-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GtCMBTVusK+YY131Lb5oDgNXl/nXquwqLphYqhnde5kZN2OxGyUyB407/mKJxu8J Tb84rteGxnC88bdh2TqkSg== 0000950123-99-000921.txt : 19990212 0000950123-99-000921.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950123-99-000921 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIEDTHEORY CORP CENTRAL INDEX KEY: 0001078577 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 161491253 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-72133 FILM NUMBER: 99529064 BUSINESS ADDRESS: STREET 1: 40 CUTTER MILL RD STREET 2: STE 405 CITY: GREAT NECK STATE: NY ZIP: 11021 BUSINESS PHONE: 5164668422 MAIL ADDRESS: STREET 1: 40 CUTTER MILL RD STREET 2: STE 405 CITY: GREAT NECK STATE: NY ZIP: 11021 S-1 1 APPLIEDTHEORY CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ APPLIEDTHEORY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7373 16-1491253 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.) CODE NUMBER)
40 CUTTER MILL ROAD, SUITE 405 GREAT NECK, NEW YORK 11021 (516) 466-8422 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID A. BUCKEL VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 40 CUTTER MILL ROAD, SUITE 405 GREAT NECK, NEW YORK 11021 (516) 466-8422 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: FRANK E. MORGAN II, ESQ. WILLIAM F. SCHWITTER, ESQ. DEWEY BALLANTINE LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP 1301 AVENUE OF THE AMERICAS 399 PARK AVENUE, 31ST FLOOR NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10022-4697 (212) 259-8000 (212) 318-6000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) AMOUNT OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)...................... $57,500,000 $15,985 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
(1) Includes shares of common stock that the Underwriters have the option to purchase to cover any over-allotments. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1999 PROSPECTUS SHARES APPLIEDTHEORY CORPORATION COMMON STOCK ------------------------ This is an initial public offering of shares of common stock of AppliedTheory Corporation. We are selling all of the shares of common stock offered under this prospectus. There is currently no public market for our shares. It is currently estimated that the initial public offering price will be between $ and $ per share. We intend to apply to have our common stock approved for listing on the Nasdaq National Market under the symbol "ATHY." SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT CERTAIN RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
PER SHARE TOTAL --------- ----------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to us............................ $ $
------------------------ The underwriters may, under certain circumstances, purchase up to an additional shares of common stock from us at the initial public offering price less the underwriting discount. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares against payment in New York, New York on , 1999. ------------------------ BEAR, STEARNS & CO. INC. CIBC WORLD MARKETS LEHMAN BROTHERS The date of this prospectus is , 1999 3 [INSIDE FRONT COVER -- GRAPHIC OF ARROW WITH NOTES. TEXT:] [ENTERPRISE SOLUTIONS] [APPLIEDTHEORY DELIVERS SOLUTIONS TO OUR CUSTOMERS THAT CREATE TRUE ENTERPRISE PORTALS LINKING INTERNAL SYSTEMS AND DATABASES, WEBSITE PRESENCE, AND INTERNET ACCESS.] [VPNS & SECURITY] [- SECURE OUTSOURCED WANS FOR INTRANET AND EXTRANET APPLICATIONS] [- END TO END MANAGEMENT SERVICES] [- FIREWALL INSTALLATION, CONFIGURATION AND MANAGEMENT] [- NETWORK AND SECURITY CONSULTING] [WEB HOSTING] [- HOSTING AND SUPPORT FOR MISSION CRITICAL APPLICATIONS] [- GUARANTEED BANDWIDTH AVAILABILITY] [- PERFORMANCE AND QUALITY OF SERVICE GUARANTEES] [- VIRTUALLY LINKED, DISTRIBUTED DATA CENTERS] [- FEATURING SECURITY, GEOGRAPHIC DIVERSITY, ENHANCED CONTENT CACHING, MIRRORING AND LOAD BALANCING] [ENTERPRISE PORTAL DEVELOPMENT] [- LINKING EXISTING DATABASES AND LEGACY SYSTEMS WITH THE WEB] [- DEVELOPING NEW DATA DRIVEN APPLICATIONS] [- CREATING OPEN, UNIVERSAL INTERFACES TO BUSINESS-CRITICAL INFORMATION] [- DELIVERING APPLICATIONS THAT ARE INTEROPERABLE, SCALABLE, SUPPORT E-COMMERCE] [- STANDARDS-BASED SOFTWARE TO LINK WITH SUPPLIERS', PARTNERS' AND CUSTOMERS' SYSTEMS] [INTERNET INTEGRATION] [- ANALYSIS, PROTO-TYPING AND IMPLEMENTATION] [- THIRD-PARTY SOFTWARE EXPERTISE INCLUDING DATABASES, OPERATING SYSTEMS AND FIREWALLS] [- TRAINED AND CERTIFIED STAFF] [INTERNET ACCESS] [- THE GEMINI2000 NETWORK, THE FIRST COAST-TO-COAST NEXT GENERATION INTERNET BACKBONE TO CARRY BOTH RESEARCH AND COMMERCIAL TRAFFIC] [- DEDICATED CONNECTIONS TO PROVIDE CUSTOMERS WITH RELIABLE, CONTINUOUS ACCESS TO THE INTERNET] [- VPN TECHNOLOGIES] [- NETWORK AND SECURITY CONSULTING] [- SECURE DIAL-UP INTERNET ACCESS [- HARDWARE AND SOFTWARE IMPLEMENTATION] ------------------------ AppliedTheory is a service mark of AppliedTheory Corporation. Gemini2000 Network is a trademark of IXC Internet Services, Inc. 4 PROSPECTUS SUMMARY Unless otherwise indicated, all information in this prospectus assumes that the underwriters' over-allotment option will not be exercised and gives effect to our reorganization as a Delaware corporation prior to consummation of this offering. This summary highlights some of the information in this prospectus. It may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements. All references to "we," "us," "our" or "AppliedTheory" in this prospectus mean AppliedTheory Corporation. NYSERNet.net, Inc. and NYSERNet.org, Inc., of which NYSERNet.net, Inc. is the sole member, are referred to interchangeably throughout this prospectus as "NYSERNet." IXC Internet Services, Inc. is referred to throughout this prospectus as "IXC." Grumman Hill Group LLC and Grumman Hill Investment III, LP, a private equity fund advised by Grumman Hill Group LLC, are referred to interchangeably throughout this prospectus as "Grumman Hill." APPLIEDTHEORY CORPORATION OUR COMPANY We are a leading provider of Internet solutions, offering an extensive array of high performance, reliable and scalable Internet technology products and services that can be tailored to meet our customers' requirements. We provide the following solutions, either individually or as part of a one-stop package: - Internet integration and enterprise portal development, including custom software application development, integration of legacy systems and Web site design and development; - Web hosting, consisting of custom hosting solutions and outsourcing, shared server, dedicated server and co-location hosting solutions; and - Internet connectivity, including virtual private network (VPN) solutions, network and security consulting and dedicated Internet access. We market our products and services to mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions, which we believe are increasingly demanding one-stop solutions for Internet services due to the difficulty and expense of managing and integrating the products and services of multiple Internet Protocol (IP)-based vendors. Our comprehensive suite of IP-based services enables our customers to capitalize on the wide variety of critical data communication opportunities made possible by the Internet. Superior customer service is a cornerstone of our operational strategy. Our 97% customer satisfaction in the second half of 1998, based on completed surveys, demonstrates our exceptional performance. As a result, our revenue churn has averaged less than 0.15% over the last two years, a rate which is well below industry averages. As of December 31, 1998, we had over 650 direct and indirect enterprise customers in a wide range of industries, which customers include: - Bank of New York, General Electric Corporation, theglobe.com, Inc., NEC Corporation, Road Runner Computer Systems, Inc. (a joint venture of Time Warner, MediaOne Group, Inc., Microsoft Corporation, Compaq Computer Corporation and Advance/Newhouse Partnership), Eastman Kodak Company, KPMG Peat Marwick LLP, Northrop Grumman Corporation and Bell Atlantic Corp.; - through NYSERNet, Cornell University, Columbia University, New York University, the New York Public Library and the New York City Board of Education; and - through the New York State Department of Labor, the U.S. Department of Labor and a consortium of 46 states and territories. Our existing network consists primarily of a robust, regional backbone. Together with IXC, a significant equity holder in our company, we are in the process of deploying the Gemini2000 Network, the 5 first coast-to-coast, next generation Internet backbone network to carry both research and commercial traffic. The Gemini2000 Network is a fully redundant, high performance national network that will enable us to offer Internet access and backbone transport services at speeds that are 100 to 1,000 times greater than those generally available to end users today. We also intend to build three new distributed data centers, co-located at Gemini2000 Network super-core sites, linked together to form a "virtual gigacenter." Our network and distributed data centers will enable us to offer our customers: - greater network reliability; - lower downtime; - simpler configurations for connecting multiple site locations; - specialized VPN solutions; - faster downloading of data; - reduced Web server load; and - better disaster recovery. Historically, we have generated our revenues using a small sales force and have expanded our customer base primarily through word of mouth. We are rapidly building our sales and marketing efforts nationally to more aggressively pursue customers. We have targeted 29 metropolitan areas throughout the United States with high concentrations of businesses and intend to grow our direct sales force by more than 100 over the next two years. These targeted markets coincide with IXC's points of presence (POPs), where we plan to have a physical local presence. We were incorporated in November 1995, and spun-off in October 1996 from NYSERNet, a not-for-profit consortium that was one of the founding institutions of the Internet, to pursue commercial IP-based opportunities. In August 1998, IXC and Grumman Hill invested $12.9 million and $6.5 million to acquire approximately 2.9 million and 1.5 million shares of our common stock. We issued 1.15 million of these shares for net proceeds of approximately $5.0 million. Our corporate headquarters are located at 40 Cutter Mill Road, Suite 405, Great Neck, New York 11021, and our telephone number at that location is (516) 466-8422. OUR INDUSTRY The Internet has grown rapidly in the 1990s and has emerged as a global medium for communications and commerce. The Internet's growth is driven by a number of factors, including the large and increasing number of cheaper, faster and more powerful multimedia home and office computers, advances in network designs, greater availability of Internet-based software and applications, the emergence of useful content and e-commerce technologies and convenient, fast and inexpensive Internet access. According to International Data Corporation (IDC), the total number of Internet users worldwide reached 69 million in 1997 and will increase to approximately 320 million by 2002. The Internet presents a compelling profit opportunity for businesses, as it enables them to reduce operating costs, access valuable information and reach new markets. Likewise, the Internet presents a compelling opportunity for public sector institutions, as it helps them serve their constituencies more cost- effectively and conveniently and comply with certain federal and state mandates. To take advantage of these opportunities, organizations must have: - an open universal interface (a doorway or "enterprise portal" to the Internet); - Web site presence; and/or - Internet access. 2 6 Expanded uses of the Internet and greater demands for existing Internet-based applications are driving an evolution and expansion in Internet services, as well as the networks over which they are delivered. Examples of existing and next generation uses of the Internet include the following:
- ---------------------------------------------------------------------------------------------------- EXISTING USES NEXT GENERATION ENHANCEMENTS NEXT GENERATION NEW SERVICES - ---------------------------------------------------------------------------------------------------- E-mail Distance learning Telemedicine Basic e-commerce Graphics-intensive e-commerce Full-motion video downloading Web site presence High-capacity interactive Web sites Multi-media interactive virtual reality sites Low-quality video conferencing High-quality, real-time video conferencing Order entry Inventory control - ----------------------------------------------------------------------------------------------------
OUR MARKET OPPORTUNITY To take full advantage of the communication and commerce opportunities made available by the Internet, enterprises will require more than a basic connection. They will need: - fast and reliable connections to the Internet; - sophisticated Web sites to attract and retain users and customers; - access to enterprise information for internal communication and for their Web sites; and - to procure and manage the services and operations to integrate all these needs. While all organizations face challenges in meeting these needs, we believe mid-sized businesses (including mid-size departments of larger businesses) and government agencies, in particular, have an acute problem. Generally, they maintain small information technology (IT) departments and do not have the resources to internally develop and manage all the components of their Internet strategies. Traditionally, enterprises have sought solutions from a variety of service providers (including system integrators, Internet service providers (ISPs), hardware and software vendors and telecommunication companies), each of which satisfies one or two elements of the total Internet problem. We believe these enterprises will demand a single provider that offers all elements of Internet solutions -- design, integration, implementation, Internet connection and operational management. OUR SOLUTION We believe that mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions are increasingly demanding one-stop solutions for Internet services due to the difficulty and expense of managing and integrating the products and services of multiple IP-based vendors. Our comprehensive suite of IP-based products and services enables our customers to capitalize on the wide variety of data communication opportunities made possible by the Internet. We offer an extensive array of high performance, reliable and scalable Internet products and services, including Internet integration and enterprise portal development, Web hosting services and Internet connectivity. We integrate these services to offer customized, IP-based applications and services that enable our commercial customers to extend their enterprises, leverage existing legacy databases and systems and take advantage of Internet-based marketing opportunities. Public sector customers similarly benefit by making greater use of the Internet to serve their constituencies more cost-effectively and conveniently, as well as comply with certain federal and state mandates. Key advantages we offer our customers include: - FLEXIBLE AND SCALABLE INTERNET SOLUTIONS. Our Internet integration and enterprise portal development solutions are customized to meet our customers' needs. These solutions make use of our customers' existing legacy databases and systems and provide them with highly integrated IP-based capabilities that deliver high performance. Our solutions are designed to easily accommodate a large 3 7 and rapidly growing number of users, as well as to facilitate distribution of the application over geographically dispersed servers. Our custom billing software for burstable service and our ability to access incremental bandwidth through our strategic relationship with IXC allow us to quickly scale solutions to meet a customer's needs. For example, upon completion of the Gemini2000 Network, we will offer dynamic bandwidth management, empowering our customers to monitor, regulate and allocate bandwidth usage within their organizations, all from their desktops. - ROBUST AND RELIABLE INFRASTRUCTURE. Our existing network consists principally of a robust, regional backbone which has had customer uptime performance of over 99.9% over the last three years. Together with IXC, we are in the process of deploying the Gemini2000 Network, the first coast-to-coast, next generation Internet backbone network to carry both research and commercial traffic. The Gemini2000 Network is a fully redundant, high performance national network that will enable us to offer Internet access and backbone transport services at speeds which are 100 to 1,000 times greater than those generally available to end users today. It will also enable us to offer our customers greater network reliability, lower downtime, simpler configurations for connecting multiple site locations and remote access VPNs. - ADVANCED DATA MANAGEMENT. Our distributed data centers will enable our customers to provide their customers and end-users with the fastest, clearest and most reliable Web access available today, allowing for data mirroring, load balancing re-direction, redundancy and content caching. These features will benefit our customers through faster downloading of data, reduced Web server load, greater network reliability and performance and better disaster recovery. Distributed data centers typically present a challenge to IT administrators because they result in less efficient use of resources, require synchronization of data in almost real time and are more complex in their operation. However, the advanced architecture of the Gemini2000 Network will enable us to tie our distributed data centers together to form a single "virtual gigacenter," thereby allowing us to deliver to our customers all the advantages of distributed data centers without the corresponding difficulties. - SUPERIOR CUSTOMER SUPPORT. Our mission is to provide the best customer support in the Internet business. We invest heavily in systems and training, understand the technical requirements of our customers and work with them to optimize business objectives through the Internet. Our 97% customer satisfaction in the second half of 1998, based on completed surveys, demonstrates our exceptional performance. As a result, our revenue churn over the last two years has averaged less than 0.15%, a rate which is well below industry averages. OUR STRATEGY Our objective is to become the leading national provider of advanced Internet technology solutions to mid-sized businesses (including mid-size departments of larger businesses) and selected public sector organizations. To achieve this objective, our strategy is to: - OFFER ONE-STOP SOLUTIONS TO THE BUSINESS MID-MARKET AND PUBLIC SECTORS. We will market our one-stop solutions to mid-sized businesses (including mid-size departments of larger businesses) and public sector organizations, initially focusing on sophisticated users of the Internet within these markets. We believe these markets are seeking single vendors who can provide a full set of Internet technology solutions. We believe the Gemini2000 Network, our new data centers and our expertise in providing Internet enterprise portal development, Web hosting and Internet connectivity position us well to serve these markets. - RAPIDLY EXPAND SALES AND MARKETING EFFORTS. Historically, we have generated our revenues using a small sales force and have secured our customer base primarily through word of mouth. We are rapidly building our sales and marketing efforts nationally to more aggressively pursue customers. We have targeted 29 metropolitan areas throughout the United States with high concentrations of 4 8 businesses and intend to grow our direct sales force by more than 100 over the next two years. These targeted markets coincide with IXC's POPs, where we plan to have a physical local presence. - LEVERAGE PUBLIC SECTOR EXPERIENCE AND RELATIONSHIPS. We have extensive experience working with clients in the academic and government sectors, which we believe are underserved markets. We designed, continually develop and maintain America's Job Bank (AJB), an enterprise-wide Web site and Intranet developed for the United States Employment Service. AJB is one of the largest and most visited employment sites in the United States, averaging over 2.3 million hits per day. We have leveraged the experience gained from this project to become a leader in providing custom applications development and outsourcing to federal and state governments. Working with NYSERNet and other non-profit institutions allows us to benefit from the research and development activities of those early adopters of leading edge technologies and applications. We have been chosen to operate the NYSERNet2000 Network, one of the first examples of next generation gigabit networks in the United States. We intend to further leverage our relationships in targeting new university, government and business customers. - COMPLETE NATIONAL NETWORK BUILDOUT. Currently, we offer Internet enterprise portal development and limited Web hosting services on a national scale, while our Internet access and VPN offerings are limited primarily to New York State. Much of the physical infrastructure required for the Gemini2000 Network is already in place, and it is intended that the network will be fully operational by the end of September 1999. When complete, the Gemini2000 Network will total over 70,000 miles of OC48 capacity, eight super-core sites and over 100 POPs. We intend to build three new data centers, which will be co-located at Gemini2000 Network super-core sites. These data centers will be linked together to form a "virtual gigacenter," benefiting customers through faster downloading, reduced Web server load, greater network reliability and performance and better disaster recovery. - MINIMIZE CAPITAL EXPENDITURES. We intend to focus on the delivery of value-added Internet technology solutions, rather than the direct ownership and management of physical infrastructure. IXC has publicly announced its intention to complete construction of, and maintain, the Gemini2000 Network physical infrastructure, including all connectivity electronics. We will be responsible for designing and implementing integration systems to connect customers to the Gemini2000 Network, as well as all the first line customer service functions, which are much less capital intensive. - JOINTLY MARKET AND SELL WITH IXC. We intend to work closely with IXC to jointly market and sell Gemini2000 Network products and services through Web and print media advertising, trade shows and other lead generation activities and by making presentations to clients of both companies. Because the Gemini2000 Network is a joint offering, sales generated by either IXC or us will yield a revenue stream for both companies. - ACQUIRE COMPLEMENTARY ASSETS OR BUSINESSES. We intend to opportunistically consider acquisitions of complementary assets, technologies and businesses that offer the potential to expand the speed of our sales and marketing efforts, increase our customer base or enhance the breadth, depth and variety of our product offerings. RISK FACTORS This offering involves a high degree of risk. See "Risk Factors" beginning on page 9. 5 9 THE OFFERING Common stock offered by us.... shares(1) Common stock outstanding after the offering.................. shares(2) Use of proceeds............... We intend to use the net proceeds from the offering for expansion of our sales and marketing efforts and working capital and general corporate purposes, including possible acquisitions. See "How We Intend to Use the Proceeds from the Offering." Dividend policy............... We currently intend to retain any future earnings for our business and, therefore, do not anticipate paying cash dividends on our common stock in the foreseeable future. Proposed Nasdaq National Market symbol................. ATHY - --------------- (1) If the underwriters exercise the option granted to them in connection with the offering to purchase additional shares of common stock to cover over-allotments, the total number of shares to be offered would increase by up to shares. (2) Based on the number of shares outstanding at January 31, 1999. Excludes 2,665,555 shares of common stock reserved for issuance pursuant to outstanding options under our stock option plan at a weighted average exercise price of $2.39 per share. 6 10 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The financial data shown below has been derived from and should be read in conjunction with our audited Financial Statements, included elsewhere in this prospectus. The information set forth below should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations." Results of operations for the periods presented are not necessarily indicative of results of operations for future periods.
PREDECESSOR(a) APPLIEDTHEORY -------------- ---------------------------------------- NINE MONTHS THREE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30, DECEMBER 31, ------------------------ 1996 1996 1997 1998 -------------- ------------ ---------- ---------- Statement of Operations Data: Total net revenues............................ $ 6,226 $ 3,076 $ 15,172 $ 22,563 Total costs and expenses...................... 10,146 4,838 20,672 27,764 ------- ---------- ---------- ---------- Loss from operations.......................... (3,920) (1,762) (5,500) (5,201) ------- ---------- ---------- ---------- Net loss attributable to common stockholders................................ (3,925) (1,762) (6,057) (5,977) ======= ========== ========== ========== Basic and diluted loss per common share....... $ (.27) $ (.93) $ (.71) ========== ========== ========== Shares used in computing basic and diluted loss per share.............................. 6,500,000 6,504,165 8,443,960 Other data: EBITDA(b)..................................... $(3,762) $ (1,681) $ (4,405) $ (3,529) Capital expenditures(c)....................... -- 506 1,270 2,480
DECEMBER 31, 1998 ------------------------- ACTUAL AS ADJUSTED(d) ------- -------------- Balance Sheet Data: Cash and cash equivalents................................. $ 1,786 $ Working capital (deficiency).............................. (3,249) Total assets.............................................. 10,518 Current portion of long-term debt and capital lease obligations............................................. 551 551 Long-term debt and capital lease obligations, less current portion................................................. 5,979 5,979 Borrowings from NYSERNet. net, Inc. ...................... 2,957 2,957 Redeemable preferred stock................................ 1,500 Total stockholders' equity (deficit)...................... (9,007)
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------- 1997 1998 ----------------------------------------------- ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- -------- ------- ------------ ----------- Quarterly Statement of Operations Data: Total net revenues......... $3,617 $ 3,908 $ 3,755 $ 3,892 $5,334 $ 4,782 $ 6,188 $ 6,259 Total costs and expenses... 4,301 5,099 5,295 5,977 5,829 5,932 7,450 8,553 ------ ------- ------- ------- ------ ------- ------- ------- Loss from operations....... (684) (1,191) (1,540) (2,085) (495) (1,150) (1,262) (2,294) ------ ------- ------- ------- ------ ------- ------- ------- Net loss attributable to common stockholders...... (762) (1,316) (1,710) (2,269) (689) (1,344) (1,455) (2,489) ====== ======= ======= ======= ====== ======= ======= ======= Other Data: EBITDA(b).................. $ (482) $ (961) $(1,306) $(1,656) $ (135) $ (750) $ (839) $(1,805) Capital expenditures(c).... 451 501 223 95 597 243 345 1,295
7 11 - --------------- (a) The operating activities prior to October 1, 1996 were conducted as a nonincorporated "division" of NYSERNet and are considered to constitute a predecessor business. The financial data presented for the years ended December 31, 1994 and 1995 and for the nine months ended September 30, 1996 reflect these activities on a "carved-out" basis from the historical financial statements of NYSERNet. (b) EBITDA is loss from operations before interest, taxes, depreciation and amortization. EBITDA is presented because management believes that certain investors find it to be a useful tool for measuring a company's ability to service its debt; however, EBITDA does not represent cash flow from operations, as defined by generally accepted accounting principles, and should not be considered as a substitute for net loss as an indicator of AppliedTheory's operating performance or cash flow as a measure of liquidity, and should be examined in conjunction with the financial statements and related notes of AppliedTheory included elsewhere in this prospectus. (c) Capital expenditures include assets acquired with debt and exclude assets acquired through capital lease financing. (d) Adjusted to give effect to this offering and the receipt by AppliedTheory of the estimated net proceeds therefrom. ------------------------ This prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the sections "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include statements regarding our, or our directors' or officers', intent, belief or current expectations with respect to, among other things: (1) trends affecting our financial condition or results of operations; and (2) our business and growth strategies. Actual events or results could differ materially from those discussed in this prospectus. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and in the other sections of this prospectus. Such forward-looking statements speak only as of the date of this prospectus, and we caution potential investors not to place undue reliance on such statements. 8 12 RISK FACTORS Any investment in our common stock involves a high degree of risk. This section describes some, but not all, of the risk factors involved in purchasing our common stock. You should carefully consider these risk factors and the other information in this prospectus before purchasing shares of our common stock. WE HAVE A LIMITED OPERATING HISTORY. We have a limited operating history. We were incorporated in 1995 and commenced operations in late 1996. As a result, our business model is still in development. Our business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly those of rapidly evolving Internet services companies. These risks relate to, among other things, our ability to: - buildout operations infrastructure; - expand sales structure and marketing programs; - increase awareness of our brand; - provide services to our customers that are reliable and cost-effective; - respond to technological development or service offerings by competitors; and - attract and retain qualified personnel. We may not be successful in addressing these risks. If we are not successful, our business or future financial or operating results could be hurt. WE HAVE A HISTORY OF LOSSES. We have incurred net losses and negative cash flows from operations in each quarterly and annual period since inception and expect to continue to do so for the foreseeable future. At December 31, 1998, we had an accumulated deficit of approximately $14.6 million. Our ability to achieve profitability is dependent in large part upon the successful completion of the Gemini2000 Network and the successful implementation of our nationwide expansion strategy. We experienced net losses of approximately $5.8 million in each of the years ended December 31, 1997 and 1998. We cannot assure you that we will be able to achieve or sustain revenue growth or profitability on either a quarterly or an annual basis. THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH OUR NATIONWIDE GROWTH STRATEGY. To date, most of our revenues have been derived from customers located in New York State. Our business strategy is to become a leading national provider of advanced Internet technology solutions to mid-sized businesses (including mid-size departments of larger businesses) and select public sector organizations. Among other things, if any of the following occur, our business could be hurt: - significant delays in the roll-out of the Gemini2000 Network or our new data centers; - our products and services are not accepted by current or potential customers; - the technology upon which the Gemini2000 Network is based is overtaken; - we fail to successfully implement our sales and marketing strategy; or - we fail in our efforts to build a national sales force. 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. Additionally, for our business strategy to succeed, we have assumed that: - we will be able to expand our business with new and current customers; - we will be able to develop and offer new products and services, and our products and services will be successful; - we will be able to retain key employees and hire new employees; and - any future business we may develop or acquire will perform in a satisfactory manner. 9 13 However, we cannot guarantee that any of these will occur. OUR ANNUAL AND QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Our annual and quarterly operating results have fluctuated significantly in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include: - demand for and market acceptance of our services; - fluctuations in data communications and telecommunications costs; - reliable continuity of service and network availability; - 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; - the timing and magnitude of expenditures for sales and marketing; - introductions of new services or enhancements by us and our competitors; - the timing of customer installations and related payments; - the ability to maintain or increase peering; - provisions for customer discounts; - the introduction by third parties of new Internet services; - increased competition in our markets; - growth of Internet use and establishment of Internet operations by mainstream enterprises; - changes in our and our competitors' pricing policies; - changes in regulatory laws and policies; - economic conditions specific to the Internet industry; and - general economic factors. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly in respect of telecommunications, depreciation, and interest expense and personnel, and therefore our results of operations are particularly sensitive to fluctuations in revenue. You should not rely on annual or quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this were to occur, the price of our common stock may fall. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE ARE DEPENDENT UPON CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES AND CONTINUED INTERNET INFRASTRUCTURE DEVELOPMENT. Our market is new and rapidly evolving. Whether 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, such as: - the reluctance of businesses to outsource their Internet integration and enterprise portal development, Web hosting and Internet connectivity needs; - the inability to market our products and services to new customers; - the inability to differentiate the products and services we offer from those of our competitors; and - the inability to maintain and strengthen our brand awareness. 10 14 In addition, our success depends in large part on continued growth in the use of the Internet. Our business would be adversely affected if Internet usage does not continue to grow. Internet usage may be inhibited for a number of reasons, such as: - 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 by this growth 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. The market for Internet-based services is extremely competitive. There are no substantial barriers to entry, and we expect that competition will intensify in the future. We believe that the primary competitive factors in our markets are: - technical expertise in developing applications focused on Web integration and IP-centric solutions; - a reliable and robust network infrastructure; - network security; - price; - flexibility and willingness to consult with customers about how to deploy Internet solutions in meaningful ways; - quality customer care; - experienced and knowledgeable salesforce and engineers; - customization; - breadth of service offerings; - brand recognition; - broad geographic presence; and - financial resources. Our current and prospective competitors generally may be divided into the following three groups: - Internet service providers (ISPs), such as Concentric Network Corp., Exodus Communications, Globix Corporation, PSINet Inc., UUNET, Frontier Global Center, GTE/BBN, Digex, Inc., Verio, Inc., and other national and regional providers; - telecommunications companies, such as AT&T Corp., Cable & Wireless P.L.C., Sprint Corporation, MCI WorldCom, Inc., the regional Bell operating companies (RBOCs), competitive local exchange carriers (CLECs) and various cable companies; and 11 15 - IT integrators and outsourcing firms, such as the Big 5 accounting firms, EDS Corp. and similar entities. Many of these competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than us. As a result, as compared to us, our competitors may be able to develop and expand their network infrastructures and services 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 readily, and devote greater resources to the marketing and sale of their products and services. Also, they may succeed in developing and expanding their communications and network infrastructures more quickly than can be done with the Gemini2000 Network. In addition to the companies named above, various organizations have entered into or are forming joint ventures or consortiums to provide services similar to ours. We believe that new competitors, including large computer hardware, software, media and other technology and telecommunications companies, will enter the tailored value-added network services market, resulting in even greater competition. Certain telecommunications companies and online services providers are currently offering or have announced plans to offer Internet or online services, or to expand their network services. Other companies, including America Online Inc., BBN Corp. and PSINet Inc., have also obtained or expanded their Internet access products and services as a result of acquisitions. These acquisitions may permit our competitors to devote greater resources to the development and marketing of new competitive products and services and the marketing of existing competitive products and services. In addition, the ability of some of our competitors to bundle other services and products with VPN services or Internet access services could place our company at a competitive disadvantage. Certain companies are also exploring the possibility of providing or are currently providing high-speed data services using alternative delivery methods such as over the cable television infrastructure, through direct broadcast satellites and over wireless transmission systems. We may not be able to, or we may find significant constraints in catching up with, new technologies. See "-- We are subject to risks relating to rapid technological change and evolving industry standards." 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 or higher revenue from enhanced services, or even if we manage to reduce our costs. Increased price or other competition could result in erosion of 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. WE DERIVE SIGNIFICANT REVENUE FROM TWO CUSTOMERS. We currently derive a substantial portion of our total revenue from two customers -- NYSERNet, a not-for-profit corporation which is also one of our major shareholders, and the New York State Department of Labor (NYSDOL). For the years ended December 31, 1997 and 1998, revenue from NYSERNet represented approximately 47% and 37% of our total revenue. Our current agreement to provide services through NYSERNet has an initial term of three years, ending October 1, 2001, and is automatically renewable for successive one year terms. While the agreement only allows termination by either party under special circumstances, it is still possible that NYSERNet could terminate the agreement or cease working with us. In addition, we derive a significant portion of our revenue from our contract with NYSDOL for the development and maintenance of the America's Job Bank Web site and Intranet. For the years ended December 31, 1997 and 1998, revenue under this agreement represented 16% and 28%, respectively, of our total revenue. The NYSDOL agreement is subject to cancellation by NYSDOL upon 15 days notice. We cannot assure you that revenue from 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. Revenue derived from a limited number of customers may continue to represent a significant portion of our total revenue. The loss of one or more of our major customers could significantly hurt our business. 12 16 THE SCALABILITY OF THE GEMINI2000 NETWORK IS UNPROVEN. Due to its limited deployment, 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. We also face risks related to this network's ability to be scaled up to our expected customer levels while maintaining superior performance. As we increase the number of our customers or as bandwidth usage increases, we may need to make additional investments in our infrastructure to maintain adequate downstream data transmission speeds, the availability of which may be limited or the cost of which may be significant. Additional network capacity may not be available from IXC or other third-party suppliers as it is needed by us, and, as a result, our network may not be able to achieve or maintain a sufficiently high capacity of data transmission. Any failure on our part to achieve or maintain high-capacity data transmission could significantly reduce consumer demand for our services and hurt our business. Although the Gemini2000 Network has been designed with a redundant backbone, we could experience failures relating to individual network POPs or even catastrophic failure of the entire network. We may need to further expand and adapt our network infrastructure in the future as the number of users and the amount of information they wish to transport increases and as we respond to changing customer requirements. Any future expansion and adaptation of our telecommunications and hosting facility infrastructure could require substantial financial, operational, technical and management resources. 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 FACE THE RISK OF SYSTEM FAILURE. 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, 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. Also, 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 these networks. Failure by our telecommunications providers to provide the data communications capacity as needed for any reason could cause interruptions in the services we provide. Any damage or failure that causes interruptions in our operations could hurt our business. 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, 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 replacing existing equipment, expanding facilities or adding redundant facilities; - cause us to spend money on existing or new equipment and infrastructure earlier than we had planned; - 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. WE ARE DEPENDENT UPON NETWORK INFRASTRUCTURE. On February 4, 1999, IXC announced that it had hired an investment bank to advise it on strategic alternatives. We are unable to predict the result of this process or the impact it may have on us. Any failure by IXC to complete construction of, or deploy and maintain, the Gemini2000 Network could hurt 13 17 our business. Although IXC has publicly announced its intention to complete construction of the Gemini2000 Network, we do not have a written agreement obligating them to do so. In addition to IXC, we also use the infrastructure of other communications carriers. Our success partly depends upon the capacity, scalability, reliability and security of the network infrastructure we lease from telecommunications network suppliers such as Bell Atlantic Corp. and Sprint Corporation. Our current projections for utilization of our network require rapid expansion of the capacity of the network to avoid constraints that would adversely affect the performance of the system. The expansion and adaptation of our network infrastructure will require substantial financial, operational and management resources. We cannot assure you that we will be able to expand or adapt our network infrastructure to meet additional demand or to meet our customers' changing requirements or evolving industry standards on a timely basis at a commercially reasonable cost, or at all. 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 the performance of the system. We also depend on the telecommunications suppliers referred to above to provide uninterrupted and "bug" free service through their telecommunications networks. If such companies 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, it could hurt our business. WE FACE SIGNIFICANT SYSTEM SECURITY RISKS. 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. Such problems caused by third parties could lead to interruptions and delays or to the cessation of service to our customers. Furthermore, such 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. This could result in our liability for damages and our reputation could suffer, thereby deterring potential customers from working with us. We rely upon encryption and authentication technology licensed 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, such industry-standard measures occasionally have been circumvented in the past. Therefore, we cannot assure you that the measures we implement will not be circumvented in the future. 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, financial condition and results of operations. WE HAVE LIMITED BRAND AWARENESS. To remain successful, we must maintain and strengthen our brand awareness. While many of our competitors have well-established brands in Internet services, we have not yet introduced a national branded offering. 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. Our business could be hurt if we cannot increase our brand awareness and acceptance. WE ARE SUBJECT TO RISKS RELATING TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS The markets for our products and services are characterized by rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service 14 18 introductions. Our future success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner: - effectively use 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; - 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 be successful in effectively using or developing new technologies, introducing new services or enhancing our existing services on a timely basis, or that such new technologies or enhancements will achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. In addition, we cannot assure you that we will succeed in adapting our network service business to alternate access devices and conduits. 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 TCP/IP, both of which are industry standards to facilitate the transfer of data. Alternative open protocol and proprietary protocol standards could emerge and become widely adopted causing a reduction in the use of TCP/IP, which 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. THERE ARE RISKS ASSOCIATED WITH OUR GOVERNMENT CONTRACTS. Contracts with various government agencies accounted for approximately 45% of our revenues in the year ended December 31, 1998. Government contracts are often subject to a competitive bidding process as 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 certain 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 such policies. If we fail to comply with the government's regulations as they apply to government contractors, we may face sanctions including substantial fines and disqualification from future awards of government contracts. Contracts with governmental agencies are or may be subject to various risks, including unilateral termination by the government for the convenience of the government and reductions in services or modifications in contractual terms due to changes in the government's requirements or budgetary restraints. In addition, the government may not continue to fund our programs. Even if funding continues, we may not obtain such 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 all of such contracts will be fully funded. WE MAY BE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS. Although we do not currently have any agreements, arrangements or understandings with respect to any such acquisitions, we may seek to acquire assets, technologies or businesses complementary to our 15 19 operations. Any such future acquisitions would be accompanied by the risks commonly encountered in acquisitions such as: - the difficulty of assimilating the operations and personnel of acquired companies, - the potential disruption of our business, - the inability of our management to maximize our financial and strategic position by 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 of acquired businesses, and the impairment of relationships with employees and customers as a result of changes in management. We cannot assure you that any completed acquisition will enhance our business. If we proceed with one or more significant acquisitions in which the consideration consists of cash, a substantial portion of our available cash, including proceeds of this 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. 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 CERTAIN SOURCES OF SUPPLY. We rely on other companies to supply certain key components of our network infrastructure, including telecommunications services and networking equipment, which, in the quantities and quality we require, are available from limited sources. The routers, switches and modems used by both Gemini2000 and our existing network are available from a limited number of suppliers. Co-location facilities and field service for equipment at all but one of our existing POPs are provided under contract by one vendor. Any failure of our sole or limited source suppliers to provide products or components to our network infrastructure could hurt our business. WE OPERATE IN AN UNCERTAIN REGULATORY ENVIRONMENT. Operators of value-added networks like us that provide access to transmission facilities only as part of a data services package are currently excluded from regulations that apply to "telecommunications carriers." As we are such an operator, we are not currently subject to direct regulation by the Federal Communications Commission, or FCC, 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 as a provider of basic telecommunications services. Currently, the FCC is reviewing its regulatory position and could impose regulation, similar to or different than that of a telecommunications carrier, on the network transport feature of a value-added network operator like us. Also, the FCC could conclude that notwithstanding our value-added services like protocol conversion, computer processing, and interaction with customer-supplied information, we are not eligible to be classified as an enhanced or information service provider and then could regulate all or part of our activities as basic telecommunications services. In addition, while state public utility commissions generally have declined to regulate enhanced or information services, some other states do regulate in limited circumstances certain aspects of enhanced services, such as where they are provided by local exchange carriers. Therefore, we cannot assure you that our activities will continue to be exempt from regulation by either or both federal or state agencies. Our business could suffer depending upon the extent to which our activities are regulated or are proposed to be regulated. In addition, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the FCC in the same manner as other telecommunications services. The growing use of the Internet has burdened the existing telecommunications infrastructure in many areas and certain 16 20 local telephone carriers have petitioned the FCC to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on these companies. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, libel and personal privacy are applicable to the Internet. The adoption of any new laws or regulations relating to the Internet could significantly hurt our business. In addition, the growth of the Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws may impose additional burdens on our business. THERE ARE RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH OUR NETWORK. 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. If we become subject to claims that we have violated U.S. or foreign laws, even if we successfully defend against these claims our business could be hurt. 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. These laws and regulations could expose us to substantial liability. Congress has recently enacted laws and regulations concerning the Internet. There is much uncertainty regarding the marketplace 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. It is possible that claims will be made against online services companies and Internet access providers under both U.S. and foreign law for defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through their networks. Several private lawsuits seeking to impose such liability upon online services companies and Internet access providers are currently pending. If any of these actions succeed, we might be required to respond by investing substantial resources or discontinuing certain service or product offerings. The increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could also have a negative impact on the growth of Internet use. Although we carry 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 incurred as a result of such liability or asserted liability could hurt our business. WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE YEAR 2000. The risks posed by the Year 2000 issue could hurt our business in a number of significant ways. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will not distinguish 21st century dates from 20th century dates. This may result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We are currently conducting a Year 2000 readiness review including assessment, implementation, testing and contingency planning. After evaluating our internally developed software, we believe that such software is Year 2000 compliant. However, we utilize software and hardware developed by third parties both for our network and for our internal information systems. Therefore, we are seeking assurances from our vendors that their products are Year 2000 compliant. We expect to continue assessing and testing our internal IT and non-IT systems during this year. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in our systems. In addition, Year 2000 issues may also impact other entities with which we do business, including, for example, those responsible for maintaining telephone and Internet communications and other suppliers. If 17 21 these entities fail to take preventive or corrective actions in a timely manner, the Year 2000 issue could hurt our business in ways which are not now quantifiable. We do not have any information regarding the Year 2000 status of our customers, most of whom are private companies. If our customers experience Year 2000 problems which result in business interruptions or otherwise impact their operations, we could experience a decrease in the demand for our services, which could hurt our business. To date, we have not incurred and we do not foresee any significant expenses associated with our Year 2000 plan. Apart from the risk that we may not achieve Year 2000 compliance, we believe that a loss of revenues, which could be significant, would arise if our major customers or providers fail to achieve Year 2000 readiness. We have not yet developed a comprehensive contingency plan to address the issues which may result from such failure. THERE IS UNCERTAINTY AS TO OUR ABILITY TO OBTAIN FUTURE FINANCING TO MEET OUR CAPITAL NEEDS. We currently anticipate that our available cash resources, combined with the net proceeds from the issuance of the common stock and financing available under a $6.2 million line of credit with NYSERNet, will be sufficient to meet our anticipated working capital and capital expenditure requirements for the foreseeable future. However, we cannot assure you that these resources will be sufficient for our anticipated working capital and capital expenditure requirements. We may need to raise additional funds through public or private debt or equity financings in order to: - take advantage of unanticipated opportunities or acquisitions of complementary assets, technologies or businesses; - develop new products; or - respond to unanticipated competitive pressures. We may also raise additional funds through public or private debt or equity financings if such financings become available on favorable terms. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders may be reduced and such 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, such securities would have certain rights, preferences and privileges senior to those of the holders of our common stock and the terms of such debt could impose restrictions on our operations. If additional funds become necessary, additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities, develop new products or otherwise respond to unanticipated competitive pressures. Such inability could hurt our business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." OUR EXISTING STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO EXERCISE CONTROL OVER US. Immediately following the offering, NYSERNet, IXC and Grumman Hill, will beneficially own approximately % , % and %, respectively, of our outstanding common stock. In addition, our executive officers and directors will beneficially own a total of approximately % of our outstanding common stock. Accordingly, NYSERNet, IXC, Grumman Hill and our officers and directors, whether acting alone or together, will be able to exert considerable influence during any stockholder vote, including any vote on the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and to 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. In addition, NYSERNet has two representatives on our Board of Directors and IXC and Grumman Hill each have one representative on our Board of Directors. Grumman Hill has a significant equity interest in IXC. NYSERNet, IXC, Grumman Hill and our officers and directors may have conflicts of interests among themselves and, in addition, the interests of NYSERNet, IXC, 18 22 Grumman Hill and our officers and directors could conflict with the interests of our other stockholders. See "Management," "Certain Transactions" and "Principal Stockholders." WE ARE DEPENDENT ON KEY PERSONNEL. We are 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, James D. Luckett, Denis J. Martin, Mark A. Oros and David A. Buckel. We expect that we will need to hire additional personnel in all areas. 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. See "Business -- Employees" and "Management." THERE HAS BEEN NO PRIOR TRADING MARKET FOR OUR COMMON STOCK; OUR STOCK PRICE MAY BE VOLATILE. There has not been a prior public market for our common stock. We will apply for quotation on the Nasdaq National Market. We cannot assure you that an active trading market will develop or be sustained, nor can we provide you with any guarantees as to how liquid that market might become nor can we guarantee that the price of our common stock will not decline below the initial public offering price. We will negotiate the initial public offering price for our common stock with the representatives of the underwriters; such price may not be indicative of prices that will prevail in the trading market. Factors such as variations in our revenue, earnings and cash flow and announcements of new service offerings, technological innovations or price reductions by us, our competitors or providers of alternative services could cause the market price of our common stock to fluctuate substantially. The stock market has experienced significant price and volume fluctuations. In particular, the market prices of securities of technology companies, especially Internet-related companies, have been highly volatile. Investors may not be able to resell their shares at or above the initial public offering price. Such broad market fluctuations, as well as any shortfall in revenue or earnings compared to securities analysts' expectations, changes in analysts' recommendations or projections and general economic and market conditions may adversely affect the market price of our common stock following this offering. See "Underwriting." 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 such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources. OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES AVAILABLE FOR FUTURE SALE. The market price of our common stock could drop as a result of sales of a large number of shares of common stock in the market after the offering. There will be shares of common stock outstanding immediately after the offering (assuming no exercise of the underwriters' over-allotment option). The shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the Securities Act), unless such shares are held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining 10,606,596 shares of our common stock are subject to restrictions under Rule 144 of the Securities Act. Holders of 10,459,985 such restricted shares have registration rights with respect to these shares. Such shares are subject to lock-up agreements pursuant to which the holders of these shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Bear, Stearns & Co. Inc. However, under Rule 144 and as a result of registration rights, these shares may become freely tradable and affect the market for our stock. A substantial number of shares of common stock issuable upon exercise of outstanding stock options will also become available for resale in the public market at prescribed times. In addition, we intend to 19 23 register under the Securities Act the shares of our common stock reserved for issuance under our stock option plan. See "Shares Eligible for Future Sale." YOU WILL EXPERIENCE SIGNIFICANT DILUTION. The initial public offering price of our common stock is substantially higher than the net tangible book value per share of the outstanding common stock immediately after this offering. Therefore, based upon an assumed initial public offering price of $ per share, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $ in the net tangible book value per share of common stock from the price you pay for such common stock. See "Dilution." WE HAVE DISCRETIONARY AUTHORITY OVER THE USE OF NET PROCEEDS FROM THE OFFERING. As of the date of this offering, we have not allocated any portion of the net proceeds of this offering for a specific purpose. Consequently, management will retain a significant amount of discretion over the application of these proceeds. Because of the number and variability of factors that determine our use of the net proceeds of the offering, there can be no assurance that such applications will not vary substantially from our current intentions. See "How We Intend to Use the Proceeds From the Offering." CERTAIN ANTI-TAKEOVER PROVISIONS MAY MAKE OUR ACQUISITION MORE DIFFICULT. Our Certificate of Incorporation and Bylaws, as well as Delaware corporate law, contain certain provisions that could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for our shares of common stock. Certain of these provisions allow us to issue, without stockholder approval, preferred stock having voting rights senior to those of the common stock. Other provisions impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. In addition, our Board of Directors is divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of the Board of Directors. As a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder (defined generally as a person owning 15% or more of the corporation's outstanding voting stock) from engaging in a business combination (as defined) for three years following the date such person became an interested stockholder unless certain conditions are satisfied. See "Description of Capital Stock." 20 24 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING We estimate that we will receive net proceeds from the sale of shares in this offering of approximately $ million (assuming an initial public offering price of $ per share and after deduction of underwriting discounts and commissions and expenses payable by us, estimated at $ million). We intend to use the net proceeds from this offering to expand our sales and marketing efforts and for working capital requirements and other general corporate purposes, including possible acquisitions of complimentary assets, technologies or businesses. We do not currently have any agreements, arrangements or understandings with respect to any such acquisitions. Pending such uses, we intend to invest the proceeds of this offering in short-term, interest bearing securities of investment grade. DIVIDEND POLICY We have never paid or declared any cash dividends on our common stock. We currently intend to retain any future earnings for our business and, therefore, do not anticipate paying cash dividends on our common stock in the foreseeable future. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements, restrictions in loan agreements and on such other factors as our Board of Directors may, in its discretion, consider relevant. 21 25 CAPITALIZATION The following table sets forth as of December 31, 1998 (i) our actual cash and cash equivalents and capitalization and (ii) such amounts, as adjusted to reflect the issuance and sale of shares of our common stock in this offering (assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses), and the receipt of the net proceeds thereof as set forth under "How We Intend to Use the Proceeds From the Offering." You should read this table in conjunction with our Financial Statements and the Notes thereto and the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
DECEMBER 31, 1998 -------------------------------------- ACTUAL AS ADJUSTED ----------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CASH AND CASH EQUIVALENTS................................... $ 1,786 $ ============ ============ LIABILITIES: Long-term debt and capital lease obligations (including current portion)....................................... $ 6,531 $ 6,531 Borrowings from NYSERNet.................................. 2,957 2,957 ------------ ------------ Total long-term debt, borrowings from NYSERNet and capital lease obligations......................... 9,488 9,488 Redeemable preferred stock -- 75,000 shares authorized; 15,000 issued and outstanding, cumulative 14% dividend; $100 liquidation value................................. 1,500 STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock -- 1,000,000 shares authorized, as adjusted............................................... Common stock, $.01 par value; 25,000,000 shares authorized; 10,026,325 shares issued and outstanding; 60,000,000 shares authorized; shares issued and outstanding, as adjusted(1)............................ 100 Common stock -- nonvoting, $.01 par value, 5,000,000 shares authorized; 36,565 shares issued and outstanding............................................ --* -- Additional paid-in capital................................ 5,516 Accumulated deficit....................................... (14,623) (14,623) ------------ ------------ Total stockholders' equity (deficit)................. (9,007) ------------ ------------ Total capitalization........................................ $ 1,981 $ ============ ============
- --------------- * Less than $500. (1) Excludes 2,665,555 shares of common stock issuable as of December 31, 1998 upon exercise of options outstanding under AppliedTheory's 1996 Incentive Stock Option Plan at a weighted average exercise price of $2.39 per share. See Note H to the Financial Statements. 22 26 DILUTION Dilution is the amount by which the initial public offering price paid by the purchasers of shares of common stock in the offering exceeds the net tangible book value per share of common stock after the offering. The net tangible book value per share of common stock is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the pro forma number of shares of common stock deemed to be outstanding on the date as of which such book value is determined. The net tangible book value of the common stock as of December 31, 1998 was a deficit of approximately ($0.90) per share. After giving effect to the sale of the shares of common stock of this offering and the application of the estimated net proceeds therefrom of $ million (assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses), the pro forma as adjusted net tangible book value of AppliedTheory at December 31, 1998, would have been $ million, or $ per share. This represents an immediate increase in the net tangible book value of $ per share to existing holders of common stock and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price....................... $ -------- Net tangible book value deficiency per share as of December 31, 1998...................................... $(0.90) Increase attributable to new investors.................... $ ------ As adjusted net tangible book value after the offering...... $ -------- Dilution to new investors................................... $ ========
If the over-allotment option is exercised in full, the pro forma net tangible book value per share of common stock after giving effect to the offering would be $ per share (assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses), the increase in the net tangible book value per share would be $ and the dilution to persons who purchase shares of common stock in the offering would be $ per share. The following table summarizes, as of December 31, 1998, the number of shares of common stock purchased from our company, the total consideration paid and the average price per share paid by the existing stockholders and new investors, adjusted to give effect of the sale of the shares of common stock in the offering (assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses):
SHARES PURCHASED TOTAL CASH CONSIDERATION --------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ --------- ------------- Existing Stockholders............... 10,062,890 % $5,356,268 % $0.53 New Investors....................... ---------- ----- ---------- ----- ----- Total..................... 100.0% $ 100.0% ========== ===== ========== =====
23 27 SELECTED FINANCIAL DATA The following selected financial data should be read together with "Management's Discussion and Analysis of Results of Operations and Financial Condition," and the historical financial statements of AppliedTheory and the Predecessor and notes thereto included elsewhere in this Prospectus. The selected financial data as of December 31, 1997 and 1998 and for the nine months ended September 30, 1996, the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998 have been derived from audited financial statements included elsewhere in this Prospectus. The selected financial data as of September 30, 1996 and December 31, 1996, and as of and for the year ended December 31, 1995 are derived from audited financial statements not included in this prospectus. These audited financial statements of AppliedTheory and the Predecessor have been audited by Grant Thornton LLP, independent certified public accountants. The selected financial data as of and for the year ended December 31, 1994 are derived from unaudited financial statements, which, in management's opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation.
