet.net, Inc. and NYSERNet.org, Inc., an entity that is
effectively a wholly-owned subsidiary of NYSERNet.net. Dr. Mandelbaum is
presently a member of the board of directors of NYSERNet.net. He served as
Director of the Center for Advanced Technology in Telecommunications (CATT) and
Professor of Computer Science at Polytechnic University from 1992 to 1996. Prior
to that, he served at the University of Rochester as Vice Provost for Computing
and Telecommunications, a Professor of Mathematics, and a Professor of
Electrical Engineering. Dr. Mandelbaum helped to oversee research and
development work in network management, network security, broadband networking
and wireless communications, and he initiated many CATT partnerships with
industry. He was also a member of the 1987 advisory committee to the Federal
Coordinating Council on Science and Engineering Technology panel of the
President's Office of Science and Technology Policy, which influenced the
creation and oversight of NSFNet, the immediate precursor of today's Internet.
Dr. Mandelbaum was also a co-founder and first president of FARNet and was an
active member of the National Telecommunications Task Force. Dr. Mandelbaum
holds both a Ph.D. and an M.A. in Mathematics from Princeton University, a B.S.
in Mathematics from the Rensselaer Polytechnic Institute, and was a Member of
the Princeton Institute of Advanced Studies in 1976 and 1977.
JAMES T. KELSEY
Mr. Kelsey, 48, has been a director of AppliedTheory since August 1998. He
chairs the Mergers and Acquisition Committee of our Board of Directors and is a
member of its Audit and Finance Committee and its Compensation Committee. Mr.
Kelsey is a managing partner of Grumman Hill Group LLC. Grumman Hill Group LLC
is the general partner of Grumman Hill Investments III, L.P., one of our largest
stockholders. Mr. Kelsey is also a managing partner of Grumman Hill Associates,
Inc., an affiliate of Grumman Hill Group LLC. Grumman Hill Associates, Inc. is
the general partner of Grumman Hill Investments LP, a significant shareholder in
Broadwing, another of our largest stockholders. Mr. Kelsey has been with Grumman
Hill Group since its inception in 1985, dealing with private equity investments
and mergers and acquisitions. From 1993 to 1996, Mr. Kelsey served as Managing
Director of the Corporate Finance practice at PricewaterhouseCoopers LLP (f/k/a/
Price Waterhouse), where he provided sales, acquisition, financing and
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<PAGE> 7
other corporate finance advice to many large multinational and middle market
U.S. companies. Mr. Kelsey holds an M.S. in Accounting from the Stern School of
Business at New York University and a B.A. in Economics from Princeton
University.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Meetings
In fiscal year 1999, there were 12 meetings of the Board of Directors
(including regularly scheduled and special meetings). During fiscal year 1999,
each of our directors participated in at least 75% of the aggregate number of
meetings of the Board of Directors and the committees thereof on which they
served.
Committees of the Board of Directors
The Committees of the Board of Directors consist of the Audit and Finance
Committee, the Compensation Committee and the Mergers and Acquisition Committee.
The Board of Directors does not have a Nominating Committee.
The Audit and Finance Committee recommends the appointment of a firm of
independent certified public accountants to audit our financial statements, as
well as overseeing the performance and reviewing the scope of the audit
performed by our independent auditors. The Audit and Finance Committee also
reviews our financial statements and reviews and evaluates our internal control
functions. The Audit and Finance Committee currently consists of Dr. Sadowsky,
Mr. Kelsey, and Mr. DeAngelo. During fiscal 1999, the Audit and Finance
Committee met 2 times.
The Compensation Committee makes recommendations to the Board of Directors
regarding the administration of our stock option and stock purchase plans,
executive compensation and salaries, and incentive compensation for our
employees and consultants. The Compensation Committee currently consists of Dr.
Harrison, Mr. Kelsey and Dr. Mandelbaum (as a non-voting member). During fiscal
1999, the Compensation Committee met 2 times.
The Mergers and Acquisitions Committee makes recommendations to the Board
regarding acquisition candidates and proposed mergers. The Mergers and
Acquisitions Committee currently consists of Mr. Kelsey, Dr. Harrison and Dr.
Mandelbaum. During fiscal 1999, the Mergers and Acquisitions Committee held
regular meetings.
DIRECTOR COMPENSATION
We do not pay non-employee directors an annual retainer to serve on our
Board of Directors or a fee for each meeting attended. However, all directors
are reimbursed for expenses incurred in connection with their attendance at
meetings. We have also established the 1999 Stock Option Plan, pursuant to which
each member of our Board of Directors who is not one of our employees and who is
elected or continues as a member of our Board of Directors may receive options
to purchase our common stock. Our Board of Directors has determined that each
director who satisfies the foregoing requirements is entitled to receive options
to purchase 15,000 shares of our common stock at an exercise price equal to fair
market value at the time of grant. These options vest quarterly over three
years.
EXECUTIVE OFFICERS OF APPLIEDTHEORY WHO ARE NOT DIRECTORS
Set forth below is a summary of the background and business experience of
each executive officer who is not also a director.
LAWRENCE B. HELFT, 54, President and Chief Operating Officer, joined
AppliedTheory in December of 1998. He is responsible for all Internet
operations, consulting and professional services activities, sales, marketing
and customer support. From September 1994 to November 1998, Mr. Helft was Chief
Executive Officer and President of Systems Union Inc., an enterprise resource
planning vendor, and from September 1993 to September 1994, he held executive
positions at EDS. Prior to that, he operated his own consulting
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<PAGE> 8
firm, managed several technology subsidiaries of the Chase Manhattan Bank, N.A.,
was the Department Head of the National Banking Group at Citicorp, N.A. and
served as Project Leader and Consultant for Unisys, Inc. Mr. Helft holds both
M.S. and M.B.A. (Management Science) degrees from New York University and a B.S.
degree in Electrical Engineering from City University of New York.