PREDECESSOR (A) APPLIEDTHEORY --------------------------------------- -------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED DECEMBER 31, ----------------------- SEPTEMBER 30, DECEMBER 31, ----------------------- 1994 1995 1996 1996 1997 1998 ------------ -------- ------------- ------------ ---------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of operations data: Total net revenues.... $2,917 $4,942 $6,226 $3,076 $15,172 $22,563 Costs and expenses Cost of revenues.... 2,815 5,163 5,742 2,331 10,796 13,316 Sales and marketing........ 5 466 1,298 792 3,706 6,400 General and administrative... 496 1,185 2,819 1,591 4,283 5,233 Research and development...... -- -- 129 43 680 243 Depreciation and amortization..... 106 126 158 81 1,095 1,672 Other expenses...... 2 -- -- -- 112 900 ------ ------- ------- ---------- ---------- ---------- Total costs and expenses... 3,424 6,940 10,146 4,838 20,672 27,764 Loss from operations.......... (507) (1,998) (3,920) (1,762) (5,500) (5,201) Interest income....... -- (26) -- -- -- (42) Interest expense...... -- -- 5 -- 347 608 ------ ------- ------- ---------- ---------- ---------- Net loss.............. (507) (1,972) (3,925) (1,762) (5,847) (5,767) Preferred stock dividends........... -- -- -- -- 210 210 ------ ------- ------- ---------- ---------- ---------- Net loss attributable to common stockholders........ $ (507) $(1,972) $(3,925) $(1,762) $(6,057) $(5,977) ====== ======= ======= ========== ========== ========== Basic and diluted loss per common share.... $(.27) $(.93) $(.71) ========== ========== ========== Shares used in computing basic and diluted loss per share............... 6,500,000 6,504,165 8,443,960 Other data: EBITDA (b).......... $ (401) $(1,846) $(3,762) $(1,681) $(4,405) $(3,529) Capital expenditures (c).............. 191 756 -- 506 1,270 2,480
24 28
PREDECESSOR (A) APPLIEDTHEORY --------------------------------------- -------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED DECEMBER 31, ----------------------- SEPTEMBER 30, DECEMBER 31, ----------------------- 1994 1995 1996 1996 1997 1998 ------------ -------- ------------- ------------ ---------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Cash flow information:..... Net cash provided by (used in) operating activities..... 191 578 (2,098) (834) (5,185) (2,704) Net cash provided by (used in) investing activities..... (191) (756) 56 (506) (1,266) (2,779) Net cash provided by financing activities..... -- 178 2,041 1,513 6,413 7,133
PREDECESSOR(A) APPLIEDTHEORY --------------------------------------- ----------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ---------------------- ------------- ----------------------------- 1994 1995 1996 1996 1997 1998 ----------- ------- ------------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS) Balance Sheet Data: Cash and cash equivalents.......... -- -- -- $173 $135 $1,786 Working capital (deficiency)......... $(693) $(2,982) $(6,775) (1,379) (3,579) (3,249) Total assets............ 1,571 2,690 3,161 3,365 5,444 10,518 Current portion of long- term debt and capital lease obligations.... -- -- -- -- 211 551 Long-term debt and capital lease obligations, less current portion...... -- -- -- -- 4,361 5,979 Borrowings from NYSERNet............. -- -- -- 1,500 2,445 2,957 Redeemable preferred stock................ -- -- -- -- 1,500 1,500 Total stockholders' equity (deficit)..... (787) (2,759) (6,684) (2,576) (8,626) (9,007)
- --------------- (a) The operating activities prior to October 1, 1996 were conducted as a nonincorporated "division" of NYSERNet and are considered to constitute a predecessor business. The financial data presented as of and for the years ended December 31, 1994 and 1995, and as of and for the nine months ended September 30, 1996 reflect these activities on a "carved-out" basis from the historical financial statements of NYSERNet. (b)EBITDA is loss from operations before interest, taxes, depreciation and amortization. EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring a company's ability to service its debt; however, EBITDA does not represent cash flow from operations, as defined by generally accepted accounting principles, and should not be considered as a substitute for net loss as an indicator of the Company's operating performance or cash flow as a measure of liquidity, and should be examined in conjunction with the financial statements and notes thereto of the Company included elsewhere in this prospectus. (c) Capital expenditures include assets acquired with debt and exclude assets acquired through capital lease financing. 25 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements that involve risks and uncertainties. Actual events or results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed in the sections entitled "Risk Factors" and "Business" and in the other sections of this prospectus. Such forward-looking statements speak only as of the date of this prospectus, and we caution potential investors not to place undue reliance on such statements. OVERVIEW We are a leading provider of Internet solutions, offering an extensive array of high performance, reliable and scalable Internet technology products and services that can be tailored to meet our customers' requirements. We provide the following solutions, either individually or as part of a one-stop package: - Internet integration and enterprise portal development, including custom software application development, integration of legacy systems and Web site design and development; - Web hosting, consisting of custom hosting solutions and outsourcing, shared server, dedicated server and co-location hosting solutions; and - Internet connectivity, including VPN solutions, network and security consulting and dedicated Internet access. We market our products and services to mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions, which we believe are increasingly demanding one-stop solutions for Internet services due to the difficulty and expense of managing and integrating the products and services of multiple IP-based vendors. Our comprehensive suite of IP-based services enables our customers to capitalize on the wide variety of critical data communication opportunities made possible by the Internet. Historically, we have generated our revenues using a small sales force and have expanded our customer base primarily through word of mouth. We are rapidly building our sales and marketing efforts nationally to more aggressively pursue customers. We have targeted 29 metropolitan areas throughout the United States with high concentrations of businesses and intend to grow our direct sales force by more than 100 over the next two years. These targeted markets coincide with IXC's POPs, where we plan to have a physical local presence. We were incorporated in November 1995 and spun-off in October 1996 from NYSERNet, a not-for-profit consortium that was one of the founding institutions of the Internet, to pursue commercial IP-based opportunities. In August 1998, IXC and Grumman Hill invested $12.9 million and $6.5 million to acquire approximately 2.9 million and 1.5 million shares of our common stock. We issued 1.15 million of these shares for gross proceeds of approximately $5.1 million. REVENUE. We derive our revenue from three principal services: - Internet integration and enterprise portal development; - Web hosting; and - Internet connectivity. We generally sell our services under contracts with terms ranging from one to five years. Beginning pro forma year ended December 31, 1996 to the year ended December 31, 1998, revenue from Internet integration and enterprise portal development increased from approximately 6% to approximately 26%. We expect revenue from these services to continue to increase as a percentage of total revenue in future periods, as we further emphasize them in our sales mix. 26 30 Revenue from Internet integration and enterprise portal development services is typically derived from hourly and per module development fees, with additional fees being generated through ongoing services, such as the monitoring, management, hosting and maintenance of these applications and Web sites. Revenue from Web hosting services is typically derived from flat rates for co-location based on space, as well as from usage-sensitive storage and throughput fees, and additional fees from value-added services such as data mirroring and load balancing re-direction. Revenue from Internet connectivity services is typically derived from fixed price and usage based fees. COST OF REVENUE. Cost of revenue consists primarily of: backbone and Internet access costs; personnel costs to operate our network and data centers; personnel costs to provide Internet integration and enterprise portal development services; and access charges from local exchange carriers. We expect our cost of revenue to continue to increase in dollar amount but decline as a percentage of revenue as we expand our customer base and our product suite. SALES AND MARKETING EXPENSE. Sales and marketing expense consists primarily of advertising and marketing programs and personnel expenses, including salary and commissions. We expect to make a substantial investment in our sales and marketing groups to achieve and properly support the intended expansion in our customer base. We expect sales and marketing expenditures to continue to increase in dollar amount and as a percentage of revenue in 1999, and then to decline as a percentage of revenue thereafter. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense consists primarily of personnel (including customer support), occupancy, general operating costs, professional fee expenses and research and development. We expect to make the necessary investments in the organization to properly manage the financial, legal and administrative aspects of the business. We expect general and administrative expense to increase in dollar amount in the future, reflecting growth in our operations and the costs associated with being a publicly held company, but to decline as a percentage of revenue. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense consists primarily of depreciation of computer equipment, office furniture and leasehold improvements. NET LOSSES. We have incurred net losses and have experienced negative cash flow from operations in each quarterly and annual period since our inception, October 1, 1996. Currently, we anticipate making significant investments in sales and marketing, new distributed data centers, customer support and personnel, and therefore believe that we will continue to experience net losses and incur negative cash flows from operations on a quarterly and annual basis for the foreseeable future. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUE. Revenue for the year ended December 31, 1998 totaled approximately $22.6 million, an increase of $7.4 million over revenue of approximately $15.2 million for the year ended December 31, 1997. This increased revenue reflects growth in revenue from our broadened product offerings to our customers and through our leveraged marketing arrangements with strategic partners. The growth in revenue derived from our Internet integration and enterprise portal development services represented approximately $4.0 million of the total increase. The increase in Internet connectivity of $2.8 million was primarily due to the increase in our customer base. Internet connectivity and Web hosting revenues accounted for approximately 74% of our revenue for the year ended December 31, 1998 as compared to approximately 87% of our revenue for the year ended December 31, 1997. COST OF REVENUE. Cost of revenue for the year ended December 31, 1998 totaled approximately $13.3 million compared with approximately $10.8 million for the year ended December 31, 1997. This increase is attributable to the overall growth in the size of our network. As a percentage of revenue, cost of revenue declined to 59% of revenue in the year ended December 31, 1998 from 71% of revenue in the year ended December 31, 1997. This decrease was due to increased network utilization associated with our 27 31 revenue growth and an increase in revenues, as a percentage of revenue, from higher margin Web hosting and Internet integration and enterprise portal development services. SALES AND MARKETING. For the years ended December 31, 1998 and 1997, sales and marketing expense was approximately $6.4 million and $3.7 million. The $2.7 million increase in 1998 reflects a substantial investment in the sales and marketing organizations necessary to support our expanded customer base. This increase also reflects a growth in subscriber acquisition costs, related to both increased direct marketing efforts as well as commissions paid to distribution partners. Additionally, the increase reflects increased marketing efforts. Sales and marketing expense as a percentage of revenue increased to 28% for the year ended December 31, 1998 from 24% for the year ended December 31, 1997 as a result of our increased commitment to building our sales and marketing program. GENERAL AND ADMINISTRATIVE. For the years ended December 31, 1998 and 1997, general and administrative expenses were approximately $5.5 million and $5.0 million. An increase in general and administrative expenses of approximately $1.0 million was primarily attributable to (a) compensation expense relating to Stock Appreciation Rights, (b) cost related to recruiting new personnel and (c) increases necessary to manage the financial, legal and administrative business, offset by a decrease in research and development from $0.7 million to $0.2 million. For the year ended December 31, 1998, general and administrative expense, including research and development declined as a percent of revenue to 24% from 33% for the year ended December 31, 1997 as a result of our increased revenue. DEPRECIATION AND AMORTIZATION. For the years ended December 31, 1998 and 1997, depreciation and amortization expense was approximately $1.7 million and $1.1 million. The increase in depreciation and amortization of approximately $0.6 million is principally attributable to acquisition of computer equipment used in support of our Web hosting and internet integration and enterprise portal development customers. INTEREST EXPENSE. Interest expense was approximately $0.6 million and $0.3 million for the years ended December 31, 1998 and 1997. The increase in interest expense of $0.3 million is attributable to the increase in outstanding borrowings under financing agreements. During the year ended December 31, 1998, cash payments of approximately $0.2 million in interest expense were deferred until December 2001. OTHER EXPENSE. On December 21, 1998, we adopted a plan which was approved by our Board of Directors to close a leased facility principally used as a Web hosting data center. The facility has experienced operational difficulties which limited its usability as a Web hosting site and its ability to generate sufficient revenues. In connection with the plan of abandonment, we have recorded a $0.9 million charge to operations for the year ended December 31, 1998 consisting of (i) a $0.5 million write-down of equipment and leasehold improvements to our management's estimate of their fair value of approximately $0.1 million 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 $0.4 million accrued liability relating to equipment leases and facility operating leases, net of anticipated subrental income in accordance with the provisions of EITF 94-3, "Liability Recognized for Certain Employee Termination Benefits and Other Costs to Exit an Activity." The plan calls for the Web hosting customer base served from this facility, located in New York City, and the related revenues, which are not significant, to be transitioned to another facility by September 1999. NET LOSS. For the year ended December 31, 1998, our net loss attributable to common stockholders totaled $6.0 million as compared to $6.1 million for the year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31, 1996 The 1996 pro forma results of operations represent the aggregation of the nine months ended September 30, 1996 in which we conducted operations as a non-incorporated division of NYSERNet and the three months ended December 31, 1996 under its present corporate structure. The financial statements for the nine months ended September 30, 1996 reflect the division's operating activities on a "carved out" basis from the historical financial statements of NYSERNet. 28 32 REVENUE. Revenue for the year ended December 31, 1997 totaled approximately $15.2 million, an increase of $5.9 million over revenue of $9.3 million for the year ended December 31, 1996. This increased revenue reflects growth in revenue from our broadened product offerings to our enterprise customers and through our leveraged marketing arrangements with our strategic partners, as well as continued growth in revenue derived from our Internet integration services and enterprise portal development services customers. Internet connectivity and Web-hosting revenues accounted for approximately 87% of our revenue for the year ended December 31, 1997 as compared to approximately 94% of our revenue for the year ended December 31, 1996. COST OF REVENUES. Cost of revenue for the year ended December 31, 1997 totaled approximately $10.8 million compared with $8.1 million for the year ended December 31, 1996. This increase is attributable to the overall growth in the size of our network. As a percentage of revenue, cost of revenue declined to 71% of revenue in the year ended December 31, 1997 from 87% of revenue in the year ended December 31, 1996. This decrease was due to increased network utilization associated with our revenue growth and an increase, as a percentage of revenue, in the higher margin Web hosting and Internet integration services and enterprise portal development services revenues. SALES AND MARKETING. For the years ended December 31, 1997 and 1996, sales and marketing expense was approximately $3.7 million and $2.1 million. The $1.6 million increase in 1997 relates to an increased marketing and advertising program along with a buildup of the direct sales force due to our focused growth into the commercial market. Sales and marketing expense as a percentage of revenue increased to 24% for the year ended December 31, 1997 from 22% in the year earlier period. GENERAL AND ADMINISTRATIVE. General and administrative expense consists primarily of personnel expense, occupancy, customer support and professional fees. For the years ended December 31, 1997 and 1996, general and administrative expenses were approximately $5.0 million and $4.6 million. This higher level of expense is principally related to the increase in research and development of approximately $0.5 million in the area of enterprise portal development and Web hosting. For the year ended December 31, 1997, general and administrative expense declined to 33% from 50% for the year ended December 31, 1996 as a result of our increased revenue and cost containment program. DEPRECIATION AND AMORTIZATION. For the years ended December 31, 1997 and 1996, depreciation and amortization expense was approximately $1.1 million and $0.2 million. The increase in depreciation and amortization is directly attributed to the high level of property and equipment acquired for use in our business. INTEREST EXPENSE. Net interest expense was approximately $0.3 million for the year ended December 31, 1997. Net interest expense for the year ended December 31, 1996 was negligible. The increase in interest expense is attributed to increased borrowings under financing agreements. OTHER EXPENSE. During the year ended December 31, 1997, we recorded approximately $0.1 million of expense relating to a loss from the disposal of equipment. NET LOSS. For the year ended December 31, 1997 the net loss attributable to common stockholders totaled $6.1 million as compared to $5.7 million for the year ended December 31, 1996. QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited statement of operations data for the eight quarters ended December 31, 1998, as well as the percentage of our revenues represented by each item. This data has been derived from unaudited interim financial statements prepared on the same basis as the audited financial statements contained herein and, in the opinion of management, include all adjustments consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information when read in conjunction with the financial statements and notes hereto appearing elsewhere 29 33 in this prospectus. The operating results for any quarter should not be considered indicative of results of any future period.
QUARTER ENDED --------------------------------------------------------------------------------------------------------- 1997 1998 ------------------------------------------------ ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30(A) DECEMBER 31(B) -------- -------- ------------ ----------- -------- -------- --------------- -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS Total net revenues.... $3,617 $ 3,908 $ 3,755 $ 3,892 $5,334 $ 4,782 $ 6,188 $ 6,259 Costs and expenses: Cost of revenues.... 2,366 2,807 2,746 2,877 2,940 2,864 3,433 4,079 Sales and marketing......... 505 833 992 1,376 1,438 1,536 1,771 1,655 General and administrative.... 1,229 1,228 1,286 1,220 1,089 1,133 1,826 1,428 Depreciation and amortization...... 201 230 233 431 360 399 422 491 Other expenses...... -- 1 38 73 2 -- (2) 900 ------ -------- -------- -------- ------ -------- -------- -------- Total........ 4,301 5,099 5,295 5,977 5,829 5,932 7,450 8,553 ------ -------- -------- -------- ------ -------- -------- -------- Loss from operations.......... (684) (1,191) (1,540) (2,085) (495) (1,150) (1,262) (2,294) Net interest expense............. 26 71 118 132 142 141 141 142 ------ -------- -------- -------- ------ -------- -------- -------- Net loss.............. $ (710) $ (1,262) $ (1,658) $ (2,217) $ (637) $ (1,291) $ (1,403) $ (2,436) ====== ======== ======== ======== ====== ======== ======== ========
1997 1998 ------------------------------------------------ ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30(A) DECEMBER 31(B) -------- -------- ------------ ----------- -------- -------- --------------- -------------- PERCENTAGE OF REVENUE: Total net revenues.... 100% 100% 100% 100% 100% 100% 100% 100% Costs and expenses: Cost of revenues.... 65 72 73 74 55 60 55 65 Sales and marketing......... 14 21 26 35 27 32 29 26 General and administrative.... 34 31 34 31 20 24 30 23 Depreciation and amortization...... 6 6 7 12 7 8 6 9 Other expenses...... 0 0 1 2 0 0 (0) 14 ------ -------- -------- -------- ------ -------- -------- -------- Loss from operations.......... (19) (30) (41) (54) (9) (24) (20) (37) ------ -------- -------- -------- ------ -------- -------- -------- Net interest expense............. 1 2 3 3 3 3 2 2 ------ -------- -------- -------- ------ -------- -------- -------- Net loss.............. (20)% (32)% (44)% (57)% (12)% (27)% (22)% (39)% ====== ======== ======== ======== ====== ======== ======== ========
- --------------- (a) Includes compensation expense included in general and administrative of approximately $0.3 million relating to stock appreciation rights. Reference is made to Note H of the audited financial statements. (b) Other expenses represent a charge for the writedown of equipment and leasehold improvements and an accrued liability for costs relating to the closing of a leased facility aggregating $900,000. Reference is made to Note C of the audited financial statements. 30 34 FACTORS AFFECTING OPERATING RESULTS 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 our control, including: - demand for and market acceptance of our services; - fluctuations in data communications and telecommunications costs; - reliable continuity of service and network availability; - 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; - the timing and magnitude of expenditures for sales and marketing; - introductions of new services or enhancements by us and our competitors; - the timing of customer installations and related payments; - the ability to maintain or increase peering; - periodic customer discounts; - the introduction by third parties of new Internet services; - increased competition in our markets; - growth of Internet use and establishment of Internet operations by mainstream enterprises; - changes in our and our competitors' pricing policies; - changes in regulatory laws and policies; - economic conditions specific to the Internet industry; and - general economic factors. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to data communications and telecommunications costs, depreciation, real estate, interest expenses and personnel, and therefore our future results of operations will be particularly sensitive to fluctuations in revenues. Due to all of the foregoing factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. See "Risk Factors -- Our annual and quarterly operating results are subject to significant fluctuations." LIQUIDITY AND CAPITAL RESOURCES We had an accumulated deficit of $14.6 million at December 31, 1998, and have used cash of $8.7 in the aggregate to fund operations since our inception on October 1, 1996, through December 31, 1998. To date, we have satisfied our cash requirements primarily through the sale of common and preferred stock and borrowings under credit agreements and equipment financing arrangements. Our principal uses of cash are to fund operations, working capital requirements and capital expenditures. At December 31, 1998, we had $1.8 million in cash and cash equivalents and a $3.2 million working capital deficit. Net cash used in 31 35 operating activities for the years ended December 31, 1998 and 1997 was approximately $2.7 million and $5.2 million. Net cash used in investing activities for the years ended December 31, 1998 and 1997, was approximately $2.8 million and $1.3 million. For the years ended December 31, 1998 and 1997, cash of approximately $7.1 million and $6.4 million was provided by financing activities. Cash provided by financing activities in the year ended December 31, 1998, included approximately $5.0 million in net proceeds from the sale of 1,150,000 shares of common stock to IXC and Grumman Hill. Net cash used in operating activities for the pro forma year ended December 31, 1996 was $2.9 million. Net cash used in investing activities was approximately $0.5 million, and net cash provided by financing activities was $3.6 million. As of December 31, 1998, our operating lease obligations will be $0.9 million, $0.9 million, and $0.8 million for 1999, 2000, and 2001. On January 20, 1998, we obtained a secured 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 cash and cash equivalents, government securities, corporate securities or corporate equities pledged by NYSERNet. At December 31, 1998, borrowings under this line amounted to $5.4 million. As of December 31, 1997, pursuant to the credit agreement referred to above, we refinanced our short-term lines of credit on a long-term basis. Accordingly, the $4.1 million line of credit balance as of December 31, 1997 was classified on the terms of the refinancing agreement. The credit 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 us either at LIBOR plus 50 basis points or at the prime rate less 200 basis points. As of December 31, 1998, as a result of certain restrictions, only $70,000 of additional credit was available under this agreement. We also have an unsecured borrowing facility with NYSERNet, which provides for borrowings up to a maximum amount of approximately $6.2 million, less any preferred stock issued to NYSERNet. Interest on the loans accrues at the prime rate (8.5% and 8.0% at December 31, 1997 and 1998) and payments are deferred for five years from the date of cash advance, or January 1, 2002, whichever is earlier. As of December 31, 1998, $2.0 million was available under this borrowing facility. We have made capital investments in our network operations center, data center and other capital assets totaling $0.5 million, $1.3 million and $2.5 million in the pro forma years ended December 31, 1996 and 1997 and 1998, respectively. Since we expect to continue to incur additional operating losses, we intend to utilize the net proceeds from this offering to meet our short-term capital requirements. We believe that proceeds from the offering will be sufficient to meet our anticipated cash needs for working capital and for the acquisition of capital equipment through at least the end of 1999. However, there can be no assurance as to the period of time through which our financial resources will be adequate to support our operations. We may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional financing, if needed, will be available on terms acceptable to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish its rights to certain of its technologies. See "Risk Factors -- There is uncertainty as to our ability to obtain future financing to meet our capital needs." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to distinguish 21st century dates from 20th century dates. This could result in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such Year 2000 requirements. 32 36 We are currently conducting our Year 2000 readiness review. The review will include assessment, implementation, testing and contingency planning. To date, we have evaluated our internally developed software and believe that such software is Year 2000 compliant. However, we utilize software and hardware developed by third parties both for our network and internal information systems. We have sought assurances from certain of our vendors and intend to continue to seek assurances from others, that such vendors' products are or will be Year 2000 compliant. We expect to continue assessing and testing our internal IT and non-IT systems into 1999. We are not currently aware of any material operations issues or costs associated with preparing our internal IT and non-IT systems for the Year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal IT and non-IT systems. Based upon the public filings and press releases of our primary equipment, telecommunications and data communications providers, we are aware that all such providers are in the process of reviewing and implementing their own Year 2000 compliance programs. Since we do not believe that we will be afforded the opportunity to test the systems of these providers, we will seek assurances from them that they are Year 2000 compliant. If our primary vendors experience business interruption as a result of the failure to achieve Year 2000 compliance, our ability to provide Internet connectivity could be impaired, which could have a material adverse effect on our business, results of operations and financial condition. We do not currently have any information regarding the Year 2000 status of our customers, most of whom are private companies. As is the case with similarly situated companies, if our customers experience Year 2000 problems, which result in business interruptions or otherwise impact their operations, we could experience a decrease in the demand for our services, which could have a material adverse impact on our business, results of operations and financial condition. We have not incurred any significant expenses to date associated with our Year 2000 plan and are not aware of any material costs associated with our anticipated Year 2000 efforts. We believe that a material loss of revenues that could materially adversely affect our business, results of operations and financial condition would arise only if our major customers or providers fail to achieve Year 2000 readiness. We have not yet developed a comprehensive contingency plan to address the issues which could result from such failure. 33 37 BUSINESS OUR COMPANY We are a leading provider of Internet solutions, offering an extensive array of high performance, reliable and scalable Internet technology products and services that can be tailored to meet our customers' requirements. We provide the following solutions, either individually or as part of a one-stop package: - Internet integration and enterprise portal development, including custom software application development, integration of legacy systems and Web site design and development; - Web hosting, consisting of custom hosting solutions and outsourcing, shared server, dedicated server and co-location hosting solutions; and - Internet connectivity, including VPN solutions, network and security consulting and dedicated Internet access. We market our products and services to mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions, which we believe are increasingly demanding one-stop solutions for Internet services due to the difficulty and expense of managing and integrating the products and services of multiple IP-based vendors. Our comprehensive suite of IP-based services enables our customers to capitalize on the wide variety of critical data communication opportunities made possible by the Internet. Superior customer service is a cornerstone of our operational strategy. Our 97% customer satisfaction in the second half of 1998, based on completed surveys, demonstrates our exceptional performance. As a result, our revenue churn has averaged less than 0.15% over the last two years, a rate which is well below industry averages. As of December 31, 1998, we had over 650 direct and indirect enterprise customers in a wide range of industries, which customers include: - Bank of New York, General Electric Corporation, theglobe.com, Inc., NEC Corporation, Road Runner Computer Systems, Inc., Eastman Kodak Company, KPMG Peat Marwick LLP, Northrop Grumman Corporation and Bell Atlantic Corp.; - through NYSERNet, Cornell University, Columbia University, New York University, the New York Public Library and the New York City Board of Education; and - through the New York State Department of Labor, the U.S. Department of Labor and a consortium of 46 states and territories. Our existing network consists primarily of a robust, regional backbone. Together with IXC, a significant equity holder in our company, we are in the process of deploying the Gemini2000 Network, the first coast-to-coast, next generation Internet backbone network to carry both research and commercial traffic. The Gemini2000 Network is a fully redundant, high performance national network that will enable us to offer Internet access and backbone transport services at speeds that are 100 to 1,000 times greater than those generally available to end users today. We also intend to build three new distributed data centers, co-located at Gemini2000 Network super-core sites, linked together to form a "virtual gigacenter." Our network and distributed data centers will enable us to offer our customers: - greater network reliability; - lower downtime; - simpler configurations for connecting multiple site locations; - specialized VPN solutions; - faster downloading of data; - reduced Web server load; and 34 38 - better disaster recovery. Historically, we have generated our revenues using a small sales force and have expanded our customer base primarily through word of mouth. We are rapidly building our sales and marketing efforts nationally to more aggressively pursue customers. We have targeted 29 metropolitan areas throughout the United States with high concentrations of businesses and intend to grow our direct sales force by more than 100 over the next two years. These targeted markets coincide with IXC's POPs, where we plan to have a physical local presence. We were incorporated in November 1995 and spun-off in October 1996 from NYSERNet, a not-for-profit consortium that was one of the founding institutions of the Internet, to pursue commercial IP-based opportunities. In August 1998, IXC and Grumman Hill invested $12.9 million and $6.5 million to acquire approximately 2.9 million and 1.5 million shares of our common stock. We issued 1.15 million of these shares for net proceeds of approximately $5.0 million. OUR INDUSTRY The Internet has grown rapidly in the 1990s and has emerged as a global medium for communications and commerce. The Internet's growth is driven by a number of factors, including the large and increasing number of cheaper, faster and more powerful multimedia home and office computers, advances in network designs, greater availability of Internet-based software and applications, the emergence of useful content and e-commerce technologies and convenient, fast and inexpensive Internet access. According to IDC, the total number of Internet users worldwide reached 69 million in 1997 and will increase to approximately 320 million by 2002. The Internet presents a compelling profit opportunity for businesses, as it enables them to reduce operating costs, access valuable information and reach new markets. Likewise, the Internet presents a compelling opportunity for public sector institutions, as it helps them serve their constituencies more cost- effectively and conveniently, and comply with certain federal and state mandates. To take advantage of these opportunities, organizations must have: - an open universal interface (a doorway or "enterprise portal" to the Internet); - Web site presence; and/or - Internet access. An enterprise portal links an organization's internal systems and databases to the Internet, facilitating internal information sharing and external interaction. Creation of an enterprise portal requires customized software development and integration to coordinate legacy systems with newer Internet-based client/server architecture. According to The Yankee Group, the market for network integration and consulting services is expected to grow from approximately $29.6 billion in 1997 to approximately $52 billion in 2001. A Web site on the Internet provides a tangible identity and interactive presence on the Internet. Businesses initially established Web sites as a means of improving internal and external corporate communications. Today, they are increasingly utilizing the Internet for mission-critical applications, such as sales and marketing, customer communication and service and project coordination, as well as in many cases expanding their businesses through newly developed e-commerce applications. According to Forrester Research, Inc. (Forrester), Web hosting revenues will grow from $362 million in 1997 to $10.5 billion in 2002. Internet access provides a basic gateway to the Internet, allowing it to transfer e-mail, access information and connect with employees, customers and suppliers. Today, Internet access is the primary component of the Internet services market. Access services include high-speed dedicated access primarily for larger organizations and dial-up access for individuals and small enterprises. Forrester projects that revenues from Internet access services in the United States will grow from $5.8 billion in 1997 to $38.1 billion in 2002. 35 39 OUR MARKET OPPORTUNITY OVERVIEW Expanded uses of the Internet and greater demands for existing Internet-based applications are driving an evolution and expansion in Internet services, as well as the networks over which they are delivered. Examples of existing and next generation uses of the Internet include the following:
- -------------------------------------------------------------------------------------------------------- EXISTING USES NEXT GENERATION ENHANCEMENTS NEXT GENERATION NEW SERVICES - -------------------------------------------------------------------------------------------------------- E-mail Distance learning Telemedicine Basic e-commerce Graphics-intensive e-commerce Full-motion video downloading Web site presence High-capacity interactive Web sites Multi-media interactive virtual reality sites Low-quality video conferencing High-quality, real-time video conferencing Order entry Inventory control - --------------------------------------------------------------------------------------------------------
This growth and evolution in Internet applications is driving the need for: - integration of internal systems and databases with Internet applications (enterprise portal development); - more complex, data intensive and interactive Web sites (Web hosting services); and - more network bandwidth with faster, more reliable Internet access (Internet connectivity). THE INTERNET ENTERPRISE PORTAL -- INTEGRATING LEGACY SYSTEMS WITH THE INTERNET To facilitate e-commerce and extend communications reach and information sharing, databases and systems must be accessible to the Internet and Web sites need to be integrated with underlying resident enterprise data and systems in an open universal interface (a doorway or "enterprise portal" to the Internet). Systems and databases which were designed before the advent of the Internet (legacy systems) must often be modified and augmented in order to inter-operate with newer Internet-based client/server architectures. WEB SITE MANAGEMENT AND E-COMMERCE E-commerce and other next generation applications (essential to realizing the rapid growth in Internet services) are complex and require guaranteed bandwidth availability and minimal latency, thus necessitating a network which incorporates performance and quality of service guarantees and committed access rates. State-of-the-art network infrastructure is required, as are the most advanced distributed data centers and collaborative outsourcing arrangements. Next generation data centers will require a secure environment, geographic diversity, enhanced content caching, leading edge network caching, mirroring and load-balancing re-direction to enable virtual linking of data centers for greater effectiveness. These features allow for faster downloading, reduced Web server load, greater network reliability and performance and better disaster recovery. INTERNET ACCESS Demand for higher speed and more reliable access will continue to escalate as new users access the Internet, existing users increase their usage and demand increases for new and higher performance. We believe that as more companies begin to implement mission-critical business applications on the Internet, the reliability and security of their Internet communications will be a key concern. 36 40 NEED FOR ONE-STOP INTERNET SOLUTION To take full advantage of the communication and commerce opportunities made available by the Internet, enterprises will require more than a basic connection. They will need: - fast and reliable connections to the Internet; - sophisticated Web sites to attract and retain users and customers; - access to enterprise information for internal communication and for their Web sites; and - to procure and manage the services and operations to integrate all these needs. While all organizations face challenges in meeting these needs, we believe mid-sized businesses (including mid-size departments of larger businesses) and government agencies, in particular, have an acute problem. Generally, they maintain small IT departments and do not have the resources to internally develop and manage all the components of their Internet strategies. Traditionally, enterprises have sought solutions from a variety of service providers (including system integrators, ISPs, hardware and software vendors and telecommunication companies), each of which satisfies one or two elements of the total Internet problem. We believe these enterprises will demand a single provider that offers all elements of Internet solutions -- design, integration, implementation, Internet connection and operational management. OUR SOLUTION We believe that mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions are increasingly demanding one-stop solutions for Internet services due to the difficulty and expense of managing and integrating the products and services of multiple IP-based vendors. Our comprehensive suite of IP-based products and services enables our customers to capitalize on the wide variety of data communication opportunities made possible by the Internet. We offer an extensive array of high performance, reliable and scalable Internet products and services, including Internet integration and enterprise portal development, Web hosting services and Internet connectivity. We integrate these services to offer customized, IP-based applications and services that enable our commercial customers to extend their enterprises, leverage existing legacy databases and systems and take advantage of Internet-based marketing opportunities. Public sector customers similarly benefit by making greater use of the Internet to serve their constituencies more cost-effectively and conveniently and comply with federal and state mandates. Key advantages we offer our customers include: - FLEXIBLE AND SCALABLE INTERNET SOLUTIONS. Our Internet integration and enterprise portal development solutions are customized to meet our customers' needs. These solutions make use of our customers' existing legacy databases and systems and provide them with highly integrated IP-based capabilities that deliver high performance. Our solutions are designed to easily accommodate a large and rapidly growing number of users, as well as to facilitate distribution of the application over geographically dispersed servers. Our custom billing software for burstable service and our ability to access incremental bandwidth through our strategic relationship with IXC allow us to quickly scale solutions to meet a customer's needs. For example, upon completion of the Gemini2000 Network, we will offer dynamic bandwidth management, empowering our customers to monitor, regulate and allocate bandwidth usage within their organizations, all from their desktops. - ROBUST AND RELIABLE INFRASTRUCTURE. Our existing network consists principally of a robust, regional backbone, which has had customer uptime performance of over 99.9% over the last three years. Together with IXC, we are in the process of deploying the Gemini2000 Network, the first coast-to-coast, next generation Internet backbone network to carry both research and commercial traffic. 37 41 The Gemini2000 Network is a fully redundant, high performance national network that will enable us to offer Internet access and backbone transport services at speeds which are 100 to 1,000 times greater than those generally available to end users today. It will also enable us to offer our customers greater network reliability, lower downtime, simpler configurations for connecting multiple site locations and remote access VPNs. - ADVANCED DATA MANAGEMENT. Our distributed data centers will enable our customers to provide their customers and end-users with the fastest, clearest and most reliable Web access available today, allowing for data mirroring, load balancing re-direction, redundancy and content caching. These features will benefit our customers through faster downloading of data, reduced Web server load, greater network reliability and performance and better disaster recovery. Distributed data centers typically present a challenge to IT administrators because they result in less efficient use of resources, require synchronization of data in almost real time and are more complex in their operation. However, the advanced architecture of the Gemini2000 Network will enable us to tie our distributed data centers together to form a single "virtual gigacenter," thereby allowing us to deliver to our customers all the advantages of distributed data centers without the corresponding difficulties. - SUPERIOR CUSTOMER SUPPORT. Our mission is to provide the best customer support in the Internet business. We invest heavily in systems and training, understand the technical requirements of our customers and work with them to optimize business objectives through the Internet. Our 97% customer satisfaction in the second half of 1998, based on completed surveys, demonstrates our exceptional performance. As a result, our revenue churn over the last two years has averaged less than 0.15%, a rate which is well below industry averages. OUR STRATEGY Our objective is to become the leading national provider of advanced Internet technology solutions to mid-sized businesses (including mid-size departments of larger businesses) and selected public sector organizations. To achieve this objective, our strategy is to: - OFFER ONE-STOP SOLUTIONS TO THE BUSINESS MID-MARKET AND PUBLIC SECTORS. We will market our one-stop solutions to mid-sized businesses (including mid-size departments of larger businesses) and public sector organizations, initially focusing on sophisticated users of the Internet within these markets. We believe these markets are seeking single vendors who can provide a full set of Internet technology solutions. We believe the Gemini2000 Network, our new data centers and our expertise in providing Internet enterprise portal development, Web hosting and Internet connectivity position us well to serve this market. - RAPIDLY EXPAND SALES AND MARKETING EFFORTS. Historically, we have generated our revenues using a small sales force and have expanded our customer base primarily through word of mouth. We are rapidly building our sales and marketing efforts nationally to more aggressively pursue customers. We have targeted 29 metropolitan areas throughout the United States with high concentrations of businesses and intend to grow our direct sales force by more than 100 over the next two years. These targeted markets coincide with IXC's POPs, where we plan to have a physical local presence. - LEVERAGE PUBLIC SECTOR EXPERIENCE AND RELATIONSHIPS. We have extensive experience working with clients in the academic and government sectors, which we believe are underserved markets. We designed, continually develop and maintain America's Job Bank, an enterprise-wide Web site and Intranet developed for the United States Employment Service. AJB is one of the largest and most visited employment sites in the United States, averaging over 2.3 million hits per day. We have leveraged the experience gained from this project to become a leader in providing custom applications development and outsourcing to federal and state governments. Working with NYSERNet and other non-profit institutions allows us to benefit from the research and development activities of those early adopters of leading edge technologies and applications. We 38 42 have been chosen to operate the NYSERNet2000 Network, one of the first examples of "next generation" gigabit networks in the United States. We intend to further leverage our relationships in targeting new university, government and business customers. - COMPLETE NATIONAL NETWORK BUILDOUT. Currently, we offer Internet enterprise portal development services and limited Web hosting services on a national scale, while our Internet access and VPN offerings are limited primarily to New York State. Much of the physical infrastructure required for the Gemini2000 Network is already in place, and it is intended that the network will be fully operational by the end of September 1999. When complete, the Gemini2000 Network will total over 70,000 miles of OC48 capacity, eight super-core sites and over 100 POPs. We intend to build three new data centers, which will be co-located at Gemini2000 Network super-core sites. These data centers will be linked together to form a "virtual gigacenter," benefiting customers through faster downloading, reduced Web server load, greater network reliability and performance and better disaster recovery. - MINIMIZE CAPITAL EXPENDITURES. We intend to focus on the delivery of value-added Internet technology solutions, rather than the direct ownership and management of physical infrastructure. IXC has publicly announced its intention to complete construction of, and maintain, the Gemini2000 Network physical infrastructure, including all connectivity electronics. We will be responsible for designing and implementing integration systems to connect customers to the Gemini2000 Network, as well as all the first line customer service functions, which are much less capital intensive. - JOINTLY MARKET AND SELL WITH IXC. We intend to work closely with IXC to jointly market and sell Gemini2000 Network products and services through Web and print media advertising, trade shows and other lead generation activities and by making presentations to clients of both companies. Because the Gemini2000 Network is a joint offering, sales generated by either IXC or us will yield a revenue stream for both companies. - ACQUIRE COMPLEMENTARY ASSETS OR BUSINESSES. We intend to opportunistically consider acquisitions of complementary assets, technologies and businesses that offer the potential to expand the speed of our sales and marketing efforts, increase our customer base or enhance the breadth, depth and variety of our product offerings. MANAGEMENT Our management has extensive expertise in IP-based applications and services. AppliedTheory was formed by NYSERNet, a not-for-profit consortium that was one of the founding institutions of the Internet, to pursue commercial IP-based opportunities. Dr. Richard Mandelbaum, our Chairman of the Board and Chief Executive Officer, is a recognized architect of the Internet and one of the four founders of NYSERNet. Our senior managers have on average over 10 years of experience in IP-based applications and services. PRODUCTS AND SERVICES We currently offer our customers a full array of high performance, reliable and scalable Internet products and services. These include: - Internet integration and enterprise portal development, including custom software application development, integration of legacy systems and Web site design and development; - Web hosting, consisting of custom hosting solutions and outsourcing, shared server, dedicated server and co-location hosting solutions; and - Internet connectivity, including VPN solutions, network and security consulting and dedicated Internet access. 39 43 We integrate these services to offer customers highly tailored, IP-based applications that enable them to capitalize on the wide variety of data communication opportunities made possible by the Internet. These services can be layered to allow customers to outsource an increasing portion of the management of their Internet operations. All of our products and services are fully supported by our Customer Support Center 24 hours a day, 7 days a week, 365 days a year (24x7). INTERNET INTEGRATION AND ENTERPRISE PORTAL DEVELOPMENT Most software applications have been designed for mainframes or client/server environments. Few applications have been designed to optimize IP use. Those that have been are referred to as "network-centric," "Internet-centric" or "IP-centric" applications. While most applications developers are unskilled in this area, one of our key strengths is our ability to develop Internet-centric applications and a unique methodology for the adaptation of existing legacy and client/server systems for the Web environment. This adaptation tends to save customers money since the alternative approach is to re-write an entire information system for the Web. Our Internet-centric approach for new applications maximizes the efficiency of the applications and minimizes network and other resources used, thus potentially offering significant cost savings to customers. Our Internet integration and enterprise portal development services include custom software application development, Web enabling and integration of legacy systems and Web site design and development. In this regard, we have developed technology for creating new applications that operate by accessing multiple, concurrent databases residing on multiple platforms. This results in a new application which has all the advantages of the older legacy systems plus the tremendous reach of the Web. A key adjunct to our custom software application development is Web site design and development. In addition to our in-house Web site design and graphics experts, we also collaborate with experienced Web design firms. Since Web site design and development is a critical part of the completed project, this process is managed as an integral part of the application development process. Web developers are a significant source of new business for us, as they are often approached to develop e-commerce Web sites for which we provide custom application development, custom hosting and network services. An example of an Internet enterprise portal application is the replacement of a multiple step, fax-based workflow system with an Internet-based data collection system. For instance, any geographically dispersed organization that needs to process product applications could use an Internet-based data collection system. Remote personnel could use their PCs to transmit these forms to interface with a central mainframe system. This Web-enabled process saves time and expense and avoids inaccuracies associated with faxing and manually inputting those forms. We work closely with our customers throughout the design, development and deployment process to ensure effective identification and fulfillment of critical success factors, rapidly delivering the highest possible quality applications while containing costs. We employ a combination of our own technologies and "best-of-breed" third party tools. WEB HOSTING SOLUTIONS Our Web hosting services are designed to provide customers with the high performance, scalability and flexibility they need to create, maintain and/or expand the functionality of a Web presence. We maintain a primary Internet data center in Syracuse, New York and a secondary one in New York City and plan to add three Internet data centers in 1999. Each new center will be fiber co-located with a Gemini2000 Network super-core site. Our advanced load balancing re-direction, data mirroring, redundancy and content caching capabilities will enable us to link these multiple data centers together to form a single "virtual gigacenter." This will provide our customers with the advantages of geographically dispersed facilities and the simplicity and economies of a single center. 40 44 To meet the differing demands of our customers, we offer Web hosting solutions with varying degrees of customization and value-added content, including: - Custom Web hosting; - Shared Server hosting; - Dedicated Server hosting; and - Co-location. CUSTOM WEB HOSTING. We provide highly customized Web hosting solutions which accommodate our custom software applications. We customize applications on our hosting platforms, which allows for testing of the applications. The fully tested applications are then moved into operation in our production hosting environment. We provide the appropriate hardware environment and database technology to best serve the needs of the application; and the custom hosting environment is specifically designed for scalability. SHARED SERVER WEB HOSTING. Our shared server Web hosting services enable customers to efficiently, reliably and cost-effectively establish a sophisticated Web presence and distribute information over the Internet without purchasing, configuring, maintaining or administering the necessary Internet hardware and software. Customers can choose between UNIX and Windows NT platforms, with three levels of performance and service available within each platform line. Each offering within the UNIX and Windows NT platform lines is scalable upwards to the next level of performance. At the request of a customer, we may incorporate software applications that are not part of our standard product offerings. DEDICATED SERVER WEB HOSTING. We also offer dedicated server Web hosting solutions for larger customers that require substantially more server and network capacity than that provided under the shared hosting plans. The dedicated Web hosting service offerings provide customers with a UNIX or Windows NT-based dedicated server that is procured, owned and managed by us but reserved strictly for a particular customer's individual use. Unlike some companies providing dedicated Web hosting services, we also support the operating system and Web server and select applications. Dedicated server Web hosting enables a customer to host complex Web sites and applications without the need to incur significant infrastructure and overhead costs. CO-LOCATION. Co-location services are offered for customers who prefer to own and have physical access to their servers, but require the high performance, reliability and security of an Internet data center. We offer co-location services on two levels: standard and managed. Under standard co-location, we provide secure space for a customer-owned server in our Internet data center, redundant power, network connections and 24x7 management, monitoring and support by our Customer Support Center. The customer performs management and maintenance of the server and all applications loaded onto the server. Under managed co-location, we offer the customer additional options if the customer does not want to perform all of the tasks associated with the operation and maintenance of the server(s). INTERNET CONNECTIVITY SOLUTIONS We provide a variety of Internet connectivity solutions, including: - VPN technologies; - Network and security consulting; - Dedicated access to the Internet; - Dial-up Internet access; and - Hardware and software implementation. VPN TECHNOLOGIES. Our specialized VPN solutions allow businesses to take advantage of the Internet for mission-critical applications. Our customers can achieve high levels of security previously available solely through the use of WANs affordable only by the largest enterprises. Customers can tailor the type 41 45 of access, services and information that users of the VPN are afforded. Our VPN solution is the functional equivalent of a WAN, run over the public Internet, generally at a lower total cost and made possible by the availability of security, reliability and high performance. We target our VPN solution mainly to customers seeking to create a secure, outsourced WAN for Intranet and Extranet applications. NETWORK AND SECURITY CONSULTING. The nature of commercial Internet traffic demands protection from unauthorized access. To minimize this risk, while maximizing the benefit of implementing distributed business applications on the Internet, we help organizations to develop and implement a comprehensive network security plan. Firewalls are key components of such a plan. We support "best-of-breed" firewall technology, including software and hardware procurement, installation, configuration and testing, product training and technical support. Additionally, we provide the installation, configuration and support of firewall-to-firewall VPN solutions, including encryption. These services are being expanded to include additional VPN configurations and additional services including virus protection and URL filtering software, external network vulnerability scans, penetration testing, internal network audits and customized security training and consulting. Together, these services add a significant measure of security to our custom application development projects. CURRENT AND NEXT GENERATION INTERNET ACCESS. The Gemini2000 Network, scheduled to be completed in the third quarter of 1999, will be a national Tier 1 backbone network supporting dedicated access at speeds between 128 kbps and OC12. In addition, burstable T-3, OC3 and OC12 services will be available. With burstable service, customers can use up to T-3, OC3 or OC12 of access when they require it but do not need to constantly pay for full pipe usage. Instead, these customers are billed based upon their average bursted bandwidth usage during the month. The Gemini2000 Network will also support a variety of shared access aggregation options such as Frame Relay, ATM and SMDS. The Gemini2000 Network will supplement our current backbone network on which we offer dedicated Internet access at speeds between 56 kbps and T-3 as well as dial-up Internet access. We will also continue to offer a selection of mail and news services to complement and complete a customer's Internet access requirements. All of our dedicated Internet access customers will continue to receive: - direct connectivity to the Internet via a high-speed backbone network; - 24x7 access to our Customer Support Center; - implementation management services; - domain name services; - name registration services; - training services; - network utilization statistics; - E-mail network status updates, if requested by the customer; and - a choice of customer premise equipment services. To complement these expanded services, we will enhance our dial-up Internet access services, deliver customer premise equipment management services via internal resources and expand our offering of firewall security services. CUSTOMER SOLUTIONS Superior customer service is a cornerstone of our operational strategy. Our 97% customer satisfaction in the second half of 1998, based on completed surveys, demonstrates our exceptional performance. As a result, our revenue churn has averaged less than 0.15% over the last two years, a rate which is well below industry averages. As of December 31, 1998, we had over 650 direct and indirect enterprise customers in a wide range of industries, which customers include: - Bank of New York, General Electric Corporation, theglobe.com, Inc., NEC Corporation, Road Runner Computer Systems, Inc., Eastman Kodak Company, KPMG Peat Marwick LLP, Northrop Grumman Corporation and Bell Atlantic Corp.; 42 46 - through NYSERNet, Cornell University, Columbia University, New York University, the City University of New York (CUNY) system, the State University of New York (SUNY) system, the New York Public Library and the New York City Board of Education; and - through the New York State Department of Labor, the U.S. Department of Labor and a consortium of 46 states and territories. In the years ended December 31, 1997 and 1998, approximately 47% and 37% of our total revenue was derived from NYSERNet pursuant to a resale agreement under which we provide NYSERNet with Internet access products and services for resale by NYSERNet to governmental, education, scientific and other not-for-profit organizations within the State of New York. Additionally, approximately 16% and 28% of our total revenue in the years ended December 31, 1997 and 1998 was derived from our contract with the New York State Department of Labor for the development and maintenance of America's Job Bank for the U.S. Department of Labor and a consortium of 46 states and territories. See "Risk Factors -- We derive significant revenue from certain customers" and "Certain Transactions -- Resale Agreement with NYSERNet." The following examples illustrate the challenges faced by our market and the solutions we have offered to certain of our current customers. FEDERAL EMPLOYMENT AGENCY Since 1979, a Federal employment agency has made job listings available for job seekers and employers at 1,800 State employment services across the country. When we began this project, the various States used mainframes and client/server systems that were not effectively compatible. Challenge: Managing the job listing database information was cumbersome, fragmented, time-consuming and expensive. Both employers and prospective employees experienced difficulty using it. The database job bank listing was hampered by: - The difficulty, costs and delay involved in posting jobs on individual mainframes; - The cost and limited availability of mainframe terminals to access job postings; - The complexities of a user-interface that discouraged many users; - Connections between state and national systems that were problematic; and - Systems that were complex and varied making data conversion and processing costly and difficult. Solution: We implemented a workflow transformation in staged increments. First, we developed a public Web site to make the database available to anyone with a Web browser. We then added enhanced features for job classification and geography searches. We subsequently expanded the job listing database to enable states and employers to easily list jobs electronically. FINANCIAL SERVICES COMPANY Challenge: A multinational financial services firm processed international applications for its products through a multiple step, labor intensive fax-based system. The company needed a streamlined, simplified Internet solution. Solution: We transformed the existing business processes by exploiting Internet technologies and building on those systems already in place. We developed a custom application to enable direct transmission of applications over the Internet, complete with images of signatures, from field agent PCs to a system in the United States. The new system eliminated faxing and saved thousands of dollars per month in long-distance charges. It also allowed new product purchases to be entered onto the customer's existing legacy systems without the risk of re-keying errors which are unavoidable with manual data entry. 43 47 DIVERSIFIED MULTINATIONAL COMPANY Challenge: A diversified multinational company that manages university student telephone accounts sought to replace its manual processes for registering, validating, and administering these accounts in order to enhance the cost and service efficiencies of the system. Solution: We developed an Internet solution that built on the customer's existing systems. Features include: - a Web-based student self-registration system customized for each school; - the elimination of significant data-collection and entry costs; - the reduction of delays in providing revenue-generating services; and - the introduction of a simple Web interface for students to register and for administrators to verify these registrations. FINANCIAL INFORMATION PROVIDER Challenge: An organization providing the financial community with information collection, analysis and distribution services wished to create a premier, data-driven Web site. The group's management stipulated that the successful vendor would be required to provide reliable Internet connectivity and round-the-clock, expert support for: - the custom Web site application; - the underlying hardware; - the operating system software; and - any third-party database software support and administration. Solution: In order to provide the capabilities the customer required, we are working with a company providing strategy, design and consulting services for electronic commerce and transactional Web sites. We provide all of the system architecture and software development for the client's site, while our collaborator develops the user interface, graphics and the on-going promotion of the site. In addition, we host the service in our secure Web hosting facility. The customer selected us because of the comprehensiveness of our technical solution, the scalability of our software framework and technology and our ability to flexibly integrate the future systems needed to support their evolving product offering. UNIVERSITY CONSORTIUM Challenge: A university consortium sought to create an advanced network to pioneer the development of a gigabit network and the next generation Internet, which will cover a large geographic area and serve as a parallel Internet connecting various entities wishing to enhance the flow of information between them. The consortium sought assistance with the design, implementation, operation and support of the project. Solution: In cooperation with a traditional telecommunications network operator, an operator of an advanced communications network and a leading communications equipment manufacturer, we are leading the development of this project. We are providing: - engineering support; - network architecture and design; - project implementation; and - on-going network management, including application and customer support. 44 48 With our support, this network will initially operate at OC12 speeds. The network is intended to serve as a premiere platform for advanced research applications. STATE EMPLOYMENT AGENCY Challenge: One of the members of a national consortium that contracts with us for the development of a national job listing database required a solution for replacing a series of outmoded mainframe-based systems that did not offer the same level of performance and ease-of-use as the system employed by the job listing database. Solution: We recommended and implemented a distributed hardware/software architecture, as well as certain enhancements to the network, including linking the system via a VPN to a system hosted in our Syracuse facility. The agency was able to eliminate difficult-to-learn, command based mainframe interfaces, enhance the overall performance characteristics of the data sharing system to near real time and eliminate system duplication through a seamless connection to the national job listing database system. SALES AND MARKETING Our sales and marketing strategy is to achieve broad market penetration by targeting enterprises such as mid-sized businesses (including mid-size departments of larger businesses) and public sector institutions that depend upon the Internet for mission-critical operations. We feel that these markets are particularly attractive to our Company because they will demand a complete one-stop Internet solution, which is not offered by traditional Internet service providers. - DIRECT SALES FORCE. The focus on multiple, leading edge product offerings necessitates a sophisticated, consultative sales organization, capable of understanding client requirements. As a result, we principally utilize a direct sales approach to offer products and services to our customers. We are in the process of expanding our direct sales organization that will have six to eight person teams of regional sales representatives, located across 29 metropolitan areas throughout the United States. We intend to grow our direct sales force by more than 100 nationally over the next two years. Each sales representative will be supported in the pre-sales process by specialists in each product line, as well as a multi-layer sales management infrastructure. To further leverage our strengths in particular industry segments, we expect to have a series of one to three person national market management teams service the entire country. At present, in addition to our general focus on mid-sized businesses, we have chosen higher education and government as two national market segments. We expect to add national market segments over the next two years as our business evolves. - VALUE-ADDED RESELLER AND STRATEGIC AFFILIATION PROGRAM. We have begun to expand our sales channels through a national value-added reseller (VAR) program. These relationships enable VARs to provide more comprehensive solutions to their customers while affording us the benefit of the VARs' sales forces without incurring the costs of maintaining a larger sales force of our own. We expect to build up a large network of VARs that are capable of providing commodity type access services on their own but who individually require a partner like us to offer next generation products and services in all Internet and IP areas for their clients. In addition, we expect to set up a series of affiliations with network and systems integrators and business process re-engineering consulting firms. These affiliations will enable us to combine our specialized Internet application development skills with their expertise in areas like e-commerce. In addition, we have developed, and will continue to develop, relationships with several Web developers who need technical and operational skills to complete their design expertise. - IXC JOINT MARKETING AND SALES. IXC has a large national sales force that focuses primarily on wholesale network services. We intend to jointly market and sell with IXC Gemini2000 Network products and services, combining their national sales presence and our expertise in value-added applications. 45 49 - MARKETING. Our marketing program is intended to build national and local strength and awareness of the AppliedTheory brand name. We intend to employ a variety of classical marketing techniques for brand awareness and lead generation. Branding efforts are expected to focus on establishing an image for AppliedTheory as a full service provider of next generation Internet technical services. We will use a combination of Web and print media advertising, public relations and presentations by senior officers, clients and partners at industry conferences to enhance awareness and acquire leads for our sales team. We also intend to promote the Gemini2000 Network joint AppliedTheory/ IXC product set for access, VPN and Web hosting products. CUSTOMER SUPPORT High quality customer service and support is critical to our objective of retaining and developing our customers. We offer superior customer service by understanding the technical requirements and business objectives of our customers and fulfilling their needs proactively on an individual basis. Over the last two years, we have averaged less than 0.15% monthly revenue churn, a rate which is well below industry averages. Located at our Network Operations Center in Syracuse, New York, the Customer Support Center is comprised of a Customer Support Team, which is responsible for all customer technical support, and a Customer Implementation Team, which is responsible for managing implementation of all customer projects. The customer support process begins when a customer calls us and is assigned an account manager and a sales engineer; that team remains responsible for the customer throughout the life of the account. For those customers requiring custom applications, the account team is supplemented by a project manager, who guides the design and installation of the project and works with the customer to continuously adjust or scale the application as required. Support options for applications customers are extensive, ranging from maintenance, upgrades, remote monitoring and remote management to full outsourcing of the application and hosting at our data center. Upon installation of a customer's system, we offer continuous technical support through the Customer Support Center. Customer Support Staff are trained internally on our products and after six months of service are trained internally on Internetworking, Unix, Monitoring and Testing Tools and Techniques, Technology Transfer and new technologies. In addition, specialized training is provided by Cisco, Microsoft, Network Associates and Oracle. The Network Operations and Customer Support Center teams use specialized software, Intermapper and Cisco Works, to identify and diagnose potential and incipient hot spots. The Network Operations team remotely services customer's connections to our network and field service personnel are dispatched when problems cannot be solved remotely. In 1998, our Customer Support Center succeeded in proactively alerting customers of potential and actual problems in 85% of cases, correcting minor difficulties before they became aggravated problems. At the same time, the Customer Support Center and Network Operations teams had a mean time to repair below the industry average of four hours. We use an advanced network monitoring package, Network Health, to monitor and measure customer and company network usage. Customers can review their usage patterns online and plan upgrades and services changes based on actual data with the Customer Support Center and their account manager. The Customer Support Center maintains industry leading standards, with its time-to-pick-up a trouble call being significantly below the cross-industry national average and five times faster than the ISP industry average. In addition, the Customer Support Center requests feedback on every problem through a weekly survey of customers served by the Center. In the third and fourth quarters of 1998, customer satisfaction based on completed surveys was above 97%. 46 50 OUR NETWORK THE GEMINI2000 NETWORK Together with IXC, we are in the process of deploying the Gemini2000 Network, the first coast-to-coast, next generation Internet backbone to carry both research and commercial traffic. The Gemini2000 Network is a fully redundant, high performance national network that will enable us to offer Internet access and backbone transport services to speeds that are 100 to 1,000 times greater than those generally available to end users today. IXC provides the telecommunications physical infrastructure and we provide customer installation and provisioning systems, including installation of the connection between the customer and a POP ("last mile" access procurement), network monitoring, customer premise equipment monitoring and management and "first line" trouble shooting. The Gemini2000 Network is expected to be completed by the end of the third quarter of 1999. The Gemini2000 Network is hierarchically architected to establish distinct geographical regions around the country and to contain data traffic within such regions whenever possible so as to not make customer traffic travel unnecessarily. There are three levels in the network -- access, edge and super-core. There is one super-core site per region and the super-core consists of a set of Cisco GigaSwitch Routers (GSRs) that are interconnected at up to OC48 by a full meshed network. Every super-core site will be connected to every other super-core site, allowing traffic between these sites to flow in a single "hop." The architectural structure of the Gemini2000 Network will allow traffic to be more quickly and efficiently directed to its destination. The Gemini2000 Network is engineered to provide the following characteristics: - SCALABILITY. The Gemini2000 Network incorporates the newest fiber and electronics, providing significant capacity to allow customers to provision incremental bandwidth as their needs grow. The hierarchical infrastructure allows customers to quickly and easily increase bandwidth by a factor of 100 or 1,000 without necessitating any architectural changes to the network. - FLEXIBILITY. The Gemini2000 Network employs high speed packet over SONET (POS) routing at the super-core level and a combination of switching and routing in the edge fabric, allowing for access at speeds from DS0 through OC12. This results in reliable, high-speed connections and will provide our customers with the ability to manage bandwidth by type of application and to accommodate applications that are delay sensitive. The use of tag switching combines the benefits of routing and virtual circuit switching and supports inter-operability of the network with a full range of user aggregation technologies, including SMDS, Frame Relay and ATM connections. The Gemini2000 Network architecture also allows it to support real-time voice and video applications. - HIGH AVAILABILITY. The Gemini2000 Network incorporates full mesh topology eliminating performance bottlenecks and circuit failures that might otherwise interrupt the flow of customer traffic. Key switching and router elements have been redundantly configured to further reduce the impact of individual component failures. All backbone locations are housed in carrier-grade facilities providing an uninterruptible power supply at each POP. The immediate availability of additional fiber capacity from IXC will give our customers the ability to quickly add network capacity as their businesses grow. - HIGH PERFORMANCE. The Gemini2000 Network employs full OC48 transmission speeds in the super-core level and OC12 at the edge level. The use of POS technology and tag switching leads to higher throughput, more efficient resource utilization and greater simplicity, with less points of failure. The network employs the best commercially available fiber, which can support speeds in excess of OC192. As a result, the Gemini2000 Network can provide connectivity that is 100 to 1,000 times faster than typical Internet business connections available today, and can be migrated to higher speeds as newer technology is developed. 47 51 - ACCESSIBILITY. High speed connectivity to the Internet will be provided through both public and private peering relationships with other providers. Four public peering points are either installed or on order and ten regional private peering centers are under development. - MANAGEABILITY. All network management traffic runs over a separate network (out of band). As a result, management activities do not interfere with increased network usage. Support staff are on site or on call for all POP locations 24x7. Until completion of the roll-out of the Gemini2000 Network, we will continue to provide services for our customers on our existing network, which is scheduled to be phased out over the next twelve months with all of our customers expected to transition to the Gemini2000 Network infrastructure by June 30, 2000. OUR EXISTING NETWORK We currently operate a DS3 (45 Mbps) network, architected in a ring topology, throughout New York State. There are sixteen POPs, all located in Bell Atlantic Central Offices, except for one located in a Frontier Communications central office. The POP locations are Albany, Syracuse, Potsdam, Utica, Ithaca, Buffalo, Olean, Binghamton, Oneonta, New York City (2), Poughkeepsie, Garden City, White Plains, Rochester and Deer Park. Major nodes are interconnected by DS3's; minor nodes are all connected by a single DS3 except Olean and Oneonta which are connected by multiple DS1's (1.544 Mbps). Connectivity to the Internet is provided by eight DS3's connected to Sprint transit and peering locations. The entire network uses Cisco routing equipment. Multiple routers at major nodes are interconnected by either FDDI or POS technology. Co-location facilities and field service for the equipment are provided under contract by Bell Atlantic. Network management and engineering support are provided by Sprint under contract. Sprint monitors the network 24x7, as does our Customer Support Center. We gather performance statistics and share them with each customer. OUR DATA CENTERS We intend to build three new geographically distributed data centers in addition to our existing primary data center in Syracuse, New York and our secondary data center in New York City. At this time plans are to construct 5,000 to 10,000 square foot facilities incorporating the following: - Raised floor; - Fully uninterruptible power (equipment will include a 22S KVA UPS, appropriate power distribution wiring and a 400KW Generator); - Multiple high speed, above and below ground connections from the data center to our Internet backbone at OC3 or above; - Constant temperature and humidity with HVAC using 3 industry standard Liebert 25 ton units; - A mix of open shelving and 19" racks to give flexibility to address varying server sizes, shapes and weights; - Intelligent fire detection and suppression system with dry fire suppression using CO(2) or FM200; - Secure card key access systems; - 24 hour on-site operations staff; and - Automated server and network monitoring tools. The new data centers will incorporate the following features: Full geographic load balancing between multiple data centers. Server content will be mirrored between data centers, and at the same time traffic load balancing will be managed both locally (within the data center) and geographically (between the data centers). 48 52 Back channel for monitoring. All data centers will be monitored remotely from a central location via dedicated high speed connections. Back channel for disk replication. Each data center will have multiple NFS servers, and content within one data center will be mirrored instantaneously. The servers will synchronize with each other. Replication between data centers will take place across a dedicated high speed connection. Content being mirrored will be checked extensively for data integrity. Customers will benefit from these features through faster downloading, reduced Web server load, greater network reliability and performance and better disaster recovery. Distributed data centers frequently present a challenge to IT administrators because they result in less efficient use of resources, require synchronization of data in almost real time and are more complex in their operation. By linking the data centers to the advanced architecture Gemini2000 Network, we will be able to offer our customers a "virtual gigacenter" providing the advantages of distributed data centers without the corresponding difficulties. COMPETITION The markets in which we compete are highly competitive and this competition is increasing. There are few substantial barriers to entry, and we expect that we will face additional competition from existing competitors and new market entrants in the future. We believe that the primary competitive factors in our markets are: - technical expertise in developing applications focused on Web integration and IP-centric solutions; - a reliable and robust network infrastructure; - network security; - price; - flexibility and willingness to consult and work with customers about how to deploy their Internet solutions in meaningful ways; - quality customer care; - experienced and knowledgeable salesforce and engineers; - customization; - breadth of service offerings; - brand recognition; - broad geographic presence; and - financial resources. Our competitors include: - Internet Service Providers (ISPs); - global, regional, and local telecommunications companies; and - IT integrators and outsourcing firms. INTERNET SERVICE PROVIDERS Our competitors include: - Specialized ISPs such as Concentric Network Corporation, Exodus Communications, Inc., Globix Corporation, as well as emerging ISPs such as QWEST/ICON CMT and AboveNet; 49 53 - ISPs that cluster in major markets and regional ISPs which have facilities in key metropolitan areas, including Frontier GlobalCenter, GTE/BBN, DIGEX and Verio Inc.; and - ISPs with a national or global presence which focus on business customers, such as PSINet and UUNET. While we believe that our next generation coast-to-coast network and distributed data center infrastructure, quality customer service and proactive support teams and target market distinguish us from ISPs, many of these competitors have greater financial, technical, and marketing resources, larger customer bases, greater name recognition and more established relationships in the industry. TELECOMMUNICATIONS CARRIERS Many long distance companies including AT&T Corp., Cable & Wireless P.L.C., Sprint Corporation and MCI WorldCom, Inc. offer Internet access services and Web hosting services. Recent reforms in federal regulation of the telecommunications industry have created greater opportunities for incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) to enter the Internet connectivity market. We believe that there is a move toward horizontal integration by ILECs and CLECs through acquisitions of, joint ventures with, or the wholesale purchase of connectivity from ISPs, in order to meet the Internet connectivity requirements of their business customers. Accordingly, we expect that we will experience increased competition from the traditional telecommunications carriers. In addition to their greater network coverage, market presence and financial, technical and personnel resources, many of these telecommunications carriers also have large existing commercial customer bases. We believe that our strong regional sales team and technical support, experienced in IP solutions and available for pre- and post- sales consultation, distinguish us from the centralized, generalist sales approaches that typify the connectivity and hosting services currently offered by the telecommunications carriers. NETWORK AND SYSTEM INTEGRATORS We compete with large IT outsourcing firms such as the Big 5 accounting firms, EDS Corp. and similar firms. These firms tend to focus on large customers who outsource entire IT functions, or re-engineer their IT infrastructure. We believe that our ability to offer specialized IP-based integration for the mid-size business market and government agencies, distinguishes us from this segment of the competition. In addition, our ability to offer somewhat lower pricing than the large integrators is another distinguishing factor. We also compete with smaller network and systems integrators. However, we believe that our expertise with large and complex systems and our ability to offer one-stop solutions for integration, data center services and purchasing network access, set us apart from this segment of the competition. GOVERNMENT REGULATION We are not currently subject to direct federal, state or local government regulation, other than regulations that apply to businesses generally. Only a small body of laws and regulations currently applies specifically to access to, or commerce on, the Internet. Due to the increasing popularity and use of the Internet, however, it is possible that laws and regulations with respect to the Internet may be adopted at federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Although sections of the Communication Decency Act of 1996 (CDA) that, among other things, proposed to impose criminal penalties on anyone distributing indecent material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The nature of future legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, legislation similar to the CDA could subject us and/or our customers to potential liability, which in turn could have a material adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might decrease the growth of the Internet, which in turn could decrease the demand for our services or increase our cost 50 54 of doing business or in some other manner have a material adverse effect on our business, results of operations and financial condition. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues could create uncertainty in the marketplace that could reduce demand for services or increase our cost of doing business as a result of costs of litigation or increased service delivery costs, or could in some other manner have a material adverse effect on our business, results of operations and financial condition. Finally, because our services are available over the Internet virtually worldwide, and because we facilitate sales by our customers to end users located in multiple states and foreign countries, such jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each such state or that we have a permanent establishment in each such foreign country. We are qualified to do business in only New York and Pennsylvania and failure by us to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for failure to qualify and could result in our inability to enforce contracts in such jurisdictions. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial condition. EMPLOYEES As of December 31, 1998, we had 151 employees, of which 38 were employed in sales, distribution and marketing, 69 were assigned to engineering and service development, 22 were employed in customer service and technical support and 22 were in finance and administration. We believe that our future success will depend in part upon our continued ability to attract, hire and retain qualified personnel. The competition for such personnel is intense and we may not be able to identify, attract and retain such personnel in the future. None of our employees is represented by a labor union and management believes that our employee relations are good. INTELLECTUAL PROPERTY RIGHTS We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our products and services. We have no patented technology that would preclude or inhibit competitors from entering our market, although the foregoing laws provide protection in certain important respects. We have entered into confidentiality and invention assignment agreements with our employees, and nondisclosure agreements with our suppliers, distributors and appropriate customers in order to limit access to and disclosure of our proprietary information. There can be no assurance that these contractual arrangements or the other steps we have taken to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our products, services or intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that these third-party technology licenses will continue to be available to the Company on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could materially adversely affect our business, results of operations and financial condition. To date, the we have not been notified that our services or products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement with respect to our current or future products. We expect that participants in our markets will be increasingly subject to infringement claims as the number of products and competitors in our industry segment grows and as certain technologies are patented giving rise to possible infringement claims without any copying on the part of the alleged infringer. Any such claim, whether meritorious or not, could be time consuming, divert 51 55 the attention of management and employees from their regular duties, result in costly litigation, cause product installation delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us, if at all. As a result, any such claim could have a material adverse effect upon our business, results of operations and financial condition. FACILITIES Our executive offices are located in Great Neck, NY and consist of approximately 5,633 square feet that are leased pursuant to an agreement that expires in July 2006. Our main operational center is in Syracuse, NY, with approximately 21,246 square feet under a lease agreement that expires in November 2008. In addition, we lease approximately 5,789 square feet in Syracuse, NY under an agreement that expires in November 2008. We also lease approximately 5,250 square feet in New York, New York for a Web hosting facility and office space under a lease that expires in September 2006. We intend to relocate our Web hosting facility in New York, New York to another facility by September 1999. In addition, we are considering relocating our corporate headquarters from Great Neck, New York to New York, New York. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. 52 56 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to executive officers and directors of AppliedTheory:
NAME AGE TITLE - ---- --- ----- Richard Mandelbaum........................ 52 Chairman of the Board and Chief Executive Officer Lawrence B. Helft......................... 53 President and Chief Operating Officer James D. Luckett.......................... 45 Senior Vice President Denis J. Martin........................... 40 Vice President and Chief Software Engineer Mark A. Oros.............................. 41 Vice President and Chief Technology Officer David A. Buckel........................... 37 Vice President and Chief Financial Officer James Guthrie............................. 54 Director Shelley A. Harrison....................... 56 Director James T. Kelsey........................... 47 Director John J. Pendray........................... 59 Director George Sadowsky........................... 62 Director
RICHARD MANDELBAUM, Chairman of the Board and Chief Executive Officer, has been with AppliedTheory since its start of operations in 1996. He is a non-voting member of both the Compensation Committee and the Audit and Finance Committee. Dr. Mandelbaum is one of the four computing and communications experts who founded NYSERNet in 1985 and is presently a member of its Board of Directors. 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 and as a Professor of Mathematics and a Professor of Electrical Engineering. Dr. Mandelbaum helped to oversee the development of, among other things, network management, network security, broadband networking and wireless communications, and he initiated many CATT partnerships with industry, especially with the banking community. He was also a member of the 1987 advisory committee to the Federal Coordinating Council on Science and Engineering Technology (FCCSET) panel of the President's Office of Science and Technology Policy, which generated the Federal National Information Infrastructure initiative as well as the National Science Foundation's Network Program Advisory Committee which was responsible for 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 (NTTF). Dr. Mandelbaum holds both a Ph.D. and an M.A. in Mathematics from Princeton University, and a B.S. in Mathematics from the Rensselaer Polytechnic Institute and was a Member of the Princeton Institute of Advanced Studies in 1976-77. LAWRENCE B. HELFT, President and Chief Operating Officer, joined AppliedTheory in December of 1998. He is responsible for AppliedTheory's Internet operations and support services and sales and marketing activities. From November 1994 to November 1998, Mr. Helft was Chief Executive Officer and President of Systems Union Inc., an enterprise resource planning vendor, and from September of 1993 to November of 1994, he held executive positions at EDS. Prior to that, he launched and ran his own consulting 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 BS degree in Electrical Engineering from City University of New York. JAMES D. LUCKETT, Senior Vice President, is one of the co-founders of AppliedTheory and has been with us since 1996. Mr. Luckett oversees our business development efforts, including product management, product development and research and development and the direction of our corporate strategic alliances. Mr. Luckett joined NYSERNet in 1989, was its President from 1996 to 1997 and is currently a member 53 57 of its Board of Directors. He was a founder of the Teaching and Learning Working Group of the Coalition for Networked Information (CNI), a founding board member of the Consortium for School Networking (CoSN) and a past board member and treasurer of FARNet, which recently merged with the National Telecommunications Task Force (NTTF). Mr. Luckett also serves as an expert advisor and panelist of the National Science Foundation. Mr. Luckett holds an M.S. in Education from S.U.N.Y. College at Brockport and a B.A. in History from S.U.N.Y. College at Plattsburgh. DENIS J. MARTIN, Vice President and Chief Software Engineer, has been with AppliedTheory since its start of operations in 1996. Mr. Martin joined NYSERNet in 1993 in which 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. MARK A. OROS, Vice President and Chief Technology Officer, has been with AppliedTheory since its start of operations in 1996. Mr. Oros joined NYSERNet in 1993 and, in conjunction with Richard Mandelbaum, he engineered the AppliedTheory network. Mr. Oros is currently responsible for technology development at AppliedTheory. Prior to joining AppliedTheory, Mr. Oros was Network Manager at Brookhaven National Labs which he joined in 1993. He was also part of the operational team that built the initial NSFNet (National Science Foundation Network), the predecessor of today's commercial computer networks. He played important roles in the construction of the computer network that supported the Cornell Theory Center -- one of the nation's major supercomputer facilities, in the development of Sprintlink (now Sprint IP Global Network) and in the design of and implementation of Sprint's International Connection Management Network (ICMNet) and Sprint's Network Operations Center for a Cornell University technology transfer. Mr. Oros holds an Associate of Arts in Data Processing degree from Catonsville Community College. DAVID A. BUCKEL, Vice President and Chief Financial Officer, has been with AppliedTheory since its start of operations in 1996. Mr. Buckel joined NYSERNet in 1995. Mr. Buckel presently manages all treasury, finance and accounting aspects for AppliedTheory. 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 concentration in Operations Management and Finance from Syracuse University, and a B.S. in Accounting from Canisius College. JAMES GUTHRIE has been a director of AppliedTheory since September 1998. He chairs the Audit and Finance Committee and is a member of the Compensation Committee. Mr. Guthrie has served as Chief Financial Officer of IXC since July 1997 and as its Executive Vice President since March 1996. He joined IXC in January 1995. Prior to joining IXC, Mr. Guthrie served as Vice President and Chief Financial Officer of The Times Mirror Company from 1993 to 1995 and as the Chief Financial Officer of Times Mirror Cable Television from 1982 to 1993. Mr. Guthrie holds a B.A. from the University of Redlands and an M.B.A. from the University of Southern California. Mr. Guthrie is a Certified Public Accountant. SHELLEY A. HARRISON has been a director of AppliedTheory since August 1998 and is a member of the Compensation Committee. Dr. Harrison has served as Chief Executive Officer of Spacehab Incorporated since April 1996 and as Chairman of its Board since August 1993. 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 code. In addition, Dr. Harrison is a founder and Managing General Partner 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 and he runs his own consulting firm. He is a member of the boards of directors of Globecomm Systems, Inc., Asymetrix Learning Systems, Inc. and NetManage, Inc. Dr. Harrison holds a Ph.D. and an M.S. in Electrophysics from Polytechnic University and a Bachelor's Degree in Electrical Engineering from NYU. 54 58 JAMES T. KELSEY has been a director of AppliedTheory since August 1998. He chairs the Compensation Committee and is a member of the Audit and Finance Committee. Mr. Kelsey is a managing partner of Grumman Hill Group LLC, general partner to Grumman Hill Investments III, L.P., which is 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 shareholder of IXC Communications, Inc., the parent company of IXC. Mr. Kelsey has been with Grumman Hill Group since its inception in 1985, dealing with private equity investments and merger 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 other corporate finance advice to many large multinationals and middle market U.S. companies. Mr. Kelsey holds an M.S. in Accounting from the Stern School of Business at NYU and a B.A. in Economics from Princeton University. JOHN J. PENDRAY has been a director of AppliedTheory since October of 1996 and is a member of the Audit and Finance Committee. Mr. Pendray is currently a Visiting Fellow at The Graduate School of Management of The University of Western Australia, Perth, Australia. From 1996 to 1998, he was Executive in Residence and Visiting Professor of Management at the Graduate Business School of the George Mason University, Fairfax, Virginia, which he joined in 1996. From May 1993, to August 1996, he was President and Chief Executive Officer of the International Group of Cincinnati Bell Information Systems, Inc. He was a founding partner of Vanguard Atlantic Ltd., a merchant banking firm investing in software and telecommunications companies, and worked with Vanguard Atlantic for eight years ending in 1997. From 1986 until November, 1998, he was a Director of TSI Software International Inc. He received his B.S. in Engineering Sciences from the University of Florida and his M.S. in Computer Science from Stanford University. GEORGE SADOWSKY has been a director of AppliedTheory since September of 1996 and is a member of the Audit and Finance Committee. Dr. Sadowsky is the Director of the Academic Computing Facility at New York University, which he joined in 1990. Dr. Sadowsky is currently an officer and director of NYSERNet. 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 since 1996 he has been a member of its Board of Trustees. From 1996 to the present, Dr. Sadowsky has been a member of the Technical Advisory Panel, InfoDev Program of the World Bank and served as consultant to various institutions, including the Inter-American Development Bank and the International Science Foundation. He spent 12 years at the United Nations as a technical adviser engaged in, among other things, the transfer of information technology to developing countries. Dr. Sadowsky holds a Ph.D. in Economics from Yale University and a bachelor degree in Mathematics from Harvard University. James Guthrie and James Kelsey serve on the Board of Directors as representatives of IXC and Grumman Hill, pursuant to the Stockholders' Agreement we entered into in August 1998. See "-- Certain Transactions." The Stockholders' Agreement will terminate upon completion of this offering and IXC and Grumman Hill will no longer be entitled to guaranteed representation on the Board of Directors. Our Certificate of Incorporation provides for our Board of Directors to be divided into three classes, with only one class standing for election each year. At each annual meeting, directors are chosen to succeed those in the class whose term expires at that meeting and to serve a term of three years. Under this provision, Mr. Pendray and Dr. Sadowsky serve as Class I directors, Mr. Guthrie and Dr. Harrison serve as Class II directors and Mr. Kelsey and Dr. Mandelbaum serve as Class III directors, with terms of office scheduled to expire at AppliedTheory's 2000, 2001 and 2002 Annual Meetings of Stockholders. Officers are elected by the Board of Directors and may be removed at any time by the Board. Our officers are elected annually at the Board of Directors meeting held immediately after the annual meeting of the stockholders, and hold their respective offices until their successors are duly elected and qualified. 55 59 COMPENSATION OF DIRECTORS Non-employee directors currently receive annual compensation in the form of 15,000 options to acquire our common stock for their service on the Board of Directors and any committee thereof. Directors are eligible to receive options under our stock option plan. LIMITATIONS ON DIRECTORS' LIABILITY LIABILITY LIMITATION. Our Certificate of Incorporation provides that, to the fullest extent permitted by the Delaware General Corporation Law, none of our directors shall be personally liable to us or our stockholders for monetary damages. Section 102(b)(7) of the Delaware General Corporation Law currently provides that a director's liability for breach of fiduciary duty to a corporation may be eliminated, except for liability: - for any breach of the director's duty of loyalty to the corporation or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the Delaware General Corporation Law, for unlawful dividends or unlawful stock repurchases or redemptions; and - for any transaction from which the director derives an improper personal benefit. Any amendment to these provisions of the Delaware General Corporation Law will automatically be incorporated by reference into our Certificate of Incorporation without any vote on the part of its stockholders unless otherwise required. INDEMNIFICATION AGREEMENTS. Prior to completion of this offering, we intend to enter into indemnification agreements with each of our directors. The indemnification agreements will provide that we will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened, pending or completed legal action, proceeding or investigation (other than actions brought by or in right of us) to which any of them was, is or is threatened to be made a party by reason of his or her status as our director, officer or agent or his or her serving at our request in any other capacity for or on our behalf, provided that: - such director acted in good faith and in a manner at least not opposed to our best interests; - with respect to any criminal proceedings, such director had no reasonable cause to believe his or her conduct was unlawful; - such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty towards us, unless the court views in light of the circumstances that the director is nevertheless entitled to indemnification; and - the indemnification does not relate to any liability arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, or the rules or regulations promulgated thereunder. With respect to any action brought by or in right of us, directors may also be indemnified, to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction, against reasonable costs and expenses incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to our best interests. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has standing Audit & Finance and Compensation Committees. The Audit & Finance Committee consists of Messrs. Guthrie, Pendray and Kelsey and Drs. Mandelbaum (ex officio) and Sadowsky. Among other functions, the Audit & Finance Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors, reviews our financial statements and reviews 56 60 and evaluates our internal control functions. The Compensation Committee consists of Messrs. Guthrie and Kelsey and Drs. Mandelbaum (ex officio) and Harrison. The Compensation Committee administers our stock option and stock purchase plans, determines executive compensation and makes recommendations to the Board of Directors concerning salaries and incentive compensation for our employees and consultants. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Guthrie and Kelsey and Drs. Mandelbaum and Harrison served as members of our Compensation Committee during fiscal year 1998. Other than Dr. Mandelbaum, who served as our Chairman and Chief Executive Officer during 1998, no committee member is or has been one of our officers or employees. Dr. Mandelbaum serves only as a non-voting member of the Compensation Committee. For certain transactions involving us and each of Dr. Harrison, IXC (of which Mr. Guthrie is an officer) and Grumman Hill (of which Mr. Kelsey is a general partner). See "Certain Transactions." EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth the total compensation for fiscal 1998 of our Chief Executive Officer and each of our other four most highly compensated executive officers whose total salary and bonus for fiscal 1998 exceeded $100,000 (each a Named Executive Officer, and collectively, the Named Executive Officers):
LONG-TERM COMPENSATION AWARDS ------------- NUMBER OF ANNUAL COMPENSATION SECURITIES ALL ------------------- UNDERLYING OTHER NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS/SARS COMPENSATION - ------------------------------ -------- ------- ------------- ------------ Richard Mandelbaum...................... $247,823 $80,000 263,890 $12,163(2) Chairman of the Board of Directors & Chief Executive Officer James D. Luckett........................ 126,538 23,000(3) 82,625 4,876(4) Sr. Vice President, Business Development & Strategic Alliances Mark A. Oros............................ 136,769 28,000(5) 152,875 8,765(6) Vice President & Chief Technology Officer Denis J. Martin......................... 123,077 81,100(7) 155,125 7,242(8) Vice President & Chief Software Engineer David A. Buckel......................... 114,486 38,000(9) 100,000 7,000(10) Vice President & Chief Financial Officer Michael D. Greenbaum(11)................ 25,516 0 0 40,000(12) Vice President, Sales and Marketing
- --------------- (1) Each of the Named Executive Officers other than Mr. Greenbaum is party to an employment agreement with AppliedTheory. See "-- Employment Agreements." (2) Represents matching contributions under the AppliedTheory 401(k) Matched Savings Plan of $9,600 and $2,563 imputed income for group term life insurance. (3) Includes a bonus of $5,000 earned in 1998 that was paid in January 1999. (4) Represents matching contributions under the AppliedTheory 401(k) Matched Savings Plan of $4,000 and $876 in imputed income for group term life insurance. (5) Includes a bonus of $4,000 earned in 1998 that was paid in January 1999. (6) Represents matching contributions under the AppliedTheory 401(k) Matched Savings Plan of $8,206 and $559 in imputed income for group term life insurance. (7) Includes a bonus of $47,100 earned in 1998 that was paid in January 1999. 57 61 (8) Represents matching contributions under the AppliedTheory 401(k) Matched Savings Plan of $6,740 and $502 in imputed income for group term life insurance. (9) Includes a bonus of $4,000 earned in 1998 that was paid in January 1999. (10) Represents matching contributions under the AppliedTheory 401(k) Matched Savings Plan of $6,699 and $301 in imputed income for group term life insurance. (11) Mr. Greenbaum's employment was terminated effective March 13, 1998. He received total severance pay in the amount of $91,039. (12) Represents the portion of a moving expense allowance ($100,000 in the aggregate) in connection with the commencement of Mr. Greenbaum's employment in 1997 that was paid in 1998. OPTION GRANTS IN LAST FISCAL YEAR. The following table summarizes certain information with respect to options to purchase our stock granted to the Named Executives during the fiscal year ended December 31, 1998.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS(1) OPTION TERM(2) ----------------------------------------------------------- -------------------- NUMBER PERCENT OF OF TOTAL OPTIONS SECURITIES GRANTED TO UNDERLYING EMPLOYEES IN EXERCISE OR BASE EXPIRATION NAME OPTIONS FISCAL YEAR PRICE ($/SHARE) DATE 5% 10% - ---- ---------- ------------- ---------------- ---------- -------- -------- Richard Mandelbaum....... 127,780 8.8% $4.40 08/03/08 353,585 896,053 8,335 0.6 4.40 09/01/08 23,064 58,449 76,665 5.3 4.40 11/09/08 212,143 537,611 37,775 2.6 4.40 12/20/08 104,529 264,896 4,375 0.3 0.60 11/30/07* 10,613 26,140 8,960 6.2 4.40 12/30/07 21,736 53,536 James D. Luckett......... 60,000 4.1 4.40 11/09/08 166,028 420,748 15,000 1.0 0.20 12/31/06* 94,512 138,477 2,625 0.2 0.60 11/30/07* 16,343 25,659 5,000 0.3 0.60 12/30/07* 31,129 48,875 Mark A. Oros............. 125,000 8.6 4.40 11/09/08 345,892 876,558 15,000 1.0 0.20 12/31/06* 94,512 138,477 10,000 0.7 0.60 12/30/07* 62,258 97,750 2,875 0.2 0.60 11/30/07* 17,899 28,103 Denis J. Martin.......... 125,000 8.6 4.40 11/09/08 345,892 876,558 2,625 0.2 0.60 11/30/07* 16,343 25,659 15,000 1.0 0.20 12/31/06* 94,512 138,477 12,500 0.9 0.60 12/30/07* 77,823 122,187 David A. Buckel.......... 100,000 6.9 4.40 11/09/08 276,714 701,247 Michael D. Greenbaum..... 0 0 0 -- 0 0
- --------------- (1) All stock options reported in this table were granted pursuant to the 1996 Employee Stock Option Plan at exercise prices equal to at least the fair market value of the common stock at the time of grant. The options vest ratably over a period not to exceed 5 years and have a ten-year term. (2) This column shows the hypothetical gains on the options granted based on assumed annual compound stock appreciation rates of 5% and 10% over the full ten-year term of the options. The assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent an estimate or projection of future common stock prices by AppliedTheory. * These figures represent SARs which were granted in 1997 and were converted by the Board of Directors in 1998 to nonqualified options to purchase common stock. 58 62 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES. The following table shows the aggregate number of shares acquired upon exercise of stock options during the last fiscal year and the aggregate value realized from those exercises, and the number of shares covered by both exercisable and unexercisable stock options as of fiscal year-end and the value of unexercised options as of fiscal year-end.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS SHARES 1998(1) AT DECEMBER 31, 1998(1)(3) ACQUIRED VALUE ------------------------------ ------------------------------ NAME ON EXERCISE REALIZED(1)(2) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE - ---- ----------- -------------- -------------- ------------- -------------- ------------- Richard Mandelbaum............ 1,086,955 $4,682,602 604,160 122,775 $1,986,023 $0 James D. Luckett.............. 400,000 1,726,400 22,625 60,000 91,975 0 Mark A. Oros.................. 250,000 1,079,000 27,875 125,000 111,925 0 Denis J. Martin............... 250,000 1,079,000 30,125 125,000 120,475 0 David A. Buckel............... 120,000 507,600 1,875 100,000 7,125 0 Michael Greenbaum............. 0 0 0 0 0 0
- --------------- (1) Subsequent to December 31, 1998, Messrs. Mandelbaum, Martin and Oros exercised options with respect to 467,420, 30,125 and 27,875 shares of common stock. This table does not reflect these exercises. (2) The value realized has been calculated as the difference between $4.40, the fair market value of the common stock on December 31, 1998, and the exercise price of each option. (3) Based on the difference between $4.40, the fair market value of the common stock on December 31, 1998, and the option exercise price for each above-stated options. The above valuation may not reflect the actual value of unexercised options as the value of unexercised options will fluctuate with market activity. EMPLOYMENT AGREEMENTS On August 4, 1998, we entered into employment agreements with Dr. Richard Mandelbaum and Messrs. James D. Luckett, Denis J. Martin, Mark A. Oros and David A. Buckel. The employment agreements provide for base salaries of $250,000, $130,000, $125,000, $143,000 and $125,000, respectively, which salaries may be increased as determined by our Board of Directors. Each of the employment agreements provides for payment of an annual bonus in accordance with our annual bonus program for senior executives, contingent upon the achievement of certain performance goals established by the Board of Directors in its discretion. Dr. Mandelbaum's employment agreement is for an initial five-year term. It automatically renews for consecutive one-year periods unless either we or Dr. Mandelbaum deliver a notice of non-renewal at least one year before termination of the initial five-year period. The employment agreements with Messrs. Luckett, Martin, Oros and Buckel are for three-year terms. For all of these employment agreements, if the executive's employment is terminated by us other than for "cause," by the executive for "good reason" or due to "death or disability" (each as defined in the employment agreements), the executive will generally be entitled to: (a) his then-current salary payable for the non-compete period (as described below), (b) the annual bonus amounts that would be paid during the non-compete period, (c) any earned but unpaid salary and bonus amounts and (d) continued coverage under all health, life, disability and similar employee benefit plans for the non-compete period and on the same basis as the executive was entitled to participate immediately prior to termination. In connection with these employment agreements, the various executives are also eligible to receive additional awards under our stock option plan and all other employee benefit plans and programs. In 59 63 addition, the employment agreements provide for an automobile allowance for each of the named executives. Each of these employment agreements includes a covenant restricting each of the named executives' ability to compete with us during a pre-determined period of time, a non-compete period. Dr. Mandelbaum has agreed not to compete with us following termination of his employment until the later of 30 months after the date his employment terminates (or 24 months if the employment agreement has been in effect for at least 6 months) and August 4, 2003. Messrs. Luckett, Martin, Oros and Buckel have each agreed not to compete with us following termination of their respective employments until the later of 12 months following termination or August 4, 2001. In addition, each executive has agreed not to disclose any of our confidential information during the period of time for which his respective non-compete restriction operates. On December 7, 1998, we entered into an employment agreement with Lawrence B. Helft. The employment agreement provides Mr. Helft with a base salary of $220,000, which salary may be increased as determined by our Board of Directors, provided that Mr. Helft is entitled to a minimum salary increase of 10% on January 1, 2000. The employment agreement provides for payment of an annual bonus in accordance with our annual bonus program for senior executives, contingent upon the achievement of performance goals established by the Board of Directors in its discretion. During the first year of his contract, if Mr. Helft meets pre-determined performance goals he will receive a bonus of 50% of his salary and will have an opportunity to receive an additional bonus of up to 50% of his annual salary if those goals are exceeded. For the second and third years of his contract, Mr. Helft will receive a bonus of 50% of his salary upon achieving pre-determined performance goals, with the ability to earn up to an additional 50% bonus based on achievement exceeding those performance goals. Upon accepting employment, Mr. Helft was granted options to acquire 340,000 shares of our common stock. After one year of employment, if Mr. Helft satisfies certain pre-determined performance goals, he will receive an additional grant of options to acquire 120,000 shares of our common stock. Mr. Helft is also eligible to receive additional awards under our stock option plan and under any other employee benefit plans and programs. His employment agreement also provides him with an automobile allowance. Mr. Helft's employment agreement has a 3-year term, expiring December 7, 2001. If Mr. Helft's employment is terminated by us other than for "cause," by Mr. Helft for "good reason," or due to "death or disability" (each as defined in the employment agreement), he will generally be entitled to: (a) his then-current salary payable for the non-compete period (as described below), (b) a pro rata portion of any guaranteed bonus or a pro rata portion of any goal-based bonus if, in the opinion of our Chief Executive Officer, Mr. Helft would have been likely to meet the goals, (c) any previously earned but unpaid salary and bonus amounts and (d) continued coverage under all health, life, disability and similar employee benefit plans for the non-compete period and on the same basis upon which he was entitled to participate immediately prior to such termination. This employment agreement includes a covenant restricting Mr. Helft's ability to compete with us. Mr. Helft agreed that he will not compete with us for 6 months after termination of his employment, or 12 months if his employment agreement has been in effect for at least 6 months. Mr. Helft has agreed not to disclose any of our confidential information during the non-compete period. 1996 INCENTIVE STOCK OPTION PLAN Our Board of Directors has adopted and our stockholders have approved our 1996 Incentive Stock Option Plan (the 1996 Option Plan), under which stock options may be granted to our employees and the employees of our subsidiaries. The 1996 Option Plan permits the grant of stock options that qualify as incentive stock options (ISOs) under Section 422 of the Internal Revenue Code, and nonqualified stock options (NSOs), which do not so qualify. We have authorized and reserved up to 8,000,000 shares of our common stock for issuance under the 1996 Option Plan. We have outstanding options for the purchase of approximately 2,665,555 shares of our common stock under the 1996 Option Plan. The shares may be unissued shares or treasury shares. If an option expires or terminates for any reason without having been 60 64 exercised in full, the unpurchased shares subject to this option will again be available for grant under the 1996 Option Plan. In the event of certain corporate reorganizations, recapitalizations or other specified corporate transactions affecting us or our common stock, proportionate adjustments may be made to the number of shares available for grant and to the number of shares and prices under outstanding option grants made before the event. The 1996 Option Plan is administered by our Board of Directors. The Board of Directors may appoint a committee of not less than three members, and may delegate to such committee the responsibilities and authority of the Board of Directors granted under the 1996 Option Plan. In the event of such appointment and delegation, any reference in this disclosure to the Board of Directors will be deemed a reference to such committee. Subject to the limitations set forth in the 1996 Option Plan, our Board has the authority to determine the persons to whom options will be granted, the time at which options will be granted, the number of shares subject to each option, the exercise price of each option, the time or times at which the options will become exercisable and the duration of the exercise period. The Board may provide for the acceleration of the exercise period of an option at any time prior to its termination or upon the occurrence of specified events, subject to limitations set forth in the 1996 Option Plan. The Board may authorize the President and Chief Executive Officer to grant up to 5,000 stock options per quarter to any employee who is not a director, provided the President and Chief Executive Officer will not be authorized to grant more than 500 options per quarter to any one employee. In the case of the merger, consolidation, dissolution, liquidation, or change in ownership of us, our Board of Directors may, in its sole discretion, accelerate the expiration date and the dates on which any part of any option will be exercisable, provided that such acceleration will be effective only upon the consummation of any such transaction. All of our employees and those of our subsidiaries and, in the case of option grants other than ISOs, any officer, director, consultant or advisor providing services to us or a subsidiary are eligible to be granted options under the 1996 Option Plan, as selected from time to time by the Board of Directors in its sole discretion. The exercise price of shares of common stock subject to ISOs granted under the 1996 Option Plan may not be less than the fair market value of the common stock on the date of grant. The maximum term of options granted under the 1996 Option Plan is 10 years from the date of grant. ISOs granted to any employee who is an owner of 10 percent or more of our shares are subject to special limitations relating to the exercise price and term of the options. The value of common stock (determined at the time of grant) that may be subject to ISOs that become exercisable by any one employee in any one year is limited by the Internal Revenue Code to $100,000. All options granted under the 1996 Option Plan are nontransferable by the optionee, except for transfers upon the optionee's death in accordance with his or her will or applicable law. In the event of an optionee's death, outstanding options that have become exercisable will remain exercisable for a period of one year, or the balance of the term of the option, whichever is shorter. In the case of any other termination of employment, outstanding ISOs that have previously become vested will remain exercisable for a period of 3 months (provided that an optionee who is disabled may exercise an ISO for one year after the cessation of employment). NSOs granted under the plan will terminate (i) immediately upon the resignation of the optionee from any position held by him as an officer, director, employee, advisor or consultant, (ii) immediately upon termination of the optionee from any such position for cause or (iii) thirty (30) days after our termination of the optionee from any such position without cause. Under the 1996 Option Plan, the exercise price of an option is payable in cash or certified or bank check. An optionee must satisfy all applicable tax withholding requirements at the time of exercise. The 1996 Option Plan has a term of 10 years, subject to earlier termination or amendment by the Board of Directors, and all options granted under the 1996 Option Plan prior to its termination remain outstanding until they have been exercised or are terminated in accordance with their terms. The Board may amend the 1996 Option Plan at any time. 61 65 CERTAIN TRANSACTIONS STOCK PURCHASE AGREEMENT On August 4, 1998, we entered into a stock purchase agreement with IXC, Grumman Hill, NYSERNet, Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A. Oros and David A. Buckel (the Stock Purchase Agreement). The Stock Purchase Agreement provided for IXC to purchase 2,933,333 shares of our common stock for a purchase price of $12.9 million and Grumman Hill to purchase 1,466,667 shares of our common stock for a purchase price of $6.5 million. We received $5.0 million for 1,150,000 newly issued shares of common stock. The Stock Purchase Agreement granted IXC and Grumman Hill a right of first offer with respect to any proposed sale or other transfer of our common stock by us, subject to certain exceptions. These rights do not apply to this offering and will terminate upon consummation of the offering. Pursuant to the Stock Purchase Agreement, IXC has a right of first refusal to provide us with broadband or private-line Internet services if the price charged by IXC is competitive with the prices of similar services from third parties. The Stock Purchase Agreement also provided for us to work with IXC in good faith to negotiate a joint marketing agreement to cover the resale by each company of the other's products and services. Pursuant to this requirement, we entered into a joint marketing and services agreement with IXC in January 1999. See "-- Joint Marketing and Services Agreement." Pursuant to the terms of the Stock Purchase Agreement, NYSERNet has granted to IXC and Grumman Hill an irrevocable proxy with respect to 1,260,000 shares of common stock, subject to reduction by that number of shares of common stock acquired by IXC and Grumman Hill from us or any of our stockholders subsequent to September 4, 1999 and prior to October 4, 2000. REGISTRATION RIGHTS AGREEMENT In connection with the Stock Purchase Agreement, we entered into a registration rights agreement dated August 4, 1998 with IXC, Grumman Hill, NYSERNet, Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A. Oros, David A. Buckel and Shelley A. Harrison (the Registration Rights Agreement). The Registration Rights Agreement provides certain demand registration rights to each party other than AppliedTheory and certain "piggyback" registration rights to NYSERNet, IXC, Grumman Hill and Dr. Mandelbaum. See "Description of Capital Stock -- Registration Rights." STOCKHOLDERS' AGREEMENT The parties to the Stock Purchase Agreement and Dr. Harrison have entered into a stockholders' agreement dated August 4, 1998 (the Stockholders' Agreement). The Stockholders' Agreement provides NYSERNet and Messrs. Mandelbaum, Buckel, Luckett, Martin, Oros and Dr. Harrison with the right to sell common stock to IXC in the event that IXC purchases some or all of Grumman Hill's holdings of our common stock. It also requires IXC to offer to buy the holdings of our capital stock of any of the other parties in the event that IXC obtains ownership of over 50% of our outstanding capital stock. The Stockholders' Agreement also provides for the election of certain persons to our Board of Directors. The Stockholders' Agreement will terminate upon completion of this offering. OPTION AGREEMENTS Certain of our stockholders (including Messrs. Luckett, Martin, Oros, Buckel and Pendray and Drs. Sadowsky, Mandelbaum and Harrison) have, in connection with the Stock Purchase Agreement, entered into option agreements dated August 4, 1998 and August 28, 1998 with NYSERNet, IXC, Grumman Hill and us (the Option Agreements). The Option Agreements provide the option stockholders with a put option to sell their stock (1,520,625 shares in the aggregate) to IXC and Grumman Hill at a purchase price of $4.40 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 1,418,000. The put rights begin September 4, 1999 (with respect to 1,510,185 shares) and September 28, 1999 (with respect to 10,440 shares) and end October 4, 2000 and October 28, 2000, respectively. The Option Agreements also provide IXC and Grumman Hill with a call option to buy 62 66 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 1,510,185 shares) and October 29, 2000 (with respect to 10,440 shares) and end August 4, 2001 and August 28, 2001, respectively. The options may be exercised in whole or part on one or more occasions at any time during the relevant option period. RESALE AGREEMENT WITH NYSERNet.org In October 1996, we entered into a resale agreement (the 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 agreed to sell the products and services to NYSERNet at its average sales price and on similar terms to its transactions with third parties. The Resale Agreement also calls for the parties to cooperate in forming a joint marketing plan for the products and services covered by the agreement and for us to provide NYSERNet with sales support and assistance and training for its sales force. Products and services sold to NYSERNet for the period from October 1, 1996 (inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 amounted to $1,587,009, $7,148,334 and $8,327,118, representing 52%, 47% and 37% of our revenue for these periods. 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 In October 1996, we entered into a resource sharing agreement with NYSERNet.org (the Resource Sharing Agreement). Pursuant to the agreement, we provide NYSERNet with office space, use of equipment and use of certain employees to the extent they are available. We share our premises for the conduct of NYSERNet's business and NYSERNet is required to pay a pro rata share of the rent for the space it occupies. The agreement also provides for NYSERNet's use of computer 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. Certain of our employees are also subject to the agreement, with some employees on the shared premises at various times providing services to NYSERNet. NYSERNet pays a pro rata share of the employees' salary and benefits. Resources we provided to NYSERNet under the Resource Sharing Agreement for the period from October 1, 1996 (inception) to December 31, 1996 and the years ended December 31, 1997 and 1998 amounted to $63,000, $210,000 and $300,000, respectively. The agreement has a term that runs from October 1, 1996 through December 31, 1999. The agreement is terminable by us only upon the failure of NYSERNet to make the payments required of it under the agreement. ASSIGNMENT, SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT WITH NYSERNet.org On October 1, 1996, we entered into an assignment, software development and license agreement with NYSERNet.org (the Development and License Agreement). This agreement assigns to us an agreement to develop for commercial use software authored and developed by NYSERNet. The software was originally designed by NYSERNet to create a Web-based version of the America's Job Bank system for the New York State Department of Labor. Under this agreement, we are to pay NYSERNet two percent of all revenues derived from the software and any software developed from it for two years. We are also to develop and provide software to NYSERNet for NYSERNet's contract with the New York State Department of Labor. The Development and License Agreement provides a perpetual, royalty-free license to NYSERNet for any new software developed from the original software assigned to us. NYSERNet may use and further develop the new software in its non-profit operations or sublicense it to any U.S. federal, state or local government agency. Payments to NYSERNet under the agreement for the year ended December 31, 1998 were $4,975. No payments were made by and under this agreement in 1996 or 1997. 63 67 The software development agreement and the license are perpetual, unless terminated by either party. The agreement is terminable if either party becomes insolvent or if either party fails to cure a default in a material provision to the agreement within 10 days after notice of the default is given. BORROWINGS WITH NYSERNet.net AND REDEEMABLE PREFERRED STOCK Pursuant to an unsecured borrowing facility with NYSERNet.net, we can borrow up to $6.2 million, less any preferred stock outstanding, at the prime rate (8.0% as of December 31, 1998). Interest payments on borrowings under the facility are deferred for five years from the date of each advance or January 1, 2002, whichever is earlier. All principal borrowings under the facility are due and payable on January 1, 2002. As of December 31, 1998, we had an outstanding amount of $3.0 million, including accrued interest, borrowed under the facility. In addition, in January 1997, NYSERNet acquired 15,000 shares of our 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. JOINT MARKETING AND SERVICES AGREEMENT WITH IXC In January 1999, we entered into a Joint Marketing and Services Agreement with IXC (the Joint Marketing and Services Agreement), one of our major stockholders. Pursuant to the Joint Marketing and Services Agreement, each of us agreed to provide the other with any of the services or products that we offer or will offer to our customers, so long as the relevant service is not covered by an exclusive marketing relationship with another party. The Joint Marketing and Services Agreement specifically provides that each of us will offer the other services such as connectivity services for the provision of dial-up and dedicated access to the Internet, Internet security services, Web-enabled solutions services, software development, voice and data communication services and any services and technical support for the foregoing services. According to the Joint Marketing and Services Agreement, each of us may use these services for our own account or for the account of our own customers or for distribution to and eventual resale by others. As part of the Joint Marketing and Services Agreement, we granted IXC a right of first refusal on any purchases from third parties we make of equipment, facilities and services necessary for the transmission of data. Correspondingly, IXC granted us a right of first refusal with respect to purchases from third parties by IXC of the support and product components necessary for the delivery of the various services covered by the agreement, including Internet access services. We agreed to provide access to each other's network for the purpose of facilitating the provision of the various services covered by the agreement. In consideration for delivering the services covered by the Joint Marketing and Services Agreement, we have agreed to pay each other prices which will enable each of us to maintain normal margins as compared to those of our competitors, provided that in no event will the price charged by either party drop below the cost of the relevant service or product. Under the Joint Marketing and Services Agreement, we have also agreed to protect each other's confidential information. The Joint Marketing and Services Agreement automatically terminates upon IXC'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 of the Joint Marketing and Services Agreement within 30 days after being provided with notice of the breach. HARRISON CONSULTING AGREEMENT In October 1996, we entered into a consulting agreement with Shelley A. Harrison. Pursuant to the agreement, Dr. Harrison is to 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. Dr. Harrison is to receive $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 500,000 shares of our common stock at $0.20 per share. The option vested with respect to 125,000 shares on October 1, 1997 and, with respect to the remaining 375,000 shares, on August 4, 1998 in connection with the consummation of our sale of common stock to IXC 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 64 68 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. 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 James Kelsey, renders consulting services and management advice to us particularly as regards raising corporate financing, which includes advice pertaining to this offering. We pay a consulting fee of $60,000 per year to Grumman Hill pursuant to 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 IXC and Grumman Hill participate. As of December 31, 1998, no borrowings were outstanding pursuant to the line of credit. The line of credit agreement will terminate upon consummation of this offering. JAMES LUCKETT NOTE On July 30, 1998, we made a loan to Mr. Luckett in the amount of $30,000. This loan is evidenced by a note, payable to us upon the earlier of: (a) July 30, 2001 or (b) the date described in any security agreement we entered into with Mr. Luckett with regard to the loan. The note accrues interest at an annual rate of 5.56%. Upon demand by us, Mr. Luckett will be required to pledge as security for the loan 7,000 shares of our common stock subject to Mr. Luckett's option agreement with IXC and Grumman Hill. See " -- Option Agreements." DAVID BUCKEL NOTE On July 30, 1998, we made a loan to Mr. Buckel in the amount of $264,000. This loan is evidenced by a note, payable to us upon the earlier of: (a) July 30, 2001 or (b) the date described in any security agreement we entered into with Mr. Buckel with regard to the loan. The note accrues interest at 5.56%. Upon demand by us, Mr. Buckel will be required to pledge as security for the loan 60,000 shares of our common stock subject to Mr. Buckel's option agreement with IXC and Grumman Hill. See "-- Option Agreements." EMPLOYMENT AGREEMENTS See "Management -- Employment Agreements" for a description of the employment agreements that we have entered into with certain of our executive officers. RELATED PARTY TRANSACTIONS NYSERNet and IXC are holders of approximately 30% and 28% of our common shares. We also maintain a significant commercial relationship with IXC, and approximately 37% of our revenues in 1998 were generated from sales to NYSERNet. In addition to the agreements mentioned above, we may from time to time enter into other transactions with NYSERNet or IXC, including transactions on a vendor/vendee basis. We also provide accounting and financial services to NYSERNet. Furthermore, three of our executive officers or directors, Richard Mandelbaum, James D. Luckett and George Sadowsky are directors of NYSERNet. One of our directors, James Guthrie, is an executive officer of IXC. As a result of these relationships, conflicts of interest may arise among certain of our directors, executive officers and stockholders. We have independent directors, auditors and counsel separate from IXC and NYSERNet and believe that we maintain adequate procedures to protect ourself in related party transactions. 65 69 PRINCIPAL STOCKHOLDERS The following table describes certain information regarding the beneficial ownership of our common stock as of January 31, 1999 by (i) each person or entity which according to our knowledge owns beneficially more than 5% of the outstanding shares of our common stock, (ii) each of our directors and officers and (iii) all of our directors and executive officers as a group. Unless otherwise indicated, to our knowledge all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent the applicable law gives spouses shared authority.