DENIS J. MARTIN, 41, Senior Vice President, Products and Services, has been
with us since the start of our operations in 1996. Mr. Martin joined
NYSERNet.org in 1993, (f/k/a NYSERNet, Inc.) where he served as Director of
Government Services and Director of Info-Services. At AppliedTheory, he
currently directs a team of developers in building on-line applications, making
innovative use of the Web for standard business functions, information systems
and legacy database integration. He has extensive experience in the software
development and systems integration field. From 1986 to 1993, Mr. Martin worked
in the technology division of the New York State Department of Education. He
also served as a consultant to state and federal agencies to develop network and
application programs. Mr. Martin received an M.S. in Information Systems
Engineering from Polytechnic University and a B.A. from Clark University.
DAVID A. BUCKEL, 38, Senior Vice President and Chief Financial Officer, has
been with us since our start of operations in 1996. Mr. Buckel joined
NYSERNet.net and NYSERNet.org in 1995 and currently serves as Chief Financial
Officer of both. Mr. Buckel presently manages all treasury, finance and
accounting aspects for us. His background includes accounting, financing and
operations management. From 1987 to 1995 he was a Corporate Controller at
Suit-Kote Corp. A Certified Management Accountant, Mr. Buckel received an M.B.A.
with concentrations in Operations Management and Finance from Syracuse
University and a B.S. in Accounting from Canisius College.
ANGELO A. GENCARELLI III, 40, Vice President, Business Integration &
Administration, joined us in 1996. Mr. Gencarelli is responsible for Network and
Web Hosting Operations, Management Information Systems and other administrative
aspects of our business. He has a combined 19 years of experience in public
accounting and private industry, having previously spent two years as a Senior
Audit Manager with Dannible & McKee, LLP and served as the Chief Financial
Officer for Bess Eaton Donut Flour Company, Inc., a 55-unit closely held retail
donut store chain in southern New England. Prior to Bess Eaton, Mr. Gencarelli
was a Senior Audit Manager with Ernst & Young where he gained extensive
experience with SEC accounting and reporting regulations. Mr. Gencarelli
received his undergraduate degree Magna Cum Laude from LeMoyne College and is a
Certified Public Accountant in New York State.
DANNY E. STROUD, 46, Vice President of Corporate Development, recently
joined AppliedTheory to lead our mergers and acquisitions strategy and to
enhance our position for future growth. A telecommunications industry veteran,
Mr. Stroud joined us in July, 1999 from Veraz Ventures, Inc., a company he
founded in 1998 to develop telecommunications opportunities in emerging markets.
Previously he served as Vice President of Networks at Verio, Inc. from 1996 to
1998 and as Vice President of Networks at Nextel Communications, Inc. His
experience also includes leadership roles at OneComm, Bay Area Cellular
Telephone (Cellular One) and Pacific Bell Yellow Pages. Mr. Stroud received his
M.B.A. from St. Mary's College of California and his B.S. from West Point.
PROPOSAL 2 -- APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Audit and Finance Committee has recommended and the Board of Directors
has approved the appointment of Grant Thornton LLP as independent certified
public accountants for fiscal year 2000, subject to stockholder ratification.
The Audit and Finance Committee, in arriving at its recommendation to the Board,
reviewed the performance of Grant Thornton LLP in prior years as well as the
firm's reputation for integrity and competence in the fields of accounting and
auditing. The Audit and Finance Committee has expressed its satisfaction with
Grant Thornton LLP in these respects.
Grant Thornton LLP has served as AppliedTheory's independent auditor since
1996. Representatives of Grant Thornton LLP are expected to be present at the
Annual Meeting and will have the opportunity to make such statements as they may
desire. They are also expected to be available to respond to appropriate
questions from the stockholders present.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF GRANT THORNTON LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT OF
APPLIEDTHEORY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth at March 24, 2000, certain information
regarding the beneficial ownership of our common stock held by (i) each person
known by us to own beneficially more than five percent of the outstanding common
stock, (ii) each of our directors and director nominees, (iii) our Chief
Executive Officer, our four most highly compensated executive officers at the
end of 1999 and an additional person who would have been one of our four most
highly compensated executive officers in 1999 if he had been an executive
officer throughout 1999 and (iv) all of our directors and executive officers as
a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------------------------ ------------------------ ----------------
<S> <C> <C>
Broadwing, Inc.(2)................................ 5,683,310 24.14%
NYSERNet.net, Inc.(3)............................. 4,740,800 20.14%
Grumman Hill Investments III LP(4)................ 2,830,405 12.02%
James G. Couch(5)................................. 1,636,408 6.95%
Geo Capital LLC(6)................................ 1,280,890 5.44%
NON-EMPLOYEE DIRECTORS:
Dominick J. DeAngelo(7)........................... 5,685,810 24.15%
Shelley A. Harrison(8)............................ 587,500 2.50%
James T. Kelsey(9)................................ 2,855,405 12.13%
George Sadowsky(10)............................... 4,791,390 20.35%
NAMED EXECUTIVE OFFICERS:
Richard Mandelbaum(11)............................ 6,619,472 28.12%
Lawrence B. Helft(12)............................. 145,250 *
Denis J. Martin(13)............................... 299,511 1.27%
David A. Buckel(14)............................... 131,091 *
Mark A. Oros(15).................................. 41,898 *
James D. Luckett(16).............................. 222,184 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(20 PERSONS)(17)................................ 16,780,754 71.28%
</TABLE>
- ---------------
* Less than one percent.