PERCENTAGE BENEFICIALLY OWNED(1) SHARES --------------------------------- BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING - ---------------- --------------------- --------------- -------------- PRINCIPAL STOCKHOLDERS: IXC Internet Services, Inc.(2) 1122 Capital of Texas Highway, South Austin, TX 78746-6426....................... 3,773,330 35.6% NYSERNet.net, Inc.(3) 125 Elwood Davis Road Syracuse, NY 13212.......................... 3,250,000 30.6 Grumman Hill Investments III, LP(4) 60 East 42nd Street, Suite 2915 New York, NY 10165.......................... 1,886,670 17.8 EXECUTIVE OFFICERS AND DIRECTORS: Richard Mandelbaum(5)......................... 4,941,115 46.0 Lawrence B. Helft............................. -- * James D. Luckett, Sr.(6)...................... 422,625 4.0 Denis J. Martin(7)............................ 280,125 2.6 Mark A. Oros(8)............................... 277,875 2.6 David A. Buckel(9)............................ 121,875 1.1 Shelley A. Harrison(10)....................... 500,000 4.6 George Sadowsky(11)........................... 3,284,060 30.9 James Guthrie(12)............................. 3,773,330 35.6 John J. Pendray(13)........................... 32,185 * James T. Kelsey(14)........................... 1,886,670 17.8 All Directors and Officers as a Group (11 persons)(15)................................ 11,009,860 96.7
- --------------- * indicates less than 1% (1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. 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 such person, but not deemed outstanding for the purpose of calculating the percentage owned by any other person listed. As of January 31, 1999, AppliedTheory had 10,606,596 shares of common stock outstanding. (2) Includes 840,000 shares as to which IXC has voting power pursuant to an irrevocable proxy granted by NYSERNet. See "Certain Transactions -- Stock Purchase Agreement." Does not include shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (3) Includes an aggregate of 1,260,000 shares as to which NYSERNet has granted irrevocable proxies to IXC and Grumman Hill. See "Certain Transactions -- Stock Purchase Agreement." Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (4) Includes 420,000 shares as to which Grumman Hill has voting power pursuant to an irrevocable proxy granted by NYSERNet. See "Certain Transactions -- Stock Purchase Agreement." Does not 66 70 include shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (5) Includes 3,250,000 shares of common stock owned by NYSERNet. Dr. Mandelbaum is a member of the board of directors of NYSERNet. Dr. Mandelbaum disclaims beneficial ownership of all shares owned by NYSERNet. Also includes 500,000 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 136,740 shares of common stock. Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (6) Includes exercisable options to purchase 22,625 shares of common stock. Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (7) Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (8) Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (9) Includes exercisable options to purchase 1,875 shares of common stock. Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (10) Includes exercisable options to purchase 375,000 shares of common stock. Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (11) Includes 3,250,000 shares of common stock owned by NYSERNet. Dr. Sadowsky is a director of NYSERNet. Dr. Sadowsky disclaims beneficial ownership of all shares owned by NYSERNet. Includes exercisable options to purchase 14,060 shares of common stock. Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (12) Includes 2,933,330 shares of common stock owned by IXC and 840,000 shares of common stock owned by NYSERNet whose voting power NYSERNet has irrevocably granted to IXC pursuant to an irrevocable proxy. See "Certain Transactions -- Stock Purchase Agreement." Mr. Guthrie is an officer of IXC. Mr. Guthrie disclaims beneficial ownership of all shares owned by IXC. (13) Includes shares subject to the option agreements described under "Certain Transactions -- Option Agreements." (14) Includes 1,466,670 shares of common stock owned by Grumman Hill and 420,000 shares of common stock owned by NYSERNet whose voting power NYSERNet has granted to Grumman Hill pursuant to an irrevocable proxy. See "Certain Transactions -- Stock Purchase Agreement." Mr. Kelsey is a general partner of Grumman Hill. Mr. Kelsey disclaims beneficial ownership of all shares owned by Grumman Hill. (15) Includes shares of our common stock owned by IXC, NYSERNet and Grumman Hill that are deemed to be beneficially owned by certain of our officers and directors by virtue of their relationships with these entities. 67 71 DESCRIPTION OF CAPITAL STOCK AUTHORIZED STOCK; ISSUED AND OUTSTANDING SHARES Effective upon the closing of this offering, our authorized capital stock will be comprised of 60,000,000 shares of common stock and 1,000,000 shares of preferred stock. COMMON STOCK Following this offering shares of common stock will be outstanding, based on the number of shares of common stock outstanding on , 1999. All of the issued and outstanding shares of common stock are and, upon the completion of this offering, the shares of common stock offered hereby will be fully paid, validly issued and non-assessable. Each holder of shares of common stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors. There are no cumulative voting rights. The holders of our common stock are entitled to dividends and other distributions as may be declared from time to time by the board of directors out of funds legally available therefor, if any. See "Dividend Policy." Upon our liquidation, dissolution or winding up, the holders of shares of common stock would be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and the payment of the liquidation preference of any outstanding preferred stock. Upon completion of this offering, the holders of common stock have no preemptive or other subscription rights to purchase shares of our stock, nor will such holders entitled to the benefits of any redemption or sinking fund provisions. As of January 31, 1999, there were approximately 34 beneficial owners of common stock. PREFERRED STOCK The Certificate of Incorporation authorizes our Board of Directors to create and issue one or more series of preferred stock and determine the rights and preferences of each series within the limits set forth in the Certificate of Incorporation and applicable law. Among other rights, the Board of Directors may determine, without the further vote or action by our stockholders: - the number of shares constituting the series and the distinctive designation of the series; - the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; - whether the series shall have voting rights in addition to the voting rights provided by law and, if so, the terms of such voting rights; - whether the series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; - whether or not the shares of that series shall be redeemable or exchangeable, and, if so, the dates, terms and conditions of such redemption or exchange, as the case may be; - whether the series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; and - the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. Unless otherwise provided by our Board of Directors, the shares of all series of preferred stock will rank on a parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Although we have no present plans to issue any shares of preferred stock, any future issuance of shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, 68 72 deferring or preventing a change of control in our company or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. See "Risk Factors -- Certain anti-takeover provisions may make our acquisition more difficult." REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement, IXC, Grumman Hill, NYSERNet and Messrs. Luckett, Martin, Oros and Buckel and Drs. Mandelbaum and Harrison have the right (a demand registration right) at any time after this offering to cause us to register their holdings of common stock under the Securities Act of 1933, as amended (the Securities Act). The demand registration rights will be exercisable by any party with registration rights only once in any six month period, and we will not be required to register shares under the demand registration rights more than once on registration forms other than Form S-3. In addition, pursuant to the Registration Rights Agreement, each of IXC, Grumman Hill, NYSERNet and Dr. Mandelbaum have certain "piggyback" registration rights if we determine to file a registration statement covering any of our securities under the Securities Act (with the exception of an offering pursuant to a registration statement on Form S-8 or S-4) and the Board of Directors approves the piggyback registration. Therefore, if we file a registration statement in relation to our equity securities (except for the registration statements described in the preceding sentence) and the Board of Directors approves the piggyback registration, we will be required to use our best efforts to include the shares of common stock as to which piggyback rights have been requested in our registered offering, subject to reduction if the managing underwriter for the offering determines that the inclusion of such shares would interfere with the successful marketing of our offering. We are required to bear all registration expenses (other than underwriting discounts and commissions and fees) related to any exercise of either demand or piggyback registration rights. In addition, we have agreed to indemnify the registration rights holders against, and provide contribution with respect to, certain liabilities under the Securities Act in connection with demand and piggyback registrations. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW We are subject to the provisions of Section 203 of the Delaware General Corporation Law (Section 203). Under Section 203, certain business combinations between a Delaware corporation whose stock generally is publicly traded or held of record by more than 2,000 stockholders and an interested stockholder are prohibited for a three-year period following the date that such a stockholder became an interested stockholder, unless (i) the corporation has elected in its original Certificate of Incorporation not to be governed by Section 203 (we did not make such an election); (ii) the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder, (iii) upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iv) the business combination was approved by the board of directors of the corporation and ratified by two-thirds of the voting stock not owned by the interested stockholder. The three-year prohibition also does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of the majority of the corporation's directors. The term business combination is defined generally to include mergers or consolidations between a Delaware corporation and an interested stockholder, transactions with an interested stockholder involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested stockholder's percentage ownership of stock. The term interested stockholder is defined generally 69 73 as a stockholder who, together with affiliates and associates, owns (or, within three years prior, did own) 15% or more of a Delaware corporation's voting stock. Section 203 could prohibit or delay a merger, takeover or other change in control of AppliedTheory and therefore could discourage attempts to acquire us. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. 70 74 SHARES ELIGIBLE FOR FUTURE SALE Immediately following this offering, there will be shares of our common stock issued and outstanding, based on the number of shares of our common stock outstanding as of , 1999. Of such shares, the shares of common stock to be sold in this offering will be immediately eligible for sale in the public market, except for any of such shares owned at any time by our affiliates within the meaning of Rule 144 under the Securities Act. The remaining 10,606,596 issued and outstanding shares are restricted securities within the meaning of Rule 144 and may not be publicly resold, except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, including that provided by Rule 144. In general, under Rule 144, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three month period a number of our shares of common stock that does not exceed: (1) the greater of 1% of the then-outstanding shares of our common stock, or (2) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about the company. A person who is not our affiliate at any time during the 90 days preceding a sale and who has beneficially owned shares for at least two years would be entitled to sell such shares immediately following this offering under Rule 144(k) without regard to the volume limitations, manner of sale provisions or notice requirements of Rule 144, but in accordance with certain other applicable provisions of Rule 144. In addition, our employees, directors, officers or consultants who purchased our shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701 which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this prospectus. Our directors and executive officers, IXC, Grumman Hill and NYSERNet, who collectively hold 10,459,560 of the outstanding shares of common stock, have agreed, subject to certain exceptions, not to offer to sell, sell, contract to sell, grant any option to sell, encumber, pledge or otherwise dispose of or exercise any demand rights with respect to any common stock or securities convertible into or exercisable or exchangeable for common stock for a period of 180 days after the date of this prospectus without the prior written consent of Bear, Stearns & Co. Inc. Certain stockholders of AppliedTheory are entitled to demand and/or piggyback registration rights with respect to 10,459,560 shares of common stock currently outstanding, plus any additional shares they may acquire in the future. See "Description of Capital Stock -- Registration Rights." After the expiration of the 180-day period, such holders may choose to exercise their demand registration rights, which could result in a large number of shares being sold in the public market. We intend to file, immediately following this offering, a registration statement on Form S-8 under the Securities Act to register the shares of common stock reserved for issuance pursuant to our stock option plan. The stock registered under such registration statement will thereafter be available for sale in the public market, subject to the resale limitations of Rule 144 applicable to affiliates of AppliedTheory. Prior to the date of this prospectus, no public market has existed for our common stock. We expect that trading of our common stock on the Nasdaq National Market will commence on the date of this prospectus. We do not make any prediction regarding the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of our common stock. The market price of our common stock can be adversely affected by sales of substantial amounts of common stock, or by the perception that such sales could occur. See "Risk Factors -- Our stock price may be affected by the availability of shares available for future sale." 71 75 CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following is a general discussion of certain U.S. federal income and estate tax consequences of the ownership and disposition of Common Stock applicable to a beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or of any state, (iii) an estate the income of which is subject to U.S. federal income tax, regardless of its source, or (iv) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more United States persons have the authority to control all substantial decisions of the trust. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period that includes the current calendar year (counting for such purposes all of the days present in the current year, two-thirds of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal tax as if they were U.S. citizens and thus are not Non-U.S. Holders for purposes of this discussion. THIS DISCUSSION IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), EXISTING AND PROPOSED REGULATIONS PROMULGATED THEREUNDER AND ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF AS OF THE DATE HEREOF, ALL OF WHICH ARE SUBJECT TO CHANGE, INCLUDING CHANGES WITH RETROACTIVE EFFECT. THIS DISCUSSION DOES NOT ADDRESS ALL ASPECTS OF U.S. FEDERAL INCOME AND ESTATE TAXATION THAT MAY BE IMPORTANT TO NON-U.S. HOLDERS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES (INCLUDING TAX CONSEQUENCES APPLICABLE TO NON-U.S. HOLDERS THAT ARE, OR HOLD INTERESTS IN COMMON STOCK THROUGH, PARTNERSHIPS OR OTHER FISCALLY TRANSPARENT ENTITIES) AND DOES NOT ADDRESS UNITED STATES STATE AND LOCAL OR NON-UNITED STATES TAX CONSEQUENCES. PROSPECTIVE NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM OF OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS THE TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. DIVIDENDS Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of Common Stock generally will be subject to United States withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. Holders (and in the case of Non-U.S. Holders that are treated as partnerships or other fiscally transparent entities, partners, shareholders or other beneficiaries of such Non-U.S. Holders) may be required to satisfy certain certification requirements and provide certain information in order to claim treaty benefits. Special rules regarding the availability of treaty benefits apply with respect to entities that are treated as partnerships or other fiscally transparent entities for U.S. federal income tax purposes but treated as corporations for purposes of the tax laws of an applicable treaty country (or, conversely, treated as corporations for U.S. federal income tax purposes but treated as partnerships or other fiscally transparent entities for purposes of the tax laws of an applicable treaty country). Any such entities that hold Common Stock, and partners, beneficiaries and shareholders of such entities, should consult their tax advisors as to the applicability of such rules to their particular circumstances. Dividends paid to a Non-U.S. Holder that are either (i) effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United States or (ii) if a tax treaty applies, attributable to a permanent establishment maintained by the Non-U.S. Holder, will not be subject to the withholding tax (provided in either case the Non-U.S. Holder files the appropriate documentation with the Company or its Paying Agent), but, instead, will be subject to regular U.S. federal income tax at the graduated rates in the same manner as if the Non-U.S. Holder were a U.S. resident. In addition to such graduated tax in the case of a Non-U.S. Holder that is a corporation, effectively connected dividends or, if a tax treaty applies, dividends attributable to a U.S. permanent establishment of the corporate Non-U.S. Holder, may be subject to a "branch profits tax" which is imposed under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable tax treaty) of the non-U.S. corporation's effectively connected earnings and profits, subject to certain adjustments. 72 76 GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax (and no tax will generally be withheld) with respect to gain realized on a sale or other disposition of Common Stock unless (i) the gain is effectively connected with a trade or business of such Non-U.S. Holder in the United States, or, if a tax treaty applies, attributable to a United States permanent establishment of the Non-U.S. Holder, (ii) in the case of certain Non-U.S. Holders who are nonresident alien individuals and hold the Common Stock as a capital asset, such individuals are present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code regarding the taxation of U.S. expatriates, or (iv) the Company is or has been a "U.S. real property holding corporation" within the meaning of the Code and the Non-U.S. Holder owned directly or pursuant to certain attribution rules more than 5% of the Company's Common Stock (assuming the Common Stock is regularly traded on an established securities market within the meaning of the Code) at any time within the shorter of the five-year period preceding such disposition or such Non-U.S. Holder's holding period. The Company is not, and does not anticipate becoming, a U.S. real property holding corporation. If a Non-U.S. Holder who is an individual falls under clause (i) of the preceding paragraph, he or she will, unless an applicable treaty provides otherwise, be taxed on the net gain derived from the sale at regular graduated U.S. federal income tax rates. If an individual Non-U.S. Holder falls under clause (ii) of the preceding paragraph, he or she will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by certain United States-source capital losses. If a Non-U.S. Holder that is a corporation falls under clause (i) in the preceding paragraph, it will be taxed on the net gain from the sale at regular graduated U.S. federal income tax rates and may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable tax treaty) on the non-U.S. corporation's effectively connected earnings and profits, subject to certain adjustments. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING Generally, the Company must report annually to the Internal Revenue Service the amount of dividends paid to a Non-U.S. Holder and the amount, if any, of tax withheld with respect to, such Non-U.S. Holder. A similar report is sent to the Non-U.S. Holder. Pursuant to tax treaties or certain other agreements, the Internal Revenue Service may make its report available to tax authorities in the recipient's country of residence. Currently, United States backup withholding tax (which generally is a withholding tax imposed at a rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) will generally not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States, unless the payor has actual knowledge that the payee is a U.S. Holder. Backup withholding tax generally will apply to dividends paid on Common Stock at addresses inside the United States to Non-U.S. Holders who fail to provide certain identifying information in the manner required. In addition, information reporting and backup withholding imposed at a rate of 31% will apply to the proceeds of a disposition of Common Stock paid to or through a U.S. office of a broker unless the disposing holder, under penalties of perjury, certifies as to its non-U.S. status or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding will not apply to a payment of disposition proceeds if the payment is made outside the United States through a non-U.S. office of a non-U.S. broker. However, U.S. information reporting requirements (but not backup withholding) will apply to a payment of disposition proceeds outside the United States if the payment is made through an office outside the United States of a broker that is (i) a U.S. person, (ii) a foreign person which derives 50% or more its gross income for certain periods from the conduct of a trade or business in the United States or (iii) a "controlled foreign corporation" for U.S. federal income tax purposes, unless the broker maintains documentary evidence that the holder is a Non-U.S. Holder and certain other conditions are met, or the holder otherwise establishes an exemption. 73 77 Recently adopted United States Treasury regulations, which generally are effective for payments made after December 31, 1999, subject to certain transition rules, alter the foregoing rules in certain respects. Among other things, such regulations provide certain presumptions under which a Non-U.S. Holder is subject to backup withholding at the rate of 31% and information reporting unless the Company receives certification from the holder of non-U.S. status. Depending on the circumstances, this certification will need to be provided (i) directly by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder that is treated as a partnership or other fiscally transparent entity, by the partners, shareholders or other beneficiaries of such entity, or (iii) by certain qualified financial institutions or other qualified entities on behalf of the Non-U.S. Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the Internal Revenue Service. FEDERAL ESTATE TAX An individual holder who is not a citizen or resident (as defined for U.S. federal estate tax purposes) of the United States and at the time of death is treated as the owner of, or has made certain lifetime transfers of, an interest in the Common Stock will be required to include the value thereof in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. 74 78 UNDERWRITING Subject to the terms and conditions set forth in an agreement between the underwriters and us, each of the underwriters named below, through their representatives Bear, Stearns & Co. Inc., CIBC Oppenheimer Corp. and Lehman Brothers, Inc., have severally agreed to purchase from us aggregate number of shares of common stock set forth opposite its name below:
NAME NUMBER OF SHARES - ---- ---------------- Bear, Stearns & Co. Inc. ................................... CIBC Oppenheimer Corp. ..................................... Lehman Brothers Inc. ....................................... -------- Total............................................. ========
The underwriting agreement provides that the obligations of the several underwriters thereunder are subject to approval of certain legal matters by their counsel and to various other conditions. Under the underwriting agreement, the indemnitees are obliged to purchase and pay for all of the above shares of common stock if any are purchased. The underwriters propose to offer the shares of common stock directly to the public at the offering price set forth on the cover page of this prospectus and at such price less a concession not in excess of $ per share of common stock to certain other dealers who are members of the National Association of Securities Dealers, Inc. The underwriters may allow, and such dealers may reallow, concessions not in excess of $ per share of common stock to certain other dealers. After the offering, the offering price, concessions and other selling terms may be changed by the underwriters. Our common stock is offered subject to receipt and acceptance by the underwriters and subject to certain other conditions, including the right to reject orders in whole or in part. The underwriters have informed us that the underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. We have granted a 30 day over-allotment option to the underwriters to purchase an amount, up to an aggregate of fifteen percent (15%) of the aggregate number of shares appearing above, of additional shares of our common stock exercisable at the offering price less the underwriting discounts and commissions, each as set forth on the cover page of this prospectus. If the underwriters exercise such option in whole or in part then each of the underwriters will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as is approximately the percentage of shares of common stock that it is obligated to purchase of the total number of shares under the underwriting agreement as shown in the table set forth above. The underwriting agreement provides that we indemnify the underwriters against certain liabilities under the Securities Act or will contribute to payments that the underwriters may be required to make in respect thereof. Our directors and executive officers and IXC, Grumman Hill and NYSERNet, who collectively hold in the aggregate 10,459,560 shares of common stock, have agreed pursuant to lock-up agreements not to sell or offer to sell or otherwise dispose of any shares of common stock, subject to certain exceptions, for a 75 79 period of 180 days after the date of this prospectus without the prior written consent of Bear, Stearns & Co. Inc. Prior to the offering, there has been no public market for our common stock. Consequently, the initial offering price for the common stock will be determined by negotiations between us the representatives of the underwriters. Among the factors to be considered in such negotiations will be our results of operations in recent periods, estimates of our prospects and the industry in which we compete, an assessment of our management, the general state of the securities markets at the time of the offering and the prices of similar securities of generally comparable companies. Application will be made for approval of the listing of our common stock on the Nasdaq National Market under the symbol ATHY. We cannot assure you, however, that an active or orderly trading market will develop for the common stock or that our common stock will trade in the public markets subsequent to the offering at or above the initial offering price. In order to facilitate the offering, certain persons participating in the offering may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock during and after the offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have actually sold to them by us. The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option granted to the underwriters. In addition, the underwriters may stabilize or maintain the price of the common stock by bidding for or purchasing shares of common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if shares of common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such activities. The Underwriters have represented and agreed that (i) they have not offered or sold and, prior to the expiry of the period of six months from the date hereof, will not offer or sell any shares of common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulation 1995; (ii) they have only issued or passed on, and will only issue or pass on, in the United Kingdom any document received by them in connection with the issue of the shares of the common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise lawfully be issued or passed on; and (iii) they have complied and will comply with all applicable provisions of the Financial Services Act of 1986 with respect to anything done by them in relation to any shares of common stock in, from or otherwise involving the United Kingdom. The underwriters have reserved for sale, at the initial public offering price, up to shares of common stock for employees, directors and certain other persons associated with us who express an interest in purchasing such shares of common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered in this offering. 76 80 LEGAL MATTERS The validity of the shares of our common stock offered hereby will be passed upon for us by Dewey Ballantine LLP, New York, New York and for the underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New York. EXPERTS Our financial statements as of December 31, 1997 and 1998 and for the nine months ended September 30, 1996, the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998 included in this prospectus have been so included in reliance on the report of Grant Thornton LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (including exhibits, schedules and amendments thereto) under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information included in our Registration Statement. For further information with respect to us and the shares of common stock to be sold in this offering, we refer you to the Registration Statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance we refer you to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement is deemed qualified in all respects by such reference. You may read and copy all or any portion of the Registration Statement or any other information we file at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our Securities and Exchange Commission filings, including the Registration Statement, are also available to you on the Securities and Exchange Commission's Web site (http://www.sec.gov). As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, we will file period reports, proxy statements and other information with the Securities and Exchange Commission. Upon approval of the common stock for the quotation on the Nasdaq National Market, such reports, proxy and information statements and other information may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish our stock holders with annual reports containing audited financial statements and with quarterly reports for the first three quarters of each year containing unaudited interim financial information. 77 81 INDEX TO FINANCIAL STATEMENTS APPLIEDTHEORY CORPORATION AND PREDECESSOR
PAGE ---- Report of Independent Certified Public Accountants.......... F-2 Financial Statements Balance Sheets -- December 31, 1997 and 1998.............. F-3 Statements of Operations for the Nine Months Ended September 30, 1996, the Three Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998.... F-4 Statement of Stockholders' Equity (Deficit) for the Nine Months Ended September 30, 1996, the Three Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998............................................... F-5 Statements of Cash Flows for the Nine Months Ended September 30, 1996, the Three Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998.... F-6 Notes to Financial Statements for the Nine Months Ended September 30, 1996, the Three Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998.... F-7 - F-20
F-1 82 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of APPLIEDTHEORY CORPORATION We have audited the balance sheets of AppliedTheory Corporation as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended and for the three months ended December 31, 1996. We have also audited the statements of operations, stockholders' equity (deficit) and cash flows of the Predecessor (Note A) for the nine months ended September 30, 1996 . These financial statements are the responsibility of AppliedTheory Corporation's management and the Predecessor's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AppliedTheory Corporation as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended and for the three months ended December 31, 1996, and the results of operations and cash flows of the Predecessor for the nine months ended September 30, 1996 in conformity with generally accepted accounting principles. GRANT THORNTON LLP New York, New York January 29, 1999 F-2 83 APPLIEDTHEORY CORPORATION BALANCE SHEETS
DECEMBER 31, ------------------------- 1997 1998 ---------- ----------- ASSETS Current assets Cash and cash equivalents................................. $ 135,179 $ 1,785,682 Accounts receivable, net of allowance of $122,000 and $157,000 in 1997 and 1998, respectively................ 1,211,323 3,584,391 Prepaid expenses and other assets......................... 187,182 255,058 ---------- ----------- Total current assets.............................. 1,533,684 5,625,131 Property and equipment, net............................... 3,910,406 4,203,171 Other assets.............................................. 689,333 ---------- ----------- Total assets...................................... $5,444,090 $10,517,635 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable.......................................... $2,006,834 $ 2,148,603 Accrued payroll........................................... 368,113 582,038 Accrued expenses.......................................... 1,010,029 2,472,967 Deferred revenue.......................................... 907,446 1,848,629 Current portion of long-term debt and capital lease obligations............................................ 210,548 551,359 Preferred stock dividends payable......................... 210,000 420,000 Due to related parties.................................... 400,277 850,101 ---------- ----------- Total current liabilities......................... 5,113,247 8,873,697 Long-term debt and capital lease obligations................ 4,360,529 5,979,238 Borrowings from NYSERNet.net, Inc........................... 2,444,636 2,957,238 Other liabilities........................................... 651,461 214,499 Redeemable preferred stock -- 75,000 shares authorized; 15,000 issued and outstanding; cumulative 14% dividend; $100 per share liquidation value.......................... 1,500,000 1,500,000 Stockholders' equity (deficit): Common stock, $.01 par value; 25,000,000 shares authorized; issued and outstanding 6,540,000 shares in 1997 and 10,026,325 shares in 1998..................... 13,080 100,263 Common stock -- nonvoting, $.01 par value, 5,000,000 shares authorized; 36,565 shares issued and outstanding in 1998................................................ 366 Additional paid-in capital................................ 7,920 5,515,688 Accumulated deficit....................................... (8,646,783) (14,623,354) ---------- ----------- Total stockholders' equity (deficit).............. (8,625,783) (9,007,037) ---------- ----------- Total liabilities and stockholders' equity (deficit)....................................... $5,444,090 $10,517,635 ========== ===========
The accompanying notes are an integral part of these statements. F-3 84 APPLIEDTHEORY CORPORATION STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY ------------------ --------------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------- SEPTEMBER 30, 1996 DECEMBER 31, 1996 1997 1998 ------------------ ----------------- ----------- ----------- Net revenues Third-party customers.............. $ 6,226,306 $ 1,489,302 $ 8,023,380 $14,235,872 NYSERNet.org, Inc. customers and services........................ 1,587,009 7,148,334 8,327,118 ----------- ----------- ----------- ----------- Total net revenues......... 6,226,306 3,076,311 15,171,714 22,562,990 ----------- ----------- ----------- ----------- Costs and expenses Cost of revenues................... 5,741,604 2,331,050 10,796,095 13,315,568 Sales and marketing................ 1,298,369 791,743 3,706,205 6,400,025 General and administrative......... 2,818,835 1,590,754 4,283,339 5,233,512 Research and development........... 129,550 43,745 679,895 242,905 Depreciation and amortization...... 157,670 81,456 1,094,681 1,671,951 Other expenses..................... 112,153 900,000 ----------- ----------- ----------- ----------- Total costs and expenses... 10,146,028 4,838,748 20,672,368 27,763,961 ----------- ----------- ----------- ----------- Loss from operations....... (3,919,722) (1,762,437) (5,500,654) (5,200,971) Interest income...................... (42,468) Interest expense..................... 4,870 346,713 608,068 ----------- ----------- ----------- ----------- NET LOSS................... (3,924,592) (1,762,437) (5,847,367) (5,766,571) Preferred stock dividends............ 210,000 210,000 ----------- ----------- ----------- ----------- Net loss attributable to common stockholders....................... $(3,924,592) $(1,762,437) $(6,057,367) $(5,976,571) =========== =========== =========== =========== Basic and diluted loss per common share.............................. $ (.27) $ (.93) $ (.71) =========== =========== =========== Shares used in computing basic and diluted loss per share............. 6,500,000 6,504,165 8,443,960 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 85 APPLIEDTHEORY CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NONVOTING COMMON COMMON STOCK STOCK ADDITIONAL --------------------- ------------------ PAID-IN ACCUMULATED DIVISIONAL SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT ---------- -------- ------ -------- ---------- ------------ ----------- Divisional deficit, January 1, 1996.... $(2,759,201) Net loss for the nine months ended September 30, 1996................... (3,924,592) ----------- Balance, September 30, 1996............ $(6,683,793) =========== Acquisition of net assets from NYSERNet.org, Inc. as of October 1, 1996...................... $ (826,979) Issuance of common stock............... 6,500,000 $ 13,000 Net loss for the three months.......... (1,762,437) ---------- -------- ------------ Balance, December 31, 1996............. 6,500,000 13,000 (2,589,416) Issuance of common stock pursuant to exercise of stock options............ 40,000 80 $ 7,920 Preferred stock dividends.............. (210,000) Net loss for the year.................. (5,847,367) ---------- -------- ---------- ------------ Balance, December 31, 1997............. 6,540,000 13,080 7,920 (8,646,783) Issuance of common stock, net of issuance costs of $80,951............ 1,150,000 2,300 4,983,419 Issuance of common stock pursuant to exercise of stock options............ 2,336,325 4,673 36,565 $ 73 263,852 Conversion of stock appreciation rights to nonstatutory stock options........ 341,000 Effect of five-for-one stock split..... 80,210 293 (80,503) Preferred stock dividends.............. (210,000) Net loss for the year.................. (5,766,571) ---------- -------- ------ -------- ---------- ------------ Balance, December 31, 1998............. 10,026,325 $100,263 36,565 $ 366 $5,515,688 $(14,623,354) ========== ======== ====== ======== ========== ============
The accompanying notes are an integral part of this statement. F-5 86 APPLIEDTHEORY CORPORATION STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY ------------------ --------------------------------------------- NINE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------- SEPTEMBER 30, 1996 DECEMBER 31, 1996 1997 1998 ------------------ ----------------- ----------- ----------- Cash flows from operating activities Net loss....................................... $(3,924,592) $(1,762,437) $(5,847,367) $(5,766,571) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization................ 157,670 81,456 1,094,681 1,671,951 Deferred payment of interest expense to NYSERNet.net, Inc. ........................ 58,915 211,323 (Gain) loss on sale of property and equipment.................................. (7,828) 111,389 20,988 Loss from assets not usable in operations.... 900,000 Conversion of stock appreciation rights to nonstatutory stock options................. 341,000 Changes in assets and liabilities Accounts receivable, net................... (812,765) (1,396,501) 185,178 (2,373,068) Other receivables.......................... 85,527 Due to (from) related parties.............. (529,728) (1,229,384) 449,824 Prepaid expenses and other assets.......... (70,916) (9,300) (60,905) (67,876) Accounts payable........................... 1,761,465 1,430,312 576,522 141,769 Accrued payroll............................ 116,177 8,071 229,373 213,925 Accrued expenses and other liabilities..... (135,851) 1,107,572 (373,037) 611,976 Deferred revenue........................... 733,476 236,620 69,309 941,183 ----------- ----------- ----------- ----------- Net cash used in operating activities...... (2,097,637) (833,935) (5,185,326) (2,703,576) ----------- ----------- ----------- ----------- Cash flows from investing activities Purchases of property and equipment............ (506,483) (1,270,383) (2,479,880) Issuance of notes receivable................... (309,000) Payments received on notes receivable.......... 1,667 Proceeds from sale of property and equipment... 56,344 4,842 8,176 ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities.............................. 56,344 (506,483) (1,265,541) (2,779,037) ----------- ----------- ----------- ----------- Cash flows from financing activities Issuance of common stock, net of issuance costs........................................ 13,000 8,000 5,254,317 Borrowings from NYSERNet.net, Inc.............. 2,041,293 2,385,721 301,279 Proceeds from line of credit borrowings, net... 4,144,005 1,285,995 Principal payments on capital leases........... (124,262) (350,199) Proceeds from long-term debt................... 1,023,724 Security deposit on equipment financing........ (382,000) Advances from NYSERNet.net, Inc................ 1,500,000 ----------- ----------- ----------- ----------- Net cash provided by financing activities.............................. 2,041,293 1,513,000 6,413,464 7,133,116 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 172,582 (37,403) 1,650,503 Cash and cash equivalents, beginning of period... 172,582 135,179 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period......... $ -- $ 172,582 $ 135,179 $ 1,785,682 =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-6 87 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 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 stock options and the private placement described in Note H), AppliedTheory Corporation is no longer a subsidiary of NET. The operating activities prior to October 1, 1996 were conducted as a nonincorporated "division" of ORG and are considered to constitute a predecessor business (the "Predecessor"). The financial statements presented for the nine months ended September 30, 1996 reflect these activities on a "carved-out" basis from the historical financial statements of ORG as if the Predecessor had been organized as of January 1, 1996. In conjunction with the proposed initial public offering, AppliedTheory Communications, Inc. intends to reorganize as a Delaware corporation. On January 28, 1999, the Company established its wholly-owned subsidiary, AppliedTheory Corporation. The Company intends to merge into AppliedTheory Corporation, which would be the surviving entity. For purposes of these financial statements and notes thereto, AppliedTheory Corporation and AppliedTheory Communications, Inc. are used interchangeably and referred to as "the Company." The Company is a provider of Internet solutions for businesses with critical Internet operations. The Company's solutions include: (i) Internet connectivity, (ii) Internet integration and enterprise portal development and (iii) Web hosting. The Company's operations are subject to certain risks and uncertainties, including actual and potential competition by entities with greater financial resources, experience and market presence, risks associated with the development of the Internet market, risks associated with consolidation in the industry, the need to manage growth and expansion, certain technology and regulatory risks and dependence upon sole and limited source suppliers. In addition, the Company has to date relied upon NET for a significant portion of the funding of its operations. The Company has a history of losses, negative cash flow from operations and at December 31, 1998 has a working capital deficiency and stockholders' deficit of $3,248,566 and $9,007,037, respectively. On January 29, 1999, the Company's Board of Directors authorized the filing of a registration statement relating to an initial public offering (IPO) of shares of common stock should market conditions permit and an increase in the number of common stock and preferred stock authorized to 60,000,000 and 1,000,000, respectively. Management has formulated plans that it believes will provide the Company with sufficient liquidity for the next twelve months in the event the IPO is delayed or unsuccessful. Management's plans include the deferral of discretionary expenses, utilization of existing cash, available credit from existing borrowing agreements and from additional financings, strategic relationships or other arrangements. There can be no assurance that these plans will be successful. F-7 88 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the Company's significant accounting policies. 1. Revenue Recognition Revenue from Internet connectivity and Web hosting services is recognized ratably over the period of the agreement as the services are provided. Revenue from Internet integration and enterprise portal development is recognized as the services are rendered or on a percentage of completion basis for contracts requiring milestone achievements prior to invoicing. 2. Deferred Revenue Deferred revenue consists principally of billings in advance of services not yet provided. 3. Research and Development The Company charges all costs incurred to establish the technological feasibility of a product or product enhancement to research and development expense. 4. Advertising Advertising costs, charged to operations when incurred, were approximately $12,000, $400, $435,000 and $1,363,000 for the nine months ended September 30, 1996, the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. 5. Income Taxes The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. A valuation allowance is recognized to the extent a portion or all of a deferred tax asset may not be realizable. 6. Loss Per Share Basic loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common shares issued or issuable pursuant to stock options and stock appreciation rights. Potential common shares issued are calculated using the treasury stock method. All potential common shares have been excluded from the computation of diluted loss per share as their effect would be antidilutive and accordingly, there is no reconciliation of basic and diluted loss per share for each of the periods presented (Note H). Loss per share has not been presented for the Predecessor because the Predecessor was not an incorporated entity. 7. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. F-8 89 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 8. Property and Equipment Property and equipment are recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Depreciation of capitalized leased assets is recorded on the straight-line method over the shorter of the term of the lease or the estimated useful life. 9. Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of The Company evaluates its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 10. Lease and Contractual Commitments The Company recognizes expense under operating leases and contractual agreements on a straight-line basis over the terms of the lease or agreement. The difference between the amounts computed on a straight-line basis and the amounts paid or payable is included in accrued expenses and other liabilities. 11. Stock Split On October 14, 1998, the Board of Directors approved a five-for-one stock split. All share and per share amounts in the accompanying financial statements have been retroactively restated to give effect to the stock split. The par value was maintained at $.01 per share. 12. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. However, these customers are concentrated in New York State. The Company's revenues from ORG customers and services to ORG accounted for approximately 52%, 47% and 37% of total net revenues for the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively (Note I). One third-party customer accounted for 14%, 16% and 28% of total net revenues for the three months ended December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively. 13. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt and capital lease obligations approximate fair value because of the short maturity of these items. F-9 90 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 The Company believes that it is not practical to estimate a fair value for its redeemable preferred stock which has a carrying value of $1,500,000. The carrying amount of the debt issued pursuant to the Company's bank credit agreement, as of December 31, 1998, approximates fair value because the interest rates change with market interest rates. 14. Supplemental Noncash Investing and Financing Activities During the years ended December 31, 1997 and 1998, the following noncash transactions occurred: (1) in 1997, the Company (i) purchased approximately $551,000 of fixed assets under capital lease obligations (Note D), (ii) incurred approximately $2,129,000 in advances to purchase fixed assets from ORG (Notes F and I) and (iii) issued 15,000 shares of $100 per share liquidation value preferred stock in settlement of the advances due to NET as of December 31, 1996 (Notes G and I), (2) the Company recorded $210,000 in dividends payable on the preferred stock in 1997 and 1998 and (3) in 1998, the Company recorded $341,000 to additional paid-in-capital from the conversion of 85,000 stock appreciation rights to nonstatutory stock options (Note H). 15. Segment and Related Information The Company operates as one business segment, as a provider of Internet solutions, and follows the requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company had revenues from its major service offerings as follows:
NINE THREE YEAR ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, -------------------------- 1996 1996 1997 1998 ------------- ------------ ----------- ----------- Net revenues Internet connectivity...... $5,690,811 $2,508,180 $12,249,040 $15,076,914 Internet integration and enterprise portal development............. 244,439 268,325 1,914,726 5,940,366 Web hosting................ 291,056 299,806 1,007,948 1,545,710 ---------- ---------- ----------- ----------- Total net revenues........... $6,226,306 $3,076,311 $15,171,714 $22,562,990 ========== ========== =========== ===========
16. Use of Estimates In preparing the financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. 17. Reclassifications Certain prior period amounts have been reclassified to conform to the current year presentation. F-10 91 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 NOTE C -- PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
1997 1998 ---------- ---------- Computer equipment.......................................... $3,098,084 $5,467,772 Office furniture and equipment.............................. 409,809 440,019 Equipment under capital leases.............................. 551,334 551,334 Leasehold improvements...................................... 983,821 353,210 ---------- ---------- 5,043,048 6,812,335 Less accumulated depreciation and amortization.............. (1,132,642) (2,609,164) ---------- ---------- $3,910,406 $4,203,171 ========== ==========
On December 21, 1998, the Company adopted a plan which was approved by the Board of Directors to close a leased facility which principally is used as a Web hosting data center. The facility has experienced operational difficulties which limited its usability as a Web hosting site and the ability to generate sufficient revenues. In connection with the plan of abandonment, the Company has recorded a $900,000 charge to operations for the year ended December 31, 1998 consisting of (i) a $486,000 write-down of equipment and leasehold improvements to management's estimate of their fair value 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 relating to equipment leases and facility operating leases, net of anticipated subrental income in accordance with the provisions of EITF 94-3, "Liability Recognized for Certain Employee Termination Benefits and Other Costs to Exit an Activity." The plan calls for the Web hosting customer base served from this facility and the related revenues, which are not significant, to be transitioned to another facility by September 1999. NOTE D -- LONG-TERM DEBT, BORROWINGS FROM NET AND CAPITAL LEASE OBLIGATIONS Long-term debt, borrowings from NET and capital lease obligations consist of the following:
DECEMBER 31, ------------------------ 1997 1998 ---------- ---------- Line of credit.............................................. $4,144,005 $5,430,000 Borrowings from NYSERNet.net, Inc........................... 2,444,636 2,957,238 Equipment financing......................................... 897,764 Capital lease obligations................................... 427,072 202,833 ---------- ---------- 7,015,713 9,487,835 Less current portion........................................ (210,548) (551,359) ---------- ---------- $6,805,165 $8,936,476 ========== ==========
Line of Credit On January 20, 1998, the Company entered into a credit agreement with Fleet Bank for the 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 F-11 92 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 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. Pursuant to the credit agreement, the Company refinanced its existing short-term lines of credit on a long-term basis. Accordingly, the $4,144,000 outstanding under this line of credit balance as of December 31, 1997 was classified based on the terms of the refinancing. At December 31, 1998, the Company had $5,430,000 outstanding under the line of credit and, as a result of certain restrictions, had $70,000 in additional availability. The average interest rate on outstanding borrowings was 10.0% and 6.1% at December 31, 1997 and 1998, respectively. Borrowings from NYSERNet.net, Inc. The Company has an unsecured borrowing facility with NET which provides for borrowings to a maximum amount of $6,187,000, less any preferred stock issued to NET (Note G), for working capital requirements. Interest on the loans accrues at the prime rate (8.5% and 8.0% at December 31, 1997 and 1998, respectively) and payments are deferred for five years from the date of each advance or January 1, 2002, whichever is earlier. All principal borrowings under this agreement are due and payable on January 1, 2002. The Company had principal borrowings under this facility of $2,385,721 and $2,687,000 at December 31, 1997 and 1998, respectively. The Company had $2,000,000 available for additional principal borrowings at December 31, 1998. In addition, the Company has interest payable under this agreement of $58,915 and $270,238 at December 31, 1997 and 1998, respectively. Amounts charged to interest expense on the borrowings under this related party debt facility amounted to $58,915 and $211,323 for the years ended December 31, 1997 and 1998, respectively. Equipment Financing During 1998, the Company entered into an equipment financing agreement with a secured lender. Borrowings under the agreement are repayable in thirty-six (36) varying monthly installments. Interest is payable monthly at a fixed rate of 10.3%. Principal payments under this financing are $417,168 in 1999, $302,699 in 2000 and $177,897 in 2001. In connection with the equipment financing, the Company was required to place on deposit $382,000 as additional collateral. The security deposit earns interest at a rate of 5.0% per annum and is refundable in equal installments on April 1, 2000 and 2001. Capital Lease Obligations The Company leases certain equipment under agreements accounted for as capital leases. The obligations for the equipment require the Company to make monthly payments through September 2000, with implicit interest rates ranging from 10.0% to 16.6%. F-12 93 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 The following is a summary of the aggregate annual maturities of long-term debt, borrowings from NET and capital lease obligations as of December 31, 1998:
YEAR ENDING DECEMBER 31, ------------------------ 1999........................................... $ 551,359 2000........................................... 371,342 2001........................................... 5,607,896 2002........................................... 2,957,238 ---------- Total................................ $9,487,835 ==========
Interest paid for the nine months ended September 30, 1996 and the years ended December 31, 1997 and 1998 was $4,870, $287,798 and $396,745, respectively. NOTE E -- ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses consisted of the following:
1997 1998 ---------- ---------- Network costs............................................... $ 301,847 $1,020,413 Lease and contractual commitments........................... 184,780 184,780 Other....................................................... 523,402 1,267,774 ---------- ---------- $1,010,029 $2,472,967 ========== ==========
Other liabilities consisted of the following:
1997 1998 -------- -------- Lease and contractual commitments........................... $367,461 $214,499 Accrued compensation........................................ 284,000 -------- -------- $651,461 $214,499 ======== ========
NOTE F -- COMMITMENTS AND CONTINGENCIES 1. Telecommunications The Company is committed to a minimum cumulative purchase commitment to a telecommunications vendor for various products and services through December 31, 2000. As of December 31, 1998, the Company has met the minimum cumulative purchase commitments of $16.5 million through December 31, 1999 and anticipates meeting the future minimum cumulative purchase commitments of $20 million over the remaining term; however, there can be no assurance that such minimum will be met. The Company has also entered into contracts expiring at various times through the year 2002 with various communication vendors to provide services consisting of aggregating, routing and transporting data communications over the Company's network. 2. Facilities and Equipment Leases The Company leases its office facilities and certain equipment with expiration dates through November 2008. Certain operating leases for the office facilities include rent holidays and scheduled base F-13 94 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 rent increases over the term of the lease. The total amount of base rent is being charged to expense on the straight-line method over the terms of the lease. Future minimum lease payments under noncancelable operating leases as of December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, - ------------------------ 1999........................................... $ 894,000 2000........................................... 900,000 2001........................................... 809,000 2002........................................... 699,000 2003........................................... 743,000 Thereafter..................................... 2,898,000 ---------- Total................................ $6,943,000 ==========
Total rent expense for operating leases amounted to $253,000, $292,000 (including $89,000 to ORG), $862,000 and $898,000 for the nine months ended September 30, 1996, the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. Effective January 1, 1997, the Company purchased all assets previously leased from ORG for $2,129,000. The assets were purchased at book value, which approximated fair value at the effective date. 3. Employment Agreements The Board of Directors has provided for severance payments upon termination of employment or change in control, as defined, for certain executive officers of the Company. Under this provision, the maximum aggregate commitment at December 31, 1998, excluding benefits, was approximately $1,265,000. 4. Litigation Matters The Company is involved in various litigation which arise through the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. NOTE G -- REDEEMABLE PREFERRED STOCK Effective January 1, 1997, the Company issued 15,000 shares of redeemable preferred stock at $100 per share liquidation value to NET in satisfaction of the $1,500,000 advance. Holders of shares of the redeemable preferred stock are entitled to receive payment for cumulative dividends at the annual rate of $14.00 per share (14%) beginning January 1, 1999, based upon a liquidation value of $100 per share, payable quarterly. At December 31, 1998, the amount of dividends payable on the 14% redeemable preferred stock was $420,000. All or any part of the preferred stock may be redeemed by the Company at any time on or after December 31, 2001, by resolution of the Company's Board of Directors. At any time on or after December 31, 2001, any holder of preferred stock may request that the Company redeem some or all of the holder's preferred stock within sixty days of such request. F-14 95 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 NOTE H -- STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTIONS The Company has authorized 25,000,000 shares of voting common stock and 5,000,000 shares of nonvoting common stock. In addition, the Company has authorized 75,000 shares of preferred stock. The Company's nonvoting common stock is identical in all respects to the voting common stock, except that the holders of the nonvoting common stock do not have the right to vote on any matter coming before the stockholders of the Company, except to the extent required by law. At the option of the Company's Board of Directors, all shares of nonvoting common stock can be converted into shares of voting common stock. On August 4, 1998, the Company completed a private placement of 1,150,000 shares of its voting common stock for proceeds of $4,985,719, net of issuance costs of $80,951. In connection with the private placement, NET sold a portion of its holdings in the Company. The stock purchase agreement also gives the investors the right of first refusal to purchase any equity securities of the Company at the same price, and on the same terms and conditions offered until such time that any class of the Company's equity securities are registered under the Securities and Exchange Act. In addition, NET granted an irrevocable proxy to vote and to execute and deliver written consents or otherwise act with respect to 1,260,000 shares of its current holdings of 3,250,000 shares to the investors of the private placement. The Company's 1996 Incentive Stock Option Plan has authorized the grant of options to key employees, directors, advisors and consultants for up to 8,000,000 shares of the Company's common stock with an exercise price of not less then the fair market value of the shares at the date of grant. All options granted have ten-year terms and vest over one to five years following the date of grant. The Board of Directors may exercise the right to accelerate the vesting provisions of the option grants upon the occurrences or certain conditions, as defined. As permitted by SFAS No. 123, the Company has elected to follow the Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," method of determining compensation cost. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ------------------ DECEMBER 31, 1996 1997 1998 ------------------ ------- ------- Risk-free interest rate........................ 6.21% 5.40% 4.80% Volatility factor.............................. .001 .001 .001 Expected life of options....................... 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the F-15 96 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 existing methods do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had the Company determined compensation cost for this plan in accordance with SFAS No. 123, the Company's pro forma net loss attributable to common stockholders and pro forma basic and diluted loss per common share would have been as follows:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED --------------------------- DECEMBER 31, 1996 1997 1998 ------------------ ------------ ----------- Pro forma net loss attributable to common stockholders................. $(1,765,450) $ (6,069,920) $(6,171,616) Pro forma basic and diluted loss per common share........................ $ (.27) $ (.93) $ (.73)
A summary of the Company's stock option activity and related information for the period October 1, 1996 through December 31, 1998, follows:
WEIGHTED PRICE AVERAGE OPTIONS PER SHARE EXERCISE PRICE ---------- ----------- -------------- Balance, October 1, 1996 Granted....................................... 3,296,500 $.084-$.20 $ .108 Forfeited..................................... (25,000) .394 .084 ---------- ----------- -------------- Balance, December 31, 1996.................... 3,271,500 .084-.20 .108 Granted....................................... 586,555 .60 .60 Exercised..................................... (40,000) .20 .20 Forfeited..................................... (11,250) .394 .394 ---------- ----------- -------------- Balance, December 31, 1997.................... 3,806,805 .084-.60 .182 Granted....................................... 1,474,515 .20-4.40 4.104 Exercised..................................... (2,372,890) .084-.60 .114 Forfeited..................................... (242,875) .084-.60 .438 ---------- ----------- -------------- Balance, December 31, 1998.................... 2,665,555 $.084-$4.40 $ 2.39 ========== =========== ============== Exercisable, December 31, 1996................ 80,000 $.20 $ .20 ========== =========== ============== Exercisable, December 31, 1997................ 918,980 $.084-$ .60 $ .154 ========== =========== ==============
The weighted average fair values of options granted were $.02, $.00 and $.87 for the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. F-16 97 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 The following table summarizes information about the shares outstanding and exercisable for options at December 31, 1998:
OUTSTANDING ----------------------------------------- EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE -------- ----------- ---------------- -------- ----------- -------- $.084-$.092 483,545 1.17 $ .091 440,545 $ .09 .20-.60 817,495 7.89 .396 596,620 .32 4.40 1,364,515 9.84 4.40 136,740 4.40 --------- --------- 2,665,555 8.75 $2.39 1,173,905 $ .71 ========= =========
During 1997, the Board of Directors authorized the issuance of 85,000 Stock Appreciation Rights (SARS) to certain executives at an exercise price varying from $.20 to $.60. The SARS vest ratably over a four-year period or upon occurrence of certain events. At the option of the Company, the SARS can be converted into nonstatutory stock options at their exercise price. Because the exercise price exceeded the fair market value of the underlying stock as of December 31, 1997, no liability was recorded. During 1998, pursuant to the sale of common stock of the Company described above, the SARS vested, the Company recorded $341,000 of compensation expense and the SARS were converted into nonstatutory stock options. NOTE I -- RELATED PARTY TRANSACTIONS 1. Transactions With NET and ORG Effective October 1, 1996, the Company purchased certain assets and assumed certain liabilities of ORG in a noncash transaction. The following is a summary of this transaction: Assets purchased Prepaid expense and other assets.......................... $116,927 Property and equipment (book value basis of $704,860)..... 773,839 Intangible assets (book value basis of $0)................ 758,000 Liabilities assumed Accrued compensation...................................... $130,669 Deferred revenue.......................................... 601,507 Other accrued liabilities................................. 877,615
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 48, the purchase of the intangible assets and the amount paid for property and equipment in excess of the assets' net book value have been recorded as a charge to retained earnings in the amount of $826,979. The Company has entered into a resale agreement with ORG to serve as ORG's sole source provider for Internet system and network management solutions to ORG's customer base under contractual arrangements. 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. In addition, F-17 98 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 the Company provides services to ORG principally related to network development. The Company's revenues from ORG's customer base and services to ORG for the following periods are:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------ 1996 1997 1998 ------------ ---------- ---------- Unrelated customers........................... $ 916,773 $3,705,546 $3,051,837 Member institutions........................... 529,179 2,890,786 4,477,004 Services to ORG............................... 141,057 552,002 798,277 ---------- ---------- ---------- $1,587,009 $7,148,334 $8,327,118 ========== ========== ==========
The excess of the Company's revenues over amounts charged by ORG to its member institutions was approximately $243,000, $1,490,000 and $2,814,000 for the three months ended December 31, 1996 and for the years ended December 31, 1997 and 1998, respectively. The Company has also entered into a resource sharing agreement with both NET and ORG. During the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, the Company charged NET approximately $25,000, $91,500 and $100,000 and ORG $63,000, $210,000 and $300,000, respectively, in management fees. During the year ended December 31, 1997, the Company purchased from ORG fixed assets previously leased from ORG with a book value of $2,129,000. In addition, the Company issued 15,000 shares of $100 per share liquidation value preferred stock in settlement of the advances due to NET (Note G). Transactions among the Company, ORG and NET throughout the period are summarized as follows:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- DECEMBER 31, 1996 1997 1998 ----------------- ----------- ----------- Balance, beginning of period............. $ (39,016) $ 490,712 $ (400,277) Revenue from ORG......................... 1,587,009 7,148,334 8,327,118 Payments made to the Company............. (6,123,558) (8,033,630) Management fees.......................... 88,083 301,297 399,780 Expenses paid on behalf of the Company by ORG.................................... (1,393,613) (10,997) (45,441) Expenses paid by the Company on behalf of ORG and Net............................ 323,824 96,756 136,733 Purchase of assets from ORG.............. (2,129,105) Equipment lease.......................... (89,335) 46,267 Company receipts deposited by ORG and NET.................................... 13,760 170,017 ORG and NET receipts deposited by the Company................................ (219,983) (1,404,401) ----------- ----------- ----------- Balance, end of period................... $ 490,712 $ (400,277) $ (850,101) =========== =========== ===========
F-18 99 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 2. Other In 1998, two officers/stockholders of the Company borrowed a total of $294,000 under term note agreements. The total principal amount plus accrued interest is due in 2001. Interest is being accrued at a rate of 5.56%. Upon demand by the Company the officers/stockholders will be required to pledge common stock of the Company as collateral on these borrowings. In December 1998, the Board authorized the Company to make available a $2.5 million credit line, effective January 1, 1999, to its Chairman/CEO to be used exclusively for purchasing the Company's common stock, under certain circumstances. This line of credit agreement will terminate upon consummation of the initial public offering transaction described in Note A. In October 1996, the Company entered into a consulting agreement with a director/stockholder, which agreement expires in October 2000. The agreement, which is automatically renewable annually after the initial term, is cancellable by either party with notice, as defined. Under this agreement, the director/ stockholder receives $5,000 per-month in consulting fees. In addition, the director/stockholder received 500,000 stock options in 1996 with an exercise price of $.20 per-share which vest ratably over the term of the initial term of the consulting agreement or upon occurrence of certain events. The compensation charge pertaining to the stock options was nominal based on the fair value of the common stock at the date of grant. These stock options became fully exercisable in 1998 as a result of the August 4, 1998 private placement transaction described in Note H. The Company incurred consulting fees of $15,000, $60,000 and $60,000 during the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. During the year ended December 31, 1998, the Company incurred $25,000 in consulting fees to one of its principal stockholders. NOTE J -- INCOME TAXES The Company generated taxable losses of approximately $1,285,000, $5,526,000 and $4,916,000 for the three months ended December 31, 1996 and the years ended December 31, 1997 and 1998, respectively. Significant components of the Company's deferred tax assets are as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------- 1996 1997 1998 ------------- ----------- ----------- Net operating loss carryforwards........... $ 501,000 $ 2,771,000 $ 4,607,000 Accruals not currently deductible for Tax purposes................................. 462,000 391,000 618,000 Acquisition of intangible assets from ORG...................................... 298,000 298,000 276,000 Other...................................... 12,000 130,000 256,000 ----------- ----------- ----------- Gross deferred tax assets.................. 1,273,000 3,590,000 5,757,000 Valuation allowance........................ (1,273,000) (3,590,000) (5,757,000) ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
F-19 100 APPLIEDTHEORY CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 A reconciliation between the Company's effective tax rate and the Federal income tax rate is as follows:
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED -------------- DECEMBER 31, 1996 1997 1998 ----------------- ----- ----- Statutory Federal income tax rate................. (34)% (34)% (34)% Valuation allowance on net operating Loss......... 33 32 32 Valuation allowance on temporary Differences...... 1 1 Expenses not deductible for income tax purposes... 1 1 1 ----- ----- ----- Effective income tax rate......................... 0% 0% 0% ===== ===== =====
The Company has provided a net deferred tax asset valuation allowance for net deferred tax assets since realization of these benefits cannot be reasonably assured. At December 31, 1998, the Company had net operating loss carryforwards of approximately $11,727,000 for income tax purposes. These net operating losses begin to expire in the year 2012. Utilization of the net operating loss arising prior to August 4, 1998 will be subject to an annual limitation due to the change in ownership on such date. Further limitations may occur in the event of significant changes in the Company's ownership. In addition, their use is limited to future earnings of the Company. NOTE K -- RETIREMENT SAVINGS PLANS During the nine months ended September 30, 1996, the Company participated in a 403(b) defined contribution plan through Teachers Insurance Annuity (TIAA) and College Retirement Equities Fund (CREF). This plan was available to eligible employees. The Company contributed a percentage of each eligible employee's regular salary. Total expense charged to operations relating to this plan for the nine months ended September 30, 1996 was $296,000. As of January 1, 1997, all employees were transferred to the AppliedTheory Communications, Inc. 401(k) and Money Purchase Pension Plans, and the 403(b) plan with TIAA and CREF was terminated and all participants were fully vested in their account balances. The AppliedTheory Communications, Inc. Money Purchase Pension Plan and the AppliedTheory Communications, Inc. 401(k) Profit Sharing Plan cover substantially all employees. In addition to employee contributions, the Company matched a percentage of the employee's elective salary deferral into the Profit Sharing Plan and contributed a percentage of each eligible employee's salary to the Money Purchase Plan. Effective October 1, 1997, the Company terminated the AppliedTheory Communications, Inc. Money Purchase Pension Plan. All employees in the Plan were vested, and all assets of the Plan were transferred into the 401(k) Profit Sharing Plan. The total contributions made by the Company under both Plans totaled approximately $30,000 for the three months ended December 31, 1996, and $587,000 and $373,000 for the years ended December 31, 1997 and 1998, respectively. NOTE L -- SUBSEQUENT EVENT 1. Agreement On January 26, 1999, the Company and IXC Internet Services, Inc., (a principal stockholder) signed a Joint Marketing and Services Agreement. Under the agreement each party can resell the services of the other party. F-20 101 [INSIDE BACK COVER --] [GRAPHIC: GEMINI2000 LOGO, INCORPORATING LOGOS OF APPLIEDTHEORY CORPORATION AND IXC COMMUNICATIONS, INC.] [GRAPHIC: MAP OF THE UNITED STATES ILLUSTRATING THE GEMINI2000 NETWORK GEOGRAPHICAL SCOPE. GEMINI2000 DATA CENTERS ARE ILLUSTRATED IN DALLAS, NEWARK AND SAN FRANCISCO. CORE POP (POINT OF PRESENCE) SITES ARE INDICATED IN SEATTLE, SAN FRANCISCO, SALT LAKE CITY, DALLAS, CHICAGO, ATLANTA, BALTIMORE/WASHINGTON D.C. AND NEWARK. THE CORE POP SITES ARE INTERCONNECTED BY OC 48 LINES. APPLIEDTHEORY EXPANSION CITIES ARE INDICATED IN LOS ANGELES, SAN DIEGO, PHOENIX, MINNEAPOLIS, DETROIT, ST. LOUIS, HOUSTON, TAMPA, PHILADELPHIA, STAMFORD, PROVIDENCE AND BOSTON. THE APPLIEDTHEORY EXPANSION CITIES ARE CONNECTED TO CORE POP SITES BY OC 3 LINES.] [GRAPHIC: THE GEMINI2000 REGIONAL HIERARCHY ILLUSTRATED WITH CORE POP SITES CONNECTED BY OC 48 LINES. THE CORE POP SITES ARE CONNECTED TO PACKET OVER SONET (POS) SITES AND ASYNCHRONOUS TRANSFER MODE (ATM) SITES WHICH ARE IN TURN CONNECTED TO APPLIEDTHEORY EXPANSION CITY SITES, ALL BY OC 3 LINES.] [TEXT: THE GEMINI2000 NETWORK IS A NEW HIGH SPEED INTERNET BACKBONE BUILT FROM THE GROUND UP WITH THE LATEST FIBER TECHNOLOGY AND ELECTRONICS. UTILIZING A UNIQUE HIERARCHICAL TOPOLOGY, IT IS 100 TO 1,000 TIMES FASTER THAN TYPICAL INTERNET BUSINESS CONNECTIONS AVAILABLE TODAY.] 102 - --------------------------------------------------------------- - --------------------------------------------------------------- PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER APPLIEDTHEORY CORPORATION NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. ------------------------ TABLE OF CONTENTS ------------------------
PAGE ---- Prospectus Summary.............................. 1 Risk Factors.................................... 9 How We Intend to Use the Proceeds From the Offering...................................... 21 Dividend Policy................................. 21 Capitalization.................................. 22 Dilution........................................ 23 Selected Financial Data......................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 26 Business........................................ 34 Management...................................... 53 Certain Transactions............................ 62 Principal Stockholders.......................... 66 Description of Capital Stock.................... 68 Shares Eligible for Future Sale................. 71 Certain U.S. Federal Tax Considerations for Non- U.S. Holders of Common Stock.................. 72 Underwriting.................................... 73 Legal Matters................................... 75 Experts......................................... 75 Where You Can Find More Information............. 75 Index to Financial Statements................... F-1
------------------------ Until , 1999 all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- - --------------------------------------------------------------- APPLIEDTHEORY CORPORATION SHARES COMMON STOCK ----------------------- PROSPECTUS ----------------------- BEAR, STEARNS & CO. INC. CIBC WORLD MARKETS LEHMAN BROTHERS ------------------------ , 1999 - --------------------------------------------------------------- - --------------------------------------------------------------- 103 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemized statement of the estimated amounts of all expenses payable by the Registrant in connection with the registration of the common stock offered hereby, other than underwriting discounts and commissions: Registration Fee-Securities and Exchange Commission......... $15,985 NASDAQ National Market Listing Fee.......................... * NASD Filing Fee............................................. 6,250 Blue Sky fees and expenses.................................. * Accountants' fees and expenses.............................. * Legal fees and expenses..................................... * Printing and engraving expenses............................. * Transfer agent and registrar fees........................... * Miscellaneous............................................... * ------- Total............................................. $ * =======
- --------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145(a) of the General Corporation Law of the State of Delaware (the DGCL) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or business, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of the DGCL further provides: (i) that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue, or matter therein, he shall be indemnified against any expenses actually and reasonably incurred by him in connection therewith; (ii) that indemnification provided for by Section 145 shall not be deemed exclusive of any rights to which the indemnified party may be entitled; (iii) and that the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out II-1 104 of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Section 102(b)(7) of the DGCL provides that a corporation in its original Certificate of Incorporation or an amendment thereto validly approved by stockholders may eliminate or limit personal liability of members of its board of directors or governing body for breach of a director's fiduciary duty. However, no such provision may eliminate or limit the liability of a director for breaching his duty of loyalty, failing to act in good faith, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty. AppliedTheory's Certificate of Incorporation contains such a provision. AppliedTheory's Certificate of Incorporation and By-Laws provide that AppliedTheory shall indemnify officers and directors and, to the extent permitted by the Board of Directors, employees and agents of AppliedTheory, to the full extent permitted by and in the manner permissible under the laws of the State of Delaware. In addition, the By-Laws permit the Board of Directors to authorize AppliedTheory to purchase and maintain insurance against any liability asserted against any director, officer, employee or agent of AppliedTheory arising out of his capacity as such. Prior to completion of this offering, AppliedTheory and each of its directors will enter into an indemnification agreement. The indemnification agreements will provide that AppliedTheory will indemnify the directors to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware and by the Certificate of Incorporation and the Bylaws. The employment agreements of AppliedTheory's executive officers (which are included as Exhibits to this Registration Statement) provide that AppliedTheory shall indemnify the officers to the fullest extent permitted by law and by the Certificate of Incorporation and Bylaws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this Registration Statement, AppliedTheory has issued securities that were not registered under the Securities Act of 1933, as amended (the Securities Act) to a limited number of persons, as described below. AppliedTheory believes that the transactions described below were exempt from registration under the Securities Act pursuant to (i) Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving public offering, (ii) Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions pursuant to compensatory benefit plans and contracts relating to compensation; or (iii) Section 3(a)(9), as an issuance of a security exchanged by the issuer with an existing security holder exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchanged. (A) ISSUANCES OF CAPITAL STOCK In March 1996, AppliedTheory transferred 6,500,000 shares, which at the time represented all of its outstanding stock, to NYSERNet.net in a reorganization of NYSERNet, Inc. AppliedTheory received as consideration for its stock certain operating assets of NYSERNet, Inc. and $13,000. On March 12, 1997, AppliedTheory issued to NYSERNet 15,000 shares of Preferred Stock pursuant to a revolving borrowing facility with NYSERNet. The Preferred Stock has a liquidation value of $100 per share and provides for dividends accruing at an annual rate of 14% of the liquidation value. AppliedTheory may redeem the Preferred Stock after December 31, 2001 at a price equal to the liquidation value plus any accrued but unpaid dividends. II-2 105 In August 1998, AppliedTheory issued 1,150,000 shares of Common Stock to IXC Internet Service, Inc. and Grumman Hill Investments III, L.P., for an aggregate offering price of $5,066,670, resulting in net proceeds of $4,985,719. As of January 31, 1999, 2,956,596 shares of common stock have been issued in connection with the exercise of stock options. (B) GRANTS OF STOCK OPTIONS Pursuant to a Non-Statutory Stock Option Contract dated October 5, 1996, AppliedTheory issued to Shelley Harrison an option to purchase 500,000 shares of AppliedTheory voting common stock at a price of $.20 per share. The option vested with regards to 125,000 shares on October 1, 1997 and, with respect to the remaining 375,000 shares, on August 4, 1998. The 1996 Incentive Stock Option Plan was adopted, as amended, by AppliedTheory's Board of Directors on September 2, 1998 and by the stockholders of AppliedTheory on October 14, 1998. As of January 31, 1999, options to purchase up to an aggregate of 5,357,570 shares of common stock had been granted to employees of AppliedTheory, of which options to purchase up to an aggregate of 2,121,849 shares of common stock remained outstanding on that date at a weighted average exercise price of $2.96 per share. In December 1998, the Board of Directors converted 85,000 outstanding Stock Appreciation Rights held by Messrs. Mandelbaum, Luckett, Martin and Oros into non-qualified options to purchase up to 85,000 shares of common stock of AppliedTheory. The options vested immediately upon issuance. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.01 -- Underwriting Agreement.* 3.01 -- Certificate of Incorporation of the Registrant.* 3.02 -- Bylaws of the Registrant.* 4.01 -- Specimen of Certificate for Common Stock of the Registrant.* 4.02 -- Registration Rights Agreement by and among IXC Internet Services, Inc., Grumman Hill Investments III, L.P., AppliedTheory Communications, Inc., NYSERNet.net, Inc., Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A. Oros, David A. Buckel and Shelley A. Harrison, dated July 10, 1998. 5.01 -- Opinion of Dewey Ballantine LLP.* 10.01 -- Stock Purchase Agreement by and among IXC Internet Services, Inc., Grumman Hill Investments III, L.P., AppliedTheory Communications, Inc., NYSERNet.net, Inc., Richard Mandelbaum, David Buckel, James Luckett, Denis Martin and Mark Oros, dated August 4, 1998. 10.02 -- 1996 Incentive Stock Option Plan. 10.03 -- Form of Option Agreements among the Registrant, IXC Internet Services, Inc. and Grumman Hill Investments III, L.P. and John Pendray, Robert Riley, Bill Owens, Jacqueline A. Owens, Patrick McManus, Stephen Kankus, Barbara J. DeMong, David Buckel, Charles Brauch, Marc Bortniker, Shelley Harrison, James Luckett, Richard Mandelbaum, Denis Martin, Mark Oros, George Sadowsky and Yechiam Yemini, each dated August 4, 1998. 10.04 -- Non-Statutory Stock Option Contract with Shelley Harrison. 10.05 -- Agreement of Lease between 55 Broad Street Company and AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.), dated May 1, 1996. 10.06 -- Agreement of Lease between Cuttermill Realty Co. and AppliedTheory Communications, Inc. and NYSERNet.org, Inc. (together as successors to NYSERNet, Inc.), dated May, 1996. 10.07 -- Lease Agreement between Elwood Davis Road Company and AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.), dated November 1995.
II-3 106 10.08 -- Form of Employment and Non-Competition Agreement between AppliedTheory Communications, Inc. and Richard Mandelbaum, James Luckett, Mark Oros, Denis Martin and David Buckel.* 10.09 -- Agreement of Employment and Non-Competition between AppliedTheory Communications, Inc. and Lawrence B. Helft, dated December 7, 1998.* 10.10 -- Consulting Agreement between AppliedTheory Communications, Inc. and Shelley A. Harrison, dated October 5, 1996. 10.11 -- Form of Indemnification Agreement between AppliedTheory Corporation and certain directors.* 10.12 -- Note with David A. Buckel, dated July 30, 1998. 10.13 -- Note with James D. Luckett, dated July 30, 1998. 10.14 -- Assignment, Software Development and License Agreement between NYSERNet.org, Inc. and AppliedTheory Communications, Inc., dated October 1, 1996. 10.15 -- Joint Marketing and Services Agreement between AppliedTheory Communications, Inc. and IXC Internet Services, Inc., dated January 26, 1999. 10.16 -- Resale Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet.com, Inc.), and NYSERNet.org, Inc., dated October 1, 1996. 10.17 -- Resource Sharing Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet.com, Inc.) and NYSERNet.org, Inc., dated October 1, 1996. 10.18 -- Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.) and the New York State Department of Labor, dated September 27, 1994. 10.19 -- Promissory Note between AppliedTheory Communications, Inc. and NYSERNet.net, Inc., dated , 1999.* 10.20 -- Revolving Note Agreement between Fleet National Bank and AppliedTheory Communications, Inc., dated January 20, 1998. 23.1 -- Consent of Grant Thornton LLP. 23.2 -- Consent of Dewey Ballantine LLP (contained in Exhibit 5.1).* 24.1 -- Power of Attorney (included on page II-6). 27.1 -- Financial Data Schedules.
(b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. - --------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 107 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-5 108 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Great Neck, New York, on February 10, 1999. APPLIEDTHEORY CORPORATION By: /s/ RICHARD MANDELBAUM ------------------------------------ Richard Mandelbaum Chairman of Board, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose names appear below appoints and constitutes Richard Mandelbaum and David A. Buckel, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute any and all amendments to the within Registration Statement, including post-effective amendments, and to sign any and all registration statements relating to the same offering of securities as this Registration Statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, together with all exhibits thereto, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons on February 10, 1999 in the capacities indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD MANDELBAUM Chairman of the Board, Chief February 10, 1999 - --------------------------------------------------- Executive Officer and Director Richard Mandelbaum (Principal Executive Officer) /s/ DAVID A. BUCKEL Vice President and Chief February 10, 1999 - --------------------------------------------------- Financial Officer (Principal David A. Buckel Financial and Accounting Officer) /s/ JAMES GUTHRIE Director February 10, 1999 - --------------------------------------------------- James Guthrie /s/ SHELLEY A. HARRISON Director February 10, 1999 - --------------------------------------------------- Shelley A. Harrison /s/ JAMES T. KELSEY Director February 10, 1999 - --------------------------------------------------- James T. Kelsey
II-6 109
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN J. PENDRAY Director February 10, 1999 - --------------------------------------------------- John J. Pendray /s/ GEORGE SADOWSKY Director February 10, 1999 - --------------------------------------------------- George Sadowsky
II-7 110 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors APPLIEDTHEORY CORPORATION In connection with our audit of the financial statements of AppliedTheory Corporation and its Predecessor referred to in our report dated January 29, 1999, we have also audited Schedule II for the nine months ended September 30, 1996, the three months ended December 31, 1996, and the years ended December 31, 1997 and 1998 of AppliedTheory Corporation and the Predecessor. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP New York, New York January 29, 1999 S-1 111 APPLIEDTHEORY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS -- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF OF PERIOD EXPENSES DEDUCTIONS PERIOD ---------- ------------ ---------- --------- (IN THOUSANDS) Predecessor: Nine months ended September 30, 1996 Allowance for doubtful accounts............ $ 30 $12 $ 18 AppliedTheory Corporation: Three months ended December 31, 1996 Allowance for doubtful accounts............ 25 2 23 Deferred tax valuation allowance........... 1,273 1,273 Year ended December 31, 1997 Allowance for doubtful accounts............ $ 23 120 21 122 Deferred tax valuation allowance........... 1,273 2,317 3,590 Year ended December 31, 1998 Allowance for doubtful accounts............ 122 60 25 157 Deferred tax valuation allowance........... 3,590 2,167 5,757
S-2 112 EXHIBIT INDEX 1.01 -- Underwriting Agreement.* 3.01 -- Certificate of Incorporation of the Registrant.* 3.02 -- Bylaws of the Registrant.* 4.01 -- Specimen of Certificate for Common Stock of the Registrant.* 4.02 -- Registration Rights Agreement by and among IXC Internet Services, Inc., Grumman Hill Investments III, L.P., AppliedTheory Communications, Inc., NYSERNet.net, Inc., Richard Mandelbaum, James D. Luckett, Denis J. Martin, Mark A. Oros, David A. Buckel and Shelley A. Harrison, dated July 10, 1998. 5.01 -- Opinion of Dewey Ballantine LLP.* 10.01 -- Stock Purchase Agreement by and among IXC Internet Services, Inc., Grumman Hill Investments III, L.P., AppliedTheory Communications, Inc., NYSERNet.net, Inc., Richard Mandelbaum, David Buckel, James Luckett, Denis Martin and Mark Oros, dated August 4, 1998. 10.02 -- 1996 Incentive Stock Option Plan. 10.03 -- Form of Option Agreements among the Registrant, IXC Internet Services, Inc. and Grumman Hill Investments III, L.P. and John Pendray, Robert Riley, Bill Owens, Jacqueline A. Owens, Patrick McManus, Stephen Kankus, Barbara J. DeMong, David Buckel, Charles Brauch, Marc Bortniker, Shelley Harrison, James Luckett, Richard Mandelbaum, Denis Martin, Mark Oros, George Sadowsky and Yechiam Yemini, each dated August 4, 1998. 10.04 -- Non-Statutory Stock Option Contract with Shelley Harrison. 10.05 -- Agreement of Lease between 55 Broad Street Company and AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.), dated May 1, 1996. 10.06 -- Agreement of Lease between Cuttermill Realty Co. and AppliedTheory Communications, Inc. and NYSERNet.org, Inc. (together as successors to NYSERNet, Inc.), dated May, 1996. 10.07 -- Lease Agreement between Elwood Davis Road Company and AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.), dated November 1995. 10.08 -- Form of Employment and Non-Competition Agreement between AppliedTheory Communications, Inc. and Richard Mandelbaum, James Luckett, Mark Oros, Denis Martin and David Buckel.* 10.09 -- Agreement of Employment and Non-Competition between AppliedTheory Communications, Inc. and Lawrence B. Helft, dated December 7, 1998.* 10.10 -- Consulting Agreement between AppliedTheory Communications, Inc. and Shelley A. Harrison, dated October 5, 1996. 10.11 -- Form of Indemnification Agreement between AppliedTheory Corporation and certain directors.* 10.12 -- Note with David A. Buckel, dated July 30, 1998. 10.13 -- Note with James D. Luckett, dated July 30, 1998. 10.14 -- Assignment, Software Development and License Agreement between NYSERNet.org, Inc. and AppliedTheory Communications, Inc., dated October 1, 1996. 10.15 -- Joint Marketing and Services Agreement between AppliedTheory Communications, Inc. and IXC Internet Services, Inc., dated January 26, 1999. 10.16 -- Resale Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet.com, Inc.), and NYSERNet.org, Inc., dated October 1, 1996. 10.17 -- Resource Sharing Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet.com, Inc.) and NYSERNet.org, Inc., dated October 1, 1996. 10.18 -- Agreement between AppliedTheory Communications, Inc. (as successor to NYSERNet, Inc.) and the New York State Department of Labor, dated September 27, 1994. 10.19 -- Promissory Note between AppliedTheory Communications, Inc. and NYSERNet.net, Inc., dated , 1999.* 10.20 -- Revolving Note Agreement between Fleet National Bank and AppliedTheory Communications, Inc., dated January 20, 1998.
113 23.1 -- Consent of Grant Thornton LLP. 23.2 -- Consent of Dewey Ballantine LLP (contained in Exhibit 5.1).* 24.1 -- Power of Attorney (included on page II-6). 27.1 -- Financial Data Schedules.
EX-4.02 2 REGISTRATION RIGHTS AGREEMENT 1 Exhibit 4.02 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of August 4, 1998, by and among IXC Internet Services, Inc., a Delaware corporation ("IXC"), Grumman Hill Investments III, L.P., a Delaware limited partnership ("Grumman Hill"), AppliedTheory Communications, Inc., a New York corporation (the "Company"), NYSERNet.net, Inc. ("NYSERNet"), Richard Mandelbaum ("Mandelbaum"), James D. Luckett, Denis Martin, Mark Oros and David A. Buckel (collectively, the Management Stockholders") and Shelley A. Harrison ("Harrison"). RECITALS: WHEREAS, pursuant to the Stock Purchase Agreement, dated May 19, 1998, by and among IXC, Grumman Hill, the Company, NYSERNet and certain stockholders of the Company (the "Stock Purchase Agreement"), IXC and Grumman Hill are purchasing, and the Company and NYSERNet are selling, for the purchase price and upon the terms and subject to the conditions of the Stock Purchase Agreement, certain shares of common stock (the "Common Stock"), of the Company (the "Initial Shares"), in the amounts as set forth on Exhibit A attached to the Stock Purchase Agreement; WHEREAS, Grumman Hill, IXC, the Management Stockholders and Harrison are entering into Option and Voting Agreements of even date herewith, pursuant to which Grumman Hill and IXC may purchase certain shares of Common Stock now or hereafter owned by the those stockholders (the "Option Shares"); and WHEREAS, the parties desire in this Agreement to provide, with respect to the Initial Shares, the Option Shares and any other shares that are or may hereafter during the term of this Agreement become beneficially owned by the parties hereto, for the granting to each of the parties hereto, the registration rights set forth herein. NOW, THEREFORE, in consideration of the premises and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: SECTION 1. Registration Rights. 1.1 Definitions. As used in this Section 1: (a) The terms "register," "registered," and "registration" refer to a registration effected by filing with the Securities and Exchange Commission (the "SEC") a registration statement ("Registration Statement") in compliance with the Securities Act of 1933, as amended (the "1933 Act"), and the declaration or ordering by the SEC of the effectiveness of such Registration Statement. (b) The term "Registrable Securities" means (i) the Initial Shares, (ii) the Option Shares and (iii) any other shares of Common Stock that during the 2 term of this Agreement are or become beneficially owned by a party. The term "Registrable Securities" shall also include any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend, stock split or other distribution with respect to, or in exchange for, upon reclassification or in replacement of, Registrable Securities. In the event of any recapitalization by the Company, whether by stock split, reverse stock split, stock dividend or otherwise, the number of shares of Registrable Securities used throughout this Agreement for various purposes shall be proportionately increased or decreased. In the event that any shares that would be deemed to be "Registerable Securities" become eligible for resale under Rule 144(k) of the Securities Act of 1933, as amended or any successor thereto, without limitation as to volume, are resold pursuant to Rule 144 or are covered by an effective "shelf" registration statement, then said shares shall no longer be deemed to be "Registerable Securities." 1.2 Demand Registration. If the Company shall receive from any party (a "Registering Party") a written request to register shares of Registrable Securities (a "Demand"), the Company shall prepare and file a Registration Statement under the 1933 Act covering the shares so requested to be registered, and shall use its best efforts to cause as expeditiously as possible such Registration Statement to become effective; provided, however, that (i) at the time the Demand is made, the Company shall have successfully completed an initial public offering, and (ii) at least $10 million of Registrable Securities are requested to be registered; provided, further, however, that if at the time the request for registration is made, the Company is in the process of registering securities under the 1933 Act for sale by it or has pending or in process a material transaction, the disclosure of which would, in the good faith judgment of the Board of Directors of the Company, materially and adversely affect the Company, the Company may defer the filing (but not the preparation) of the requested Registration Statement (i) in the case of another registration statement, for up to sixty (60) days, and (ii) in the case of a material transaction, for up to thirty (30) days (but the Company shall use its best efforts to resolve the transaction and file the Registration Statement as soon as practicable). The Company shall be required to register the Registrable Securities pursuant to this Section 1.2 in response to any Demand by any Registering Party, provided (i) only one Demand may be made by any Registering Party in any six (6) month period and (ii) the Company shall not be required to register the Registrable Securities more than once on registration forms other than Form S-3 (or any substantially equivalent successive form). 1.3 Piggy-Back Registrations. If (i) the Company proposes to file a registration statement under the 1933 Act with respect to an offering by the Company for its own account and/or for the account of any stockholders of any shares of Common Stock (other than a registration statement on Form S-4 or S-8 or successor forms thereto or filed in connection with an exchange offer or an offering of securities solely to the Company's existing stockholders), and (ii) the Board of Directors of Page 2 3 the Company shall approve of a "piggy-back registration" then the Company shall in each case give written notice of such proposed filing to each of Mandelbaum, NYSERNet, IXC and Grumman Hill (each, a "Piggy-Back Registering Party") at least 30 days before the anticipated filing date, and such notice shall offer (except as otherwise contemplated by the penultimate sentence of this Section) each such Piggy-Back Registering Party the opportunity to register such number of shares of Registrable Securities as such Piggy-Back Registering Party may request. The Company shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit such Piggy-Back Registering Party to include such securities in such offering on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering delivers a written opinion to the Company that the inclusion of such Registrable Securities by a Piggy-Back Registering Party would materially and adversely affect the success or offering price of, or materially increase the consideration (including commission) to be paid to the underwriter in connection with, such offering, then the amount of securities to be offered for the account of such Piggy-Back Registering Party shall be reduced to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter; provided, that if securities similar to those represented by the Registrable Securities are being offered for the account of other persons as well as the Company, if Registerable Securities owned by more than one Piggy-Back Registering Party are being offered such reduction shall not represent a greater fraction of the number of securities intended to be offered by the Piggy-Back Registering Party than the fraction of similar reductions imposed on such other persons other than the Company. 1.4 Expenses of Registration. All expenses incurred in connection with the first two registrations effected pursuant to Section 1.2 and all registrations effected the first two pursuant to Section 1.3, including, without limitation, all registration, filing, listing and qualification fees (including SEC, securities exchange, National Association of Securities Dealers Inc. and blue sky fees and expenses), printing expenses, escrow fees, fees and disbursements of counsel for the Company, and expenses of any special audits and/or "cold comfort" letters incidental to or required by such registration, fees and disbursements of underwriters customarily paid by companies or sellers of securities, and the reasonable fees and expenses of any special experts retained by the Company in connection with the registration shall be borne by the Company; provided, however, that the Company shall not be required to pay underwriters' discounts or commissions relating to Registrable Securities or any of the expenses for more than two registrations under Section 1.2. 1.5 Holdback Agreement; Restrictions on Public Sale by the Company and Others. Each of IXC, Grumman Hill, the Company, NYSERNet and the stockholders party hereto agree, upon the request of the managing underwriter or underwriters in an underwritten offering in which such party is to participate as a Registering Page 3 4 Party, not to effect any public or private offer, sale or distribution of any securities of the Company of the same class as the securities included in any registration statement, or any securities convertible into or exchangeable or exercisable for such securities (except as part of such registration or pursuant to registrations on Forms S-4 or S-8 or any successor form to such Forms), during the 90-day period beginning on, the effective date of such registration statement. 1.6 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC (but in any event within seventy-five (75) days after the date of the Demand pursuant to Section 1.2) a Registration Statement with respect to such Registrable Securities (which, in the case of a Demand registration pursuant to Section 1.2, shall be on a form designated by the underwriters) and use its diligent best efforts to cause such Registration Statement to become effective, and keep such Registration Statement effective for up to one hundred twenty (120) days or such longer period as the Company may agree upon, or until the distribution has been completed, whichever occurs first; (b) prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to keep such registration Statement effective as provided in Section 1.6(a) and to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such Registration Statement; (c) furnish to a Registering Party such numbers of copies of the Registration Statement, the prospectus, including a preliminary prospectus, and of each amendment and supplement (in each case, including all exhibits), in conformity with the requirements of the 1933 Act, and such other documents as the Registering Party may reasonably request in order to facilitate the disposition of Registrable Securities owned by the Registering Party; (d) use its best efforts to register and qualify the securities covered by such Registration Statement under such other securities or Blue Sky laws of such jurisdictions in such states as shall be reasonably necessary to facilitate an orderly distribution of the Registrable Securities, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in any such jurisdiction in which, but for the requirements of this Section 1.6d), it would not otherwise be obligated to be so qualified in to file a general consent to service of process in any such states or jurisdictions, but the Company will Page 4 5 be required to consent to service of process in actions arising out of or in connection with the sale of any Registrable Securities; (e) use its best efforts to cause such securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities of the United States of America or any state thereof as may be necessary to consummate the disposition of such securities; (f) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, usual and customary in form, with the managing underwriter of such offering and take such other actions as the underwriters reasonably request in order to expedite or facilitate a disposition of such securities; (g) use its best efforts to cause all such securities covered by such Registration Statement to be listed on any securities exchange on which the Common Stock is then listed, and if the Common Stock is not already so listed at such time, to use its best efforts promptly to cause all such securities to be listed on either the New York Stock Exchange or the American Stock Exchange or to be included in the National Association of Securities Dealers Automated Quotation System and to provide a transfer agent and registrar for such securities covered by such Registration Statement no later than the effective date of such Registration Statement; (h) use its best efforts to obtain a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters; (i) notify the Registering Party at any time when a prospectus relating thereto is required to be delivered under the 1933 Act of the happening of any event as a result of which, or of the Company becoming otherwise aware that, the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Registering Party, prepare and furnish to the Registering Party, a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the Registering Party of such securities under the Registration Statement, such prospectus shall not include an untrue statement of a material fact or a misstatement of a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; Page 5 6 (j) make reasonably available for inspection by, and grant reasonable access to officers and employees of Company to answer questions of, representatives of the Registering Party, by any underwriter participating in any disposition to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by the Registering Party or any such underwriter, all pertinent information such as financial and other records, pertinent corporate documents and properties of the Company reasonably requested by such persons in connection with the Registration Statement; (k) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Restricted Stock for sale in any jurisdiction, use its best efforts promptly to obtain its withdrawal; (l) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, beginning with the first fiscal quarter beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; and (m) cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD") and in the performance of any due diligence investigation by any Registering Party (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). Each Party agrees that, upon receipt of any notice from the Company of the happening of any event described in Section 1.6(i), the Registering Party will forthwith discontinue disposition of such securities pursuant to such Registration Statement until the Registering Party's receipt of the copies of the supplemental or amended prospectus contemplated by Section 1.6(i), and, as so directed by the Company, the Registering Party will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in the Registering Party's possession, of the prospectus covering such securities covered by such Registration Statement current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 1.6(a) shall be extended by the number of days during the period from the date of the giving of such notice pursuant to Section 1.6(i) and through the date when each seller of such securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 1.6(i). Page 6 7 1.7 Selection of Underwriter. The Company shall select, in its sole discretion, the managing underwriter or underwriters with respect to the related offering of its Common Stock. 1.8 Indemnification. (a) The Company will, and does hereby undertake to, indemnify and hold harmless the Registering Party, each of the Registering Party's officers, directors and affiliates and each person controlling the Registering Party, with respect to any registration, qualification, listing or compliance effected pursuant to this Section 1, and each underwriter, if any (including any broker or dealer which may be deemed an underwriter), and each person who controls any underwriter (including any such broker or dealer), of the Registrable Securities held by or issuable to the Registering Party, against all claims, losses, damages, liabilities and expenses, joint or several (or actions in respect thereto whether or not a party thereto) ("Claims"), to which they may become subject under the 1933 Act, the Securities Exchange Act of 1934, as amended, (the "1934 Act"), or other federal, state or common law, or otherwise, arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary, final or summary prospectus, offering circular, or other similar document or any amendment or supplement thereto (including any related Registration Statement, notification, or the like) incident to any such registration, qualification, listing, or compliance, or arising out of or based upon any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any violation or alleged violation by the Company of any federal, state or common law, rule or regulation applicable to the Company in connection with any such registration, qualification, or compliance, and will reimburse, as incurred, the Registering Party, each such underwriter, and each such director, officer, affiliate and controlling person, for any legal and any other expenses reasonably incurred in connection with investigating or defending such Claim (whether or not the indemnified party is a party to any proceeding); provided that the Company will not be liable in any such case to the extent that any such Claim arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by the Registering Party or by such underwriter and stated to be specifically for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Registering Party or any other indemnified party and shall survive the transfer of such securities by the Registering Party. (b) The Registering Party will indemnify the Company, each of its directors, and each officer who signs a Registration Statement in connection Page 7 8 therewith, and each person controlling the Company, each underwriter, if any, and each person who controls any underwriter, of the Company's securities covered by such a Registration Statement, against all Claims, joint or several (or actions in respect thereto whether or not a party thereto), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, preliminary, final or summary prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, the Company, each such underwriter and each such director, officer, partner and controlling person, for any legal or any other expenses reasonably incurred in connection with investigating or defending any such Claim (whether or not the indemnified party is a party to any proceeding), in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) was made in such Registration Statement, preliminary, final or summary prospectus, offering circular or other document, in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Registering Party and stated to be specifically for use therein. In no event shall the Registering Party be required to contribute any amount (A) in excess of the lesser of (i) that proportion of the total of such Claims indemnified against equal to the proportion of the total securities sold under such registration statement that is being sold by the Registering Party or (ii) the net proceeds received by the Registering Party from its sale of securities under such registration statement and (B) for amounts paid in settlement of any Claims if such settlement is effected without the consent of the Registering Party, such consent not to be unreasonably withheld. (c) Promptly after the receipt by the indemnified party of a notice of any claim, action, suit or proceeding of any third party which is subject to indemnification hereunder, such party (the "Indemnified Party") shall give written notice of such claim to the party obligated to provide indemnification hereunder (the "Indemnifying Party"), stating the nature and basis of such claim and the amount thereof, to the extent known. Failure of the Indemnified Party to give such notice promptly shall not relieve the Indemnifying Party from any liability which it may have on account of this indemnification or otherwise, except to the extent that the Indemnifying Party is materially prejudiced thereby (except that the Indemnifying Party shall not be liable for any expenses incurred during the period in which the Indemnified Party failed to give such notice). The Indemnifying Party shall be entitled to participate in the defense of and, if it so chooses, to assume the defense of, or otherwise contest, such claim, action, suit or proceeding with counsel selected by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided, that, the Page 8 9 Indemnified Party shall be entitled, to the extent it so elects and at its sole cost and expense, to assume and control the defense of any claim involving any equitable claim, including, but not limited to, injunctive relief. Upon the election by the Indemnifying Party to assume the defense of, or otherwise contest, such claim, action, suit or proceeding, the Indemnifying Party shall not be liable for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof, although the Indemnified Party shall have the right to participate in the defense thereof and to employ counsel, at its own expense. Notwithstanding the foregoing, the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnified Party, if, and only to the extent that (i) the Indemnifying Party has not employed counsel (or such counsel is not reasonably acceptable to the Indemnified Party) to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, (ii) the employment of counsel and the amount reimbursable therefor by the Indemnified Party has been authorized in writing by the Indemnifying Party or (iii) representation of the Indemnifying Party and the Indemnified Party by the same counsel would, in the reasonable determination of such Indemnified Party, constitute a conflict of interest (in which case the Indemnifying Party will not have the right to direct the defense of such action on behalf of the Indemnified Party). The Parties shall use commercially reasonable efforts to minimize damages from Claims by third parties and shall act in good faith in responding to, defending against, settling or otherwise dealing with such Claims, notwithstanding any dispute as to liability as between the Parties under this Section 1.8. The Parties shall also cooperate in any such defense, give each other reasonable access to all information relevant thereto and make employees and other representatives available on a mutually convenient basis to provide additional information and explanation of any material provided in connection therewith. Whether or not the Indemnifying Party shall have assumed the defense, the Indemnifying Party shall not be obligated to indemnify the other party hereunder for any settlement entered into without the Indemnifying Party's prior written consent, which consent shall not be unreasonably withheld or delayed. (d) If the indemnification provided for in this Section 1.8 is for any reason held by a court of competent jurisdiction to be unavailable to an Indemnified Party in respect of any Claims referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party and the Indemnified Party, or (ii) if the allocation provided by clause (i) Page 9 10 above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Indemnifying Party and the Indemnified Party in connection with the action or inaction which resulted in such Claims, as well as any other relevant equitable considerations. In connection with any registration of the Company's securities, the relative benefits received by the Indemnifying Party and the Indemnified Party shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Indemnifying Party and the Indemnified Party, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the Parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Indemnifying Party and the Indemnified Party agree that it would not be just and equitable if contribution pursuant to the foregoing paragraph were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. (f) If the Registrable Securities are to be sold pursuant to any underwritten public offering, the Company and each seller shall enter into an underwriting agreement that contains, among other things, customary representations, warranties, covenants and indemnities relating to such offering. (g) Indemnification similar to that specified herein (with appropriate modifications) shall be given by the Company and the Registering Party with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the 1933 Act. (h) The obligations of the parties under this Section 1.8 shall be in addition to any liabilities which any party may otherwise have to any other party. 1.9 Information by the Registering Party. The Registering Party shall furnish to the Company such information regarding the Registering Party and the distribution proposed by the Registering Party as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification, or compliance referred to in this Section 1. Page 10 11 1.10 Rule 144/Rule 144A Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) at all times make and keep public information available, as those terms are understood and defined in SEC Rule 144 and Rule 144A or any similar or analogous rule promulgated under the 1933 Act; (b) file with the SEC, in a timely manner, all reports and other documents required of the Company under the 1933 Act and 1934 Act; and (c) so long as any Party owns any Registrable Securities, furnish to such Party forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 and Rule 144A of the 1933 Act, and of the 1933 Act and the 1934 Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as such Party may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. SECTION 2. Miscellaneous. 2.1 Entire Agreement. This Agreement, the Stock Purchase Agreement and the other agreements and documents referred to therein constitute the entire agreement of the parties and supersede all prior written or oral agreements, contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter hereof. 2.2 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. 2.3 Amendments and Waivers. This Agreement may not be modified, amended or waived except by written document specifically identifying this Agreement and signed by the parties. 2.4 Headings. The headings included in this Agreement are for convenience of the parties only and shall not affect the construction or interpretation of this Agreement. 2.5 Notices. All notices hereunder shall be in writing and shall be given to the respective parties by U.S. mail, personal delivery, or facsimile transmission to their respective addresses as follows: Page 11 12 If to the Company: AppliedTheory Communications, Inc. 125 Elwood Davis Road Syracuse, NY 13212 Attn: Richard Mandelbaum, President and Treasurer with a copy to: Frank E. Morgan II, Esq. Dewey Ballantine LLP 1301 Avenue of the Americas New York, NY 10019 If to IXC: IXC Internet Services, Inc. 1122 Capital of Texas Hwy S. Austin, TX 78746-6426 Attn: Jeffrey C. Smith, Esq. with a copy to: Michael P. Whalen, Esq. Riordan & McKinzie 696 Town Center Drive, Suite 1500 Costa Mesa, CA 92626 If to Grumman Hill: Grumman Hill Investments III, L.P. 60 East 42nd Street, Suite 2915 New York, NY 10165 Attn: Elizabeth Fath with a copy to: Michael P. Whalen, Esq. Riordan & McKinzie 696 Town Center Drive, Suite 1500 Costa Mesa, CA 92626 Page 12 13 If to NYSERNet: NYSERNet.net, Inc. 125 Elwood Davis Rd. Syracuse, NY 13212 Attn: David Buckel, Assistant Secretary/Assistant Treasurer with a copy to: Robert Mechur, Esq. Underberg & Kessler LLP 1800 Chase Square Rochester, NY 14604 If to the Stockholders At their respective addresses as communicated to the Company from time to time. All such notices shall be deemed effective upon receipt. 2.6 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and permitted assigns. 2.7 Remedies, Waivers. No failure or delay on the part of any party in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. Any waiver or consent shall be effective only in the specific instance and for this specific purpose for which it was given. The parties to this Agreement acknowledge and agree that the breach of any of the terms of this Agreement will cause irreparable injury for which an adequate remedy at law is not available. Accordingly, it is agreed that either party shall be entitled to an injunction, restraining order or other equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States or any state thereof, without the requirement of posting any bond. All rights and remedies existing under this Agreement are cumulative to and not exclusive of, any rights or remedies available under this Agreement or otherwise. 2.8 Severability. In the event that any provision of this Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of contempt jurisdiction, such provision shall be Page 13 14 reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. 2.9 Termination. The provisions of this Agreement shall terminate and be of no further effect upon (a) as to all Parties, upon the mutual consent of the Parties and (b) as to a Party, such Party ceasing to own or have rights to acquire Registrable Securities. 2.10 Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 2.11 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. Page 14 15 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers, duly authorized for such purpose, as of the date first written above. IXC INTERNET SERVICES, INC. By: /s/ Stuart K. Coppens -------------------------------- Name: Stuart K. Coppens Title: VP GRUMMAN HILL INVESTMENTS III, L.P. By: Grumman Hill Group LLC -------------------------------- Its General Partner By: /s/ James T. Kelsey -------------------------------- Name: James T. Kelsey Title: President APPLIEDTHEORY COMMUNICATIONS, INC. By: /s/ Richard Mandelbaum -------------------------------- Name: Richard Mandelbaum Title: President & CEO NYSERNet.net, INC. By: /s/ David A. Buckel -------------------------------- Name: David A. Buckel Title: Asst. Sec/Treas Page 15 16 STOCKHOLDERS: /s/ Richard Mandelbaum ------------------------------------ Richard Mandelbaum /s/ David A. Buckel ------------------------------------ David A. Buckel /s/ James D. Luckett ------------------------------------ James D. Luckett /s/ Denis Martin ------------------------------------ Denis Martin /s/ Mark Oros ------------------------------------ Mark Oros /s/ Shelley A. Harrison ------------------------------------ Shelley A. Harrison Page 16 EX-10.01 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.01 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of this 19th day of May, 1998 (the "Closing Date"), by and among IXC Internet Services, Inc., a Delaware corporation ("IXC"), Grumman Hill Investments III, L.P., a Delaware limited partnership ("Grumman Hill", and, together with IXC, the "Purchasers"), AppliedTheory Communications, Inc., a New York corporation (the "Company"), NYSERNet.net, Inc. ("NYSERNet") and Richard Mandelbaum, David Buckel, James Luckett, Denis Martin and Mark Oros (the "Management Stockholders"). WITNESSETH WHEREAS, Purchasers desire to purchase, and the Company and NYSERNet desire to sell, for the purchase price and upon the terms and subject to the conditions of this Agreement, certain shares of common stock of the Company from the persons named and in the amounts set forth on Exhibit A hereto (the "Initial Shares"); and WHEREAS, the parties desire to enter into certain other agreements regarding future purchases by Purchasers and sales of shares of common stock of the Company by the Management Stockholders and other stockholders of the Company (the "Option Shares") in the amounts set forth on Exhibit A attached hereto; and to enter into other agreements referred to herein (the "Ancillary Agreements") in connection with such purchases and sales. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the respective representations, warranties, covenants, agreements and conditions contained herein, the sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I AGREEMENTS 1.1. Purchase and Sale of Stock. On the Closing Date, upon the terms and subject to the conditions of this Agreement, the Company shall issue, sell, assign, transfer and deliver, as applicable, and NYSERNet shall sell, assign, transfer and deliver, the Initial Shares to Purchasers (two-thirds to IXC and one-third to Grumman Hill) and Purchasers shall purchase and acquire the Initial Shares from the Company and NYSERNet. 1.2. Purchase Price. The purchase price for the sale, assignment, transfer and delivery of the 880,000 Initial Shares to Purchasers (the "Purchase Price") is $22.0290 per share for an aggregate purchase price for all the Initial Shares of $19,385,520. The Purchase Price shall be payable by Purchasers (two-thirds by IXC and 2 one-third by Grumman Hill) to the Company and NYSERNet in cash by wire transfer to each of their respective accounts, in the amounts set forth opposite each of their respective names on Exhibit A hereto, which amounts, in the aggregate, shall be equal to the aggregate Purchase Price. 1.3. Amendment to By-laws. On the Closing Date, the Company shall adopt By-laws in the form attached hereto as Exhibit B. 1.4. Joint Marketing Agreement. IXC and the Company agree to work together in good faith to negotiate, on mutually acceptable terms, an agreement (the "Joint Marketing Agreement") to cover the resale by each company of the others' products and services. 1.5. Option Agreements. On the Closing Date, the Purchasers and certain stockholders of the Company as set forth on Exhibit A hereto shall enter into and deliver an Option Agreement substantially in the form of Exhibit C hereto with respect to the Option Shares. Within ten (10) business days after the Closing Date, the Purchasers shall offer all other stockholders of the Company the right to sell up to an aggregate of 20,000 of their shares to the Purchasers by executing an Option Agreement with the Purchasers. 1.6. Other Agreements. On the Closing Date, the Purchasers, the Company, NYSERNet and the Stockholders shall enter into and deliver (i) that certain Stockholders Agreement substantially in the form of Exhibit D hereto and (ii) that certain Registration Rights Agreement substantially in the form of Exhibit E hereto. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY, MANAGEMENT AND NYSERNET The Company and the Management Stockholders hereby represent and warrant to Purchasers as follows: 2.1. Company's Organization, Good Standing, Capitalization. The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of New York. The Company has all requisite power and authority to carry on its business as it is now being conducted, and is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary under applicable law with respect to the business presently conducted by the Company (the "business"), except where the failure to be so qualified would not have a material adverse effect on the business, financial condition, results of operations or prospects of the Company taken as a whole (a "Material Adverse Effect"). True, complete and current copies of the Certificate of Incorporation, Bylaws and stock ledger of the Company as of the date of this Agreement have been delivered to Purchasers and no amendment or modification has been made thereto. As of the date hereof, the authorized capital stock of the Company consists of (i) 75,000 shares of the Company's preferred stock, $.01 par value per share (the 2 3 "Preferred Stock"), of which 15,000 shares are issued and outstanding and (ii) 2,500,000 shares of the Company's common stock, $.01 par value per share (the "Common Stock"), of which 1,439,475 shares are issued and outstanding. The number of outstanding shares of Preferred Stock and Common Stock are hereinafter referred to as the "Outstanding Shares." All of the Outstanding Shares have been duly authorized and validly issued and are fully paid and non-assessable and free of preemptive rights with respect thereto and were issued in compliance with all applicable securities laws. There are no voting trusts or other agreements, arrangements or understandings with respect to the voting of the Common Stock to which the Company, any Stockholder or any other person is a party. Except as set forth in Schedule 2.1 hereto, there are no preemptive rights, registration rights, subscriptions, options, warrants, rights, convertible securities or other agreements or commitments of any character relating to issued or unissued shares of Common Stock or other securities of the Company and there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire or sell, issue or otherwise transfer any outstanding securities thereof. Schedule 2.1 hereto sets forth the record ownership of all the outstanding shares and options. 2.2. Authority; Execution; Delivery. The Company has full power and authority to enter into and perform its obligations under this Agreement and each of the Ancillary Agreements to be executed or delivered by it, and to sell the shares to be sold by the Company pursuant to this Agreement (the "Shares") in accordance with the terms hereof so as to vest in Purchasers on the Closing Date good and marketable title to the Shares, free and clear of any claim, lien, pledge, option, charge, security interest or encumbrance of any nature whatsoever (collectively, "liens"). The execution, delivery and performance of this Agreement by the Company has been duly and effectively authorized by all necessary corporate or other organizational action. Except as set forth on Schedule 2.2 hereof, no other corporate or other organizational proceedings on the part of the Company are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors rights in general, moratorium laws or by general principles of equity. 2.3. Consents; No Violation, Etc. (a) Except as reflected in Schedule 2.3(a), no authorization, consent, approval, license, exemption by filing or registration with any court, arbitrator or governmental, administrative or self-regulatory authority, is or will be necessary in connection with the entry into, execution, delivery and performance of this Agreement or any of the documents relating to the transactions contemplated hereunder by the Company, or for the consummation of the transactions contemplated hereby and thereby. (b) Except as set forth on Schedule 2.3(b), neither the execution and delivery of this Agreement, the other agreements contemplated hereby, the 3 4 consummation of the transactions contemplated herein or therein, nor compliance by the Company with any of the provisions hereof or thereof will (with or without the giving of notice or the passage of time) (i) violate, conflict with, result in a breach of, constitute a default under, or result in the creation of any lien upon the assets, under any of the terms, conditions or provisions of (A) the certificate of incorporation of the Company, (B) any note, bond, mortgage, indenture, deed of trust, or any license, agreement, or any other instrument or obligation to which the Company is a party, or by which the Company or any of the Company's assets or properties may be bound or affected, or (ii) violate any judgment, order, writ, injunction, decree, statute, law, rule or regulation applicable to the Company or any of the Company's assets or properties. 2.4. Financial Statements. Attached hereto as Schedule 2.4 are the financial statements of the Company at and for the fiscal year ended December 31, 1997 (the "Financial Statements"). Except as disclosed on Schedule 2.4, such Financial Statements: (a) have been prepared in accordance with the books and records of the Company; (b) have been prepared in accordance with GAAP consistently applied throughout the period covered thereby; (c) fairly present the financial condition and results of operations of the Company's business as of the date thereof and for the period covered therein; and (d) contain and reflect all necessary adjustments and accruals, subject to normal year-end adjustments, for a fair presentation of the financial condition and the results of operations of the business as of the date thereof and for the period covered by such Financial Statements. 2.5. Absence of Undisclosed Liabilities and Obligations. Except as set forth on Schedule 2.5, to the best of the Company's knowledge, the Company has no liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) other than (a) liabilities reflected or reserved against in the Financial Statements or incurred in the ordinary course of business since the date of the Financial Statements and (b) liabilities and obligations specifically disclosed on a Schedule hereto. 2.6. Absence of Certain Changes or Events. Except as disclosed on Schedule 2.6, since the date of the Financial Statements, there has not been any: (a) change in the business which has or is reasonably likely to result in a Material Adverse Effect; (b) change in the shares of outstanding capital stock, issuance of any security convertible into capital stock or any declaration, setting aside, or payment of any dividend or other distribution (whether in cash, securities, property or otherwise) in respect of the Company's capital stock; (c) increase in the compensation payable or to become payable by the Company in connection with the business to any of its current or former officers, directors, employees, consultants or agents (collectively, the "Personnel") or any increase of general applicability in the compensation payable to Personnel (other than pursuant to existing corporate policies, practices and procedures) or any amendment to any Employee Plan or the adoption of any new Employee Plan, as defined in Section 2.13, that would increase the benefits or rights of Personnel 4 5 participating under such Plans; (d) significant labor trouble or any material controversy or unsettled grievance pending or, to the best of the Company's knowledge, threatened between the Company and any Personnel or a collective bargaining organization representing or seeking to represent Personnel; (e) sale, assignment or transfer of any material asset or any conducting of business other than in the ordinary course; (f) waiver of any material rights of the Company with respect to the Company's business whether or not in the ordinary course of business; (g) material liability or loss incurred with respect to any of the Company's assets or the operation of the business, except liabilities incurred in the ordinary course of business consistent with past practice and operating losses consistent with the Company's business plan; (h) any capital expenditure or execution of any lease with respect to any of the assets or any aspect of the business, or any incurring of liability therefor, requiring any payment or payments in excess of $10,000 individually or $250,000 in the aggregate; (i) borrowing or lending of money by or pledging the credit of the business or guaranteeing of any indebtedness of others by the Company or default with respect to, or failure to pay, any material obligation of the Company; (j) failure to operate the business in the ordinary course so as to preserve the business intact and to preserve the goodwill of the business' suppliers, customers and others having business relations with it; (k) loss of service of any Personnel that is or are material, individually or in the aggregate, to the conduct of the business; (l) material change in accounting practice of the Company with respect to the business, except as required by GAAP; (m) material cancellations by any supplier, customer or contractor with respect to the business; (n) any agreement, arrangement or understanding by the Company to do any of the foregoing. 2.7. Taxes. (a) For purposes of this Agreement, the term "Tax" means any net or gross income, gross receipts, sales, use, rental, value added, ad valorem, transfer, turnover, franchise, profits, license, withholding, payroll, employment, excise, capital, severance, stamp, occupation, premium, property or windfall profits tax, alternative or add-on minimum tax, customs, duty or other tax, fee, assessment or charge 5 6 of any kind whatsoever, together with any interest and any penalty, fine, addition to tax or additional amount imposed by any governmental department, court or other authority, whether domestic or foreign. (b) For purposes of this Agreement, the term "Tax Return" means any report, return, declaration, statement, form, extension or other document filed or required to be filed with any federal, state, local or other governmental department, court or other authority in respect of Taxes. (c) Except as set forth on Schedule 2.7(c), all Tax Returns required to be filed on or before the Closing Date by or on behalf of the Company have been or will be timely filed on or before the Closing Date. All such Tax Returns were (or to the extent not yet filed will be) true, complete and correct in all material respects and filed on a timely basis. (d) The Company has complied (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the payment and withholding of Taxes, including without limitation, the withholding and reporting requirements under Sections 1441 through 1464, 3401 through 3406, and 6041 and 6049 of the Code, as well as similar provisions under any other laws, and has, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required to be so paid. (e) The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency and there are no outstanding deficiencies, assessments, or written proposals for the assessment of any amount of Taxes proposed, asserted or assessed against the Company. (f) The Company has established on its books and records reserves adequate to pay all Taxes attributable to periods prior to the Closing Date and not yet due and payable in accordance with GAAP. (g) There are no liens for Taxes (other than for current Taxes not yet due and payable) on the Company's assets. 2.8. Accounts Receivable. Except as set forth on Schedule 2.8, the Company's accounts receivable arose out of the sale of services in the ordinary course of the business, have been billed or invoiced in the ordinary course of the business in accordance with all applicable laws, regulations and administrative rulings and procedures, represent bona fide indebtedness of the applicable account debtor not subject to defense, set-off or counterclaim and are collectible in full, net of the reserves set forth in the books of the Company. 2.9. Properties. The structures and equipment owned, operated or leased by the Company are in good operating condition and repair (ordinary wear and tear, excepted), and are in conformity in all material respects with all applicable laws, ordinances, orders, regulations and other requirements (including applicable zoning, 6 7 environmental, occupational safety and health laws and regulations) presently in effect or, to the Company's knowledge, presently scheduled to take effect. 2. 10. Intellectual Property. (a) All domestic and foreign patents, patent applications, trademarks, trademark registrations, servicemarks, trade names, registered copyrights and licenses with respect to the foregoing ("Intellectual Property"), owned in whole or in part, related to or used by the Company and that relate to and are used by the business are set forth on Schedule 2.10(a). (b) All registration and maintenance fees that have become due and payable in respect of any grant or registration of any Intellectual Property have been paid and no act has been done or omitted to be done by the Company, or any licensee thereof or any holder of any rights with respect thereto, to impair or dedicate to the public or entitle any U.S. or foreign governmental authority or any other person to cancel, forfeit, modify or consider abandoned any Intellectual Property, or to give any person any rights with respect thereto, and all of the Company's rights in the Intellectual Property are valid, enforceable and free of defects. The Company has no knowledge of any facts or claims which cause or might cause any patent to be invalid or unenforceable, and the Company has not received any notice of an intention on the part of any person to assert such a claim. Except as set forth on Schedule 2.10(b), the Company is the sole and exclusive owner of the Intellectual Property. Except as set forth on Schedule 2.10(b), the Company owns or otherwise has the right to use any and all Intellectual Property that is used in or is necessary for the conduct of its business free and clear of any lien, royalty or other payment obligations. (c) The Company has not received any notice of any conflict with or violation or infringement of, nor are proceedings or claims pending, nor have any such proceedings or claims been instituted or asserted in writing against the Company, nor are any proceedings threatened, alleging any violation, nor is there any valid basis known to the Company for any such proceeding or claim, of any rights or asserted rights of any other person with respect to any Intellectual Property of such other person. (d) The Company has taken all actions consistent with standard practice in its industry to preserve and maintain its Intellectual Property relating to the business. 2.11. Insurance. The Company maintains policies of insurance against such losses and risks as are adequate in accordance with customary industry practice to protect the Company's business, subject to the Company's self-insurance retention levels. The Company has not received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance and, so far as known to the Company, no such improvements or expenditures are required. 2.12. Employment Matters. Except as set forth on Schedule 2.12, with respect to the Personnel, (i) there are no pending claims by any current or former Personnel against the Company other than for compensation and benefits due in the ordinary course of employment; (ii) there are no pending claims against the Company 7 8 arising out of any statute, ordinance or regulation relating to employment practices or occupational or safety and health standards; (iii) there are no pending or, to the best knowledge of the Company, threatened labor disputes, strikes or work stoppages against the Company; and (iv) to the best knowledge of the Company, there are no union organizing activities in process or contemplated with respect to the business. 2.13. Employee Benefit Plans. (a) A list of all employee profit-sharing, incentive, deferred compensation, welfare, pension, retirement, group insurance, bonus, severance and other employee benefit plans, arrangements or agreements (oral or written), regardless of whether any such plan, arrangement or agreement is an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), maintained or previously maintained or contributed to or previously contributed to by the Company for the benefit of current or former Personnel ("Employee Plans") is set forth on Schedule 2.13(a). (b) The Employee Plans by their terms and operation are in material compliance with all applicable laws (including, but not limited to, ERISA and the Code). There are no actions, suits or claims pending or threatened (other than routine noncontested claims for benefits) or, to the Company's knowledge, no set of circumstances exist which may reasonably give rise to such a claim against any Employee Plan or administrator or fiduciary of any such Employee Plan. 2.14. Litigation. There is neither (a) any litigation, proceeding, arbitral action or government investigation pending or, so far as known to the Company, threatened against, relating to or affecting (i) the business, (ii) any Employee Plan or any fiduciary or administrator thereof or (iii) the transactions contemplated by this Agreement, nor (b) any valid basis known to the Company for any such litigation, proceeding or investigation which if adversely determined could, in any one case or in the aggregate, have a Material Adverse Effect. Except as set forth on Schedule 2.14 hereof, there are no decrees, injunctions or orders of any court or governmental department or agency outstanding against the Company with respect to the business. 2.15. Compliance with Laws. (a) The Company has complied in all material respects with all applicable statutes, regulations, rules, orders, ordinances and other laws ("Laws") of the United States of America, all state, local and foreign governments and other governmental bodies and authorities, and agencies of any of the foregoing ("Governmental Authority") to which it is subject with respect to regulatory matters. The Company has maintained all material records required to be maintained by all governmental authorities and there are no presently existing circumstances known to the Company which would result or would be likely to result in violations of any such laws. (b) The Company is in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority (including, without limitation, Environmental Laws (as such term is hereinafter defined in Section 2.19) applicable to the business), except to the extent noncompliance would not have a Material Adverse Effect. Except as set forth on Schedule 2.15(b), the Company has not 8 9 received any notice or other communication to the effect that, or otherwise been advised that, it is not in compliance with any of such laws, and the Company has no reason to anticipate that any presently existing circumstances are likely to result in violations of any such laws which could, in any one case or in the aggregate, have a Material Adverse Effect. (c) The Company has not made, and, to the knowledge of the Company, no Personnel or representative of the Company or any person acting on behalf of the Company has made, directly or indirectly with respect to the Company's business, any bribes, kickbacks, or other illegal payments or illegal political contributions, illegal payments from corporate funds to governmental officials in their individual capacities, or illegal payments from corporate funds to obtain or retain business either within the United States or abroad. 2.16. No Brokers. The Company has not entered into and will not enter into any agreement, arrangement or understanding with any person or firm which will result in the obligation of Purchaser to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby or any other transaction. 2.17. Transactions with Certain Persons. Except as disclosed in the Financial Statements and on Schedule 2.17 hereto, no affiliate, shareholder., officer, director, employee or agent of the Company, or member of his or her immediate family, is presently a party to any material transaction with the Company relating to the business, including, without limitation, any contract, agreement or other arrangement (a) providing for the furnishing of services by, (b) providing for the rental of real or personal property from, or (c) otherwise requiring payments to (other than services as officers, directors or employees) any such person or entity in which any such person has a substantial interest as a shareholder, officer, director, trustee, member, partner or similar status. 2.18. Records. The records of the Company relating to the business have been maintained in all material respects in accordance with good business practices and, as applicable, in accordance with GAAP consistently applied. The minute books of the Company are correct, complete and current in all material respects. 2.19 Environmental Matters. (a) No substance defined as or subject to regulation as hazardous substances, hazardous or toxic pollutants or hazardous wastes, in or pursuant to any of the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act of 1976, the Hazardous Materials Transportation Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Emergency Planning and Community Right-to-Know Act or in any other federal, state or local environmental law in effect on the Closing Date (collectively, "Environmental Laws"), including, irrespective of inclusion or exclusion from any of the aforementioned categories, crude oil or any substances derived from the fractional distillation of crude oil, polychlorinated biphenyls, asbestos-containing material, radioactive materials, pesticides, and any pharmaceutical products that exhibit any characteristics that would render such products a regulated hazardous waste if a waste (all 9 10 of the above being collectively referred to herein as "Hazardous Materials") have been or are stored, treated, disposed of, managed, generated, manufactured, produced, released (as defined in CERCLA Section 101(22)), emitted or discharged on, to, in, under or from the real property owned or leased by the Company relating to the business or disposed of at a location owned or operated by a third party pursuant to an arrangement for disposal. (b) The Company is in compliance in all material respects with all Environmental Laws and has obtained all environmental licenses, permits, approvals, registrations and authorizations (federal, state and local) material to the business. Except as set forth on Schedule 2.19(b), all such licenses, permits, approvals, registrations and authorizations will remain in full force and effect as of the Closing. (c) No governmental or private action, suit or proceeding to enforce or impose liability under any Environmental Laws is pending or, to the best of the Company's knowledge, threatened against the Company and, to the best of the Company's knowledge, no lien has been created on any real property owned or leased by the Company relating to the business, under any Environmental Laws. 2.20. Investments. The Company does not own any capital stock, partnership interests or other equity interests in any corporation, partnership, joint venture, trust or other business association. 2.21. Material Contracts and Other Agreements. Schedule 2.21 hereto discloses all material peering agreements, arrangements and relationships, collocate agreements, service swap agreements and local access agreements; all material vendor maintenance contracts; a written description of any and all material affinity, bounty and retail programs; all agreements containing covenants not to compete on the part of the Company or otherwise restricting the ability of the Company or any Management Stockholder in any material way to engage in the business of the Company as currently conducted; all material notes, mortgages, indentures, letters of credit, guarantees, performance bonds an other obligations and agreements and other instruments for or relating to any lending or borrowing (including assumed debt) entered into by the Company or pursuant to which any properties or assets of the Company are pledged or mortgaged as collateral; any employment or consulting agreement with any Stockholder or any present or former director, officer or employee of the Company which calls for annual compensation in excess of Fifty Thousand Dollars ($50,000); all agreements with independent sales representatives or contractors relating to the sale and distribution of the Company's products and services; all material personal property leases; and any other Contracts which are material to the Company. With respect to each such Contract, (1) such Contract is valid, binding and enforceable against the Company and, to the best knowledge of the Company and the Stockholders, and each other party thereto in accordance with its terms; (2) neither the Company nor, to the best knowledge of the Company and the Management Stockholders, and other party to such Contract is in material breach thereof or material default thereunder, and (3) there does not exist any event that, with the giving notice or the lapse of time or both, would constitute a material of or a material default under such Contract, and neither the Company nor the Management Stockholders has received or given notice of any such breach, default or 10 11 event. None of the Company or the Stockholders is aware of any circumstances pursuant to which Purchaser's purchase of shares pursuant to the terms of this Agreement could reasonably be expected to materially and adversely affect the relationship of the Company with any party or parties to any Contract. 2.22. Suppliers and Customers. Schedule 2.22 hereto sets forth the ten (10) largest suppliers of goods and services of the Company for the fiscal year ended December 31, 1997 (the "Large Suppliers"), the amount of all payments made to each large Supplier for such fiscal year, the ten (10) largest customers, groups of related customers or bulk customers for the fiscal year ended December 31, 1997 (the "Large Customers"), and the amount of all payments made by such Large Customers for such fiscal year. The Company has a good business relationship with its Large Suppliers and Large Customers and no supplier is a sole source of supply of any good or service used by the Company. None of the Large Suppliers or Large Customers has canceled or otherwise terminated or threatened in writing to cancel or otherwise terminate, its relationship with the Company or since the Balance Sheet Date, decreased materially, or threatened to decrease or limit materially, it services, supplies or materials to the Company or its usage or purchase of the products or services of the Company. Neither the Company nor the Stockholders is aware of any circumstances pursuant to which Purchasers' purchase of shares pursuant to the terms of this Agreement could reasonably be expected to materially and adversely affect the relationship of the Company with any Large Supplier or Large Customer. 2.23. Title to Assets. The Company owns or leases all tangible personal property necessary for the conduct of its business as presently conducted. Each such asset has been maintained in accordance with ordinary industry practice, is in good operating condition and is usable in the ordinary course of business, other than where any such failures individually or in the aggregate would not have a Material Adverse Effect. Except for Encumbrances arising under Contracts identified on Schedule 2.23 hereto and for other imperfections which individually or in the aggregate would not have a Material Adverse Effect and except for leased or licensed assets, the Company has good and marketable title to all of the owned tangible personal property used in the conduct of its business, free and clear of any and all Encumbrances. The Company has good and valid leasehold title to all leased tangible personal property leased by it from third parties, free and clear of all Encumbrances, except for imperfections individually or in the aggregate as would not cause a Material Adverse Effect. 2.24. Disclosure. No representation or warranty by the Company or NYSERNet set forth in this Agreement, or any other agreement delivered in connection herewith contains any untrue statement of a material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make such representations and warranties not misleading. 2.25. Exclusive Representations and Warranties. Other than the representations and warranties set forth herein, the Company is not making any other representation or warranty, express or implied, with respect to its business or operations. 11 12 NYSERNet represents and warrants to the Purchasers as follows: 2.26. Corporate Organization. NYSERNet is duly organized, validly existing and in good standing under the laws of the State of New York, with all requisite power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted. 2.27. Authority Relative to Agreement. NYSERNet has the full power and authority to execute and deliver this Agreement and each of the Ancillary Agreements, to the extent it is a party thereto, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated on its part hereby and thereby. This Agreement and each of the Ancillary Agreements, to the extent NYSERNet is a party thereto, have been duly executed and delivered by NYSERNet and constitute the legal, valid and binding obligations of NYSERNet, enforceable against NYSERNet in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting creditors' rights generally and subject to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 2.28. No Violations or Consents. Except as set forth on Schedule 2.28 hereto, the execution, delivery and performance of this Agreement and each of the Ancillary Agreements by NYSERNet, to the extent NYSERNet is a party thereto, and the consummation by it of the transactions contemplated hereby and thereby will not (a) violate or conflict with any provision of any law applicable to NYSERNet by which any property or asset of it is bound or (b) require the consent, waiver, approval, license or authorization of or any filing by NYSERNet with any public authority. 2.29. Ownership. NYSERNet has good and marketable title in and to the shares (the "NYSERNet Shares") set forth opposite its name on Schedule 2.1 hereto. The NYSERNet Shares are, and on the Closing Date will be, free and clear of any and all Encumbrances. At the Closing, upon consummation of the transactions contemplated by this Agreement, Purchasers will acquire good and marketable title to the NYSERNet Shares, free and clear of any and all Encumbrances. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASERS Each Purchaser represents and warrants to the Company as follows: 3. 