(1) Calculated according to Rule 13d-3(d) of the Exchange Act of 1934. Under
Rule 13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days are
deemed outstanding for the purpose of calculating the number and percentage
owned by the holder of the options, warrants, rights or conversion
privileges, but not deemed outstanding for the purpose of calculating the
percentage owned by any other person listed. As of March 24, 2000 we had
23,540,798 shares of common stock outstanding.
(2) c/o IXC Internet Services, Inc., 201 East Fourth Street, 102-620,
Cincinnati, OH 45201-2301. These shares are held through Broadwing Internet
Services, Inc., a subsidiary of Broadwing, Inc. Does not include 259,815
shares subject to the option agreements described under "Certain
Transactions -- Option Agreements." Also includes exercisable options to
purchase 22,500 shares of our common stock.
(3) 224 Harrison Street, 8th Floor, Syracuse, NY 13202.
(4) 60 East 42nd St., Suite 2915, New York, NY 10165. Grumman Hill Investments
III, LP is a private equity fund advised by Grumman Hill Group LLC. Grumman
Hill Group LLC is the general partner of Grumman Hill Investments III, LP.
Does not include 129,908 shares subject to the option agreements described
under "Certain Transactions -- Option Agreements."
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(5) Box 8343, Incline Village, NV 89452-1964.
(6) 767 Fifth Avenue, 45th Floor, New York, NY 10153-4590.
(7) c/o Broadwing, Inc., 1122 Capital of Texas Highway South, Austin, TX 78746.
Includes 5,683,310 shares of common stock owned by Broadwing. Mr. DeAngelo
is an executive officer of Broadwing. Mr. DeAngelo disclaims beneficial
ownership of all shares owned by Broadwing. Also includes exercisable
options to purchase 1,250 shares of our common stock and additional options
to purchase 1,250 shares of our common stock that are exercisable within 60
days.
(8) c/o SPACEHAB, Incorporated, 300 D Street, SW, Suite 814, Washington, DC
20024. Includes exercisable options held by Harrison Enterprises Inc., a
company significantly owned by Dr. Harrison, to purchase 586,250 shares of
common stock and additional options held by Dr. Harrison to purchase 1,250
shares of our common stock that are exercisable within 60 days.
(9) c/o Grumman Hill Group LLC, 60 East 42nd St., Suite 2915, New York, NY
10165. Includes 2,830,405 shares of common stock owned by Grumman Hill
Investments III, LP. Mr. Kelsey is a managing partner of the general
partner of Grumman Hill Investments III, LP. Mr. Kelsey disclaims
beneficial ownership of all shares owned by Grumman Hill Investments III,
LP. Also includes exercisable options to purchase 23,750 shares of our
common stock and additional options to purchase 1,250 shares of our common
stock that are exercisable within 60 days.
(10) 64 Sweet Briar Road, Stamford, CT 06905-1514. Includes 4,740,800 shares of
common stock owned by NYSERNet.net. Dr. Sadowsky is a director of
NYSERNet.net. Dr. Sadowsky disclaims beneficial ownership of all shares
owned by NYSERNet.net. Also includes exercisable options to purchase 23,750
shares of our common stock and additional options to purchase 1,250 shares
of our common stock that are exercisable within 60 days.
(11) Includes 4,740,800 shares of common stock owned by NYSERNet.net. Dr.
Mandelbaum is a director of NYSERNet.net. Dr. Mandelbaum disclaims
beneficial ownership of all shares owned by NYSERNet.net. Also includes
750,000 shares of common stock held by Ms. Paulette Mandelbaum as trustee
for the "Mandelbaum Descendants' Trust" and as to which Dr. Mandelbaum
disclaims beneficial ownership. Includes exercisable options to purchase
264,487 shares of our common stock and additional options to purchase
20,400 shares of our common stock that are exercisable within 60 days.
Includes 389,723 shares subject to the option agreements described under
"Certain Transactions -- Option Agreements."
(12) Includes exercisable options to purchase 93,409 shares of our common stock
and additional options to purchase 16,500 shares of our common stock that
are exercisable within 60 days.
(13) Includes exercisable options to purchase 12,785 shares of our common stock
and additional options to purchase 4,800 shares of our common stock that
are exercisable within 60 days.
(14) Includes exercisable options to purchase 34,088 shares of our common stock
and additional options to purchase 4,800 shares of our common stock that
are exercisable within 60 days.
(15) Mr. Oros resigned his employment from AppliedTheory as of December 3, 1999.
(16) Includes options exercisable in 60 days to purchase 4,800 shares of common
stock. Mr. Luckett resigned his employment from Applied Theory as of March
24, 2000.
(17) Of these shares, 15,580,961 are outstanding shares and 1,199,793 are
options outstanding that are exercisable within 60 days. Also includes
13,232,015 shares of our common stock owned by Broadwing, NYSERNet.net and
Grumman Hill Investments III, LP that are deemed to be beneficially owned
by our officers and directors by virtue of their relationships with these
entities.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes the compensation we paid for the last three
fiscal years to our Chief Executive Officer and AppliedTheory's four other most
highly compensated executive officers other than the
8
<PAGE> 11
Chief Executive Officer and one additional individual who served as an executive
officer for part of 1999, all of whom shall collectively be referred to as the
Named Executive Officers.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------ -----------------------
SECURITIES
UNDERLYING OTHER
OPTION/SARS ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) (#) COMP.($)
- --------------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Richard Mandelbaum.................. 1999 271,946 207,500(2) 20,400 11,091
Chairman and Chief Executive 1998 247,823 80,000 395,835 12,163
Officer 1997 255,055 -- 81,563 11,328
Lawrence B. Helft................... 1999 220,504 110,000(3) 196,500 11,474
President and Chief Operating 1998 15,231 50,000 510,001 --
Officer 1997 -- -- -- --
Denis J. Martin..................... 1999 199,055 223,177(4) 4,800 10,020
Senior Vice President, 1998 123,077 81,100 232,688 7,242
Products and Services 1997 143,710 -- 45,188 1,617
David A. Buckel..................... 1999 129,739 90,750(5) 4,800 7,823
Senior Vice President and 1998 114,486 38,000 150,000 7,000
Chief Financial Officer 1997 105,666 -- 32,813 5,136
Mark A. Oros(6)..................... 1999 211,121 33,300(7) -- 9,591
Vice President and Chief 1998 136,769 28,000 229,313 8,765
Technology Officer 1997 145,730 -- 41,813 7,308
James D. Luckett(8)................. 1999 132,659 43,500(9) 4,800 8,260
Senior Vice President 1998 126,538 23,000 123,938 4,876
1997 137,021 -- 33,938 7,049
</TABLE>
- ---------------
(1) Except as indicated, no executive named in the above table received Other
Annual Compensation in an amount in excess of the lesser of either $50,000
or 10% of the total of salary and bonus reported.