1. Corporate Organization. Such Purchaser is duly organized, validly existing and in good standing under the laws of its state of formation, with all requisite power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted. 3.2. Authority Relative to Agreement. Such Purchaser has the full power and authority to execute and deliver this Agreement and each of the Ancillary Agreements, to the extent it is a party thereto, to carry out its obligations hereunder and thereunder, and to consummate the transactions contemplated on its part hereby and 12 13 thereby. This Agreement and each of the Ancillary Agreements, to the extent such Purchaser is a party thereto, have been duly executed and delivered by such Purchaser and constitute the legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting creditors' rights generally and subject to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.3. No Violations or Consents. The execution, delivery and performance of this Agreement and each of the Ancillary Agreements by such Purchaser, to the extent such Purchaser is a party thereto, and the consummation by it of the transactions contemplated hereby and thereby will not (a) violate or conflict with any provision of any law applicable to such Purchaser or by which any property or asset of it is bound or (b) require the consent, waiver, approval, license or authorization of or any filing by such Purchaser with any public authority. 3.4. Securities Act Representation. Such Purchaser hereby represents, acknowledges, covenants and agrees as follows: (i) the Initial shares acquired hereunder are being acquired for such Purchaser's own account for investment purposes only and not with a view to any resale in violation of the Securities Act of 1933, as amended (the "Securities Act") or any state securities or "blue sky" law; (ii) the Initial Shares have not been registered under the Securities Act or any state securities or "blue sky" law (iii) such Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act; and (iv) such Purchaser has been afforded an opportunity to examine all documents and to ask questions of, and to receive answers from, the Company and its representatives concerning the terms of this Agreement, the transactions contemplated hereby and as set forth in the Exhibits attached hereto and such Purchaser's purchase of the Initial shares. 3.5. Further Representations. IXC hereby represents, acknowledges, covenants and agrees as follows: (i) the IRU and Stock Purchase Agreement dated as of July 22, 1997, as amended (the "PSINet Agreement"), by and between IXC and PSINet Inc. ("PSI") and the Contribution Agreement dated as of December 22, 1997 by and between IXC and IXC Carrier Inc. ("Carrier") (the "Fiber Agreement") are in full force and effect, (ii) IXC owns of record or beneficially at least fifty percent (50%) of the approximately 20% interest in common stock of PSI received under the PSINet Agreement (a total of approximately 10 million shares), which has as of April 15, 1998 a market value of not less than $60 million, (iii) IXC owns an IRU in two fibers over a significant portion of the network of Carrier, as set forth in the Fiber Agreement and (iv) IXC shall not transfer any of its assets to any other entity including any Affiliate of IXC with the intent of avoiding its obligations hereunder or under the Option Agreements contemplated hereby. 13 14 ARTICLE 4 INDEMNITY 4.1. Indemnification by Purchasers. (a) Each Purchaser agrees to indemnify the Stockholders against, and hold each Stockholder harmless from, any and all Damages (as defined in Section 4.3 below) arising out of the breach of any representation, warranty, covenant or agreement of Purchasers contained herein or as set forth in the Exhibits attached hereto. Notwithstanding the foregoing, Purchasers shall not be liable to the Stockholders under this Section 4.1(a) for any Damages arising out of the breach of any representation or warranty of Purchasers herein or as set forth in Exhibits attached hereto unless and until the aggregate amount of all such Damages exceeds $100,000 ("Purchasers' Threshold Amount"), in which case Purchasers shall be required to indemnify the Stockholders for the amount of such Damages above the Purchasers' Threshold Amount. (b) The Stockholders agree to give each Purchaser prompt written notice of any action by or in respect of a third party of which they have actual knowledge concerning any Damage as to which they may request indemnification hereunder. Purchasers shall have the right to direct, through counsel of their choosing, the defense or settlement of any such action (provided that Purchasers shall have first acknowledged their indemnification obligations hereunder specifically in respect of such action) at their own expense, which counsel shall be reasonably satisfactory to the indemnified party or parties. If Purchasers elect to assume the defense of any such action, the indemnified party or parties may participate in such defense, but in such case the expenses of the indemnified party or parties incurred in connection with such participation shall be paid by the indemnified party or parties. The indemnified party or parties shall cooperate with Purchasers in the defense or settlement of any such action. If Purchasers elect to direct the defense of any such action, the indemnified party or parties shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted Damages, unless (i) each Purchaser consents in writing to such payment, (ii) each Purchaser withdraws from the defense of such asserted Damages, or (iii) a final judgment from which no appeal may be taken by or on behalf of Purchasers is entered against such indemnified party for such Damages. If Purchasers shall fail to defend, or if, after commencing or undertaking any such defense, Purchasers (i) fail to prosecute or (ii) withdraw from such defense, the indemnified party or parties shall have the right to undertake the defense or settlement thereof at Purchaser's expense. 4.2. Indemnification by the Company and NYSERNet. (a) The Company and NYSERNet agree to indemnify each Purchaser against and hold each Purchaser harmless from any and all Damages of such Purchaser arising out of the breach of any representation, warranty, covenant or agreement of the Company contained herein. NYSERNet also agrees to indemnify each Purchaser against and hold each Purchaser harmless from any and all Damages of such Purchaser arising out of the breach of any representation, warranty, covenant or agreement of NYSERNet contained herein. Notwithstanding the foregoing, neither the Company nor NYSERNet shall be liable to Purchasers under this Section 4.2 (a) for any Damages arising hereunder unless and until the aggregate amount of all such Damages exceeds $100,000 (the "Company's and 14 15 NYSERNet's Threshold Amount"), in which case (i) the Company and NYSERNet shall be required to indemnify Purchasers for the amount of such Damages above the Company's and NYSERNet's Threshold Amount, and (ii) the aggregate liability of the Company and NYSERNet under this Section 4.2 (a) shall not exceed 10% of the total amount of the Purchase Price received by such person pursuant to this Agreement. (b) Each Purchaser agrees to give the Company and NYSERNet prompt written notice of any action by or in respect of a third party of which it has actual knowledge concerning any Damages as to which it may request indemnification hereunder. The Company and NYSERNet shall have the right to direct, through counsel of their own choosing, the defense or settlement of any such action (provided that the Company and NYSERNet shall have first acknowledged their indemnification obligations hereunder specifically in respect of such action) at their own expense, which counsel shall be reasonably satisfactory to Purchasers. If the Company and NYSERNet elect to assume the defense of any such action, Purchasers may participate in such defense, but in such case the expenses of Purchasers incurred in connection with such participation shall be paid by Purchasers. Purchasers shall cooperate with the Company and NYSERNet in the defense or settlement of any such action. If the Company and NYSERNet elect to direct the defense of any such action, Purchasers shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted Damages, unless the Company and NYSERNET (i) consent in writing to such payment, (ii) the Company and NYSERNet withdraw from the defense of such asserted Damages, (iii) a final judgment from which no appeal may be taken by or on behalf of the Company and NYSERNet is entered against Purchasers for such Damages. If the Company and NYSERNet (i) fail to defend, or if, after commencing or undertaking any such defense, the Company and NYSERNet fail to prosecute or (ii) withdraw from such defense, Purchasers shall have the right to undertake the defense or settlement thereof at the Company's and NYSERNet's expense. 4.3. Damages. "Damages" shall mean any claim, demand, loss, liability, damage or expense, including without limitation, interest, penalties and reasonable attorneys', accountants' and experts' fees and costs of investigation incurred as a result thereof. The term "Damages" shall not be limited to matters asserted by third parties against the indemnified party, but shall also include Damages sustained or incurred by the indemnified party in the absence of third party claims. In particular, in the event of the existence or occurrence of a fact or event which is not disclosed on the disclosure schedules and which constitutes a breach of a representation or warranty by the Company or NYSERNet, the Damages relating to such breach for IXC or GHI, respectively, shall be deemed equal to the product of: (1) the Detriment (as defined) to the Company with respect to such breach, and (2) IXC's or GHI's Ownership Percentage (as defined). "Detriment" shall mean the dollar value of the negative effect on the Company of the existence or occurrence of the fact or event constituting the breach, e.g., in the event an undisclosed liability for $100,000 exists, the Detriment is $100,000. "Ownership Percentage" shall mean the percentage of the outstanding shares of the Company's common stock purchased hereunder by IXC or GHI, as applicable. 15 16 4.4. General Indemnification Provisions. If the indemnifying party is controlling the defense of an action, the indemnifying party will not, without the prior written consent of the indemnified party or parties, enter into any settlement of such action which could reasonably be expected to lead to liability or create any financial or other obligation on the part of the indemnified party or parties. If the indemnified party or parties are controlling the defense of an action, the indemnified party or parties will not enter into any settlement of such action without the consent of the indemnifying party, which consent shall not be unreasonably withheld. The controlling party shall deliver, or cause to be delivered, to the other party or parties copies of all correspondence, pleadings, motions, briefs, appeals or other written statements relating to or submitted in connection with the defense of any such action and timely notices of, and the right to participate in any hearing or other court proceeding relating to such action. 4.5. Company and Management Stockholders' Representations and Warranties. Purchasers' review of the books and records of the Company shall not be deemed to constitute actual knowledge so as to reduce Purchasers' right to rely on the Company's and the Management Stockholders' representations and warranties contained herein. ARTICLE 5 THE CLOSING 5. 1. Conduct Prior to the Closing. (a) From and after the date of this Agreement until the earlier to occur of (i) the Closing Date or (ii) the termination of this Agreement by mutual consent of the parties hereto, except as expressly contemplated by this Agreement or as consented to by the Purchasers, neither the Company, NYSERNet nor any Management Stockholder shall take any action inconsistent with the terms of this Agreement or which would cause any representation or warranty hereunder not to be true as of the Closing Date. (b) Access to Information and Documents, Confidentiality. From and after the date of this Agreement, the Company shall give each Purchaser and such Purchaser's attorneys, accountants and other representatives full access to its properties, documents, books and records and shall furnish each Purchaser with such information concerning the Company as such Purchaser may reasonably request. Each Purchaser acknowledges and agrees that (i) the information it has obtained and will obtain concerning the Company's business is confidential and belongs to the Company, and (ii) such Purchaser will hold and will cause its officers, directors, attorneys, accountants and agents to hold all such confidential information in confidence and will use, and cause such other persons to, use such information solely in connection with such Purchaser's investment in the Company. (c) Best Efforts to Satisfy Closing Conditions. The Company and each Purchaser shall use best efforts to cause the closing conditions set forth below to be satisfied as soon as practicable following the execution hereof. 16 17 5.2. Closing. The Closing shall be held on May _, 1998 at 10:00 a.m. at the offices of Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New York 10019, or at such other time and place mutually agreeable to the parties hereto. 5.3. Conditions of the Obligations of the Purchasers. The obligation of each Purchaser to purchase the Initial Shares is subject to the fulfillment or waiver of each of the following conditions on or before the Closing Date: (a) Representations and Warranties. The representations and warranties of the Company, NYSERNet and the Management Stockholders herein shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. (b) Performance. The Company, NYSERNet and the Management Stockholders shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by them on or before the Closing Date. (c) Proceedings, Documents and Approval. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchasers, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. Any required governmental consent or approval shall have been obtained. (d) Employment and Non-Competition Agreements. Each of the following persons shall have executed and delivered to the Company an Employment and Non-Competition Agreement in the Form of Exhibit F hereto: Messrs. Mandelbaum, Buckel, Luckett, Martin and Oros. (e) Stockholders' Agreement. The Company, NYSERNet, the Management Stockholders and Harrison shall have executed and delivered the Stockholders' Agreement. (f) Registration Rights Agreement. The Company, NYSERNet, the Management Stockholders and Harrison shall have executed and delivered the Registration Rights Agreement. (g) Option Agreements. Each Management Stockholder and Harrison shall have executed and delivered to Grumman Hill and IXC an Option Agreement. (h) New York State Requirements. Other than those required generally of New York State corporations, no limitations, consents or requirements relating to the Company or NYSERNet's interest in the Company, including but not limited to the Attorney General's consent, shall remain in effect at the Closing Date. (i) Preferred Stock Rights. The Company shall have delivered to the Purchasers for filing with the Secretary of State of New York a Restated Certificate of 17 18 Incorporation in the form of the Certificate filed on March 12, 1998 except that Sections 4, 5.02 and 6 shall be deleted therefrom and other sections shall, as required, be appropriately renumbered to reflect such deletions. 5.4. Conditions of the Obligations of the Company. The obligation of the Company to sell Shares to each Purchaser is subject to the fulfillment or waiver of each of the following conditions on or before the Closing Date: (a) Representations and Warranties. The representations and warranties of each Purchaser hereunder shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. (b) Performance. Each Purchaser shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with on or before the Closing Date. (c) Approvals. Any required governmental consent or approval shall have been obtained. 5.5. Conditions of the Obligations of NYSERNet. The obligation of NYSERNet to sell Shares to each Purchaser is subject to the fulfillment or waiver of each of the following conditions on or before the Closing Date: (a) Representations and Warranties. The representations and warranties of each Purchase hereunder shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date. (b) Performance. Each Purchaser shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with on or before the Closing Date. (c) Proceedings, Documents and Approval. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchasers, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. Any required governmental consent or approval shall have been obtained. (d) Stockholders' Agreement. Grumman Hill and IXC shall have executed and delivered the Stockholders' Agreement. (e) Registration Rights Agreement. Grumman Hill and IXC shall have executed and delivered the Registration Rights Agreement. 18 19 (f) Option Agreements. Grumman Hill and IXC shall have executed and delivered an Option Agreement for each of the Management Stockholders and Harrison. 5.6. Deliveries by the Company, NYSERNet. On the Closing Date, the Company, NYSERNet and the Management Stockholders (to the extent each is a party thereto) shall deliver the following: (a) Certificates representing all of the Initial Shares, registered in the name of the Purchasers and, as to those registered in the name of NYSERNet, duly endorsed by NYSERNet, for transfer to Purchasers (two-thirds to IXC and one-third to Grumman Hill) or accompanied by an assignment duly executed by NYSERNet and any other documents that are necessary to transfer to Purchasers good and marketable title to all of the Initial Shares; (b) Evidence of the Company and NYSERNet having obtained the licenses, permits, authorizations, consents and approvals set forth on Exhibit G hereto; (c) Executed copies of the Stockholders' Agreement and Registration Rights Agreement and Option Agreements; (d) A legal opinion from Dewey Ballantine LLP, legal counsel for the Company, and of Underberg & Kessler, LLP, legal counsel for NYSERNet, each dated the Closing Date, in form and substance reasonably satisfactory to the Purchasers. 5.7. Deliveries by Purchasers. On the Closing Date, Purchasers shall deliver the following: (a) Cash by wire transfer to each of the sellers of the Initial Shares set forth on Exhibit A hereto, in the amount set forth opposite each of such persons' names. (b) Executed copies of the Stockholders' Agreement, Registration Rights Agreement and all Option Agreements. 5.8 Further Assurances. NYSERNet and the Company, at any time on or after the Closing Date, will execute, acknowledge and deliver any further assignments and other assurances, documents and instruments of transfer, reasonably requested by Purchaser, and will take any other action that may be reasonably requested by Purchasers, for the purpose of assigning, transferring and confirming to Purchasers, or reducing to possession, any or all of the Initial Shares purchased hereunder. ARTICLE 6 ADDITIONAL COVENANTS OF PARTIES ------------------------------- 6.1. Governmental Filings. To the extent necessary to complete all contemplated transactions under this Agreement and the Option Agreements entered into on the Closing Date, the Purchasers, NYSERNet, the Company and the Management Stockholders, as applicable, undertake and covenant to use their best efforts to file any required applications and filings with any governmental authorities, including but not 19 20 limited to any initial, renewal or extension filings under the Hart-Scott-Rodino Antitrust Improvements Act, and to obtain all necessary consents, approvals and permits and to meet all required waiting periods thereunder in a timely fashion in order to permit the transactions contemplated by this Agreement to occur and in any event prior to the time that the "put" provided for in the Option Agreements is first exercisable and thereafter throughout the entire period the "put" is exercisable. 6.2. Right of First Offer. (a) At any time from the Closing under this Agreement until the time that any class of the Company's equity securities are registered under the Securities and Exchange Act of 1934, as amended, in the event that the Company desires to enter into negotiations to issue, sell or otherwise transfer any of its capital stock or securities exercisable for, or exchangeable into capital stock (the "Offered Stock") to any person, it shall promptly so notify Grumman Hill, IXC, NYSERNet and the Management Stockholders (other than Richard Mandelbaum) (the "Offerees") and shall offer to sell to each of the Offerees (the "Offer") its pro rata share (as defined below) of the Offered Stock it desires to sell at the price, and on the terms and conditions, upon which the Company would be willing to sell the Offered Stock to that person. In the event that the consideration to be paid by such person is not cash, the Board shall determine in good faith an equivalent cash price and the Offerees, at their option, can choose to pay the equivalent cash price, or, if practicable, to pay consideration of the same or similar kind to that which such person will pay. At any time during the first seven (7) days following receipt of the Offer, the Offerees may notify the Company that they exercise their right to purchase their pro rata portion of the Offered Stock (based on the respective Offeree's percentage ownership of the Company's capital stock computed on a basis that assumes full exercise of (i) all employee stock options and (ii) the put option in the Option Agreements referred to herein) on the same terms and conditions as are specified in the Offer (an "Acceptance Notice"). If the Company shall not receive any Acceptance Notice or shall not receive Acceptance Notices sufficient to sell all of the Offered Stock, it shall have the right to sell any remaining shares of the Offered Stock to any person or entity at a price equal to the price set out in the Offer, and upon such other terms and conditions as are no less favorable to the Company than those set out in the Offer; provide, however, that none of such terms and conditions shall violate any provision of this Agreement and such sale must be consummated within ninety (90) days from the date of the Offer. (b) With respect to each purchase of Offered Stock by the Offerees under this Section 6.2, the closing therefor shall be held at 10 a.m. at the principal office of the Company on the date determined in accordance with Section 6.2(a) hereof. The purchase price for the Offered Stock shall be paid in full at such closing in cash or by certified check payable to the order of the Company against delivery of the appropriate stock certificates or instruments evidencing such Offered Stock, duly endorsed or with duly executed stock powers attached thereto. Stock delivered at each closing hereunder shall be free and clear of all liens, charges and encumbrances, and all title thereto, and all rights and privileges of ownership thereof, immediately shall be vested in the purchaser thereof. The purchaser shall pay all transfer taxes, and all requisite transfer tax stamps shall be duly affixed to the stock certificates at the time of delivery. 20 21 (c) The first offer rights of the Offerees pursuant to this Section 6.2 shall not apply to securities issued, (A) as a stock dividend or upon any subdivision of shares of Common Stock, provided that the securities issued pursuant to such stock dividend or subdivision are limited to additional shares of Common Stock, (B) pursuant to subscriptions, warrants, options, convertible securities, or other rights outstanding as of the date hereof, (C) options for employees, directors or consultants issued post Closing provided such options are solely for non-voting stock, (D) pursuant to a firm commitment underwritten public offering, and (E) upon the exercise of any right which was not itself issued in violation of the terms of this Section 6.2. In the event stock options are issued post Closing for shares of the Company's voting stock, the right of first offer under this Section 6.2 shall apply such that the Offerees may acquire their pro rata amount of the shares into which the options are exercisable at the option issuance date upon payment of the aggregate exercise price for said shares but shall have no right to acquire actual options themselves. This right must be exercised, if at all, within seven (7) days following receipt of the Offer for said shares. (d) The right of first offer set forth in this Section 6.2 is not transferable by any party other than Grumman Hill which shall be permitted to assign its right of first offer rights herein to (i) one or more of its limited partners, (ii) any affiliated fund, i.e. an investment partnership with the same or an affiliated general partner or manager as Grumman Hill, or (iii) IXC or an affiliate of IXC, provided, however, that in such case, the rights would only be assignable to the extent that assuming the exercise of the transferred rights, IXC and its affiliates would beneficially own not more than 49.9% of the outstanding equity of the Company unless such transfer has received the prior unanimous consent of the Company's Board of Directors. 6.3 Right of First Refusal At any time after the Closing under this Agreement and for so long as IXC owns a minimum of the number of shares (subject to adjustment in the event of stock splits, combinations, other recapitalization, stock dividends and similar events) acquired from the Company and NYSERNet under the Agreement, in the event that the Company (or any subsidiary thereof) develops a need for broadband or private-line services, the Company will provide written notice to IXC of the nature of the Company's requirements as soon as is reasonably practicable. IXC shall have the exclusive right to provide all, or any portion of, such broadband or private-line services to the Company so long as the price charged by IXC to the Company for such services is competitive with the prices and discounts of other providers for a similar amount of similar services. If the Company is able to obtain a quote for a similar amount of broadband or private-line services from another provider at less than the price then being quoted by IXC, then IXC shall not have the right to provide such services to the Company unless it is willing to provide those services at the price quoted by such other provider. 6.4. Irrevocable Proxy NYSERNet hereby grants to IXC and Grumman Hill an irrevocable proxy with full power of substitution and revocation pursuant to the provisions of Section 609 of the New York Business Corporation Law (the "Proxy") to vote, and to execute and deliver written consents or otherwise act with respect to 252,000 shares of the Company's Common Stock reduced by the amount of the shares of the 21 22 Company's common stock acquired after the date of this Agreement by IXC and Grumman Hill from the Company or from any stockholders of the Company for the duration of the Initial Option Period (as this term is defined in the Option Agreement attached hereto as Exhibit C), with such proxy exercisable by IXC with respect to two thirds the shares of stock and by Grumman Hill with respect to one third of the shares of stock. NYSERNet hereby affirms that the Proxy is given as a condition of this Agreement and as such is coupled with an interest and is irrevocable. ARTICLE 7 MISCELLANEOUS 7.1. Survival. All of the representations and warranties set forth in this Agreement and the provisions of Section 7.9 shall terminate and be extinguished on the first anniversary hereof. 7.2. Notices. All notices, requests, demands and other communications made under this Agreement shall be in writing, correctly addressed to the recipient at the addresses set forth under such recipient's signature on the signature page hereto and shall be deemed to have been duly given; (a) upon delivery, if served personally on the party to whom notice is to be given; (b) on the date of receipt, refusal or non-delivery indicated on the receipt if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, or by air courier; or (c) on confirmation of receipt if delivered by facsimile transmission, provided the original thereof is sent by mail, in the manner set forth above, within the next business day after the facsimile transmission is sent. Any party may give written notice of a change of address in accordance with the provisions of this Section 7.2 and after such notice of change has been received, any subsequent notice shall be given to such party in the manner described at such new address. 7.3. Headings, Agreement. The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The term "Agreement" for purposes of representations and warranties hereunder shall be deemed to include the Schedules and Exhibits hereto. 7.4. Publicity. So long as this Agreement is in effect, unless otherwise required by applicable law, the parties hereto shall not, and shall cause their affiliates not to, issue or cause the publication of any press release or other announcement with respect to the transactions contemplated by this Agreement or this Agreement without the consent of the other parties, which consent shall not be unreasonably withheld or delayed. 7.5. Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) constitutes the entire agreement among the parties and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof 7.6. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefits of the parties hereto and their respective 22 23 successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder (except as permitted by the terms of Section 6.2(d) hereof) shall be assigned by any of the parties hereto without the prior written consent of the other parties, provided that Purchasers shall be permitted to assign this Agreement to any respective affiliate thereof without the prior written consent of the Company or NYSERNet. For this purpose, however, Grumman Hill and IXC shall not be considered as affiliates of each other. 7.7. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. 7.8. Governing Law and Choice of Forum. The validity, construction and performance of this Agreement, and any action arising out of or relating to this Agreement or any of the Ancillary Agreements, shall be governed by the laws, without regard to the laws as to choice or conflict of laws, of the State of New York. 7.9. Cumulative Remedies. No remedy made available hereunder by any of the provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. Notwithstanding the foregoing, the parties have agreed that the indemnification provisions contained in Sections 4.1 and 4.2, above, shall be the sole and exclusive remedies of the parties with respect to the breach by the other parties of any representation, warranty, covenant or agreement herein, except in the case of party who has committed a fraud in respect thereto. 7.10. Third-Party Beneficiaries. This Agreement is not intended to confer upon any other person any rights or remedies hereunder. 23 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by an individual thereunto duly authorized, all as of the date first written above. IXC INTERNET SERVICES, INC. By: /s/ Ben L. Scott ------------------------ Name: Ben L. Scott Title: Chairman & CEO Address: 1122 Capital of Texas Hwy S. Austin, Texas 78746-6426 Attn: Jeffrey C. Smith, Esq. With a copy to: Michael P. Whalen, Esq. Riordan & McKinzie 695 Town Center Drive, Suite 1500 Costa Mesa, California 92626 GRUMMAN HILL INVESTMENTS III, L.P. By: Grumman Hill Group LLC, general partner By: /s/ James T. Kelsey ------------------------ Name: James T. Kelsey Title: With a copy to: Michael P. Whalen, Esq. Riordan & McKinzie 695 Town Center Drive, Suite 1500 Costa Mesa, California 92626 APPLIED THEORY COMMUNICATIONS, INC. By: /s/ Richard Mandelbaum ------------------------ Name: Richard Mandelbaum Title: President & CEO Address: 125 Elwood Davis Road Syracuse, NY 13212 Attention: Chief Financial Officer With a copy to: Frank E. Morgan, II Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 STOCKHOLDERS /s/ Richard Mandelbaum - ------------------------ Richard Mandelbaum /s/ David Buckel - ------------------------ David Buckel /s/ James Luckett - ------------------------ James Luckett /s/ Denis J. Martin - ------------------------ Denis Martin /s/ Mark Oros - ------------------------ Mark Oros With a copy to: Frank E. Morgan, II, Esq. Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 25 NYSERNET.NET, INC. By: /s/ Richard Mandelbaum ------------------------ Name: Richard Mandelbaum Title: Chairman c/o Robert F. Mechur, Esq. Underberg & Kessler, LLP 1800 Chase Square Rochester, NY 14604 2 EX-10.02 4 1996 INCENTIVE STOCK OPTION PLAN 1 EXHIBIT 10.02 NYSERNet.com, INC. 1996 INCENTIVE STOCK OPTION PLAN as amended by Resolution of the Board of Directors on 09/02/98 and of the shareholders on 10/14/98 1. Purpose. The NYSERNet.com, Inc. 1996 INCENTIVE STOCK OPTION PLAN (hereinafter referred to as the "Plan") is designed to furnish additional incentive to key employees and, as to Nonstatutory Options (as hereinafter defined) directors, advisors, consultants and other employees of NYSERNET.com, Inc., a New York corporation (hereinafter referred to as the "Company"), and its parents or subsidiaries, upon whose judgment, initiative and efforts the successful conduct of the business of the Company largely depends, by encouraging such persons to acquire a proprietary interest in the Company or to increase the same, and to strengthen the ability of the Company to attract and retain persons of training, experience and ability. Such purpose will be effected through the granting of stock options ("Stock Options"), as herein provided. Such options will either be "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("Statutory Options") or nonstatutory stock options which are not Incentive Stock Options ("Nonstatutory Options") as determined by the Board of Directors of the Company at the time each option is granted. 2. Eligibility. (a) The persons who shall be eligible to receive Statutory Options under the Plan shall be those employees of the Company, or of any of its parents or subsidiaries within the meaning of Section 425(e) and (f) of the Code, who are exempt from the overtime provisions of the Fair Labor Standards Act of 1938, as amended, by reason of employment in an executive, administrative or professional capacity under 29 U.S.C. Section 213(a)(1). No Statutory Option shall be granted to a person who would, at the time of the grant of such option, own, or be deemed to own for purposes of Section 422(b)(6) of the Code, more than 10% of the total combined voting power of all classes of shares of stock of the Company or its parents or subsidiaries unless at the time of the grant of the option both of the following conditions are met: (i) the option price is at least 110% of the fair market value of the shares of stock subject to the option, as defined in subparagraph 4(a) hereof, and (ii) the option is, by its terms, not exercisable after the expiration of five years from the date the option is granted. (b) The persons who shall be eligible to receive Nonstatutory Options shall be those employees, officers and directors of, and advisors and consultants to, the Company as the Board of Directors may from time to time select. 2 3. Shares Subject to Options. (a) Subject to the provisions of Section 4(g) hereof, Stock Options may be granted under the Plan to purchase in the aggregate not more than 8,000,000 shares of the Common Stock of the Company, consisting of a combination of not more than 5,000,000 shares of the $0.01 par value Voting Common Stock and not more than 3,000,000 shares of the $0.01 par value Non-Voting Common Stock of the Company (hereinafter referred to as "Shares"), which Shares may, in the discretion of the Board of Directors of the Company, consist either in whole or in part of authorized but unissued Shares or Shares held in the treasury of the Company. Any Shares subject to an option which for any reason expires or is terminated unexercised as to such Shares shall continue to be available for options under the Plan. (b) The aggregate fair market value, determined as of the time any Statutory Option is granted to any individual, of Shares for which Incentive Stock Options within the meaning of the Code are exercisable for the first time by such individual in any calendar year, under all incentive stock option plans of the Company or in any corporation which is a parent or subsidiary of the Company, shall not exceed $100,000. Any options granted hereunder in excess of such number shall be Nonstatutory Options. In determining whether any option is a Statutory or Nonstatutory Option, options shall be considered in the order in which they were granted. 4. Terms and Conditions of Stock Options. Stock Options shall by granted by the Board of Directors or by any other party delegated such authority pursuant to section 8 of this Plan and shall be subject to the following terms and conditions: (a) Price. Each Stock Option shall state the number of Shares subject to the option and the option price, which, in the case of Statutory Options, shall be not less than the fair market value of the Shares with respect to which the option is granted at the time the option is granted; provided, however, that the option price shall be at least 110% of fair market value in the case of a grant of a Statutory Option to a person who would at the time of the grant, own, or be deemed to own for purposes of Section 422(b)(6) of the Code, more than 10% of the total combined voting power of all classes of the capital stock of the Company or its parents or subsidiaries. For purposes of this subsection, "fair market value" shall mean: (i) the mean between the bid and asked price for the Shares on the business day immediately preceding the date of the grant of the option; or (ii) the most recent sale price for the Shares as of the date of the grant of the option; or (iii) such price as shall be determined by the Board of Directors of the Company in an attempt made in good faith to meet the requirements of Section 422(b)(4) of the Code. (b) Term. Except as otherwise provided in subparagraphs 4(d) and 4(e), the term of each Stock Option shall be determined by the Board of Directors of the 2 3 Company, but in no event shall an option be exercisable either in whole or in part after the expiration of ten years from the date on which it is granted. The Board of Directors and an optionee may, by mutual agreement, terminate any Stock Option granted to such optionee. In the case of the merger, consolidation, dissolution, liquidation, or change in ownership of the Corporation, the Board of Directors of the Corporation may, in its sole discretion, accelerate the expiration date and the dates on which any part of any Stock Option shall be exercisable; provided, however, that such acceleration shall be effective only upon the consummation of any such transaction. (c) Non-Assignment During Life. During the lifetime of the optionee, a Stock Option shall be exercisable only by him and shall not be assignable or transferable by him, whether voluntarily or by operation of law or otherwise, and no other person shall acquire any rights therein. (d) Death of Optionee. In the event that an optionee shall die while employed by the Company or within three months after retirement, but prior to the exercise of all Statutory Options granted to him under the Plan, the remaining Statutory Options may be exercised in whole or in part after the date of the optionee's death only: (i) by the optionee's estate or by or on behalf of the person or persons to whom the optionee's rights under the option pass under the optionee's Will or the laws of descent and distribution; (ii) to the extent that the optionee was entitled to exercise the option at the date of his death; and (iii) during the balance of the term of the option or within one year of the date of the Optionee's death, whichever is shorter. (e) Order of Option Exercise. An optionee may exercise Stock Options in any order the Optionee chooses, regardless of the order in which the Stock Options were granted. (f) Termination of Employment. A Statutory Option shall be exercisable during the lifetime of the optionee to whom it is granted only if, at all times during the period beginning on the date of the granting of the Statutory Option and ending on the day three months before the date of such exercise, he is an employee of the Company or any of its parents or subsidiaries, or an employee of a corporation or a parent or subsidiary of such corporation issuing or assuming a Statutory Option granted hereunder in a transaction to which Section 425(a) of the Code applies; provided, however, that in the case of an optionee who is disabled within the meaning of Section 105(d)(4) of the Code, the three-month period after cessation of employment during which a Statutory Option shall be exercisable shall be one year. A Nonstatutory Option shall terminate (i) immediately upon the resignation of the optionee from any position held by him as an officer, director, employee, advisor or consultant to the Company, (ii) immediately upon the termination by the Company of the optionee from any such position for cause or (iii) thirty (30) days after the termination by the Company of the optionee from any such position without cause. Notwithstanding the foregoing, no Stock Option shall be exercisable after the expiration of the stated term thereof. For purposes of this subsection, an employment relationship will be treated as continuing intact while the optionee is on military duty, sick leave or other bona fide leave of absence, such as temporary employment by the Government, if the period of such leave does not exceed 3 4 90 days, or, if longer, so long as a statute or contract guarantees the optionee's right to re-employment with the Company, or any of its parents or subsidiaries, or another corporation issuing or assuming a Stock Option granted hereunder in a transaction to which Section 425(a) of the Code applies. When the period of leave exceeds 90 days and the individual's right to re-employment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the 91st day of such leave. (g) Anti-Dilution Provisions. Subject in the case of Statutory Options to the provisions of Section 422 of the Code and the regulations promulgated thereunder, the aggregate number and kind of Shares available for Stock Options under the Plan, and the number and kind of Shares subject to, and the option price of, each outstanding Stock Option shall be proportionately adjusted by the Board of Directors of the Company for any increase, decrease or change in the total outstanding Shares of the Company resulting from a stock dividend, recapitalization, merger, consolidation, split-up, combination, exchange of Shares or similar transaction (but not by reason of the issuance or purchase of Shares by the Company in consideration for money, services or property). (h) Power to Establish Other Provisions. Subject to the discretion of the Board of Directors of the Company and, in the case of Statutory Options, subject to the provisions of Section 422 of the Code and the regulations promulgated thereunder, Stock Options granted under the Plan shall contain such other terms and conditions as the Board of Directors of the Company shall deem advisable. 5. Exercise of Option. Stock Options shall be exercised as follows: (a) Notice and Payment. Each Stock Option, or any installment thereof, shall be exercised, whether in whole or in part, by giving written notice to the Company at its principal office, specifying the number of Shares purchased and the purchase price being paid, and accompanied by the payment of all or such part of the purchase price as shall be specified in the option, by cash or by certified or bank check payable to the order of the Company. Each such notice shall also contain representations on behalf of the optionee that (i) the optionee acknowledges that the Company is selling the Shares being acquired by him under a claim of exemption from registration under the Securities Act of 1933, as amended (hereinafter referred to as the "Act"), as a transaction not involving any public offering; (ii) the optionee is acquiring the Shares without a view to distribution or resale; (iii) the optionee understands and agrees that the Shares purchased may not be thereunder transferred unless (A) a registration statement with respect thereto shall then be effective under the Act, and the Company will have complied with any other applicable laws, or (B) the optionee shall have obtained an opinion of counsel, in form and content reasonably satisfactory to the 4 5 Company and to its counsel, to the effect that the proposed transfer will be exempt from the registration provisions of the Act, will comply with applicable state laws, and will not result in any violation of the Act or of any other applicable laws; (iv) because any Shares purchased will not have been registered under the Act, they must be held indefinitely unless and until they are subsequently registered under the Act or an exemption from such a registration is available; (v) any routine sales of the Shares purchased made in reliance upon Rule 144 promulgated under the Act can be made only in limited amounts and in accordance with all the terms and conditions of that Rule, and in case the Rule is not applicable, compliance with Regulation A or some other disclosure exemption may be required; and (vi) the Company has no obligation to register the Shares, to comply with any disclosure exemption, or to take such action as may be necessary to meet the requirements of Rule 144. Appropriate legends may be placed on any certificate for Shares received by an optionee pursuant to the exercise of a Stock Option in order to give notice of the transfer restrictions set forth herein, and the Company may cause stop transfer orders to be placed against such certificate(s). It shall be a further condition to any exercise of the option and the purchase of Shares pursuant thereto that the Company counsel be satisfied that the issuance of such Shares will be in compliance with the Act and any other laws applicable thereto, and the Company shall be entitled to receive such other information, assurances, documents, representations or warranties as it or its counsel may reasonably require with respect to such compliance. (b) Issuance of Certificates. Certificates representing the Shares purchased by the optionee shall be issued as soon as practicable after the optionee has complied with the provisions of Section 5(a) hereof. (c) Rights as a Shareholder. The optionee shall have no rights as a Shareholder with respect to the Shares purchased until the date of the issuance to him of a Certificate representing such Shares. (d) Order of Option Exercise. An optionee may exercise Stock Options granted by the Company under the Plan in any order the optionee chooses, regardless of the chronological order in which the options were granted. 6. Term of Plan. Stock Options may be granted pursuant to the Plan from time to time within a period of ten years after the date the Plan is adopted by the Board of Directors of the Company or the date the Plan is approved by the holders of a majority of the outstanding Shares of the Company, whichever date is earlier. However, the Plan shall not take effect until approved by the holders of a majority of the outstanding Shares of the Company, at a duly constituted meeting thereof held, or by 5 6 unanimous written consent of such Shareholders obtained, within 12 months before or after the date the Plan is adopted by the Board of Directors. 7. Amendment and Termination of Plan. The Board of Directors of the Company, without further approval of the Shareholders of the Company, may at any time suspend or terminate the Plan, or may amend it from time to time in any manner; provided, however, that no amendment shall be effective without prior approval of the Shareholders of the Company which would: (i) except as provided in Section 4(g) hereof, increase the maximum number of Shares for which Stock Options may be granted under the Plan; (ii) change the eligibility requirements for individuals entitled to receive Stock Options under the Plan; or (iii) cause Stock Options granted or to be granted under the Plan which are designated as Statutory Options to fail to qualify as Incentive Stock Options under Section 422 of the Code and the regulations promulgated thereunder. 8. Administration. The Plan shall be administered by the Board of Directors of the Company and decisions of the Board of Directors concerning the interpretation and construction of any provisions of the Plan or of any Stock Option granted pursuant to the Plan shall be final. The Company shall effect the grant of Stock Options under the Plan in accordance with the decisions of the Board of Directors, which may, from time to time, adopt rules and regulations for the carrying out of the Plan. For purposes of the Plan, a Stock Option shall be deemed to be granted on the date the grant of such stock option is approved by the Board of Directors of the Company. Subject to the express provisions of the Plan, the Board of Directors shall have the authority, in its discretion and without limitation (a) to determine: the individuals to receive Stock Options; the times when such individuals shall receive Stock Options; the number of Shares to be subject to each option; the term of each option; the date(s) on which each option shall become exercisable; whether an option shall be exercisable in whole, in part, or in installments; the number of Shares to be subject to each installment; the date each installment shall become exercisable; the term of each installment; the option price of each option; and the terms of payment for Shares purchased by the exercise of each option; (b) to accelerate the date of exercise of any installment; and (c) to make all other determinations necessary or advisable for administering the Plan. The Board of Directors may appoint a Stock Option Committee or a Compensation Committee of not less than three members, and may delegate to such Committee the responsibilities and authority of the Board of Directors hereunder. In the event of such appointment and delegation, any reference in the Plan to the Board of Directors shall be deemed a reference to such Committee. The Board of Directors and any Stock Option Committee or Compensation Committee thereof may authorize the President and Chief Executive Officer of the Company to grant a maximum of 5,000 Stock Options per quarter, such Stock Options to be granted in the discretion of the President and Chief Executive Officer to employees of the Company; provided, that the President and Chief Executive Officer shall not be authorized to grant more than 500 options to any particular employee in any given quarter; provided, further that the President and Chief Executive shall not have the authority to grant options to any Company employee who is employed at or above the level of Director. 6 7 9. Reservation of Shares. The Board of Directors of the Company shall be under no obligation to reserve Shares to fill Stock Options. Likewise, because of the substantial nature of the conditions which must be met to entitle eligible employees to deliveries of reserved Shares, the Board of Directors shall be under no obligation to reserve Shares against such deliveries. The optioning and reservation of Shares for employees hereunder shall not be construed to constitute the establishment of a trust of the Shares so optioned and reserved, and no particular Share shall be identified as optioned and reserved for employees hereunder. The Company shall be deemed to have complied with the terms of the Plan if, at the time of the issuance and delivery pursuant to option or reservation, or both, it has a sufficient number of Shares authorized and unissued for the purpose of the Plan, irrespective of the date when such Shares were authorized. 10. Application of Proceeds. The proceeds of the sale of Shares by the Company under the Plan will constitute general funds of the Company and may be used by the Company for any purpose. Date approved by Board of Directors - September 2, 1998 Shareholders - October 14, 1998 7 EX-10.03 5 FORM OF OPTION AGREEMENTS 1 EXHIBIT 10.03 OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of __________ ____, 1998, by and among ________________ ("Stockholder"), NYSERNet.net, Inc. ("NYSERNet") and IXC Internet Services, Inc., a Delaware corporation ("IXC"), and Grumman Hill Investments III, L.P. ("Grumman Hill" or "GHI", and together with IXC, "Purchasers"). A. Pursuant to that certain Stock Purchase Agreement of even date herewith by and among AppliedTheory Communications, Inc., a New York corporation ("ATC"), IXC, Grumman Hill, NYSERNet and certain stockholders (including Stockholder) of ATC (the "Stock Purchase Agreement"), Purchasers are purchasing certain shares of common stock of ATC. B. The parties hereto hereby acknowledge that none of them would be willing to enter into the transactions contemplated by the Stock Purchase Agreement without the execution and delivery of this Agreement at the closing of the transactions contemplated by the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, covenants, representations, warranties and promises set forth herein, the parties hereto agree as follows: ARTICLE I THE PUT OPTION SECTION 1.1 THE PUT OPTION. During the Initial Option Period defined below, the Stockholder shall have the option (the "Put Option"), in Stockholder's own discretion, to sell _____ shares of Common stock of ATC held by Stockholder (the "Stock"), either directly or through one or more trusts established for the benefit of himself or family members, for the Purchase Price defined below to Purchasers (two-thirds to IXC, one-third to Grumman Hill). This option cannot be revoked by Purchasers without the consent of Stockholder. SECTION 1.2 INITIAL OPTION PERIOD. The "Initial Option Period" shall begin on the thirteen month anniversary of the execution of this Agreement and shall end on the twenty-sixth month anniversary of the execution of this agreement. SECTION 1.3 PURCHASE PRICE. The "Purchase Price" shall be $22.0290 per share. SECTION 1.4 EXERCISE OF PUT OPTION. Stockholder may exercise the Put Option in whole or in part on one or more occasions during the Initial Period by written notice to Purchasers at the address set forth in the Stock Option Agreement. On or before 2 20 business days from the date of such notice, each Purchaser shall pay the Stockholder for the Stock, with such Purchaser paying a pro-rata share of the Purchase Price in (two-thirds IXC, one-third Grumman Hill). The date of such payment is referred to as the "Put Option Closing". Stockholder agrees that, upon such payment, without further action on Stockholder's part, IXC will become the sole legal and beneficial owner of two-thirds of the shares of Stock and Grumman Hill will become the sole legal and beneficial owner of one-third of the shares of Stock. Stockholder covenants to sell and transfer to Purchasers all right, title and interest in and to the Stock, free and clear of all liens, claims, charges, encumbrances, restrictions, liabilities, obligations, rights or interests of others of any kind. From and after the receipt of payment by Stockholder as set forth above, Stockholder shall cease to have any rights with respect to the Stock. THE CALL OPTION THE CALL OPTION. During the Subsequent Option Period defined below, Purchasers shall have the option (the "Call Option"), in their discretion, to purchase the Stock held by the Stockholder for the Purchase Price per share. This Call Option can be separately exercised, in whole or in part, by IXC as to two-thirds of the shares of Stock and by Grumman Hill as to one-third of the shares of Stock. This option cannot be revoked by Stockholder. SECTION 1.5 SUBSEQUENT OPTION PERIOD. The "Subsequent Option Period" shall begin on the first day of the twenty-seventh month from the date this Agreement is executed and shall end on the last day of the thirty-sixth month from the execution date of this Agreement. SECTION 1.6 EXERCISE OF CALL OPTION. Either Purchaser may exercise its Call Option by written notice to Stockholder at the address set forth in the Stock Purchase Agreement. On or before 10 business days from the date of such notice, such Purchaser shall pay the Stockholder for the Stock. The date of such payment is referred to as a "Call Option Closing." Stockholder agrees that, upon such payment, without further action on Stockholder's part, such Purchaser, will become the sole legal and beneficial owner of the Stock purchased. Stockholder covenants to sell and transfer to such Purchaser all right, title and interest in and to the Stock, free and clear of all liens, claims, charges, encumbrances, restrictions, liabilities, obligations, rights or interests of others of any kind. From and after the receipt of payment as set forth above, Stockholder shall cease to have any rights with respect to the Stock. CREATION OF ESCROW ACCOUNT SECTION 1.7 DELIVERY OF STOCK TO ESCROW AGENT. Stockholder shall, within ninety days of the date hereof, deliver to _______________ (the "Escrow Agent") a certificate representing the shares of Stock subject to the Put Option and the Call Option. Such certificate shall be properly endorsed for transfer or accompanied by a stock power duly endorsed for transfer. Stockholder may, from time to time, substitute Page 2 3 certificates representing an equivalent number of shares of the Stock with the endorsement or stock powers referred to above in substitution of the certificates then held in escrow pursuant to this Agreement. SECTION 1.8 RELEASE OF STOCK BY ESCROW AGENT. At any Put Option Closing or Call Option Closing, the Escrow Agent shall deliver to the Purchasers, free from any lien or encumbrance, a certificate representing the shares of Stock to which the Put Option or Call Option pertained and for which the Purchase Price was delivered to the Stockholder. At the expiration of the Subsequent Option Period, a certificate representing the shares of Stock, if any, not previously delivered to the Purchasers by the Escrow Agent under the terms of this Agreement shall be delivered by the Escrow Agent to the Stockholder, together with any corresponding stock power. SECTION 1.9 ADJUSTMENT IN OPTIONS. In the event that the outstanding shares of the Stock subject to either the Put Option or the Call Option are changed into or exchanged for a different number or kind of shares of ATC or other securities of ATC by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination or shares, Stockholder and the Escrow Agent shall make an appropriate and equitable adjustment in the number and kind of shares as to which the Put Option or Call Option apply. ADDITIONAL AGREEMENTS SECTION 1.10 ASSIGNMENT. This Agreement shall not be assigned by any party without the other parties' prior written consent. Notwithstanding the foregoing, this Agreement may be assigned without prior written notice or consent by IXC to Grumman Hill or GHI to IXC or to any Affiliate of IXC or Grumman Hill or entity which merges with or into IXC or Grumman Hill or acquires substantially all the assets of IXC or GHI, so long as the consideration to be received by Stockholder shall not be different from that contemplated hereunder. SECTION 1.11 NOTICES. All notices, demands and other communications which may or are required to be given hereunder or with respect hereto shall be in writing, shall be given either by personal delivery or by nationally recognized overnight courier or by telecopier, and shall be deemed to have been given or made when personally delivered, one business day after delivered to a nationally recognized overnight courier, postage prepaid and receipt requested, or one business day after transmission by telecopier, receipt confirmed, addressed as set forth in the Stock Purchase Agreement. SECTION 1.12 ENTIRE AGREEMENT. This Agreement, together with the Stock Purchase Agreement and the related agreements in substantially the form of the exhibits to the Stock Purchase Agreement, constitutes the entire agreement between the parties and supersedes and cancels any and all prior agreements between the parties relating to the subject matter hereof. Page 3 4 SECTION 1.13 RULES OF CONSTRUCTION. This Agreement shall be construed as follows: (a) Except as otherwise defined in this Agreement, words shall be given their commonly understood meaning in agreements of this nature, except that accounting terms shall be given the meaning ascribed thereto by generally accepted accounting principles and interpretations; (b) This Agreement has been negotiated on behalf of the parties hereto with the advice of counsel and no general rule of contract construction requiring an agreement to be more stringently construed against the drafter or proponent of any particular provision shall be applied in construction of this Agreement; (c) The captions of Articles and Sections hereof are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement; (d) Throughout this Agreement, the masculine, feminine or neuter genders shall be deemed to include the masculine, feminine and neuter, and the singular and plural, and vice versa; and (e) All of the exhibits and schedules attached hereto are incorporated herein and made a part of this Agreement by reference thereto. SECTION 1.14 LAW GOVERNING. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, but not including the choice of law rules thereof. SECTION 1.15 WAIVER OF PROVISIONS. The terms, covenants, representations, warranties or conditions of this Agreement may be waived only by a written instrument executed by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or the breach of any provision, term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or of the breach of any other provision, term, covenant, representation or warranty of this Agreement. The representations and warranties of ATC and the Stockholder contained in this Agreement or in any certificate or other document delivered pursuant hereto or in connection herewith prior to or at the Closing shall not be deemed waived or otherwise amended or modified by any investigation made by any party hereto. SECTION 1.16 SUCCESSORS. All of the terms and conditions of this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of Purchasers and Stockholder. For the purpose of this Agreement, the term "successors" shall include but not be limited to heirs, legatees, and devisees. SECTION 1.17 COUNTERPARTS. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all parties are not signatory to the original or the same counterpart. Page 4 5 SECTION 1.18 SEVERABILITY. In the event that any provision in this Agreement be held invalid or unenforceable, by a court of competent jurisdiction, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement, unless such provision goes to the essence of this Agreement in which case the entire Agreement may be declared invalid and not binding upon any of the parties. SECTION 1.19 COSTS AND EXPENSES. Each party shall pay all attorney fee's, accountant's fees and expenses incurred by it in connection with the proposed transaction. No party will retain any broker, finder or similar intermediary in connection with the proposed transaction and each party will indemnify the other parties from any commissions, finder's fees or similar obligations incurred by such party. Page 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day, month and year first above written. IXC INTERNET SERVICES, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ GRUMMAN HILL INVESTMENTS III, L.P. By:________________________________________ Name:______________________________________ Title:_____________________________________ NYSERNet.net, INC. By:________________________________________ Name:______________________________________ Title:_____________________________________ STOCKHOLDER: ___________________________________________ Name:____________________ Page 6 EX-10.04 6 NON-STATUTORY STOCK OPTION CONTRACT 1 EXHIBIT 10.04 APPLIEDTHEORY COMMUNICATIONS, INC. NON-STATUTORY STOCK OPTION CONTRACT Optionee: SHELLEY HARRISON Number of Optioned Shares: 100,000 Date of Grant: October 5, 1996 Option Price Per Share: $1.00 This NON-STATUTORY STOCK OPTION CONTRACT is made between AppliedTheory Communications, Inc., a New York Corporation (hereinafter referred to as the "Company") and the Optionee whose name is set forth above. WITNESSETH: 1. The Company hereby grants to the Optionee an option to purchase an aggregate of that number of shares of the One Cent ($.01) par value Voting Common Stock of the Company set forth above (hereinafter referred to as the "Shares"), at the price per share set forth above. 2. The period during which the option granted hereby shall be exercisable shall commence on the date of grant set forth above and terminate on December 31, 2005. This option may be exercised at any time and from time to time, in whole or in part, subject to the following limitations: (a) Until and including September 30, 1997, Optionee may not exercise his option to purchase any of the Shares which Optionee is entitled to purchase hereunder. (b) Beginning on October 1, 1997, Optionee may exercise his option to purchase not more than 25,000 of the Shares which Optionee is entitled to purchase hereunder. (c) The remaining 75,000 options will vest as stated in the consulting agreement dated October 5, 1996. If the foregoing in (c) does not occur by December 31, 2006, the remaining 75,000 options expire, ungranted. 3. In order for the options granted hereby to be exercised, in whole or in part, the. notice by the Optionee to the Company must be accompanied by payment in full of the option price for the Shares being purchased. 4. The option granted hereby is not transferable by the Optionee other than by will or the laws of descent and distribution and is exercisable, during his lifetime, only by him. 1 2 5. The Optionee acknowledges that, in reliance on his representations set forth herein, the option granted hereunder and the sale of Shares to him pursuant to the exercise of all or any part of such option are and will be granted and sold under a claim of exemption from registration under the Securities Act of 1933, as amended (the "Act"), as transaction(s) not involving any public offering. 6. The Optionee hereby represents and agrees that, on any exercise of the option granted hereby, A. He will acquire the Shares without a view to distribution or resale; B. The Shares purchased may not be thereafter transferred unless (i) a registration statement with respect thereto shall then be effective under the Act, and the Company will have complied with any other applicable laws, or (ii) the Optionee shall have obtained an opinion of counsel, in form and content reasonably satisfactory to the Company and to its counsel, to the effect that the proposed transfer will be exempt from the registration provisions of the Act, will comply with applicable state laws, and will not result in any violation of the Act or of any other applicable law; C. Because any Shares purchased will not have been registered under the Act, they must be held indefinitely unless and until they are subsequently registered under the Act or an exemption from such registration is available; D. Any routine sales of the Shares purchased, made in reliance upon Rule 144 promulgated under the Act, can be made only in limited amounts and in accordance with all the terms and conditions of that Rule, and in case the Rule is not applicable, compliance with Regulation A or some other disclosure exemption may be required; E. Except as set forth in Section 8 below, the Company has no obligation to register the Shares, to comply with any such disclosure exemption, or to take such action as may be necessary to meet the requirements of Rule 144; F. Appropriate legends may be placed on any certificate for the Shares received by him in order to give notice of the repurchase and transfer restrictions set forth herein, and the Company may cause stop transfer orders to be placed against such certificate(s); and G. The Company counsel must be satisfied that the issuance of Shares pursuant to the exercise of the option will be in compliance with the Act and any other laws applicable thereto, and the Company shall be entitled to receive such other information, assurances, documents, representations or warranties as it or its counsel may reasonably require with respect thereto. 7. Optionee and the Company agree that the option granted hereby is not part of or governed by the terms and provisions of the Company's 1996 Incentive Stock Option Plan (the "Plan). 8. If the Company files a registration statement on Form S-8 or other applicable form covering shares of its common stock issuable pursuant to the Plan, the Company will, at its option, either include the Shares in such registration statement, or file a separate registration statement for the Shares. 9. This Non-Statutory Stock Option Contract shall be binding upon and inure to the benefit Of any successor or assignee of the Company and any executor, administrator, legal representative, legatee or distributee entitled by law to exercise the Optionee's rights hereunder. 2 3 IN WITNESS WHEREOF, the Company has caused this Non-Statutory Stock Option Contract to be executed in its behalf by its duty authorized officer, and the Optionee has hereunto set his hand, the day and year written below. AppliedTheory Communications, Inc. By: /s/ Richard Mandelbaum --------------------------------- Richard Mandelbaum, President ------------------------------------- Shelley Harrison, Optionee Dated: Syracuse, New York Dec 31, 1997 3 EX-10.05 7 AGREEMENT OF LEASE 1 Exhibit 10.05 AGREEMENT OF LEASE Between 55 BROAD STREET COMPANY, Owner and NYSERNet, INC., Tenant Premises Portion of Sixteenth (16th) Floor New York Information Technology Center 55 Broad Street New York, New York Dated May 1, 1996 2 TABLE OF CONTENTS ARTICLE 1 Demised Premises, Term, Rents ARTICLE 2 Use and Occupancy ARTICLE 3 Alterations ARTICLE 4 Ownership of Improvements ARTICLE 5 Repairs ARTICLE 6 Compliance With Laws ARTICLE 7 Subordination, Attornment, Etc. ARTICLE 8 Property Loss, Etc. ARTICLE 9 Destruction-Fire or Other Casualty ARTICLE 10 Eminent Domain ARTICLE 11 Assignment and Subletting ARTICLE 12 Tenant's Initial Installation and Owner's Work Contribution ARTICLE 13 Access to Demised Premises ARTICLE 14 Vault Space ARTICLE 15 Certificate of Occupancy ARTICLE 16 Default ARTICLE 17 Remedies ARTICLE 18 Damages ARTICLE 19 Fees and Expenses; Indemnity ARTICLE 20 Entire Agreement ARTICLE 21 End of Term ARTICLE 22 Quiet Enjoyment ARTICLE 23 Escalation ARTICLE 24 No Waiver ARTICLE 25 Mutual Waiver of Trial by Jury ARTICLE 26 Inability to Perform ARTICLE 27 Notices ARTICLE 28 Partnership Tenant ARTICLE 29 Utilities and Services ARTICLE 30 Table of Contents, Etc. ARTICLE 31 Miscellaneous Definitions, Severability and Interpretation Provisions ARTICLE 32 Adjacent Excavation ARTICLE 33 Building Rules ARTICLE 34 Broker ARTICLE 35 Security ARTICLE 36 Arbitration, Etc. ARTICLE 37 Parties Bound ARTICLE 38 Single Rights for Additional Option Space SCHEDULE A Building Rules EXHIBIT 1 Plan of Demised Premises EXHIBIT 2 Core Work EXHIBIT 3 Certificate of Occupancy -i- 3 LEASE dated as of the 1st day of May, 1996, between 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, Borough of Manhattan, City, County, and State of New York, as landlord (referred to as "Owner"), and NYSERNet, INC., a New York corporation, having its principal office at 200 Elwood Davis Road, Suite 1013, Liverpool, NY, 13088-6147, as tenant (referred to as "Tenant"). W I T N E S S E T H: Owner and Tenant hereby covenant and agree as follows: ARTICLE I DEMISED PREMISES, TERM, RENTS Section 1.01. Demised Premises: Owner hereby leases to Tenant and Tenant hereby hires from Owner that portion of the sixteenth (16th) floor indicated by outlining and diagonal markings in the floor plan initialled by the parties and annexed hereto as Exhibit "1" in the building known as 55 Broad Street, in the Borough of Manhattan, City of New York (said building is referred to as the "Building", and the Building together with the plot of land upon which it stands is referred to as the "Real Property"), at the annual rental rate or rates set forth in Section 1.03, and upon and subject to all of the terms, covenants and conditions contained in this Lease. The premises leased to Tenant, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at the commencement of, or at any time during, the term of this Lease, other than Tenant's Personal Property (as defined in Article 4), are referred to, collectively, as the "Demised Premises". Section 1.02. Demised Term: A. The Demised Premises are leased for a term (referred to as the "Demised Term") to commence on the 1st day of May, 1996, and the Demised Term shall end on the 30th day of September, 2006 unless sooner terminated pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. The date upon which the Demised Term shall commence pursuant to this Subsection A is referred to as the "Commencement Date" and the date fixed pursuant to this Subsection A as the date upon which the Demised Term shall end is referred to as the "Expiration Date". B. Owner shall perform the core work ("Core Work") referred to in Exhibit "2", which Core Work shall be performed by Owner, at Owner's expense, prior to the Commencement Date, except that Owner shall have the right to enter the Demised Premises after the Commencement Date to complete unfinished details of such work and the performance of such work by Owner shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent or relieve Tenant of any of its obligations under this Lease or impose any liability upon Owner or its agents or upon any lessor under a "Superior Lease" (as hereinafter defined) or upon the holder of any "Mortgage" (as hereinafter defined) by reason of any annoyance or interference with Tenant's business or otherwise. Owner agrees that the performance by Owner of the completion of unfinished details of the Core Work shall be done in a manner designed to minimize interference with the performance by Tenant of Tenant's Initial Alterations, without any obligation on Owner's part to employ labor at overtime or other premium pay rates. Section 1.03. Fixed Rent: A. This Lease is made at the annual rental rates (referred to as "Fixed Rent") of NINETY-NINE THOUSAND SEVEN HUNDRED FIFTY and 00/100 ($99,750.00) DOLLARS with respect to the period ("First Rent Period") from the Commencement Date to the last day of the calendar month in which the day immediately preceding the date which is five (5) months next following the first anniversary of the Commencement Date shall occur, both dates inclusive, ONE HUNDRED FIVE THOUSAND and 00/100 ($105,000.00) DOLLARS with respect to the next year of the Demised Term ("Second Rent Period") and ONE 4 HUNDRED TEN THOUSAND TWO HUNDRED FIFTY and 00/100 ($110,250.00) DOLLARS with respect to each of the next three (3) years of the Demised Term ("Third Rent Period") and ONE HUNDRED TWENTY-THREE THOUSAND THREE HUNDRED SEVENTY-FIVE and 00/100 ($123,375.00) DOLLARS ("Fourth Rent Period") with respect to the remainder of the Demised Term. B. The Fixed Rent, any increases in the Fixed Rent and any additional rent payable pursuant to the provisions of this Lease shall be payable by Tenant to Owner at its office (or at such other place as Owner may designate in a notice to Tenant) in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment or by Tenant's good check drawn on a bank or trust company whose principal office is located in New York City and which is a member of the New York Clearinghouse Association, without prior demand therefor and without any offset or deduction whatsoever except as otherwise specifically provided in this Lease. The Fixed Rent shall be payable in equal monthly installments of EIGHT THOUSAND THREE HUNDRED TWELVE and 50/100 ($8,312.50) DOLLARS, with respect to the First Rent Period, EIGHT THOUSAND SEVEN HUNDRED FIFTY and 00/100 ($8,750.00) DOLLARS with respect to the Second Rent Period, NINE THOUSAND ONE HUNDRED EIGHTY-SEVEN and 50/100 ($9,187.50) DOLLARS with respect to the Third Rent Period and TEN THOUSAND TWO HUNDRED EIGHTY-ONE and 25/100 ($10,281.25) DOLLARS with respect to the Fourth Rent Period and shall be payable in advance, on the first (1st) day of each month during the Demised Term (except as otherwise provided in Subsection C of this Section). C. The sum of EIGHT THOUSAND THREE HUNDRED TWELVE and 50/100 ($8,312.50) DOLLARS, representing the installment of Fixed Rent for the first (1st) full calendar month of the Demised Term after the expiration of the Rent Holiday Period (as hereinafter defined), is due and payable at the time of the execution and delivery of this Lease. Section 1.04. Tenant's General Covenant: Tenant covenants (i) to pay the Fixed Rent, any increases in the Fixed Rent, and any additional rent payable pursuant to the provisions of this Lease, and (ii) to observe and perform, and to permit no violation of, the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. Section 1.05. Rent Holiday: Provided Tenant is not then in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant shall be entitled to a rent holiday and shall not be required to pay any portion of the Fixed Rent with respect to the period (the "Rent Holiday Period") from the Commencement Date to and including the date one hundred fifty (150) days next following the Commencement Date but, during such period of one hundred fifty (150) days, Tenant shall otherwise be required to comply with all of the other terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, including, but not limited to, the payment of all sums payable pursuant to the provisions of Article 23 and Article 29. The date next following the expiration of the Rent Holiday Period is referred to as the "Rent Commencement Date". ARTICLE 2 USE AND OCCUPANCY Section 2.01. General Covenant of Use: Tenant shall use and occupy the Demised Premises for the following purpose: general offices of Tenant for Tenant's information technology business and a staging facility for Tenant's products, but at all times in compliance with the provisions of this Lease and in accordance with the Certificate of Occupancy affecting the Building and the Demised Premises. -2- 5 SECTION 2.02. NO ADVERSE USE: Tenant shall not use or occupy, or permit the use or occupancy of, the Demised Premises or any part thereof, for any purpose other than the purpose specifically set forth in Section 2.01, or in any manner which (a) shall adversely affect or interfere with (i) any services required to be furnished by Owner to Tenant or to any other tenant or occupant of the Building, or (ii) the proper and economical rendition of any such service, or (iii) the use or enjoyment of any part of the Building by any other tenant or occupant, or (b) shall impair the character or dignity of the Building below that of a First-Class Building. ARTICLE 3 ALTERATIONS SECTION 3.01. GENERAL ALTERATION COVENANTS: Tenant shall not make or perform, or permit the making or performance of, any alterations, installations, decorations, improvements, additions or other physical changes in or about the Demised Premises (referred to collectively, as "Alterations" and individually as an "Alteration") without Owner's prior consent in each instance. Owner agrees not unreasonably to withhold its consent to any non-structural Alterations proposed to be made by Tenant to adapt the Demised Premises for Tenant's business purposes. Notwithstanding the foregoing provisions of this Section or Owner's consent to any Alterations, all Alterations shall be made and performed in conformity with and subject to the following provisions: A. All Alterations shall be made and performed at Tenant's sole cost and expense and at such time and in such manner as Owner may, from time to time, reasonably designate; B. No Alteration shall adversely affect the structural integrity of the Building; C. Alterations shall be made only by contractors or mechanics approved by Owner, such approval not unreasonably to be withheld (notwithstanding the foregoing, all Alterations requiring mechanics in heating, ventilation air conditioning, electrical, plumbing, sprinklers and other mechanical trades with respect to which Owner has adopted or may hereafter adopt a list or lists of approved contractors shall be made only by contractors selected by Tenant from such list or lists provided there are at least three [3] contractors on each such list and the prices charged by such contractors are competitive for similar work in the Borough of Manhattan in comparable first class office buildings); D. No Alteration shall affect any part of the Building other than the Demised Premises or adversely affect any service required to be furnished by Owner to Tenant or to any other tenant or occupant of the Building (including, without limitation, the Building-wide standard systems required to provide elevator, heat, ventilation, air-conditioning and electrical and plumbing services in the Building); E. No Alteration shall intentionally reduce the value or utility of the Building or any portion thereof as a First-Class building; F. No Alteration shall affect the Certificate of Occupancy for the Building or the Demised Premises; G. No Alteration shall affect the outside appearance of the Building or the color or style of any venetian blinds (except that Tenant may remove any venetian blinds provided that they are promptly replaced by Tenant with blinds of a similar type, material and color); -3- 6 H. All business machines and mechanical equipment shall be placed and maintained by Tenant in settings sufficient, in Owner's reasonable judgment, to absorb and prevent vibration, noise and annoyance to other tenants or occupants of the Building; I. Tenant shall submit to Owner detailed plans and specifications stamped by Tenant's architect (including layout, architectural, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Owner's approval of such plans and specifications, such approval not unreasonably to be withheld or delayed, notwithstanding the foregoing. Tenant shall not be required to submit any detailed plans and specifications for any Alterations unless such plans and specifications are, in the ordinary course, prepared for such Alterations or are required to be prepared in connection with any filings or other applicable requirements of any law, order, rule or regulation of any federal, state, county or municipality, including but not limited to, the Department of Building of the City of New York, and in those cases where Tenant shall not be required to submit such detailed plans and specifications, Tenant shall submit to Owner, in lieu thereof, information with respect to such Alterations in reasonably sufficient detail so as to enable Owner to determine the nature and extent of the work to be performed, and following the completion of each Alteration, Tenant shall submit to Owner a computerized "as built" drawing file for the Demised Premises (or if the Demised Premises comprise more than one (1) floor, for each floor of the Demised Premises being altered) and in those cases where Tenant shall not be so required to submit such detailed plans and specifications, Tenant shall submit to Owner, in lieu thereof, information with respect to such Alterations in reasonably sufficient detail so as to enable Owner to determine the nature and extent of the work to be performed; such file will be in DXF format and contain, on a separate layer, all ceiling-height partitions and doors within the Demised Premises (or if the Demised Premises comprise more than one (1) floor, within each floor of the Demised Premises being altered); J. Prior to the commencement of each proposed Alteration, Tenant shall have procured and paid for and exhibited to Owner, so far as the same may be required from time to time, all permits, approvals and authorizations of all Governmental Authorities (as defined in Section 6.01.) having or claiming jurisdiction; K. Prior to the commencement of each proposed Alteration, Tenant shall furnish to Owner duplicate original policies of workmen's compensation insurance covering all persons to be employed in connection with such Alteration, including those to be employed by all contractors and subcontractors, and of comprehensive public liability insurance (including property damage coverage) in which Owner, its agents, the holder of any Mortgage (as defined in Section 7.01.) and any lessor under any Superior Lease (as defined in Section 7.01.) shall be named as parties insured, which policies shall be issued by companies, and shall be in form and amounts, satisfactory to Owner and shall be maintained by Tenant until the completion of such Alteration; L. In the event Owner or its agents employ any independent architect or engineer to examine any plans or specifications submitted by Tenant to Owner in connection with any proposed Alteration, Tenant agrees to pay to Owner a sum equal to any reasonable actual out-of-pocket fees incurred by Owner in connection therewith. M. All fireproof wood test reports, electrical and air conditioning certificates, and all other permits, approvals and certificates required by all Governmental Authorities shall be timely obtained by Tenant and submitted to Owner; N. All Alterations, once commenced, shall be made promptly and in a good and workmanlike manner; -4- 7 O. Notwithstanding Owner's approval of plans and specifications for any Alteration, all Alterations shall be made and performed in full compliance with all Legal Requirements (as defined in Section 6.01.) and with all applicable rules, orders, regulations and requirements of the New York Board of Fire Underwriters and the New York Fire Insurance Rating Organization or any similar body; P. All Alterations shall be made and performed in accordance with the Building Rules and Building Rules for Alterations; Q. All materials and equipment to be installed, incorporated or located in the Demised Premises as a result of all Alterations shall be new and first quality; R. No materials or equipment shall be subject to any lien, encumbrance, chattel mortgage or title retention or security agreement of any kind, except for Tenant's business equipment; S. Tenant, before commencement of each Alteration, the estimated cost of which constituting a single project shall exceed ONE HUNDRED THOUSAND and 00/100 ($100,000.00) DOLLARS, shall furnish to Owner a performance bond or other security satisfactory to Owner, in an amount at least equal to the estimated cost of such Alteration, guaranteeing the performance and payment thereof. Such sum of ONE HUNDRED THOUSAND and 00/100 ($100,000.00) DOLLARS set forth in this subsection shall be deemed increased annually by the percentage increase in the Consumer Price Index for the month in which the first anniversary of the Commencement Date and each subsequent anniversary date thereof occurs over the Consumer Price Index in the month in which the Commencement Date shall occur. The foregoing requirement to furnish a performance bond or other security satisfactory to Owner shall not apply with respect to the performance of Tenant's Initial Installation; T. Other than with respect to Tenant's Initial Installation, unless such Alteration was payable by Owner in full, no Alteration shall be commenced unless any preceding Alteration shall have been fully paid for and proof of such payment furnished to Owner; U. Following the completion of each Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alteration required by any Governmental Authority and shall furnish Owner with copies thereof. V. Tenant agrees that Tenant will not install, affix, add or paint in or on, nor permit, any work of visual art (as defined in the Federal Visual Artists' Rights Act of 1990 or any successor law of similar import) or other Alteration to be installed in or on, or affixed, added to, or painted on, the interior or exterior of the Demised Premises, or any part thereof, including, but not limited to, the walls, floors, ceilings, doors, windows, fixtures and on land included as part of the Demised Premises, which work of visual art or other Alteration would, under the provisions of the Federal Visual Artists' Rights Act of 1990, or any successor law of similar import, require the consent of the author or artist of such work or Alteration before the same could be removed, modified, destroyed or demolished. W. Under no circumstances shall Tenant be permitted to locate any telecommunications facilities in the telecommunications closets of the Building. With respect to Tenant's telecommunications facilities, (i) Tenant shall contract separately with all providers of Tenant's telecommunications facilities (each of which is referred to as a "Provider") and pay each Provider for all services provided by it to Tenant, and (ii) each Provider shall use, exclusively, the telecommunications cable distribution system in the Building designated by Owner and shall contract separately with the company providing cable distribution service in the Building (referred to as the "Telecommunications Cable Distribution Company") for the supply and maintenance of distribution cables. The Provider and Tenant shall comply with all reasonable rules and regulations adopted by Owner and the Telecommunications Cable Distribution Company. Except for Owner's acts, Owner shall -5- 8 not be liable to Tenant or anyone claiming through or under Tenant for any damages, including, but not limited to, special, incidental, remote or consequential damages, including, without limitation, lost revenue, lost profits and additional operating or personnel expenses arising from any acts, omissions or negligence of the Provider and the Telecommunications Cable Distribution Company. SECTION 3.02. NO CONSENT TO CONTRACTOR/NO MECHANICS LIEN: Nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Owner, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialmen, for the performance of any labor or the furnishing of any material for any specific Alteration to, or repair of, the Demised Premises, the Building, or any part of either. Any mechanic's or other lien filed against the Demised Premises or the Building or the Real Property for work claimed to have been done for, or materials claimed to have been furnished to, Tenant or any person claiming through or under Tenant or based upon any act or omission or alleged act or omission of Tenant or any such person shall be discharged by Tenant, at Tenant's sole cost and expense, within ten (10) days after the filing of such lien. SECTION 3.03. LABOR HARMONY: Tenant shall not, at any time prior to or during the Demised Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Demised Premises, whether in connection with any Alteration or otherwise, if such employment will interfere or cause any conflict with other contractors, mechanics, or laborers engaged in the construction, maintenance or operation of the Building by Owner, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Owner, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Notwithstanding the foregoing, Owner agrees that all work performed by Owner in the Demised Premises pursuant to Article 1 herein shall be performed using so-called "Union labor". Owner represents and warrants to Tenant that similar requirements are contained in all present leases in the Building and will be contained in all future leases in the Building during the Demised Term. Owner agrees that Owner shall enforce all similar requirements in all other leases in the Building against the tenants thereof and all persons claiming through or under such tenants. SECTION 3.04. COMPLIANCE WITH FIRE SAFETY: Without in any way limiting the generality of the provisions of Section 3.01, all Alterations shall be made and performed in full compliance with all standards and practices adopted by Owner for fire safety in the Building. No Alteration shall affect all or any part of any Class E Fire Alarm and Communication system installed in the Demised Premises, except that in connection with any such Alteration Tenant may relocate certain components of such system, provided (i) such relocation shall be performed in a manner first approved by Owner such approval not to be unreasonably withheld or delayed, (ii) the new location of any such component shall be first approved by Owner such approval not to be unreasonably withheld or delayed, (iii) prior to any such relocation Tenant shall submit to Owner detailed plans and specifications therefor which shall be first approved by Owner such approval not to be unreasonably withheld or delayed and (iv) Owner shall have the election of relocating such components either by itself or by its contractors, in which event all reasonable expenses incurred by Owner shall be reimbursed by Tenant upon demand of Owner, as additional rent. Owner represents that the Demised Premises will be in compliance with Local Law #5 of 1973, Local Law #16 of 1984 and Local Law #58 and the Americans With Disabilities Act on the Commencement Date, and as Owner completes Alterations in the public portions of the Building such public portions of the Building will be completed in compliance with Local Law #5 of 1973, Local Law #16 of 1984 and Local Law #58 and the Americans With Disabilities Act. SECTION 3.05. SPRINKLERS: The Demised Premises shall contain a sprinkler system and notwithstanding anything to the contrary set forth in Sections 5.01 and 6.01, Owner, at Owner's expense, shall perform routine maintenance of, and shall repair and replace if necessary, said sprinkler system and any replacements thereof, unless such repair or replacement is due to Tenant's acts, omissions or negligence, in which event Owner shall repair or replace same, at Tenant's sole cost and expense. Owner shall also perform controlled inspections of said sprinkler system as and when required by law and Tenant shall give Owner reasonable access -6- 9 to perform such repairs, maintenance and inspections. Any sprinkler system and any replacements thereof whether made at Tenant's expense or Owner's expense, shall be deemed the property of Owner. SECTION 3.06. HAZARDOUS MATERIAL: If any Legal Requirement of any Governmental Authority requires that any hazardous material contained in or about the Demised Premises and installed therein by Tenant or any person claiming through or under Tenant be removed or dealt with in any particular manner in connection with any Alterations of the Demised Premises or otherwise, then it shall be Tenant's obligation, at Tenant's expense, to remove or so deal with such hazardous material in accordance with all such laws, orders, rules and regulations. In the event Tenant is required to remove or so deal with such hazardous material in accordance with the provisions of the foregoing sentence then, notwithstanding anything to the contrary contained herein, Owner, at Owner's election, shall have the option to itself remove or so deal with such hazardous material and, in such event, Tenant shall pay to Owner all of Owner's costs in connection therewith within ten (10) days next following the rendition of a statement thereof by Owner to Tenant. SECTION 3.07. DISPUTE RESOLUTION: Any dispute with respect to the reasonability of any failure or refusal of Owner to grant its consent or approval to any request for such consent or approval pursuant to the provisions of Section 3.01 with respect to which request Owner has agreed, in such Section not unreasonably to withhold such consent or approval, shall be determined by arbitration in accordance with the provisions of Article 36. SECTION 3.08. FIRE ALARM AND COMMUNICATION SYSTEM CONNECTION FEES: In the event that Tenant, pursuant to the provisions of this Lease, including, but not limited to, the provisions of this Article 3 and Article 6, connects any of the following equipment to any Class E Fire Alarm and Communication system installed in the Demised Premises, Tenant shall pay to Owner as a one (1) time connection fee the following sums set forth opposite the equipment listed below (which sums shall be subject to increases due to increases in the cost to Owner of operating and maintaining such Class E Fire Alarm and Communication system over such costs on the date of this Lease): A. Speakers in excess of 4 per floor of the Demised Premises (or if the Demised Premises contain less than one (1) floor, in excess of four in the Demised Premises) $500.00 per device B. Strobe Lights (single unit) $100.00 per device C. Combination Speakers/Strobe light $250.00 per device D. Duct Detectors (supplementary air conditioning systems) $500.00 per point E. Smoke Detectors (multi-purpose) $500.00 per point F. Preaction Sprinkler System: waterflow $500.00 per point tamper $500.00 per point G. Warden Phone (additional) $1,000.00 per unit H. Fail Safe Door Release $250.00 per connection -7- 10 SECTION 3.09. A. In the event that, at any time during the Demised Term, in connection with any Alterations proposed to be performed by Tenant in the Demised Premises Tenant is unable to obtain a New York City Department of Environmental Protection Form ACP5 dated 9/91 (or any successor form), signed by a certified asbestos investigator, or any other form or approval required by Federal, State, County or Municipal authorities, indicating that said Alterations do not constitute an asbestos project, Owner agrees, upon notice from Tenant to such effect, to perform such work as shall be required to enable Tenant to obtain any such form or approval. B. If any laws, orders, rules or regulations of any Federal, State, County or Municipal authority require that any asbestos or other hazardous material contained in or about the Demised Premises be removed or dealt with in any particular manner, then it shall be Owner's obligation, at Owner's expense, with due diligence, to remove or so deal with such asbestos or other hazardous material in accordance with such laws, orders, rules and regulations. C. Notwithstanding the provisions of subsections A and B of this Section, in the event any work performed by Owner pursuant to the provisions of either or both of such subsections is in any way disturbed or damaged by Tenant or any person claiming through or under Tenant, or asbestos or other hazardous material is installed in the Demised Premises by or on behalf of Tenant, or any person claiming through or under Tenant, Owner shall have no responsibility in connection with the disturbed or damaged work or the asbestos or other hazardous material so installed by Tenant or any person claiming through or under Tenant and no obligation to perform any work with respect to the disturbed or damaged work or the asbestos or other hazardous material so installed by Tenant or any person claiming through or under Tenant, but it shall be Tenant's obligation, at Tenant's expense, to (i) perform such work with respect to such disturbed or damaged work or the asbestos or other hazardous material so installed by Tenant or any person claiming through or under Tenant as shall be required to enable Tenant to obtain any form or approval referred to in subsection A, and (ii) remove or so deal with such asbestos or other hazardous material in accordance with all such laws, orders, rules and regulations referred to in subsection B. D. Owner shall cause to perform any such work it is so required to perform hereunder with reasonable diligence and, if required in Owner's reasonable judgment in connection therewith, the employment of labor or contractors at overtime or other premium pay rates. ARTICLE 4 OWNERSHIP OF IMPROVEMENTS ------------------------- SECTION 4.01. GENERAL RIGHTS OF OWNER AND TENANT: All appurtenances, fixtures, improvements, additions and other property attached to or installed in the Demised Premises, whether by Owner or Tenant or others, and whether at Owner's expense, or Tenant's expense, or the joint expense of Owner and Tenant, shall be and remain the property of Owner, except that any such fixtures, improvements, additions and other property installed at the sole expense of Tenant with respect to which Tenant has not been granted any credit or allowance by Owner, whether pursuant to Addendum A or otherwise, and which are removable without material damage to the Demised Premises shall be and remain the property of Tenant and are referred to as "TENANT'S PERSONAL PROPERTY". Any replacements of any property of Owner, whether made at Tenant's expense or otherwise, shall be and remain the property of Owner. -8- 11 ARTICLE 5 REPAIRS SECTION 5.01. TENANT'S REPAIR OBLIGATIONS: Tenant shall take good care of the Demised Premises (including, but not limited to, any Class E Fire Alarm and Communication system and any sprinkler system installed therein and any installations made or equipment installed therein as a result of any requirement of New York City Local Law #16 of 1984 or any successor law or like import) and, at Tenant's sole cost and expense, shall make all repairs and replacements, structural and otherwise, ordinary and extraordinary, foreseen and unforeseen as and when needed to preserve the Demised Premises (including, but not limited to, any Class E Fire Alarm and Communication system and any installations made or equipment installed therein as a result of any requirement of New York City Local Law #16 of 1984 or any successor law of like import) in good and safe working order and in first class repair and condition, except that Tenant shall not be required to make any repairs or replacements to the Demised Premises unless necessitated or occasioned by the acts, omissions or negligence of Tenant or any person claiming through or under Tenant or any of their servants, employees, contractors, agents, visitors or licensees, or by the manner of use or occupancy of the Demised Premises by Tenant or any such person (in contradistinction to the mere use or occupancy of the Demised Premises for the purposes set forth in Section 2.01). For the purposes of this Article, any repairs or work involving asbestos or other hazardous materials or involving compliance with Local Laws #5 of 1973, #16 of 1984, #58 of 1987 and the Americans With Disabilities Act and any successor laws of like import shall be deemed to be non-structural repairs or replacements. Without affecting Tenant's obligations set forth in the preceding sentence, Tenant, at Tenant's sole cost and expense, shall also (i) make all repairs and replacements, and perform all maintenance as and when necessary, to the lamps, tubes, ballasts, and starters in the lighting fixtures installed in the Demised Premises, (ii) make all repairs and replacements, as and when necessary, to Tenant's Personal Property and to any Alterations made or performed by or on behalf of Tenant or any person claiming through or under Tenant, and (iii) if the Demised Premises shall include any space on any ground, street, mezzanine or basement floor in the Building, make all replacements, as and when necessary, to all windows and plate and other glass in, on or about such space, and obtain and maintain, throughout the Demised Term, plate glass insurance policies issued by companies, and in form and amounts, satisfactory to Owner, in which Owner, its agents and any lessor under any ground or underlying lease shall be named as parties insured, and (iv) perform all maintenance and make all repairs and replacements, as and when necessary, to any air conditioning equipment, private elevators, escalators, conveyors or mechanical systems (other than the Building's standard equipment and systems) which may be installed in the Demised Premises by Owner, Tenant or others. However, the provisions of the foregoing sentence shall not be deemed to give to Tenant any right to install air conditioning equipment, elevators, escalators, conveyors or mechanical systems. All repairs and replacements made by or on behalf of Tenant or any person claiming through or under Tenant shall be made and performed in conformity with, and subject to the provisions of Article 3 and shall be at least equal in quality and class to the original work or installation. The necessity for, and adequacy of, repairs and replacements pursuant to this Article 5 shall be measured by the standard which is appropriate for first class office buildings of similar construction and class in the Borough of Manhattan, City of New York. SECTION 5.02. Supplementing the provisions of Section 5.01, Owner, at Owner's sole cost and expense, shall timely make (i) all structural repairs to the Demised Premises as and when required, (ii) all repairs necessary to furnish the plumbing, electrical, air conditioning, ventilating, heating and elevator services required to be furnished by Owner to Tenant under the provisions of Article 29, and (iii) all necessary repairs to the public portions of the Building which affect Tenant's use and enjoyment of the Demised Premises, except that Owner shall not be required to make any of the repairs referred to in subdivision (i), (ii) or (iii) of this sentence if Tenant is obligated to make such repairs pursuant to the provisions of Section 5.01. Notwithstanding the foregoing provisions of this Section, Owner shall have no obligation to make any repairs unless and until notice of any repair claimed necessary shall have been given to Owner. -9- 12 ARTICLE 6 COMPLIANCE WITH LAWS SECTION 6.01. GENERAL COVENANTS: Tenant, at Tenant's sole cost and expense, shall comply with all Legal Requirements (hereinafter defined) which shall impose any duty upon Owner or Tenant with respect to the Demised Premises or the use or occupation thereof, including, but not limited to, any requirement that asbestos or other hazardous material installed in the Demised Premises by Tenant or any person claiming through or under Tenant be removed or dealt with in any particular manner, except that Tenant shall not be required to make any Alterations in order so to comply unless such Alterations shall be necessitated or occasioned, in whole or in part, by the acts, omissions, or negligence of Tenant or any person claiming through or under Tenant, or any of their servants, employees, contractors, agents, visitors or licensees, or by the manner of use or occupancy of the Demised Premises by Tenant or by any such person (in contradistinction to the mere use or occupancy of the Demised Premises for the purposes set forth in Section 2.01). For all purposes of this Lease the term "Legal Requirements" shall mean all present and future laws, codes, ordinances, statutes, requirements, orders and regulations, ordinary and extraordinary, foreseen and unforeseen (including, but not limited to, the New York State Energy Conservation Construction Code, New York City Local Laws #5 of 1973, #16 of 1984 and #58 of 1987 and the Americans with Disabilities Act, and any successor laws of like import) of any Governmental Authority (hereinafter defined) and all directions, requirements, orders and notices of violations thereof. For all purposes of this Lease, the term "Governmental Authority" shall mean the United States of America, the State of New York, the County of New York, the Borough of Manhattan, the City of New York, any political subdivision thereof and any agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over Owner, Tenant, this Lease or the Real Property or any portion thereof. Any work or installations made or performed by or on behalf of Tenant or any person claiming through or under Tenant pursuant to the provisions of this Article shall be made in conformity with, and subject to the provisions of Article 3. Compliance with any requirement regarding other hazardous material which is Tenant's obligation to so remove shall be made in conformity with the provisions of Section 3.06. SECTION 6.02. TENANT'S COMPLIANCE WITH OWNER'S FIRE INSURANCE: Tenant shall not do anything, or permit anything to be done, in or about the Demised Premises which shall (i) invalidate or be in conflict with the provisions of any fire and/or other insurance policies covering the Building or any property located therein, or (ii) result in a refusal by fire insurance companies of good standing to insure the Building or any such property in amounts reasonably satisfactory to Owner, or (iii) subject Owner to any liability or responsibility for injury to any person or property by reason of any business operation being conducted in the Demised Premises, or (iv) cause any increase in the fire insurance rates applicable to the Building or property located therein at the beginning of the Demised Term or at any time thereafter. Tenant, at Tenant's expense, shall comply with all present and future rules, orders, regulations and/or requirements of the New York Board of Fire Underwriters and the New York Fire Insurance Rating Organization or any similar body and the issuer of any insurance obtained by Owner covering the Building and/or the Real Property, whether ordinary or extraordinary, foreseen or unforeseen, including, but not limited to, any requirement that asbestos or other hazardous material be removed or dealt with in any particular manner and any requirement of New York City Local Law #5 of 1973, #16 of 1984, #58 of 1987 and the Americans With Disabilities Act or any successor laws of like import. SECTION 6.03. FIRE INSURANCE RATES: In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make up" of rates applicable to the Building or property located therein issued by the New York Fire Insurance Rating Organization, or other similar body fixing such fire insurance rates, shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to the Building or property located therein. -10- 13 \ ARTICLE 7 SUBORDINATION, ATTORNMENT, ETC. SECTION 7.01. LEASE SUBORDINATION: This Lease and all rights of Tenant under this Lease are, and shall remain, unconditionally subject and subordinate in all respects to all ground and underlying leases now or hereafter in effect affecting the Real Property or any portion thereof, and to all mortgages which may now or hereafter affect such leases or the Real Property, of which Tenant has been given notice and to all advances made or hereafter to be made under such mortgages, and to all renewals, modifications, consolidations, correlations, replacements and extensions of, and substitutions for, such leases and mortgages (such leases as above described are referred to herein collectively as the "Superior Lease" and such mortgages as above described are referred to herein collectively as the "Mortgage"). The foregoing provisions of this Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall execute and deliver promptly any certificate or other instrument which Owner, or any lessor under any Superior Lease, or any holder of any Mortgage may request. If, in connection with obtaining financing with respect to the Building, the Real Property, or the interest of the lessee under any Superior Lease, any recognized lending institution shall request reasonable modifications of this Lease as a condition of such financing, Tenant covenants not unreasonably to withhold or delay its agreement to such modifications, provided that such modifications do not materially increase the obligations, or materially and adversely affect the rights, of Tenant under this Lease. No act or failure to act on the part of Owner which would entitle Tenant under the terms of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease shall result in a release or termination of such obligations or a termination of this Lease unless (i) Tenant shall have first given written notice of Owner's act or failure to act to the holder or holders of any Mortgage and/or the lessor under any Superior Lease of whom Tenant has been given written notice, specifying the act or failure to act on the part of Owner which could or would give basis to Tenant's rights; and (ii) the holder or holders of such Mortgage and/or the lessors under any Superior Lease, after receipt of such notice, have failed or refused to correct or cure the condition complained of within a reasonable time thereafter, but nothing contained in this sentence shall be deemed to impose any obligation on any such holder or lessor to correct or cure any such condition but in no event shall Owner be relieved of its obligations hereunder. "Reasonable time" as used above means and includes a reasonable time to obtain possession of the Building if any such holder or lessor elects to do so (provided such holder or lessor institutes proceedings to obtain possession within a reasonable time after notice from Tenant pursuant to the foregoing provisions and conducts such proceedings with reasonable diligence) and a reasonable time after so obtaining possession to correct or cure the condition if such condition is determined to exist (provided such holder or lessor commences said cure within ten (10) days after obtaining possession and prosecutes the work required to cure with reasonable diligence). SECTION 7.02. TENANT ATTORNMENT: If, at any time prior to the expiration of the Demised Term, any Superior Lease under which Owner then shall be the lessee shall terminate or be terminated for any reason, or the holder of any Mortgage comes into possession of the Real Property or the Building or the estate created by any Superior Lease by a receiver or otherwise, Tenant agrees, at the election and upon demand of any owner of the Real Property, or of the holder of any Mortgage so in possession, or of any lessee under any Superior Lease covering the premises which include the Demised Premises, to attorn, from time to time, to any such owner, holder, or lessee, upon the then executory terms and conditions of this Lease, for the remainder of the term originally demised in this Lease, provided that such owner, holder or lessee, as the case may be, shall then be entitled to possession of the Demised Premises. The provisions of this Section shall enure to the benefit of any such owner, holder, or lessee, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of any Superior Lease, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Tenant, however, upon demand of any such owner, holder, or lessee, agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this Section, satisfactory to any such owner, holder, or lessee, acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section shall be construed to impair any right otherwise exercisable by any such owner, holder, or lessee. Notwithstanding anything to the contrary set forth in this Article -11- 14 no such owner, holder or lessee shall be bound by (i) any payment of any instalment of Fixed Rent or increases therein or any additional rent which may have been made more than thirty (30) days before the due date of such installment (except prepayments in the nature of security for the performance of Tenant's obligations under this Lease), or (ii) any amendment or modification to this Lease which is made without its consent. SECTION 7.03. TENANT ESTOPPEL CERTIFICATE: From time to time, within seven (7) days next following Owner's request, Tenant shall deliver to Owner a written statement executed and acknowledged by Tenant, in form satisfactory to Owner, (i) stating that this Lease is then in full force and effect and has not been modified (or if modified, setting forth the specific nature of all modifications), and (ii) setting forth the date to which the Fixed Rent has been paid, and (iii) stating whether or not, to the best knowledge of Tenant, Owner is in default under this Lease, and, if Owner is in default, setting forth the specific nature of all such defaults and (iv) stating that Tenant has accepted and occupied the Demised Premises and all improvements required to be made by Owner pursuant to the provisions of this Lease, have been made, if such be the case. Tenant acknowledges that any statement delivered pursuant to this Section may be relied upon by any purchaser or owner of the Building, or of the Real Property, or any part thereof, or of Owner's interest in the Building or the Real Property or any Superior Lease, or by the holder of any Mortgage, or by any assignee of the holder of any Mortgage, or by any lessor under any Superior Lease. SECTION 7.04. OWNER ASSIGNMENT OF LEASE AND RENTS: If Owner assigns its interest in this Lease, or the rents payable hereunder, to the holder of any Mortgage or the lessor under any Superior Lease, whether the assignment shall be conditional in nature or otherwise, Tenant agrees that (a) the execution thereof by Owner and the acceptance by such holder or lessor shall not be deemed an assumption by such holder or lessor of any of the obligations of the Owner under this Lease unless such holder or lessor shall, by written notice sent to Tenant, specifically otherwise elect; and (b) except as aforesaid, such holder or lessor shall be treated as having assumed Owner's obligations hereunder only upon the foreclosure of such holder's Mortgage or the termination of such lessor's Superior Lease and the taking of possession of the Demised Premises by such holder or lessor, as the case may be. SECTION 7.05. Owner agrees within a reasonable time after the execution and delivery of this Lease to request the then holder or holders of the existing Mortgage to enter into an agreement substantially to the effect that in the event of any foreclosure of the existing Mortgage, such holder or holders will not make Tenant a party-defendant to such foreclosure (unless required by law in order to obtain jurisdiction, but in such event, no judgment foreclosing this Lease will be sought) nor disturb its possession under this Lease so long as there shall be no default by Tenant under this Lease beyond applicable grace periods (any such agreement, or any agreement of similar import, is referred to as a "Non-Disturbance Agreement" and any provisions in any Mortgage substantially to the same effect as those contained in a Non-Disturbance Agreement are referred to as "Non-Disturbance Provisions"). At or about the time that Owner executes any future Mortgage, Owner agrees to request the then holder or holders of such future Mortgage to enter into a Non-Disturbance Agreement or include Non-Disturbance Provisions in such future Mortgage. At or about the time that Owner executes any future Superior Lease of the Real Property or the Building, Owner shall request the lessor thereof to enter into an agreement substantially to the effect that in the event of the termination of such Superior Lease by reason of the default or insolvency of the lessee thereunder, such lessor will permit Tenant to attorn to such lessor and will not disturb its possession under this Lease so long as there shall be no default by Tenant under this Lease beyond applicable grace periods (any such agreement, or any agreement of similar import, is referred to as a "Tenant Recognition Agreement" and any provisions in any such Superior Lease substantially to the same effect as those contained in a Tenant Recognition Agreement are referred to as ""Tenant Recognition Provisions"). If Owner is unable in good faith to obtain any such Non-Disturbance Agreement, Non-Disturbance Provisions, Tenant Recognition Agreement or Tenant Recognition Provisions, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected hereby and Owner shall not be liable to Tenant for its failure to obtain any such Non-Disturbance Agreement, Non-Disturbance Provisions, Tenant Recognition Agreement or Tenant Recognition Provisions, it being intended that Owner's sole obligation with respect to any Non-Disturbance Agreement, Non-Disturbance Provisions, -12- 15 Tenant Recognition Agreement or Tenant Recognition Provisions, shall be to request, in good faith, (a) within a reasonable time after the execution and delivery of this Lease (with respect to the existing Mortgage) and (b) at or about the date of execution of any future Mortgage or Superior Lease (with respect to any future Mortgage or Superior Lease) the then holders of any Mortgage or the then lessor under the Superior Lease, as the case may be, to enter into such Non-Disturbance Agreement (with respect to the existing Mortgage) or enter into such Non-Disturbance Agreement or include Non-Disturbance Provisions in any future Mortgage or enter into such Tenant Recognition Agreement or include Tenant Recognition Provisions in any future Superior Lease, as the case may be. If required by the holder of any Mortgage or by the lessor under any Superior Lease, Tenant shall promptly join in any commercially reasonable Non-Disturbance Agreement or Tenant Recognition Agreement to indicate its concurrence with the provisions thereof. Owner will pay any commercially reasonable fee charged by any holder or lessor for preparing such Agreement or Provisions. ARTICLE 8 PROPERTY LOSS, ETC. SECTION 8.01. Any Building employee to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agent with respect to such property and neither Owner nor Owner's agents shall be liable for any loss of or damage to any such property by theft or otherwise. Neither (i) the performance by Owner, Tenant or others of any decorations, repairs, alterations, additions or improvements in or to the Building or the Demised Premises, nor (ii) the failure of Owner or others to make any such decorations, repairs, alterations, additions or improvements, nor (iii) any damage to the Demised Premises or to the property of Tenant, nor any injury to any persons, caused by other tenants or persons in the Building, or by operations in the construction of any private, public or quasi-public work, or by any other cause, nor (iv) any latent defect in the Building or in the Demised Premises, nor (v) any temporary or permanent closing, darkening or bricking up of any windows of the Demised Premises for any reason whatsoever including, but not limited to, Owner's own acts, nor (vi) any inconvenience or annoyance to Tenant or injury to or interruption of Tenant's business by reason of any of the events or occurrences referred to in the foregoing subdivisions (i) through (v), shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, or any lessor under any Superior Lease, other than such liability as may be imposed upon Owner by law for Owner's negligence or the negligence of Owner's agents, servants or employees in the operation or maintenance of the Building or for the breach by Owner of any express covenant of this Lease on Owner's part to be performed. Tenant's taking possession of the Demised Premises shall be conclusive evidence, as against Tenant, that, at the time such possession was so taken, the Demised Premises and the Building were in good and satisfactory condition and Owner's Initial Construction was substantially completed. ARTICLE 9 DESTRUCTION-FIRE OR OTHER CASUALTY SECTION 9.01. OWNER'S REPAIR OBLIGATIONS: If the Demised Premises shall be damaged by fire or other casualty and if Tenant shall give prompt notice to Owner of such damage, Owner, at Owner's expense, shall repair such damage. However, Owner shall have no obligation to repair any damage to, or to replace, Tenant's Personal Property or any other property or effects of Tenant. Except as otherwise provided in Section 9.03, if the entire Demised Premises shall be rendered untenantable by reason of any such damage, the Fixed Rent shall abate for the period from the date of such damage to the earlier of (x) the date ten (10) days next following the date when such damage shall have been repaired or (y) the date upon which Tenant shall have completed its repairs thereto and commenced the conduct of its business therein, and if only a part of the Demised Premises shall -13- 16 be so rendered untenantable, the Fixed Rent shall abate for such period in the proportion which the area of the part of the Demised Premises so rendered untenantable bears to the total area of the Demised Premises. However, if, prior to the date when all of such damage shall have been repaired, any part of the Demised Premises so damaged shall be rendered tenantable and shall be used or occupied by Tenant or any person or persons claiming through or under Tenant, then the amount by which the Fixed Rent shall abate shall be equitably apportioned for the period from the date of any such use or occupancy to the date when all such damage shall have been repaired. Tenant hereby expressly waives the provisions of Section 227 of the New York Real Property Law, and of any successor law of like import then in force, and Tenant agrees that the provisions of this Article shall govern and control in lieu thereof. Notwithstanding the foregoing provisions of this Section, if, prior to or during the Demised Term, (i) the Demised Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, and if Owner shall decide not to restore the Demised Premises, or (ii) the Building shall be so damaged by fire or other casualty that, in Owner's opinion, substantial alteration, demolition, or reconstruction of the Building shall be required (whether or not the Demised Premises shall have been damaged or rendered untenantable), then, in any of such events, Owner, at Owner's option, may give to Tenant, within ninety (90) days after such fire or other casualty, a five (5) days' notice of termination of this Lease and, in the event such notice is given, this Lease and the Demised Term shall come to an end and expire (whether or not said term shall have commenced) upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date, the Fixed Rent shall be apportioned as of such date or as of any earlier date upon which the Fixed Rent shall have abated as hereinabove provided in this Section and any prepaid portion of Fixed Rent for any period after such date shall be refunded by Owner to Tenant. Section 9.02. OWNER'S SUBROGATION WAIVER PROVISIONS: Owner now has and shall attempt to maintain, throughout the Demised Term, in Owner's fire insurance policies covering the Building, provisions to the effect that such policies shall not be invalidated should the insured waive, in writing, prior to a loss, any or all right of recovery against any party for loss occurring to the Building. In the event that at any time Owner's fire insurance carriers shall exact an additional premium for the inclusion of such or similar provisions, Owner shall give Tenant notice thereof. In such event, if Tenant agrees, in writing, to reimburse Owner for such additional premium for the remainder of the Demised Term, Owner shall require the inclusion of such or similar provisions by Owner's fire insurance carriers. As long as such or similar provisions are included in Owner's fire insurance policies then in force, Owner hereby waives (i) any obligation on the part of Tenant to make repairs to the Demised Premises necessitated or occasioned by fire or other casualty that is an insured risk under such policies, and (ii) any right of recovery against Tenant, any other permitted occupant of the Demised Premises, and any of their servants, employees, agents or contractors, for any loss occasioned by fire or other casualty which is an insured risk under such policies. In the event that at any time Owner's fire insurance carriers shall not include such or similar provisions in Owner's fire insurance policies, the waivers set forth in the foregoing sentence shall, upon notice given by Owner to Tenant, be deemed of no further force or effect. Section 9.03. TENANT NEGLIGENCE: Except to the extent expressly provided in Section 9.02, nothing contained in this Lease shall relieve Tenant of any liability to Owner or to its insurance carriers which Tenant may have under law or the provisions of this Lease in connection with any damage to the Demised Premises or the Building caused by fire or other casualty. Notwithstanding the provision of Section 9.01, if any such damage, occurring after any date when the waivers set forth in Section 9.02 are no longer in force and effect, is due to the fault or neglect of Tenant, any person claiming through or under Tenant, or any of their servants, employees, agents, contractors, visitors or licensees, then there shall be no abatement of Fixed Rent by reason of such damage. Section 9.04. TENANT SUBROGATION WAIVER PROVISIONS: Tenant acknowledges that it has been advised that Owner's insurance policies do not cover Tenant's Personal Property or any other property of Tenant in the Demised Premises; accordingly, it shall be Tenant's obligation to obtain and maintain insurance covering its property in the Demised Premises and loss of profits including, but no limited to, water damage coverage and business interruption insurance. Tenant shall attempt to obtain and maintain, throughout the Demised Term, in -14- 17 Tenant's fire and other insurance policies covering Tenant's Personal Property and other property of Tenant in the Demised Premises, and Tenant's use and occupancy of the Demised Premises, and/or Tenant's profits (and shall cause any other permitted occupants of the Demised Premises to attempt to obtain and maintain, in similar policies), provisions to the effect that such policies shall not be invalidated should the insured waive, in writing, prior to a loss, any or all right of recovery against any party for loss occasioned by fire or other casualty which is an insured risk under such policies. In the event that at any time the fire insurance carriers issuing such policies shall exact an additional premium for the inclusion of such or similar provisions, Tenant shall give Owner notice thereof. In such event, if Owner agrees, in writing, to reimburse Tenant or any person claiming through or under Tenant, as the case may be, for such additional premium for the remainder of the Demised Term, Tenant shall require the inclusion of such or similar provisions by such insurance carriers. As long as such or similar provisions are included in such insurance policies then in force, Tenant hereby waives (and agrees to cause any other permitted occupants of the Demised Premises to execute and deliver to Owner written instruments waiving) any right of recovery against Owner, any lessors under any Superior Leases, the holders of any Mortgage, and all other tenants or occupants of the Building, and any servants, employees, agents or contractors of Owner, or of any such lessor, or holder or any such other tenants or occupants, for any loss occasioned by fire or other casualty which is an insured risk under such policies. In the event that at any time such insurance carriers shall not include such or similar provisions in any such insurance policy, the waiver set forth in the foregoing sentence (or in any written instrument executed by any other permitted occupant of the Demised Premises) shall, upon notice given by Tenant to Owner, be deemed of no further force or effect with respect to any insured risks under such policy from and after the giving of such notice. During any period while any such waiver of right of recovery is in effect, Tenant, or any other permitted occupant of the Demised Premises, as the case may be, shall look solely to the proceeds of such policies to compensate Tenant or such other permitted occupant for any loss occasioned by fire or other casualty which is an insured risk under such policies. SECTION 9.05. Supplementing the provisions of Section 9.01, if as a result of any damage to fifty (50%) percent or more of the Demised Premises by fire or other casualty, (a) it shall become impractical for Tenant to conduct its business in any part of the Demised Premises, and (b) no part of the Demised Premises shall be used or occupied for business purposes by Tenant or any other person claiming through or under Tenant, the entire Demised Premises shall be deemed untenantable for the purposes of Section 9.01. SECTION 9.06. Supplementing the provisions of Section 9.02, if any damage to the Demised Premises or the Building by fire or other casualty occurring after any date when the waivers set forth in Section 9.02 are no longer in force and effect is due to the fault or negligence of Tenant, any person claiming through or under Tenant, or any of their servants, employees, agents, contractors, visitors or licensees, and if Owner shall have rent insurance policies in force at that time covering the loss of Fixed Rent for the Demised Premises, and if such policies shall not be affected by the provisions of this Section, then, notwithstanding anything contained in Section 9.03 to the contrary, the Fixed Rent shall abate in accordance with the provisions of Section 9.01, but only to the extent of any proceeds received by Owner under such rent insurance policies with respect to the Demised Premises and the Demised Term. Owner presently has such rent insurance policies in force and shall attempt to maintain same during the entire Demised Term. ARTICLE 10 EMINENT DOMAIN SECTION 10.01. TAKING OF THE DEMISED PREMISES: If the whole of the Demised Premises shall be acquired for any public or quasi-public use or purpose, whether by condemnation or by deed in lieu of condemnation, this Lease and the Demised Term shall end as of the date of the vesting of title with the same effect as if said date were the Expiration Date. If only a part of the Demised Premises shall be so acquired or condemned then, except as otherwise provided in this Section, this Lease and the Demised Term shall continue in force and -15- 18 effect but, from and after the date of the vesting of title, the Fixed Rent shall be reduced in the proportion which the area of the part of the Demised Premises so acquired or condemned bears to the total area of the Demised Premises immediately prior to such acquisition or condemnation. If only a part of the Real Property shall be so acquired or condemned, then (i) whether or not the Demised Premises shall be affected thereby, Owner, at Owner's option, may give to Tenant, within sixty (60) days next following the date upon which Owner shall have received notice of vesting of title, a five (5) days' notice of termination of this Lease, and (ii) if the part of the Real Property so acquired or condemned shall contain more than ten (10%) percent of the total area of the Demised Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has reasonable means of access to the Demised Premises, Tenant, at Tenant's option, may give to Owner, within sixty (60) days next following the date upon which Tenant shall have received notice of vesting of title, a five (5) days' notice of termination of this Lease. In the event any such five (5) days' notice of termination is given, by Owner or Tenant, this Lease and the Demised Term shall come to an end and expire upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date. If a part of the Demised Premises shall be so acquired or condemned and this Lease and the Demised Term shall not be terminated pursuant to the foregoing provisions of this Section, Owner, at Owner's expense, shall restore that part of the Demised Premises not so acquired or condemned to a self-contained rental unit. In the event of any termination of this Lease and the Demised Term pursuant to the provisions of this Section, the Fixed Rent shall be apportioned as of the date of such termination and any prepaid portion of Fixed Rent for any period after such date shall be refunded by Owner to Tenant. SECTION 10.02. CONDEMNATION AWARD OR CLAIMS: In the event of any such acquisition or condemnation of all or any part of the Real Property, Owner shall be entitled to receive the entire award for any such acquisition or condemnation, Tenant shall have no claim against Owner or the condemning authority for the value of any unexpired portion of the Demised Term and Tenant hereby expressly assigns to Owner all of its right in and to any such award. Nothing contained in this Section shall be deemed to prevent Tenant from making a claim in any condemnation proceedings for the value of any items of Tenant's Personal Property which are compensable, in law, as trade fixtures. ARTICLE 11 ASSIGNMENT AND SUBLETTING SECTION 11.01. GENERAL COVENANT: Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, covenants that, without the prior consent of Owner in each instance, it shall not (i) assign whether by merger, consolidation or otherwise, mortgage or encumber its interest in this Lease, in whole or in part, except as set forth in Section 11.05 (ii) sublet, or permit the subletting of, the Demised Premises or any part thereof, or (iii) permit the Demised Premises or any part thereof to be occupied, or used for desk space, (other than affiliates), mailing privileges or otherwise, by any person other than Tenant. The sale, pledge, transfer or other alienation of (a) any controlling interest of the issued and outstanding capital stock of any corporate Tenant (unless such stock is publicly traded on a recognized security exchange or over-the counter market) or (b) any controlling interest in any partnership or joint venture Tenant, however accomplished, and whether in a single transaction or in a series of related and/or unrelated transactions, shall be deemed for the purposes of this Section as an assignment of this Lease which shall require the prior consent of Owner in each instance. SECTION 11.02. OWNER'S RIGHTS UPON ASSIGNMENT: If Tenant's interest in this Lease is assigned, whether or not in violation of the provisions of this Article, Owner may collect rent from the assignee; if the Demised Premises or any part thereof are sublet to, or occupied by, or used by, any person other than Tenant, whether or not in violation of this Article, Owner, after default by Tenant under this Lease, may collect rent from the subtenant, user or occupant. In either case, Owner shall apply the net amount collected to the rents reserved -16- 19 in this Lease, but neither any such assignment, subletting, occupancy, or use, whether with or without Owner's prior consent, nor any such collection or application, shall be deemed a waiver of any term, covenant or condition of this Lease or the acceptance by Owner of such assignee, subtenant, occupant or user as tenant. The consent by Owner to any assignment, subletting, occupancy or use shall not relieve Tenant from its obligation to obtain the express prior consent of Owner to any further assignment, subletting, occupancy or use. If this Lease is assigned to any person or entity pursuant to any proceeding of the type referred to in Subsections 16.01(c) and 16.01(d), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Owner, shall be and remain the exclusive property of Owner and shall not constitute property of Tenant or of the estate of Tenant within the meaning of any proceeding of the type referred to in Subsections 16.01(c) and 16.01(d). Any and all monies or other considerations constituting Owner's property under the preceding sentence not paid or delivered to Owner shall be held in trust for the benefit of Owner and shall be promptly paid to or turned over to Owner. Any person or entity to which this Lease is assigned pursuant to any proceeding of the type referred to in Subsections 16.01(c) and 16.01(d) shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall execute and deliver to Owner upon demand an instrument confirming such assumption. The listing of any name other than that of Tenant on any door of the Demised Premises or on any directory or in any elevator in the Building, or otherwise, shall not operate to vest in the person so named any right or interest in this Lease or in the Demised Premises, or the Building, or be deemed to constitute, or serve as a substitute for, any prior consent of Owner required under this Article, and it is understood that any such listing shall constitute a privilege extended by Owner which shall be revocable at Owner's will by notice to Tenant. Tenant agrees to pay to Owner reasonable counsel fees incurred by Owner in connection with any proposed assignment of Tenant's interest in this Lease or any proposed subletting of the Demised Premises or any part thereof. Neither any assignment of Tenant's interest in this Lease nor any subletting, occupancy or use of the Demised Premises or any part thereof by any person other than Tenant, nor any collection of rent by Owner from any person other than Tenant as provided in this Section, nor any application of any such rent as provided in this Section shall, in any circumstances, relieve Tenant of its obligation fully to observe and perform the terms, covenants and conditions of this Lease on Tenant's part to be observed or performed. SECTION 11.03 SUBLET RIGHTS. A. (1) As long as Tenant is not in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, Owner agrees not to unreasonably withhold Owner's prior consent to sublettings by Tenant of all or parts of the Demised Premises to not more than two (2) subtenants. Each such subletting shall be for undivided occupancy by the subtenant of that part of the Demised Premises affected thereby, for the use expressly permitted in this Lease, i.e., as general offices for an information technology business, and at no time shall there be more than two (2) occupants, including Tenant, in the Demised Premises. (2) Without Owner's prior consent, Tenant shall not (a) negotiate or enter into a proposed subletting with any tenant, subtenant or occupant of any space in the Building or (b) list or otherwise publicly advertise the Demised Premises or any part thereof for subletting at a rental lower than the higher of (i) the Fixed Rent then in effect under this Lease, allocable to the space sought to be sublet or (ii) the rental at which the Owner is then actively negotiating comparable space in the Building. (3) At least thirty (30) days prior to any proposed subletting, Tenant shall submit to Owner a statement (the "Proposed Sublet Statement") containing the name and address of the proposed subtenant, the nature of the proposed subtenant's business and its current financial status, if such status is obtained or obtainable by Tenant, and all of the principal terms and conditions of the proposed subletting including, but not limited to, the proposed commencement and expiration dates of the term thereof. Unless the proposed sublet area shall constitute only an entire floor (or floors), the Proposed Sublet Statement shall be accompanied by a floor plan delineating the proposed sublet area. -17- 20 (4) Owner may arbitrarily withhold consent to a proposed subletting if, (a) the occupancy of the proposed subtenant will impair the character or dignity of the Building or impose any material additional burden upon Owner in the operation of the Building or (b) the occupancy of the proposed subtenant will impair the reputation of (i) the Building as an information technology center or (ii) the floor on which the proposed sublet area is located as a floor devoted to information technology tenants, or (c) the proposed subtenant shall be a person or entity with whom Owner is then actively negotiating to lease space in the Building. (5) In the event of any dispute between Owner and Tenant as to the reasonableness of Owner's failure or refusal to consent to any subletting, such dispute shall be submitted to arbitration in accordance with the provisions of Article 36. B. Notwithstanding the foregoing provisions of this Section 11.03, Owner shall have the following rights with respect to each proposed subletting by Tenant: (1) In the event Tenant proposes to sublet all or substantially all of the Demised Premises, Owner, at Owner's option, may give to Tenant, within thirty (30) days after the submission by Tenant to Owner of the Proposed Sublet Statement, a notice terminating this Lease on the date (referred to as the "Earlier Termination Date") immediately prior to the proposed commencement date of the term of the proposed subletting, as set forth in such statement, and, in the event such notice is given, this Lease and the Demised Term shall come to an end and expire on the Earlier Termination Date with the same effect as if it were the Expiration Date, the Fixed Rent shall be apportioned as of said Earlier Termination Date and any prepaid portion of Fixed Rent for any period after such date shall be refunded by Owner to Tenant; or (2) In the event Tenant proposes to sublet all or any portion of the Demised Premises, Owner, at Owner's option, may give to Tenant, within thirty (30) days after the submission by Tenant to Owner, of the Proposed Sublet Statement, a notice electing to eliminate such portion of the Demised Premises (said portion is referred to as the "Eliminated Space") from the Demised Premises during the period (referred to as the "Elimination Period") commencing on the date (referred to as "Elimination Date") immediately prior to the proposed commencement date of the term of the proposed subletting, as set forth in the Proposed Sublet Statement, and ending on the proposed expiration date of the term of the proposed subletting, as set forth in the Proposed Sublet Statement, and in the event such notice is given the following shall apply: (a) The Eliminated Space shall be eliminated from the Demised Premises during the Elimination Period; (b) Tenant shall surrender the Eliminated Space to Owner on or prior to the Elimination Date in the same manner as if said Date were the Expiration Date; (c) If the Eliminated Space shall constitute less than an entire floor, (i) Owner, at Owner's expense, shall have the right to make any alterations and installations in the Demised Premises required, in Owner's judgment, reasonably exercised, to make the Eliminated Space a self-contained rental unit with access through corridors to the elevators and core toilets serving the Eliminated Space, and if the Demised Premises shall contain any core toilets (for the purposes of this Article core toilets shall be deemed to include any unisex toilets) or any corridors (including any corridors proposed to be constructed by Owner pursuant to this subdivision (c), providing access from the Eliminated Space to the core area), (ii) Owner and any tenant or other occupant of the Eliminated Space shall have the right to use such toilets and corridors in common with Tenant and any other permitted occupants of the Demised Premises, and the right to install signs and directional indicators in or about such corridors indicating the name and location of such tenant or other occupant; -18- 21 (d) During the Elimination Period, the Fixed Rent, the Demised Premises Area (as defined in Article 23), and Tenant's Electrical Share (as defined in Section 29.05) shall each be reduced in the proportion which the area of the Eliminated Space bears to the total area of the Demised Premises immediately prior to the Elimination Date (including an equitable portion of the area of any corridors referred to in subdivision (c) of this Subsection 11.03.B.(2) as part of the area of the Eliminated Space for the purpose of computing such reduction), and in the event that the Eliminated Space shall be the entire Demised Premises, during the Elimination Period, Tenant shall have no rights with respect to the Demised Premises nor any obligations with respect to the Demised Premises, including, but not limited to, any obligations to pay Fixed Rent or any increases therein or any additional rent, and any prepaid portion of Fixed Rent for any period after the Elimination Date allocable to the Elimination Space shall be refunded by Owner to Tenant; (e) There shall be an equitable apportionment of any increase in the Fixed Rent pursuant to Article 23 for the Escalation Year and Tax Escalation Year (as defined in Article 23) in which said Elimination Date shall occur; (f) If the Elimination Period shall end prior to the Expiration Date, the Eliminated Space, in its then existing condition (provided it is usable for general offices as an information technology business or is put in such condition by Owner at Owner's expense prior to the Restoration Period), shall be deemed restored to and once again a part of the Demised Premises during the period (referred to as the "Restoration Period") commencing on the date next following the expiration of the Elimination Period and ending on the Expiration Date; (g) During the Restoration Period, if any, the Fixed Rent, the Demised Premises Area and Tenant's Electrical Share shall each be increased in the proportion which the area of the Eliminated Space bears to the total area of the Demised Premises immediately prior to the commencement of the Restoration Period (including an equitable portion of the area of any corridors referred to in subdivision (c) of this Subsection 11.03.B.