(2) Includes a bonus of $187,500 earned in 1999 that was paid in January 2000.
(3) Includes a bonus of $110,000 earned in 1999 that was paid in January 2000.
(4) Includes a bonus of $170,177 earned in 1999 that was paid in January 2000.
(5) Includes a bonus of $43,750 earned in 1999 that was paid in January 2000.
(6) As of December 3, 1999, Mr. Oros resigned his employment with us.
(7) Includes a bonus of $9,000 earned in 1999 that was paid in January 2000.
(8) As of March 24, 2000, Mr. Luckett resigned his employment with us.
(9) Includes a bonus of $33,500 earned in 1999 that was paid in January 2000.
The Other Annual Compensation for the year ended December 31, 1999 that is
reported above includes matching contributions under the AppliedTheory 401(k)
Matched Savings Plan and imputed income for group term life insurance. These
amounts are shown in the following table:
<TABLE>
<CAPTION>
401(K) MATCHING LIFE INSURANCE
CONTRIBUTION ($) PREMIUMS ($)
---------------- --------------
<S> <C> <C>
Richard Mandelbaum.............................. 9,600 1,491
Lawrence B. Helft............................... 9,600 1,874
Denis J. Martin................................. 9,600 420
David A. Buckel................................. 7,513 310
Mark A. Oros.................................... 9,110 481
James D. Luckett................................ 7,566 694
</TABLE>
9
<PAGE> 12
Option Grants in Fiscal 1999
The following table sets forth information relating to grants of stock
options we made during fiscal year 1999 to the Named Executive Officers under
our 1999 Stock Option Plan. We did not grant any stock appreciation rights
("SARs") during fiscal year 1999.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS GRANTED PRICE PER GRANT DATE
UNDERLYING OPTIONS TO EMPLOYEES SHARE EXPIRATION PRESENT
NAME AND POSITION GRANTED (#) IN FISCAL YEAR ($/SH)(1) DATE VALUE(2)
- ----------------- ------------------ --------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Richard Mandelbaum......... 20,400(3) 3.02% 16.00 9/9/09 276,644
Chairman of the Board and
Chief Executive Officer
Lawrence B. Helft.......... 16,500 2.44% 16.00 9/9/09 223,757
President and Chief 180,000(4) 26.67% 13.18 11/12/09 2,012,400
Operating Officer
Denis J. Martin............ 4,800(3) 0.71% 16.00 9/9/09 65,093
Senior Vice President,
Products and Services
David A. Buckel............ 4,800(3) 0.71% 16.00 9/9/09 65,093
Senior Vice President and
Chief Financial Officer
Mark A. Oros............... -- -- -- -- --
Vice President and Chief
Technology Officer (5)
James D. Luckett........... 4,800(3) 0.71% 16.00 9/9/09 65,093
Senior Vice President(6)
</TABLE>
- ---------------
(1) The exercise price equals the closing price of our on the date of grant. The
options expire ten years after grant.
(2) The fair value of these options at the date of grant was estimated using a
Black-Scholes option pricing model. The following weighted-average
assumptions were used to estimate the value of options: a 4 year expected
life of the options; a dividend yield of 0%; expected volatility of .80; and
a risk-free rate of return of 5.70%.
(3) The options are exercisable in two installments, 83% on January 1, 2000 and
the remainder on March 20, 2000.
(4) The options are exercisable in four equal annual installments beginning on
December 31, 2000.
(5) Mr. Oros resigned his employment with us as of December 3, 1999.
(6) Mr. Luckett resigned his employment with us as of March 24, 2000.
10
<PAGE> 13
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year End Values
The following table sets forth the number of shares covered by stock
options held by the Named Executive Officers at December 31, 1999, and also
shows the value of "in-the-money" options (market price of AppliedTheory's stock
less the exercise price) at that date. Except as listed in the table, no other
Named Executive Officer exercised any AppliedTheory stock options or
beneficially owned unexercised AppliedTheory stock options.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS($) FISCAL YEAR END($)(2)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME AND POSITION EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard Mandelbaum........... 701,130 7,291,240 264,487 145,187 6,563,686 3,336,485
Chairman of the Board and
Chief Executive Officer
Lawrence B. Helft............ 34,090 594,586 93,409 579,002 2,318,100 12,308,900
President and Chief
Operating Officer
Denis J. Martin.............. 92,063 896,183 12,785 132,640 317,281 3,228,963
Senior Vice President,
Products and Services
David A. Buckel.............. 703 9,912 34,088 122,822 845,951 2,990,658
Senior Vice President and
Chief Financial Officer
Mark A. Oros................. 41,813 428,306 -- -- -- --
Vice President and Chief
Technology Officer
James D. Luckett............. 4,250 87,408 52,188 69,625 1,387,108 1,700,094
Senior Vice President
</TABLE>
- ---------------
(1) The value realized equals the difference between the option exercise price
and the closing price (or fair value if before our initial public offering
on April 30, 1999) of our common stock on the date of exercise, multiplied
by the number of shares to which the exercise relates.
(2) The value is based on the difference between the option exercise price and
the closing price of our common stock on December 31, 1999 of $27.75 per
share. The above valuations may not reflect the actual value of unexercised
options, as the value of unexercised options will fluctuate with market
activity.
EMPLOYMENT AGREEMENTS
AppliedTheory did not enter into any new employment agreements during 1999.
INDEMNIFICATION AGREEMENTS
AppliedTheory has entered into indemnification agreements with each of our
directors, Named Executive Officers and with certain other officers and senior
managers. These agreements provide that we shall indemnify and hold harmless
each indemnitee from liabilities incurred as a result of such indemnitee's
status as a director, officer or employee of AppliedTheory, subject to certain
limitations.
CERTAIN TRANSACTIONS
Stock Purchase Agreement
On August 4, 1998, we entered into a stock purchase agreement with
Broadwing, Grumman Hill, NYSERNet.net, Richard Mandelbaum, James D. Luckett,
Denis J. Martin, Mark A. Oros and David A. Buckel. The stock purchase agreement
provided for Broadwing to purchase 4,400,000 shares of our common stock for a
purchase price of $12.9 million, and Grumman Hill to purchase 2,200,000 shares
of our common stock for a purchase price of $6.5 million. We received $5.0
million for 1,725,000 newly issued shares of
11
<PAGE> 14
common stock. The balance of the stock purchased by Broadwing and Grumman Hill
in this transaction was sold by NYSERNet.net.
Under the stock purchase agreement, NYSERNet.net granted to Broadwing and
Grumman Hill an irrevocable proxy in respect of 1,890,000 shares of common stock
held by NYSERNet.net. The number of shares covered by this proxy will be reduced
from time to time by that number of shares of our common stock which Broadwing
and Grumman Hill acquire from us or from our stockholders during the period
between September 4, 1999 and October 28, 2000. This period coincides with the
applicable period under the option agreements described below under "-- Option
Agreements" and during which Broadwing and Grumman Hill could be required to
purchase shares from our stockholders. When the stock purchase agreement was
concluded, this proxy was granted to allow Broadwing and Grumman Hill to have
voting power over a majority of the shares which, at that time, were generally
entitled to vote at stockholders' meetings. The granting of the proxy was a
condition to Broadwing's and Grumman Hill's agreement to purchase shares from
NYSERNet.net and us. As of December 31, 1999, the proxy has been eliminated as a
result of Broadwing's and Grumman Hill's purchase of shares of our common stock
from our stockholders.
Registration Rights Agreement
In connection with the stock purchase agreement, we entered into a
registration rights agreement dated August 4, 1998 with Broadwing, Grumman Hill,
NYSERNet.net, Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A.
Oros, David A. Buckel and Shelley A. Harrison. This agreement gave the above
parties certain rights to cause us to register their holdings of common stock
under the Securities Act, known as demand registration rights. It also gave each
of Broadwing, Grumman Hill, NYSERNet.net and Dr. Mandelbaum piggyback
registration rights, if we determine to file a registration statement covering
any of our securities under the Securities Act and our board of directors
approves the piggyback registration.
Option Agreements
In connection with the stock purchase agreement, some of our stockholders,
including Messrs. Luckett, Martin, Oros, Buckel and Pendray and Drs. Sadowsky,
Mandelbaum and Harrison, have entered into option agreements dated August 4,
1998 and August 28, 1998 with Broadwing, Grumman Hill and NYSERNet.net. These
option agreements provide the optionee stockholders with a put option to sell
their stock, 2,280,938 shares in the aggregate, to Broadwing and Grumman Hill at
a purchase price of $2.93 per share. The number of shares of common stock held
by Messrs. Luckett, Martin, Oros, Buckel and Pendray and Drs. Sadowsky,
Mandelbaum and Harrison that are subject to the option agreements is 2,127,000.
The put rights begin September 4, 1999, with respect to 2,265,278 shares, and
September 28, 1999, with respect to 15,660 shares, and end October 4, 2000 and
October 28, 2000. The option agreements also provide Broadwing and Grumman Hill
with a call option to buy the stock held by the option stockholders from them at
the same purchase price as in the put option. The call option rights begin
October 5, 2000, with respect to 2,265,278 shares, and October 29, 2000, with
respect to 15,660 shares, and end August 4, 2001 and August 28, 2001. The
options may be exercised in whole or part on one or more occasions at any time
during the relevant option period. During September and October 1999, the
optionee stockholders sold a total of 1,891,215 shares to Broadwing and Grumman
Hill under this option agreement.
Joint Marketing and Services Agreement with Broadwing
In January 1999, we entered into a joint marketing and services agreement
with Broadwing under which each of us may sell and provide the other with any of
the services or products that we offer. This agreement also provides the right
of first refusal to each party for various purchases of equipment, facilities
and services. The joint marketing and services agreement automatically
terminates upon Broadwing's disposition of all of its equity holdings in us or
when terminated by one of the parties. Either of us may terminate the joint
marketing and services agreement if the other fails to cure a breach of a
material provision within 30 days after being provided with notice of the
breach. During 1999, we purchased network access services under contract from
Broadwing totaling approximately $840,000.
12
<PAGE> 15
Harrison Consulting Agreement
In October 1996, we entered into a consulting agreement with Harrison
Enterprises Inc. Under the agreement, Harrison Enterprises Inc. and Dr. Harrison
render advisory and consulting services with respect to our operations,
financing and business planning, particularly in relation to any sales of
securities, mergers or similar transactions. Harrison Enterprises Inc. receives
$5,000 per month under the agreement in addition to the grant by us upon the
commencement of the agreement of an option to purchase 750,000 shares of our
common stock at $0.13 per share. The option vested with respect to 187,500
shares on October 1, 1997 and with respect to the remaining 562,500 shares on
August 4, 1998 in connection with the consummation of our sale of common stock
to Broadwing and Grumman Hill under the stock purchase agreement. The consulting
agreement has an initial term that runs from October 5, 1996 through October 5,
2000, and will automatically renew for successive one year terms unless either
party notifies the other of its intent not to renew at least 90 days before the
end of the term then in effect. We incurred consulting fees of $60,000 during
the year ended December 31, 1999.
Grumman Hill Consulting Arrangement
We currently have an arrangement through which Grumman Hill serves in a
consulting and advisory capacity to our management. In accordance with this
arrangement, Grumman Hill, including Mr. Kelsey, renders consulting services and
management advice to us particularly regarding raising corporate financing,
which includes advice pertaining to this offering. We paid a consulting fee of
$120,000 during the year ended December 31, 1999 to Grumman Hill under this
arrangement.
Mandelbaum Line of Credit Agreement
Effective January 1, 1999, we have made available to Dr. Mandelbaum a
credit line of $2,500,000 to be used exclusively by Dr. Mandelbaum for the
purchase of our stock in any future private equity placement in which Broadwing
and Grumman Hill participate. In the event any borrowings are drawn against the
line of credit, repayment terms, interest rates and collateral provisions will
be established by our Board of Directors. The line of credit agreement was
terminated upon consummation of the initial public offering.
Resale Agreement with NYSERNet.org
In October 1996, we entered into a resale agreement with NYSERNet.org to
provide it with Internet access products and services which it resells to
governmental, educational, scientific and other not-for-profit organizations
within the State of New York. We sell products and services to NYSERNet.org
which are priced using our standard price list less appropriate discounts, and
are sold by us on terms and conditions, similar to those granted to third party
customers. The resale agreement also calls for us to form a joint marketing plan
with NYSERNet.org for the products and services covered by the agreement and for
us to provide NYSERNet.org with sales support and assistance and training for
its sales force. Products and services sold to NYSERNet.org for the year ended
December 31, 1999 amounted to $10.3 million representing 27% of our revenue for
the period. The resale agreement has an initial term that runs from October 1,
1996 through September 30, 2001, and will automatically renew for successive one
year terms unless either party notifies the other of its intent not to renew at
least 60 days before the end of the term then in effect. The agreement is
terminable upon the insolvency of a party, an attempted unauthorized assignment
by a party, a failure to make any payment due under the agreement not remedied
within 30 days or a failure to remedy any breach of the terms of the agreement
within 30 days of receiving notice of the breach.
Resource Sharing Agreement with NYSERNet.org and NYSERNet.net
In October 1996, we entered into a resource sharing agreement with
NYSERNet.org and NYSERNet.net. Under the agreement, we provide NYSERNet.org and
NYSERNet.net with office space, use of equipment and use of our employees to the
extent they are available. We share our premises with NYSERNet.org and
NYSERNet.net and they are required to pay a pro rata share of the rent for the
space they occupy. The agreement also provides for NYSERNet.org's and
NYSERNet.net's use of computer
13
<PAGE> 16
equipment, furniture and supplies in the operation of its business and payment
to us of a pro rata share of the fair rental value of the equipment plus the
cost of maintaining the equipment. A number of our employees are also subject to
the agreement, with some employees on the shared premises at various times
providing services to NYSERNet.org and NYSERNet.net. NYSERNet.org and
NYSERNet.net pay a pro rata share of the employees' salary and benefits.
Resources we provided to NYSERNet.org and NYSERNet.net under the resource
sharing agreement for the year ended December 31, 1999 amounted to approximately
$300,000 and $100,000, respectively. The agreement has a term that runs from
October 1, 1996 through December 31, 1999 and has been extended until December
31, 2000. The agreement is terminable by us only upon the failure of
NYSERNet.org to make the payments required of it under the agreement.
Borrowings with NYSERNet.net and Redeemable Preferred Stock
Under an unsecured revolving borrowing facility with NYSERNet.net, we can
borrow up to $6.2 million, less any preferred stock outstanding, at the prime
rate. The prime rate was 8.5% as of December 31, 1999. Interest payments on
borrowings under the facility are deferred until January 1, 2000. All principal
borrowings under the facility are due and payable on January 1, 2002. We had no
principal borrowings outstanding under this facility on December 31, 1999.
In addition, in January 1997, NYSERNet.net acquired 15,000 shares of our
redeemable preferred stock having a liquidation value of $100 per share and
providing for dividends to accrue at an annual rate of 14.0% of the liquidation
value. On May 5, 1999, we paid approximately $1,993,000 to fully redeem all
outstanding preferred stock and accrued dividends with a portion of the proceeds
from our initial public offering.
David Buckel Note
On July 30, 1998, we made a loan to Mr. Buckel in the amount of $264,000.
This loan was evidenced by a note, payable to us upon the earlier of July 30,
2001 or the date described in any security agreement we enter into with Mr.
Buckel in the future with regard to the loan. The note accrued interest at
5.56%. This note and accrued interest were repaid in full during 1999.
Related Party Transactions
As of March 24, 2000, Broadwing, NYSERNet.net and Grumman Hill are the
respective holders of approximately 24%, 20% and 12% of our common shares. We
also maintain a significant commercial relationship with Broadwing, and
approximately 27% of our revenues in 1999 were generated from sales to
NYSERNet.org. In addition to the transactions described above, we may from time
to time enter into other transactions with NYSERNet.net, NYSERNet.org or
Broadwing, including transactions on a vendor/vendee basis. We also provide
accounting, financial and other services to NYSERNet.net and NYSERNet.org.
Furthermore, two of our executive officers and/or directors, Dr. Mandelbaum and
Dr. Sadowsky, are also directors of NYSERNet.net. and Dr. Sadowsky is a director
of NYSERNet.org. Mr. Buckel is an executive officer of NYSERNet.net and
NYSERNet.org, and Mr. Oros (who resigned from AppliedTheory as of December 3,
1999) is an executive officer of NYSERNet.org. One of our directors, Mr.
DeAngelo, is an executive officer of Broadwing. As a result of these
relationships, conflicts of interest may arise among some of our directors,
executive officers and stockholders. We have independent directors, auditors and
counsel separate from Broadwing, NYSERNet.net and NYSERNet.org and believe that
we maintain adequate procedures to protect us in related party transactions.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation of AppliedTheory's executives is subject to review and
approval by the compensation committee (the "Compensation Committee") of our
Board of Directors. The Compensation Committee consists of 2 non-employee
directors, Dr. Harrison, (Chairman) and Mr. Kelsey and our Chairman and Chief
Executive Officer, Dr. Mandelbaum, who is a non-voting member of the
Compensation Committee.
14
<PAGE> 17
Compensation Philosophy
In determining executive compensation policies, the Compensation Committee
has four primary objectives:
(1) to attract, motivate and retain key executive talent;
(2) to balance the flexibility to reward individuals' skills with the
need to structure compensation for defined roles;
(3) to ensure that executive compensation is competitive with that of
other leading companies in related fields; and
(4) to provide incentives to achieve corporate objectives, thereby
contributing to the overall goal of enhancing stockholder value.
The Compensation Committee's compensation policies discussed below are
designed to achieve the foregoing objectives. The Compensation Committee expects
to continuously review and refine AppliedTheory's compensation practices as
necessary to respond to a changing business environment.
In order to evaluate and establish appropriate compensation practices, the
Compensation Committee consults multiple sources of information. The
Compensation Committee uses data from benchmark companies within the Internet or
similar high technology industries to assess AppliedTheory's performance and
compensation operations, product lines, revenues and markets served. The
Compensation Committee seeks to set its executive compensation levels
competitively with the benchmark companies, to the extent such targets are
consistent with the Compensation Committee's objectives.
Elements of Executive Compensation.
Our executive compensation program has three components: (1) annual cash
compensation in the form of base salary and incentive bonus payments, (2)
long-term incentive compensation in the form of stock options granted under
AppliedTheory's Stock Incentive Plan and (3) other compensation and employee
benefits generally available to all of our employees, such as health insurance.
Annual cash compensation is primarily designed to reward current performance.
Long-term incentives and other compensation and employee benefits are primarily
designed to create performance incentives over the long term for executive
officers and employees.
Base Salary. The base salary of each executive officer is set at a level
deemed sufficient to attract and retain qualified executive officers. The
Compensation Committee has generally determined target base salaries according
to the average base salaries paid by benchmark Internet and similar high
technology companies. Aggregate base salary increases are intended to maintain
compensation levels that are in line with leading companies in related fields,
while individual base salary increases are set to reflect individual performance
levels. The base salaries of certain executive officers are subject to minimums
set forth in individual employment agreements.
Incentive Bonuses. Annual cash bonuses are designed to provide incentives
based on individual contribution to the achievement of the our annual business
goals. Bonus payments have generally been reflective of AppliedTheory's
performance in achieving revenues, other operating and corporate objectives, as
well as the scope of an executive officer's responsibilities. The Compensation
Committee makes a determination as to incentive bonus payments at the end of
each year based on a subjective valuation of the contributions of individual
executive officers to the achievement of our annual business goals. The award of
annual incentive bonuses is based on achieving corporate goals and the amount of
individual incentive bonus payments is determined by percentage ranges
established annually by the Compensation Committee.
Long-Term Incentives. The grant of stock options is our current method for
providing long-term incentive compensation to our employees. The Compensation
Committee believes that the use of stock options attracts and retains qualified
personnel for positions of substantial responsibility and also serves to
motivate its executive officers to promote the success of our business and
maximize stockholder value.
15
<PAGE> 18
Compensation of Chief Executive Officer.
The Compensation Committee based the fiscal year 1999 Chief Executive
Officer ("CEO") compensation on the policies described above.
Dr. Mandelbaum served as our Chairman and CEO throughout the fiscal year.
During fiscal 1999, Dr. Mandelbaum received a total of $479,446 for his
services. Dr. Mandelbaum's compensation level for fiscal 1999 was deemed by the
Compensation Committee to be appropriate given Dr. Mandelbaum's qualifications
and contribution to meeting AppliedTheory's objectives.
Tax Deductibility of Executive Compensation.
Section 162(m) of the Tax Code disallows corporate deductibility for
certain compensation paid in excess of $1 million to the our Chief Executive
Officer and to each of the four other most highly paid executive officers of
publicly-held companies. "Performance-based compensation," as defined in Section
162(m), is not subject to the deductibility limitation provided certain
stockholder approval and other requirements are met. We believe that the stock
options granted in fiscal 1999 and prior years satisfied the requirements of
federal tax law and thus compensation recognized in connection with such awards
should be fully deductible. It is the Company's intention to maximize the
deductibility of compensation paid to its officers, to the extent consistent
with our best interests. During fiscal 1999, AppliedTheory did not exceed the $1
million deductibility cap with respect to any officer covered by Section 162(m).
COMPENSATION COMMITTEE,
Dr. Shelley A. Harrison, Chairman
Mr. James T. Kelsey
Dr. Richard Mandelbaum (non-voting)
Notwithstanding any statement to the contrary in any of AppliedTheory's
previous or future filings with the Securities and Exchange Commission, the
Report of the Compensation Committee and the accompanying Performance Graph
shall not be deemed to be incorporated by reference as a result of any general
incorporation by reference of this proxy statement or any part thereof into any
such filings.
16
<PAGE> 19
PERFORMANCE GRAPH
Set forth below is a line graph comparing our cumulative total stockholder
return on Common Stock since April 30, 1999, the date our common stock began
trading on the Nasdaq National Market (as measured by dividing the difference
between the share price of our common stock at the beginning and the end of the
measurement period by the share price at the beginning of the measurement
period) with (i) the cumulative total return of the Standard and Poors 500 Index
and (ii) the cumulative total return of the Russell 2000 Index.
STOCK PERFORMANCE CHART
<TABLE>
<CAPTION>
APPLIEDTHEORY RUSSELL 2000 S&P 500
------------- ------------ -------
<S> <C> <C> <C>
4/99 100 100 100
5/99 66 101 98
6/99 61 102 99
7/99 74 103 100
8/99 65 100 101
9/99 59 98 96
10/99 60 99 102
11/99 85 106 106
12/99 135 117 110
1/00 128 117 102
2/00 142 129 100
3/00 128 133 114
</TABLE>
OTHER MATTERS
Our Board of Directors knows of no matters to be presented at the Annual
Meeting other than those described in this proxy statement. In the event that
other business properly comes before the meeting, the persons named as proxies
will have discretionary authority to vote the shares represented by the
accompanying proxy in accordance with their own judgment.
PROXY SOLICITATION EXPENSE
The cost of the solicitation of proxies will be borne by us. In addition to
solicitation by mail, our directors, officers and employees and its
subsidiaries, without receiving any additional compensation, may solicit proxies
personally or by telephone or facsimile. We have retained American Stock
Transfer & Trust Company to request brokerage houses, banks and other custodians
or nominees holding stock in their names for others to forward proxy materials
to their customers or principals who are the beneficial owners of shares and
will reimburse them for their expenses in doing so. We do not anticipate that
the costs and expenses incurred in connection with this proxy solicitation will
exceed those normally expended for a proxy solicitation for those matters to be
voted on in the Annual Meeting.
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COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who beneficially own more than 10% of our
Common Stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Such directors, executive officers and
greater than 10% stockholders are required by applicable regulation to provide
us with copies of all Section 16(a) forms they file.
AppliedTheory believes that during fiscal year 1999, all Section 16(a)
filing requirements were satisfied on a timely basis, except that: Mr. DeAngelo
was late filing his Form 3; Grumman Hill Investments III, L.P., Broadwing, Inc.,
Mr. DeAngelo and Mr. Kelsey were each late with two Form 4s reporting a total of
five transactions per party; Drs. Harrison, Mandelbaum and Sadowsky and Messrs.
Buckel and Martin were each late with one filing reporting one transaction per
person; and Mr. Luckett was late with two Form 4s reporting a total of two
transactions.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR NEXT YEAR'S ANNUAL MEETING
The proxy rules adopted by the Securities and Exchange Commission provide
that certain stockholder proposals must be included in the proxy statement for
our Annual Meeting. For a proposal to be considered for inclusion in
AppliedTheory's proxy materials for our 2001 Annual Meeting of stockholders, it
must be received in writing by us on or before December 11, 2000 at its
principal office, 1500 Broadway, 3rd Floor, New York, NY 10036, Attention:
Secretary.
Our Form 10-K Annual Report to Stockholders, including our audited
financial statements for the year ended December 31, 1999, is being mailed
herewith to all stockholders of record on the Record Date and is incorporated
herein by this reference.
By Order of the Board of Directors,
/s/ David A. Buckel
David A. Buckel
Asst. Secretary and Treasurer
Senior Vice President, Chief Financial
Officer
AppliedTheory Corporation
New York, N.Y.
April 11, 2000
Each stockholder, whether or not he or she expects to be present in person
at the Annual Meeting, is requested to MARK, SIGN, DATE and RETURN THE ENCLOSED
PROXY CARD in the accompanying envelope as promptly as possible. A stockholder
may revoke his or her proxy at any time prior to voting.
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APPLIEDTHEORY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS - MAY 25, 2000
PROXY
The undersigned hereby appoints David A. Buckel, Dr. Richard
Mandelbaum, and Lawrence B. Helft, and each of them, as proxies of the
undersigned, each with full power to act without the other and with
full power of substitution and re-substitution, to vote all the shares
of common stock of AppliedTheory Corporation that the undersigned is
entitled to vote at the Annual Meeting of Stockholders to be held on
May 25, 2000, at 8:00 a.m. (local time) at The New York Marriott
Marquis, 1535 Broadway, New York, New York, and at any postponements or
adjournments thereof, with all the powers the undersigned would have if
personally present, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING ITEMS:
(1) To elect to the Board of Directors the following nominee for
the term indicated in the proxy statement.
FOR the nominee listed below. / /
WITHHOLD AUTHORITY to vote for the nominee listed below. / /
George Sadowsky
<PAGE> 22
(2) Ratification of the appointment by the Board of Directors of
GRANT THORNTON LLP as independent certified public accountants
for fiscal year 2000.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the proxies are authorized to vote upon such other matters
as may properly come before the meeting, all in accordance with the accompanying
Notice and proxy statement, receipt of which is hereby acknowledged.
IF THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES REPRESENTED
THEREBY WILL BE VOTED. IF A CHOICE IS SPECIFIED BY THE STOCKHOLDER, THE SHARES
WILL BE VOTED ACCORDINGLY. IF NOT OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED FOR ITEMS 1 AND 2.
Dated _______________________________ 2000
___________________________________________
___________________________________________
Sign exactly as name appears hereon. When
signing in a representative capacity, please
give full title. Joint owners (if any)
should each sign.