(2) as part of the area of the Eliminated Space for the purpose of computing such increase) and in the event that the Eliminated Space shall be the entire Demised Premises, during the Restoration Period, the Demised Premises, in its then existing condition, (provided it is usable for general offices as an information technology business or is put in such condition by Owner at Owner's expense prior to the Restoration Period) shall be deemed restored to Tenant and Tenant shall have all rights with respect to the Demised Premises which are set forth in this Lease and all obligations with respect to the Demised Premises which are set forth in this Lease, including, but not limited to, the obligations for the payment of Fixed Rent and any increases therein (as it would have been adjusted if Tenant occupied the Demised Premises during the Elimination Period) and any additional rent; and (h) There shall be an equitable apportionment of any increase in the Fixed Rent pursuant to Article 23 for the Escalation Year and Tax Escalation Year in which the Restoration Period, if any, shall commence. However, notwithstanding the foregoing, Owner and Tenant acknowledge the possibility that all or any of the tenants or occupants of the Eliminated Space may not have vacated and surrendered all or any portions of the Eliminated Space to Owner by the commencement of the Restoration Period; accordingly, notwithstanding anything to the contrary contained in the foregoing provisions of this Subsection B, the following shall apply: -19- 22 (x) The Restoration Period applicable to the Eliminated Space shall commence on the commencement date of the Restoration Period with respect to those portions, if any, of the Eliminated Space which are vacant on the commencement of the Restoration Period and with respect to these portions, if any, of the Eliminated Space which are not vacant on the commencement of the Restoration Period on the respective later date or dates upon which such portions of the Eliminated Space become vacant and Owner gives notice to Tenant of such vacancy but the Expiration Date shall not be affected thereby, the increases in the Fixed Rent, the Demised Premises Area and Tenant's Electrical Share shall be equitably adjusted to reflect the fact that all or any portions of the Eliminated Space have not been restored to Tenant on the commencement of the Restoration Period but are restored to Tenant and included back in the Demised Premises on a date or dates after the commencement of the Restoration Period; (y) except as expressly set forth in this Subsection 11.03.B. to the contrary, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected thereby; and (z) Tenant waives any rights to rescind this Lease and to recover any damages which may result from the failure of Owner to deliver possession of all or any portions of the Eliminated Space on the commencement of the Restoration Period; Owner agrees to institute within ten (10) business days after the commencement of the Restoration Period, possession proceedings against any tenants and occupants who have not so vacated and surrendered all or any portions of the Eliminated Space, and agrees to prosecute such proceedings with reasonable diligence. At the request of Owner, Tenant shall execute and deliver an instrument or instruments, in form satisfactory to Owner, setting forth any modifications to this Lease contemplated in or resulting from the operation of the foregoing provisions of this Subsection 11.03; however, neither Owner's failure to request any such instrument nor Tenant's failure to execute or deliver any such instrument shall vitiate the effect of the foregoing provisions of this Section. The failure by Owner to exercise any option under this Section 11.03 with respect to any subletting shall not be deemed a waiver of such option with respect to any extension of such subletting or any subsequent subletting of the premises affected thereby or any other portion of the Demised Premises. Tenant agrees to indemnify Owner from all loss, cost, liability, damage and expense, including, but not limited to, reasonable counsel fees and disbursements, arising from any claims against Owner by any broker or other person, for a brokerage commission or other similar compensation in connection with any such proposed subletting, in the event (a) Owner shall (i) fail or refuse to consent to any proposed subletting, or (ii) exercise any of its options under this Section 11.03, or (b) any proposed subletting shall fail to be consummated for any reason whatsoever. C. Tenant agrees that (1) one-half (1/2) of any increase in the rental value of the Demised Premises over and above the Fixed Rent payable pursuant to the provisions of this Lease, as such Fixed Rent may be increased from time to time pursuant to the provisions of this Lease, and (2) any consideration paid to Tenant or any subtenant or other person claiming through or under Tenant in connection with an assignment of Tenant's interest in this Lease or the interest of any subtenant or other person claiming through or under Tenant under any sublease whether or not such assignment shall be effected with court approval in a proceeding of the types described in Subsection 16.01(c) or (d), or in any similar proceeding, or otherwise, shall accrue to the benefit of Owner and not to the benefit of Tenant, or of any subtenant or other person claiming through or under Tenant, or of the creditors of Tenant or of any such subtenant or other person claiming through or under Tenant. Accordingly, Tenant agrees that if Owner shall fail to exercise its option to sooner terminate this Lease in connection with any proposed subletting by Tenant of all or substantially all of the Demised Premises, or its option to eliminate the Demised Premises or to eliminate from the Demised Premises any portion thereof, in connection with any proposed subletting by Tenant of the entire Demised Premises or any portion thereof, or if any subtenant or other person claiming through or under Tenant shall sublet all or any portion of the Demised Premises, Tenant shall pay to Owner a sum equal to one-half (1/2) to any Subletting Profit, as such term is hereinafter defined. All rentals and -20- 23 other sums (including, but not limited to, sums payable for the sale or rental of any fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of the sale thereof, the then net unamortized [on a straight-line basis over the term of this Lease or, in the event of a further subletting, over the term of the initial sublease, as the case may be] cost thereof, which were provided and installed in the sublet premises at the sole cost and expense of the Tenant or such subtenant or other person claiming through or under Tenant and for which no allowance or other credit has been given by Owner) payable by any subtenant to Tenant or to any subtenant or other person claiming through or under Tenant in connection with (i) any subletting of the entire Demised Premises in excess of the Fixed Rent then payable by Tenant to Owner under this Lease, or (ii) any subletting of a portion of the Demised Premises in excess of that proportion of the Fixed Rent applicable to the floor on which the portion of the Demised Premises so sublet is located payable by the Tenant to Owner under this Lease which the area of the portion of the Demised Premises so sublet bears to the total area of the Demised Premises on said floor on which the portion of the Demised Premises so sublet is located, are referred to, in the aggregate, as "Subletting Profit"; in computing any Subletting Profit it shall be deemed that the rental reserved under any such subletting shall commence to accrue as of the commencement of the term of such subletting even if such rental actually commences to accrue as of a date subsequent to such commencement, and there shall be deducted a reasonable single brokerage commission, if any such commission shall be incurred by Tenant or any such subtenant or other person claiming through or under Tenant in connection with such subletting which deduction for such reasonable single brokerage commission shall be amortized on a straight-line basis over the entire term of such subletting. Tenant agrees that if Tenant, or any subtenant or other person claiming through or under Tenant, shall assign or have assigned its interest as Tenant under this Lease or its interest as subtenant under any sublease, as the case may be, whether or not such assignment shall be effected with court approval in a proceeding of the types described in Subsections 16.01(c) or (d), or in any similar proceeding, or otherwise, Tenant shall pay to Owner a sum equal to any consideration payable to Tenant or any subtenant or other person claiming through or under Tenant for such assignment. All sums payable hereunder to Tenant shall be paid to Owner as additional rent immediately upon such sums becoming payable to Tenant or to any subtenant or other person claiming through or under Tenant and, if requested by Owner, Tenant shall promptly enter into a written agreement with Owner setting forth the amount of such sums to be paid to Owner, however, neither Owner's failure to request the execution of such agreement nor Tenant's failure to execute such agreement shall vitiate the provisions of this Section. For the purposes of this Article, a trustee, receiver or other representative of the Tenant's or any subtenant's estate under any federal or state bankruptcy act shall be deemed a person claiming through or under Tenant. D. Neither Owner's consent to any subletting nor anything contained in this Section shall be deemed to grant to any subtenant or other person claiming through or under Tenant the right to sublet all or any portion of the Demised Premises or to permit the occupancy of all or any portion of the Demised Premises by others. Neither any subtenant referred to in this Section nor its heirs, distributees, executors, administrators, legal representatives, successors nor assigns, without the prior consent of Owner in each instance, shall (i) assign, whether by merger, consolidation or otherwise, mortgage or encumber its interest in any sublease, in whole or in part, or (ii) sublet, or permit the subletting of, that part of the Demised Premises affected by such subletting or any portion thereof, or (iii) permit such part of the Demised Premises affected by such subletting or any portion thereof to be occupied or used for desk space, mailing privileges or otherwise, by any person other than such subtenant and any sublease shall provide that any violation of the foregoing provisions of this sentence shall be an event of default thereunder. Except as otherwise set forth in this Article 11, the sale, pledge, transfer or other alienation of (a) any of the issued and outstanding capital stock of any corporate subtenant (unless such stock is publicly traded on any recognized security exchange or over-the-counter market) or (b) any interest in any partnership or joint venture subtenant, however accomplished, and whether in a single transaction or in a series of related or unrelated transactions, shall be deemed for the purposes of this Section to be an assignment of such sublease which shall require the prior consent of Owner in each instance and any sublease shall so provide. Section 11.04. OWNER'S RIGHTS UPON LEASE DISAFFIRMANCE: A. In the event that, at any time after Tenant may have assigned Tenant's interest in this Lease, this Lease shall be disaffirmed or rejected in any proceeding of the types described in Subsections 16.01(c) and (d), or in any similar proceeding, or in the event of -21- 24 termination of this Lease by reason of any such proceeding or by reason of lapse of time following notice of termination given pursuant to Section 16.01 based upon any of the Events of Default set forth in said Subsections, Tenant, upon request of Owner given within thirty (30) days next following any such disaffirmance, rejection or termination (and actual notice thereof to Owner in the event of a disaffirmance or rejection or in the event of termination other than by act of Owner), shall (i) pay to Owner all Fixed Rent, additional rent and other charges due and owing by the assignee to Owner under this Lease to and including the date of such disaffirmance, rejection or termination, and (ii) as "tenant", enter into a new lease with Owner of the Demised Premises for a term commencing on the effective date of such disaffirmance, rejection or termination and ending on the Expiration Date unless sooner terminated as in such lease provided, at the same Fixed Rent and then executory terms, covenants and conditions as are contained in this Lease, except that (a) Tenant's rights under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any person claiming through or under such assignee or by virtue of any statute or of any order of any court, and (b) such new lease shall require all defaults existing under this Lease to be cured by Tenant with due diligence, and (c) such new lease shall require Tenant to pay all increases in the Fixed Rent reserved in this Lease which, had this Lease not been so disaffirmed, rejected or terminated, would have accrued under the provisions of Article 23 of this Lease after the date of such disaffirmance, rejection or termination with respect to any period prior thereto. In the event Tenant shall default in its obligation to enter into said new lease for a period of ten (10) days next following Owner's request therefor, then, in addition to all other rights and remedies by reason of such default, either at law or in equity, Owner shall have the same rights and remedies against Tenant as if Tenant had entered into such new lease and such new lease had thereafter been terminated as at the commencement date thereof by reason of Tenant's default thereunder. Nothing contained in this Section shall be deemed to grant to Tenant any right to assign Tenant's interest in this Lease. SECTION 11.05. As long as Tenant is not then in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, Owner's consent shall not be required to an assignment of Tenant's interest in this Lease to any person, corporation, partnership, or other business entity which is a successor of Tenant, either by merger or consolidation or the purchase of all or substantially all of the assets, business and goodwill of NYSERNet, Inc., Tenant named herein, provided that said person, corporation, partnership or other business entity shall have a net worth, as determined in accordance with generally accepted accounting principles consistently applied, at least equal to that of Tenant named herein as of the date of this Lease, and provided further that such successor, person, corporation, partnership or other business entity shall continue to operate Tenant's present business in the Demised Premises and the interest of Tenant named herein in this Lease is not the sole or principal asset of Tenant named herein and such assignment is made for a good business purpose. At the time of said proposed assignment, Tenant shall deliver to Owner a reasonably detailed statement of the financial condition of the aforesaid proposed assignee, prepared in accordance with generally accepted accounting principles applied on a consistent basis, sworn to by an executive officer of Tenant and the proposed Assignee, which statement shall reflect the financial condition of the aforesaid proposed assignee at that time. Notwithstanding anything contained in this Section to the contrary, such assignment shall not be valid if the aforesaid proposed assignee shall not have a net worth, at least equal to that of Tenant as of the date of this Lease or the interest of Tenant named herein in this Lease is the sole or principal asset of Tenant named herein or such assignment is not made for a good business purpose. In the event of any dispute between Owner and Tenant as to the validity of any such assignment such dispute shall be determined by arbitration in the City of New York in accordance with the provisions of Article 36. Any such determination shall be final and binding upon the parties whether or not a judgment shall be entered in any court. If the determination of any such arbitration shall be adverse to Owner, Owner, nevertheless, shall not be liable to Tenant and Tenant's sole remedy in such event shall be to have the proposed assignment deemed valid. No such assignment shall be valid, unless, within ten (10) days after the execution thereof, Tenant shall deliver to Owner (1) a duplicate original instrument of assignment in form and substance reasonably satisfactory to Owner duly executed by Tenant, acknowledged before a notary public, in customary and reasonable form and substance in which Tenant shall (a) waive all notices of default given to the assignee and all other notices of every kind or description, now or hereafter provided in this Lease, by statute or by rule of law; (b) acknowledge that Tenant's obligations with respect to this Lease shall not be discharged, released -22- 25 or impaired by (i) such assignment; (ii) any amendment or modification of this Lease (whether or not the obligations of Tenant are increased thereby); (iii) any further assignment or transfer of Tenant's interest in this Lease; (iv) any exercise, non-exercise or waiver by Owner of any right, remedy, power or privilege under or with respect to this Lease; (v) any waiver, consent, extension, indulgence or other act or omission with respect to any of the obligations of Tenant under this Lease; (vi) any act or thing which, but for the provisions of such assignment, might be deemed a legal or equitable discharge of a surety or assignor, to all of which Tenant shall consent in advance; it being the purpose and intent of Owner and Tenant that the obligations of Tenant hereunder as assignor shall be absolute and unconditional under any and all circumstances; and (II) an instrument in form and substance reasonably satisfactory to Owner, duly executed by the proposed assignee, acknowledged before a notary public, in which such proposed assignee shall assume observance and performance of, and agree to be bound by, all of the terms, covenants and conditions of this Lease on Tenant's part to be performed. SECTION 11.06. A. Supplementing the provisions of Article 11, as long as Tenant is not in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed and performed, after notice and expiration of applicable cure periods, NYSERNet, Inc., Tenant named herein, shall have the right, without the prior consent of Owner, to assign its interest in this Lease, for the use permitted in this Lease to Netcast Communications Corp. or to any subsidiary or affiliate of Tenant named herein, which is in the same general line of business as Tenant named herein and only for such period as it shall remain such subsidiary or affiliate. For the purposes of this Article: (a) a "subsidiary" of Tenant named herein shall mean any corporation not less than fifty-one (51%) percent of whose outstanding voting stock at the time shall be owned by Tenant named herein, and (b) an "affiliate" of Tenant named herein shall mean any corporation, partnership or other business entity which controls or is controlled by, or is under common control with Tenant. For the purpose of the definition of "affiliate" the word "control" (including, "controlled by" and "under common control with") as used with respect to any corporation, partnership or other business entity, shall mean the possession of the power to direct or cause the direction of the management and policies of such corporation, partnership or other business entity, whether through the ownership of voting securities or contract. No such assignment shall be valid or effective unless, within ten (10) days after the execution thereof, Tenant shall deliver to Owner all of the following: (I) a duplicate original instrument of assignment, in form and substance reasonably satisfactory to Owner, duly executed by Tenant, in customary and reasonable form and substance in which Tenant shall (a) waive all notices of default given to the assignee, and all other notices of every kind or description now or hereafter provided in this Lease, by statute or rule of law, and (b) acknowledge that Tenant's obligations with respect to this Lease shall not be discharged, released or impaired by (i) such assignment, (ii) any amendment or modification of this Lease, whether or not the obligations of Tenant are increased thereby, (iii) any further assignment or transfer of Tenant's interest in this Lease, (iv) any exercise, non-exercise or waiver by Owner of any right, remedy, power or privilege under or with respect to this Lease, (v) any waiver, consent, extension, indulgence or other act or omission with respect to any other obligations of Tenant under this Lease, (vi) any act or thing which, but for the provisions of such assignment, might be deemed a legal or equitable discharge of a surety or assignor, to all of which Tenant shall consent in advance, it being the purpose and intent of Owner and Tenant that the obligations of Tenant hereunder as assignor shall be absolute and unconditional under any and all circumstances, and (II) an instrument, in form and substance reasonably satisfactory to Owner, duly executed by the assignee, in which such assignee shall assume the observance and performance of, and agree to be bound by, all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. B. Further supplementing the provisions of Article 11, as long as Tenant is not in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed and performed, after notice and the expiration of applicable cure periods NYSERNet, Inc., Tenant named herein, shall have the right without the prior consent of Owner, to sublet to, or permit the use or occupancy of, all or any part of the Demised Premises to Netcast Communications Corp. or by any subsidiary or affiliate (as said terms are defined in Section 11.06A.) of Tenant named herein for the use permitted in this Lease provided that such subsidiary or affiliate is in the same general line of business as the Tenant named herein and only for such period as it shall remain such subsidiary or affiliate and in the same general line of business as the Tenant named herein. However, -23- 26 no such subletting shall be valid unless, prior to the execution thereof, Tenant shall give notice to Owner of the proposed subletting, and within ten (10) days prior to the commencement of said subletting, Tenant shall deliver to Owner an agreement, in form and substance reasonably satisfactory to Owner, duly executed by Tenant and said subtenant, in which said subtenant shall assume performance of and agree to be bound by, all of the terms, covenants and conditions of this Lease which are applicable to said subtenant and such subletting. Tenant shall give prompt notice to Owner of any such use or occupancy of all or any part of the Demised Premises and such use or occupancy shall be subject and subordinate to all of the terms, covenants and conditions of this Lease. No such use or occupancy shall operate to vest in the user or occupant any right or interest in this Lease or the Demised Premises. For the purposes of determining the number of subtenants or occupants in the Demised Premises, the occupancy of any such permitted subsidiary or affiliate of Tenant shall be deemed the occupancy of Tenant and such subsidiary or affiliate shall not be counted as a subtenant or occupant for the purposes of Section 11.03 and the provisions of Section 11.03 relating to Owner's option to terminate this Lease and the provisions of Section 11.03 relating to Subletting Profits shall not be applicable to any proposed subletting to any such subsidiary or affiliate of Tenant pursuant to the provisions of this Section. SECTION 11.07. TENANT'S DIRECTORY LISTINGS: Supplementing the provisions of Section 11.02, (i) so long as Owner shall maintain a directory in the lobby of the Building, Owner shall make available to Tenant space for the listing of Tenant's name and the names of any of the officers or employees of Tenant and any permitted occupants of the Demised Premises provided that the names so listed shall not require more than Tenant's Proportionate Share of the space of said directory, and (ii) so long as Owner shall maintain the names of occupants of the Building and the floors on which they are located in the elevators serving the Demised Premises, Owner shall list the names of Tenant and any permitted occupants of the Demised Premises (not to exceed the number of names which can reasonably be placed in the space proportionately allocated to Tenant in such elevators using Building standard size lettering) for the sixteenth (16th) floor in such elevators. SECTION 11.08. Notwithstanding anything to the contrary contained in the foregoing provisions of this Lease, including, but not limited to, the provisions of this Article, a public offering of the stock or interest of Tenant named herein on a recognized security exchange or over-the-counter market shall not be considered an assignment of this Lease requiring the prior approval of Owner. ARTICLE 12 TENANT'S INITIAL INSTALLATION AND OWNER'S WORK CONTRIBUTION SECTION 12.01. "AS IS": Tenant acknowledges that Owner has made no representations to Tenant with respect to the condition of the Demised Premises and Tenant agrees to accept possession of the Demised Premises in the condition which shall exist on the Commencement Date "as is" and further agrees that Owner shall have no obligation to perform any work or make any installations in order to prepare the Demised Premises for Tenant's occupancy. SECTION 12.02. TENANT'S INITIAL INSTALLATION. A. Promptly after the Commencement Date, Tenant shall, at Tenant's cost and expense, perform various Alterations in the Demised Premises required for Tenant's occupancy and use of the Demised Premises and conduct of its business therein. Such Alterations (referred to as "Tenant's Initial Installation") shall be made and performed in accordance with the provisions of this Lease, including, without limitation, the provisions of Articles 3 and 6 hereof. Tenant shall prosecute Tenant's Initial Installation to completion with all reasonable diligence. SECTION 12.03. OWNER'S CONTRIBUTION. A. Subject to the provisions and requirements of this Article 12, and provided that Tenant is not then in default under any of the terms, covenants or conditions of this Lease on the part of Tenant to be observed or performed, Owner shall contribute the sum of not more than ONE -24- 27 HUNDRED EIGHTY-THREE THOUSAND SEVEN HUNDRED FIFTY AND 00/100 ($183,750.00) DOLLARS in the aggregate toward the cost and expense actually incurred by Tenant with respect to Tenant's Initial Installation including the cost of all architectural, engineering and designers fees and, if there is any portion of such sum remaining thereafter, for the purchase of furniture, fixtures and telephone equipment incurred by Tenant in connection therewith. Owner's contribution on account of Tenant's Initial Installation is referred to as "Owner's Work Contribution". Irrespective of the actual cost and expense of Tenant's Initial Installation, in no event shall Owner's Work Contribution exceed the aggregate sum of ONE HUNDRED EIGHTY-THREE THOUSAND SEVEN HUNDRED FIFTY AND 00/100 ($183,750.00) DOLLARS. B. (1) Subject to the provisions of the following Paragraph (2) of this Subsection B, and provided that Tenant is not then in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed and performed after notice and the expiration of applicable cure periods, Owner shall distribute Owner's Work Contribution on account of Tenant's Initial Installation as the work with respect thereto progresses, upon Tenant's submission to Owner of (i) vouchers or bills, in form reasonably acceptable to Owner, for the cost and expense of Tenant's Initial Installation, and (ii) partial waivers of mechanic's liens from all contractors, subcontractors, materialmen and laborers who performed any services or delivered any materials in connection with Tenant's Initial Installation and which services or materials were the subject of the previous month's distribution by Owner to Tenant of Owner's Work Contribution, provided however, that at no time shall Owner be required to pay more than the value of the work in place, and provided further that any such work shall comply with any plans and specifications previously approved by Owner and shall otherwise comply with the requirements of this Lease and Tenant's request for distribution shall be accompanied by a certification of Tenant's architect or designer to that effect. Distributions of Owner's Work Contribution shall be made not more than monthly. (2) Notwithstanding the aforesaid, Owner shall not be required to disburse the last fifteen (15%) percent of Owner's Work Contribution until occurrence of all of the following: (i) completion of Tenant's Initial Installation in accordance with the plans and specifications approved by Owner and otherwise in accordance with the provisions of this Lease and a certification by Tenant's architect or designer to that effect, (ii) proof in form reasonably satisfactory to Owner of complete payment by Tenant of the cost and expense of such Tenant's Initial Installation (including receipt of waivers of mechanics liens from all contractors, subcontractors, materialmen and laborers who performed any services or delivered any materials in connection with such Tenant's Initial Installation; (upon request Tenant shall furnish the Owner such documentation as Owner shall reasonably request to confirm such complete payment), and (iii) proof that all consents, approvals or signoffs to be obtained by Tenant under any Legal Requirements or as required by any Governmental Authority have been obtained; upon compliance of the aforesaid, then, provided that Tenant is not then in default under any of the terms, covenants or conditions of this Lease on the part of Tenant to be observed or performed, the balance of Owner's Work Contribution shall thereafter be distributed to Tenant in accordance with provisions of this Section 12.03. C. The making of the Owner's Work Contribution by Owner shall constitute a single nonrecurring obligation on the part of Owner. In the event this Lease is renewed or extended for a further term by agreement or operation of law, Owner's obligation to give Owner's Work Contribution or any part thereof shall not apply to any such renewal or extension. D. Tenant acknowledges and agrees that Owner is merely acting on behalf of Tenant in connection with the disbursement of the Owner's Work Contribution in accordance with the provisions of this Section 12.03 to the contractors, suppliers and materialmen employed in connection with Tenant's Initial Installation, and that Owner shall have no obligation, liability or responsibility to any of the contractors, suppliers or materialmen seeking any of the Owner's Work Contribution pursuant to any of the aforesaid contracts or agreements with such contractors, suppliers or materialmen or otherwise, provided that Owner shall be obligated to disburse such Owner's Work Contribution only as expressly provided by the provisions of this Section 12.03. Nothing contained in this Section 12.03 shall relieve Tenant of any obligations or liabilities to such contractors, suppliers -25- 28 or materialmen under such contracts, agreements or otherwise. Nothing contained in this Article 12 shall relieve any obligations of Tenant under Section 3.02. or 3.03. of this Lease. Tenant shall indemnify Owner and Owner's Indemnitees from all loss, cost, liability and expense, including but not limited to reasonable counsel fees, incurred in connection with, or arising from, any claims or actions by any contractors, suppliers or materialmen employed in connection with Tenant's Initial Installation. ARTICLE 13 ACCESS TO DEMISED PREMISES SECTION 13.01. OWNER'S RIGHT TO ENTER: Owner and its agents shall have the following rights in and about the Demised Premises: (i) to enter the Demised Premises at all times to examine the Demised Premises or for any of the purposes set forth in this Article or for the purpose of performing any obligation of Owner under this Lease or exercising any right or remedy reserved to Owner in this Lease, or complying with any Legal Requirement which Owner is obligated to comply with hereunder, and if Tenant, its officers, partners, agents or employees shall not be personally present or shall not open and permit any entry into the Demised Premises at any time when such entry shall be necessary or permissible, to use a master key or to forcibly enter the Demised Premises; (ii) to erect, install, use and maintain pipes, ducts and conduits in and through the Demised Premises; (iii) to exhibit the Demised Premises to others; (iv) to make such decorations, repairs, alterations, improvements or additions, or to perform such maintenance, including, but not limited to, the maintenance of all heating, air conditioning, ventilating, elevator, plumbing, electrical, telecommunication and other mechanical facilities, as Owner may deem necessary or desirable; (v) to take all materials into and upon the Demised Premises that may be required in connection with any such decorations, repairs, alterations, improvements, additions or maintenance; and (vi) to alter, renovate and decorate the Demised Premises at any time during the Demised Term if Tenant shall have removed all or substantially all of Tenant's property from the Demised Premises. The lessors under any Superior Lease and the holders of any Mortgage shall have the right to enter the Demised Premises from time to time through their respective employees, agents, representatives and architects to inspect the same or to cure any default of Owner or Tenant relating thereto. Owner shall have the right, from time to time, to change the name, number or designation by which the Building is commonly known which right shall include, without limitation, the right to name the Building after any tenant of the Building. SECTION 13.02. OWNER'S RESERVATION OF RIGHTS TO PORTIONS OF THE BUILDING: All parts (except surfaces facing the interior of the Demised Premises) of all walls, windows and doors bounding the Demised Premises (including exterior Building walls, core corridor walls, doors and entrances), all balconies, terraces and roofs adjacent to the Demised Premises, all space in or adjacent to the Demised Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air conditioning, ventilating, plumbing, electrical, telecommunication and other mechanical facilities, closets, service closets and other Building facilities, and the use thereof, as well as access thereto through the Demised Premises for the purposes of operation, maintenance, alteration and repair, are hereby reserved to Owner. Owner also reserves the right at any time to change the arrangement or location of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets and other public parts of the Building, provided any such change does not permanently and unreasonably obstruct Tenant's access to the Demised Premises. Nothing contained in this Article shall (i) impose any obligation upon Owner with respect to the operation, maintenance, alteration or repair of the Demised Premises or the Building or (ii) permit Owner to reduce the Building services provided to the Demised Premises. SECTION 13.03. ACCESS TO THIRD PARTIES: Owner and its agents shall have the right to permit access to the Demised Premises, whether or not Tenant shall be present, to any receiver, trustee, assignee for the benefit of creditors, sheriff, marshal or court officer entitled to, or reasonably purporting to be entitled to, such access for the purpose of taking possession of, or removing, any property of Tenant or any other occupant of the Demised Premises, or for any other lawful purpose, or by any representative of the fire, police, building, sanitation -26- 29 or other department of the City, State or Federal Governments. Neither anything contained in this Section, nor any action taken by Owner under this Section, shall be deemed to constitute recognition by Owner that any person other than Tenant has any right or interest in this Lease or the Demised Premises. SECTION 13.04. NO ACTUAL OR CONSTRUCTIVE EVICTION: The exercise by Owner or its agents or by the lessor under any Superior Lease or by the holder of any Mortgage of any right reserved to Owner in this Article shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, or upon any lessor under any Superior Lease or upon the holder of any Mortgage, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. SECTION 13.05. Supplementing the provisions of Sections 13.01, 13.02 and 13.03, Owner agrees that except in cases of emergency, any entry upon the Demised Premises pursuant to the provisions of said Sections shall be made at reasonable times, and only after reasonable advance notice (which may be mailed, delivered or left at the Demised Premises, notwithstanding any contrary provisions of Article 27), and any work performed or installation made pursuant to said Section shall be made with reasonable diligence and any such entry, work or installations shall be made in a manner designed to minimize interference with Tenant's normal business operations (however, nothing contained in this Section shall be deemed to impose upon Owner any obligation to employ contractors or labor at so-called overtime or other premium pay rates). SECTION 13.06. Further supplementing the provisions of Sections 13.01 and 13.03. Owner's right to exhibit the Demised Premises to others shall be limited to insurance carriers and representatives thereof, prospective purchasers of the Real Property or the Building, holders or prospective holders of any mortgage affecting the Real Property or the Building or any ground or underlying lease, and other legitimate business visitors, and, during the last eighteen (18) months of the Demised Term, any prospective tenant of the Demised Premises. SECTION 13.07. Further supplementing the provisions of Section 13.01, Owner agrees that any pipes, ducts or conduits installed in or through the Demised Premises during the Demised Term pursuant to the provisions of Section 13.01, shall either be concealed behind, beneath or within partitioning, columns, ceilings or floors, or completely furred at points immediately adjacent to partitioning, columns or ceilings, and that when the installation of such pipes, ducts or conduits shall be completed, such pipes, ducts or conduits shall not materially reduce the usable area of the Demised Premises. SECTION 13.08. In the event that all or part of the Demised Premises are rendered untenantable by reason of interruption or reduction of services, Tenant may give to Owner written notice thereof. Owner agrees that if after the expiration of twenty (20) consecutive business days following receipt of such notice, in which the Demised Premises are so untenantable as hereinabove provided the Demised Premises or the applicable portion thereof shall continue to be untenantable by reason of such interruption or reduction of services, (but excluding any interruption caused by, or repair necessitated by, a casualty, a taking by exercise of the right of eminent domain or the wrongful acts, wrongful omissions or negligence of Tenant or anyone claiming by, through or under Tenant, or their respective employees, agents, contractors or invitees), then, commencing on the day after the expiration of such consecutive twenty (20) day period, in which the Demised Premises are so untenantable as hereinabove provided, Fixed Rent under Article 1 and increases thereof under Article 23 shall abate until the Demised Premises, or such portion thereof as has been rendered untenantable, are rendered tenantable, provided, (i) Tenant shall not have been using or occupying all or such portion of the Demised Premises for the conduct of its business; and (ii) if less than substantially all of the Demised Premises are untenantable, Tenant shall continue to pay Fixed Rent under Article 1 and increases thereof under Article 23 with respect to the tenantable portion of the Demised Premises which is satisfactory for the conduct of Tenant's normal business based on the proportion that the rentable square feet of the tenantable portion of the Demised Premises bears to the total rentable square feet of the Demised Premises. -27- 30 ARTICLE 14 VAULT SPACE SECTION 14.01. The Demised Premises do not contain any vaults, vault space or other space outside the boundaries of the Real Property, notwithstanding anything contained in this Lease or indicated on any sketch, blueprint or plan. Owner makes no representation as to the location of the boundaries of the Real Property. All vaults and vault space and all other space outside the boundaries of the Real Property which Tenant may be permitted to use or occupy are to be used or occupied under a revocable license, and if any such license shall be revoked, or if the amount of such space shall be diminished or required by any Federal, State or Municipal Authority or by any public utility company, such revocation, diminution or requisition shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner. Any fee, tax or charge imposed by any governmental authority for any such vault, vault space or other space shall be paid by Tenant. ARTICLE 15 CERTIFICATE OF OCCUPANCY SECTION 15.01. Tenant will not at any time use or occupy, or permit the use or occupancy of, the Demised Premises in violation of any Certificate(s) of Occupancy covering the Demised Premises. Owner agrees that a temporary or permanent Certificate(s) of Occupancy covering the Demised Premises will be in force on the Commencement Date permitting the Demised Premises to be used as "offices". However, neither such agreement, nor any other provision of this Lease, nor any act or omission of Owner, its agents or contractors, shall be deemed to constitute a representation or warranty that the Demised Premises, or any part thereof, may be lawfully used or occupied for any particular purpose or in any particular manner, in contradistinction to mere "office" use. A true copy of the existing Certificate of Occupancy is annexed hereto as Exhibit 3. ARTICLE 16 DEFAULT SECTION 16.01. EVENT OF DEFAULT: Upon the occurrence, at any time prior to or during the Demised Term, of any one or more of the following events (referred to herein, singly, as an "Event of Default" and collectively as "Events of Default"): (a) if Tenant shall default in the payment when due of any installment of Fixed Rent or any increase in the Fixed Rent or in the payment when due of any additional rent and such default shall continue for a period of ten (10) days after notice by Owner to Tenant of such default; or (b) if Tenant shall default in the observance or performance of any term, covenant or condition of this Lease on Tenant's part to be observed or performed (other than the covenants for the payment of Fixed Rent, any increase in the Fixed Rent and additional rent) and Tenant shall fail to remedy such default within thirty (30) days after notice by Owner to Tenant of such default, or if such default is of such a nature that it cannot be completely remedied within said period of thirty (30) days and Tenant shall not commence, promptly after receipt of such notice, or shall not thereafter diligently prosecute to completion, all steps necessary to remedy such default; or -28- 31 (c) if Tenant shall file a voluntary petition in bankruptcy or insolvency, or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, or shall make an assignment for the benefit of creditors, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or of all or any part of Tenant's property; or (d) if, within ninety (90) days after the commencement of any proceeding against Tenant, whether by the filing of a petition or otherwise, seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, such proceeding shall not have been dismissed, or if, within thirty (30) days after the appointment of any trustee, receiver or liquidator of Tenant, or of all or any part of Tenant's property, without the consent or acquiescence of Tenant, such appointment shall not have been vacated or otherwise discharged, or if any execution or attachment shall be issued against Tenant or any of Tenant's property pursuant to which the Demised Premises shall be taken or occupied or attempted to be taken or occupied; or (e) if Tenant shall default in the observance or performance of any term, covenant or condition on Tenant's part to be observed or performed under any other lease with Owner of space in the Building and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or (f) if the Demised Premises shall become deserted or abandoned for a period of ninety (90) consecutive days or more; or (g) if (i) Tenant's interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, or (ii) there shall be any sale, pledge, transfer or other alienation described in Section 11.01 of this Lease which is deemed an assignment of this Lease for purposes of said Section 11.01, except as expressly permitted under Article 11; then, during such time as such Event(s) of Default is/are continuing, Owner may at any time, at Owner's option, give to Tenant a five (5) days' notice of termination of this Lease and, in the event such notice is given, this Lease and the Demised Term shall come to an end and expire (whether or not said term shall have commenced) upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date, but Tenant shall remain liable for damages and all other sums payable pursuant to the provisions of Article 18. SECTION 16.02. "TENANT"/MONEYS RECEIVED: If, at any time (i) Tenant shall be comprised of two (2) or more persons, or (ii) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this Lease shall have been assigned, the word "Tenant", as used in Subsections (c) and (d) of Section 16.01, shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Owner from or on behalf of Tenant during the pendency of any proceeding of the types referred to in said Subsections (c) and (d) shall be deemed paid as compensation for the use and occupation of the Demised Premises and the acceptance of any such compensation by Owner shall not be deemed an acceptance of rent or a waiver on the part of Owner of any rights under Section 16.01. -29- 32 ARTICLE 17 REMEDIES SECTION 17.01. OWNER'S RIGHT OF RE-ENTRY AND RIGHT TO RELET: If Tenant shall default in the payment when due of any installment of Fixed Rent or in the payment when due of any increase in the Fixed Rent or any additional rent, after notice and the expiration of applicable cure periods or if this Lease and the Demised Term shall expire and come to an end as provided in Article 16: (a) Owner and its agents and servants may immediately, or at any time after such default or after the date upon which this Lease and the Demised Term shall expire and come to an end, re-enter the Demised Premises or any part thereof, after notice, either by summary proceedings or by any other applicable action or proceeding, or otherwise which is specifically permitted by law (without being liable to indictment, prosecution or damages therefor), and may repossess the Demised Premises and dispossess Tenant and any other persons from the Demised Premises and remove any and all of their property and effects from the Demised Premises; and (b) Owner, at Owner's option, may relet the whole or any part or parts of the Demised Premises, from time to time, either in the name of Owner or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Expiration Date, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Owner, in its sole discretion, may determine. Owner shall have no obligation to relet the Demised Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Demised Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise to affect any such liability; Owner, at Owner's option, may make such repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Demised Premises as Owner, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. SECTION 17.02. WAIVER OF RIGHT TO REDEEM, ETC.: Tenant hereby waives the service of any notice of intention to re-enter or to institute legal proceedings to that end which may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights which Tenant and all such persons might otherwise have under any present or future law to redeem the Demised Premises, or to re-enter or repossess the Demised Premises, or to restore the operation of this Lease, after (i) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (ii) any re-entry by Owner, or (iii) any expiration or termination of this Lease and the Demised Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words "re-enter", "re-entry" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease on Tenant's part to be observed or performed, Owner shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this Lease for such breach. The right to invoke the remedies hereinbefore set forth in this Lease is cumulative and shall not preclude Owner from invoking any other remedy allowed by law or in equity. -30- 33 SECTION 17.03. Owner agrees that the first sentence of Section 17.02 shall not be deemed a waiver of Tenant's right to be served with any notice of petition and petition in any summary proceedings under the provisions of the Real Property Actions and Proceedings Law of the State of New York and of any successor law of like import then in force. SECTION 17.04. The right of Tenant to invoke remedies set forth in this Lease is cumulative and shall not preclude Tenant from invoking any other remedy allowed by law or in equity, unless otherwise specifically provided in this Lease. ARTICLE 18 DAMAGES SECTION 18.01. AMOUNT OF OWNER'S DAMAGES: If this Lease and the Demised Term shall expire and come to an end as provided in Article 16, or by or under any summary proceeding or any other action or proceeding, or if Owner shall re-enter the Demised Premises as provided in Article 17, or by or under any summary proceeding or any other action or proceeding, then, in any of said events: (a) Tenant shall pay to Owner all Fixed Rent, additional rent and other charges payable under this Lease by Tenant to Owner to the date upon which this Lease and the Demised Term shall have expired and come to an end or to the date of re-entry upon the Demised Premises by Owner, as the case may be; and (b) Tenant shall also be liable for and shall pay to Owner, as damages, any deficiency (referred to as a "Deficiency") between the Fixed Rent reserved in this Lease for the period which otherwise would have constituted the unexpired portion of the Demised Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of Section 17.01 for any part of such period (first deducting from the rents collected under any such reletting all of Owner's expenses in connection with the termination of this Lease or Owner's re-entry upon the Demised Premises and with such reletting including, but not limited to, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, alteration costs and other expenses of preparing the Demised Premises for such reletting). Any such Deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for payment of installments of Fixed Rent, Owner shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Owner's right to collect the Deficiency for any subsequent month by a similar proceeding. Solely for the purposes of this Subsection (b), the term "Fixed Rent" shall mean the Fixed Rent in effect immediately prior to the date upon which this Lease and the Demised Term shall have expired and come to an end, or the date of re-entry upon the Demised Premises by Owner, as the case may be, adjusted, from time to time, to reflect any increases which would have been payable pursuant to any of the provisions of this Lease including, but not limited to, the provisions of Article 23 of this Lease if the term hereof had not been terminated; and (c) At any time after the Demised Term shall have expired and come to an end or Owner shall have re-entered upon the Demised Premises, as the case may be, whether or not Owner shall have collected any monthly Deficiencies as aforesaid, Owner shall be entitled to recover from Tenant, and Tenant shall pay to Owner, on demand, as and for liquidated and agreed final damages, a sum equal to the amount by which the Fixed Rent reserved in this Lease for the period which otherwise would have constituted the unexpired portion of the Demised Term exceeds the then fair and reasonable rental value of the Demised Premises for the same period, -31- 34 both discounted to present worth at the rate of seven and one-half (7 1/2%) percent per annum. If, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Demised Premises, or any part thereof, shall have been relet by Owner for the period which otherwise would have constituted the unexpired portion of the Demised Term, or any part thereof, the amount of rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Demised Premises so relet during the term of the reletting. Solely for the purposes of this Subsection (c), the term "Fixed Rent" shall mean the Fixed Rent in effect immediately prior to the date upon which this Lease and the Demised Term shall have expired and come to an end, or the date of re-entry upon the Demised Premises by Owner, as the case may be, adjusted to reflect any increases pursuant to the provisions of Article 23 for the Escalation Year and Tax Escalation Year immediately preceding such event. SECTION 18.02. RENTS UNDER RELETTING: If the Demised Premises, or any part thereof, shall be relet together with other space in the Building, the rents collected or reserved under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this Article 18. Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents shall exceed the Fixed Rent reserved in this Lease. Nothing contained in Articles 16, 17 or this Article shall be deemed to limit or preclude the recovery by Owner from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Owner may be entitled in addition to the damages set forth in Section 18.01. ARTICLE 19 FEES AND EXPENSES; INDEMNITY SECTION 19.01. OWNER'S RIGHT TO CURE TENANT'S DEFAULT: If Tenant shall default in the observance or performance of any term, covenant or condition of this Lease on Tenant's part to be observed or performed after notice and the expiration of applicable cure periods, Owner, at any time thereafter and without notice in cases of emergency and in other cases after the expiration of thirty (30) days after notice by Owner to Tenant thereof, may remedy such default for Tenant's account and at Tenant's expense, without thereby waiving any other rights or remedies of Owner with respect to such default. SECTION 19.02. TENANT'S INDEMNITY AND LIABILITY INSURANCE OBLIGATIONS: A. Tenant agrees to indemnify and save Owner and "Owner's Indemnitees" (as hereinafter defined) harmless of and from all loss, cost, liability, damage and expense including, but not limited to, reasonable counsel fees, penalties and fines, incurred in connection with or arising from (i) any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (ii) the breach or failure of any representation or warranty made by Tenant in this Lease, or (iii) the use or occupancy or manner of use or occupancy of the Demised Premises by Tenant or any person claiming through or under Tenant, or (iv) any improper acts, improper omissions or negligence of Tenant or any such person, or the contractors, agents, servants, employees, visitors or licensees of Tenant or any such person, in or about the Demised Premises or the Building either prior to, during, or after the expiration of, the Demised Term, including, but not limited to, any improper acts, improper omissions or negligence in the making or performing of any Alterations. Tenant further agrees to indemnify and save harmless Owner and Owner's Indemnitees of and from all loss, cost, liability, damage and expense, including, but not limited to, reasonable counsel fees and disbursements incurred in connection with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy, act, omission or negligence referred to in the preceding sentence, except with respect to the performance of the Core Work by Owner or its agents. "Owner's Indemnitees" shall mean the Owner, the shareholders or the partners comprising Owner and its and their partners and shareholders, officers, directors, employees, agents (including without limitation, any leasing and managing agents) and contractors together with the -32- 35 lessor under any Superior Lease and the holder of any Mortgage. If any action or proceeding shall be brought against Owner or Owner's Indemnitees based upon any such claim and if Tenant, upon notice from Owner, shall cause such action or proceeding to be defended at Tenant's expense by counsel acting for Tenant's insurance carriers in connection with such defense or by other counsel reasonably satisfactory to Owner, without any disclaimer of liability by Tenant or such insurance carriers in connection with such claim, Tenant shall not be required to indemnify Owner and Owner's Indemnitees for counsel fees in connection with such action or proceeding. B. Throughout the Demised Term Tenant shall maintain comprehensive public liability and water legal liability insurance against any claims by reason of personal injury, death and property damage occurring in or about the Demised Premises covering, without limitation, the operation of any private air conditioning equipment and any private elevators, escalators or conveyors in or serving the Demised Premises or any part thereof, whether installed by Owner, Tenant or others, and shall furnish to Owner duplicate original policies of such insurance at least ten (10) days prior to the Commencement Date and at least ten (10) days prior to the expiration of the term of any such policy previously furnished by Tenant, in which policies Owner, and Owner's Indemnitees shall be named as parties insured, which policies shall be issued by companies, and shall be in form and amounts, satisfactory to Owner. SECTION 19.03. PAYMENTS: Tenant shall pay to Owner, within fifteen (15) days next following rendition by Owner to Tenant of bills or statements therefor: (i) sums equal to all expenditures made and monetary obligations incurred by Owner including, but not limited to, expenditures made and obligations incurred for reasonable counsel fees and disbursements, in connection with the remedying by Owner, for Tenant's account pursuant to the provisions of Section 19.01, of any default of Tenant, and (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Section 19.02, and (iii) sums equal to all expenditures made and monetary obligations incurred by Owner including, but not limited to, expenditures made and obligations incurred for reasonable counsel fees and disbursements, in collecting or attempting to collect the Fixed Rent, any additional rent or any other sum of money accruing under this Lease or in enforcing or attempting to enforce any rights of Owner under this Lease or pursuant to law, whether by the institution and prosecution of summary proceedings or otherwise; and (iv) all other sums of money (other than Fixed Rent) accruing from Tenant to Owner under the provisions of this Lease. Any sum of money (other than Fixed Rent) accruing from Tenant to Owner pursuant to any provision of this Lease whether prior to or after the Commencement Date, may, at Owner's option, be deemed additional rent, and Owner shall have the same remedies for Tenant's failure to pay any item of additional rent when due as for Tenant's failure to pay any installment of Fixed Rent when due. Tenant's obligations under this Article shall survive the expiration or sooner termination of the Demised Term. The foregoing shall not apply to the performance of the Core Work by Owner or the payment by Owner of legal fees to counsel for Owner with respect to the preparation and negotiation of this Lease. SECTION 19.04. TENANT'S LATE PAYMENTS--LATE CHARGES: If Tenant shall fail to make payment of any installment of Fixed Rent or any increase in the Fixed Rent or any additional rent within ten (10) days after the date when such payment is due including applicable grace periods, Tenant shall pay to Owner, in addition to such installment of Fixed Rent or such increase in the Fixed Rent or such additional rent, as the case may be, as a late charge and as additional rent, a sum equal to two (2%) percent per annum above the then current prime rate (as the term "prime rate" is defined in Section 31.03) charged by Chemical Bank or its successor of the amount unpaid computed from the date such payment was due to and including the date of payment. -33- 36 ARTICLE 20 ENTIRE AGREEMENT SECTION 20.01. ENTIRE AGREEMENT: This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged in this Lease. Neither Owner nor Owner's agents have made any representations or warranties with respect to the Demised Premises, the Building, the Real Property or this Lease except as expressly set forth in this Lease and no rights, easements or licenses are or shall be acquired by Tenant by implication or otherwise unless expressly set forth in this Lease. This Lease may not be changed, modified or discharged, in whole or in part, orally and no executory agreement shall be effective to change, modify or discharge, in whole or in part, this Lease or any provisions of this Lease, unless such agreement is set forth in a written instrument executed by the party against whom enforcement of the change, modification or discharge is sought. All references in this Lease to the consent or approval of Owner shall be deemed to mean the written consent of Owner, or the written approval of Owner, as the case may be, and no consent or approval of Owner shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Owner. ARTICLE 21 END OF TERM SECTION 21.01. END OF TERM: On the date upon which the Demised Term shall expire and come to an end, whether pursuant to any of the provisions of this Lease or by operation of law, and whether on or prior to the Expiration Date, Tenant, at Tenant's sole cost and expense, (i) shall quit and surrender the Demised Premises to Owner, broom clean and in good order and condition, ordinary wear excepted, and (ii) shall remove all of Tenant's Personal Property and all other property and effects of Tenant and all persons claiming through or under Tenant (including, but not limited to, all telecommunications (facilities) from the Demised Premises and the Building, and (iii) shall repair all damage to the Demised Premises and the Building occasioned by such removal and (iv) shall, at Owner's election, exercisable within six (6) months following the expiration or earlier termination of the Demised Term, remove any private interior staircases in the Demised Premises or connecting the Demised Premises or any part thereof with any other space (referred to herein as the "Other Space") in the Building occupied by Tenant, and restore those portions of the Demised Premises, the Other Space and the Building affected by any such staircases (including, but not limited to, the slabbing over of any openings) to the condition of each which existed prior to the installation of any such staircases, and repair any damage to the Demised Premises, Other Space and the Building occasioned by such removal. Notwithstanding the provisions of subdivision (iv) of the foregoing sentence, in the event Owner does not elect to have removed any such staircase referred to therein, any such staircase shall be and remain the property of Owner at no cost or expense to Owner. Owner shall have the right to retain any property and effects which shall remain in the Demised Premises after the expiration or sooner termination of the Demised Term, and any net proceeds from the sale thereof, without waiving Owner's rights with respect to any default by Tenant under the foregoing provisions of this Section. Tenant expressly waives, for itself and for any person claiming through or under Tenant, any rights which Tenant or any such person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and of any successor law of like import then in force, in connection with any holdover summary proceedings which Owner may institute to enforce the foregoing provisions of this Article. If said date upon which the Demised Term shall expire and come to an end shall fall on a Sunday or holiday, then Tenant's obligations under the first sentence of this Section shall be performed on or prior to the Saturday or business day immediately preceding such Sunday or holiday. Tenant's obligations under this Section shall survive the expiration or sooner termination of the Demised Term. -34- 37 ARTICLE 22 QUIET ENJOYMENT SECTION 22.01. QUIET ENJOYMENT: Owner covenants and agrees with Tenant that upon Tenant paying the Fixed Rent and additional rent reserved in this Lease and observing and performing all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Demised Premises during the Demised Term, subject, however, to the terms, covenants and conditions of this Lease including, but not limited to, the provisions of Section 37.01, and subject to the Superior Lease and the Mortgage referred to in Section 7.01. ARTICLE 23 TAX PAYMENTS AND OPERATING ESCALATION SECTION 23.01. DEFINITIONS: In the determination of any increase in the Fixed Rent under the provisions of this Article, Owner and Tenant agree that the following terms shall have the following meanings: A. The term "Tax Escalation Year" shall mean each fiscal year commencing July 1st and ending on the following June 30th which shall include any part of the Demised Term. B. The term "Escalation Year" shall mean each calendar year which shall include any part of the Demised Term. C. The term "Taxes" shall be deemed to mean a sum equal to the aggregate of: (i) the product determined by multiplying (a) the then applicable full New York City real estate tax rate in effect with respect to the Borough of Manhattan by (b) the then applicable assessed valuation of the Real Property plus (ii) amounts assessed by any business improvement district in which the Real Property is located plus (iii) any other assessments, special or otherwise, upon or with respect to the Real Property imposed by the City or County of New York or any other taxing authority. If, due to any change in the method of taxation, any franchise, income, profit, sales, rental, use and occupancy or other tax or payments in lieu of any such taxes shall be substituted for, or levied against Owner or any owner of the Building or the Real Property, in lieu of any real estate taxes or assessments upon or with respect to the Real Property, such tax or payments in lieu of any such taxes shall be included in the term Taxes for the purposes of this Article. D. The term "Demised Premises Area" shall mean 5,250 square feet. E. The term "Building Area" shall mean 398,537 square feet. F. The term "Tenant's Proportionate Share" shall mean the fraction, the denominator of which is the Building Area and the numerator of which is the Demised Premises Area. G. (1) The term "Operating Expenses" shall, subject to the provisions of Paragraph (2) of this Subsection 23.01.G, mean the aggregate cost and expense actually incurred by Owner in the operation, maintenance, management and security of the Real Property and any plazas, sidewalks and curbs adjacent thereto including, without limitation, the cost and expense of the following: (a) salaries, wages, medical, surgical and general welfare and other so-called "fringe" benefits (including group insurance and retirement benefits) for employees (including, but not limited to, employees who provide twenty four (24) hour services, -35- 38 seven (7) days per week throughout the year) of Owner or any contractor of Owner engaged in the cleaning, operation, maintenance or management of the Real Property, or engaged for security purposes and/or for receiving or transmitting deliveries to and from the Building, and payroll taxes and workmen's compensation insurance premiums relating thereto, (b) gas, steam, water and sewer rental, (c) thirty five (35%) percent of all electrical costs incurred in the operation of the Building, provided, however, in the event that Owner discontinues the redistribution or furnishing of electrical energy to the tenants and occupants of the Building, then the cost and expense incurred by Owner for electricity shall thereafter be deemed to be one hundred (100%) percent of (i) the total cost and expense to Owner of purchasing electricity for the Building less (ii) any reimbursement to Owner by the tenants in the Building for the payment for the Floor HVAC Units and the Floor Public Light and Power (as said terms are defined in Section 29.05). (d) utility taxes, (e) rubbish removal, (f) fire, casualty, liability, rent and other insurance carried by Owner, (g) repairs, repainting, replacement, maintenance of grounds, and Included Improvements (as provided in Paragraph (2) of this Subsection 23.01.G), (h) Building supplies, (i) uniforms and cleaning thereof, (j) snow removal, (k) window cleaning, (l) service contracts with independent contractors for any of the foregoing (including, but not limited to, elevator, heating, air conditioning, ventilation, sprinkler system, fire alarm and telecommunication equipment maintenance), (m) management fees (whether or not paid to any person, firm or corporation having an interest in or under common ownership with Owner or any of the persons, firms or corporations comprising Owner) in the amount of one ($1.00) dollar per rentable square foot of the Building Area in the first Escalation Year which amount for management fees shall increase in each Escalation Year subsequent to the first Escalation Year by the same percentage of increase as the percentage of increase in the aggregate of all other Operating Expenses, (n) reasonable legal fees and disbursements and other reasonable expenses (excluding, however, legal fees and expenses incurred in connection with any application or proceeding brought for reduction of the assessed valuation of the Real Property or any part thereof or legal fees and expenses incurred in Landlord/Tenant matters), -36- 39 (o) auditing fees, (p) deleted prior to execution, (q) all costs of compliance under the provisions of any present or future Superior Lease other than the payment of rental and impositions thereunder and increases in the basic rent under such leases as a result of adjustments in such basic rent, and (r) all other costs and expenses incurred in connection with the operation, maintenance, and security of the Real Property, and any plazas, sidewalks and curbs adjacent thereto. (2) The cost and expense of the following shall be excluded from the calculation of operating expenses: (a) leasing commissions; (b) executives' salaries above the grade of building manager and superintendent; (c) capital improvements and replacements which under generally accepted accounting principles and practice would be classified as capital expenditures, except the cost and expense of any improvement, alteration, replacement or installation which is either (i) required by any Legal Requirement, or (ii) designed, in Owner's reasonable judgment, to result in savings or reductions in Operating Expenses or (iii) designed, in Owner's reasonable judgment, to benefit the tenants of the Building (such improvements, alterations, replacements and installations are referred to as "Included Improvements"); the cost and expense of Included Improvements whenever made shall be included in Operating Expenses for any Escalation Year subsequent to the Base Escalation Year to the extent of (x) the annual amortization or depreciation of the cost and expense to Owner of such Included Improvements, as amortized on a straight line basis over fifteen (15) years allocable to such Escalation Year plus (y) an annual charge for interest upon the unamortized or undepreciated portions of such cost and expense at the average prime rate during the Escalation Year in question (provided, however, with respect to the Included Improvements referred to in (ii), the amount of such Included Improvements included in Operating Expenses for any such Escalation Year, inclusive of such charge for interest for such Year allocable to such Included Improvement, shall not exceed the amount of such savings or reductions for such Escalation Year unless such savings or reductions in Operating Expenses for prior Escalation Years exceeded, in the aggregate, the amounts, inclusive of interest, paid by Tenant to Owner with respect to such Included Improvements for such prior Escalation Years (any such excess is referred to as a "Shortfall"), in which event the amount of such Included Improvements inclusive of interest included in Operating Expenses for such Escalation Year shall not exceed the total of the amount of such savings or reductions in Operating Expenses for such Escalation Year plus such Shortfall as aforesaid; -37- 40 (d) any other item which under generally accepted accounting principles and practice would not be regarded as an operating, maintenance or management expense; (e) any item for which Owner is compensated through proceeds of insurance; (f) any specific compensation which Owner receives from any tenant for services rendered to such tenant by Owner above and beyond those services generally rendered by Owner to tenants in the Building without specific compensation therefor; (g) sixty-five (65%) percent of all electrical costs incurred in the operation of the Building, provided however, in the event that Owner discontinues the redistribution or furnishing of electrical energy to the tenants and occupants of the Building, then the aforesaid exclusion of sixty-five (65%) percent of such electrical costs shall not apply; and (h) the cost of maintaining and staffing Owner's office in the Building. H. The term "Base Operating Expenses" shall mean the sum of $2,391,222.00. I. The term "Owner's Tax Statement" shall mean an instrument containing a computation of any increase in the Fixed Rent in reasonable detail pursuant to the provisions of Section 23.02 A. of this Article. J. The term "Owner's Operating Expense Statement" shall mean an instrument in reasonable detail containing a computation of any increase in the Fixed Rent in reasonable detail pursuant to the provisions of Section 23.04 of this Article. K. The term "Monthly Escalation Installment" shall mean a sum equal to one-twelfth (1/12th) of the increase in the Fixed Rent payable pursuant to the provisions of Subsection 23.04 A for the Escalation Year with respect to which Owner has most recently rendered an Owner's Operating Expense Statement, appropriately adjusted to reflect (i) in the event such Escalation Year is a partial calendar year, the increase in the Fixed Rent which would have been payable for such Escalation Year if it had been a full calendar year, and (ii) the amount by which current Operating Expenses as reasonably estimated by Owner exceed Operating Expenses as reflected in such Owner's Operating Expense Statement; and (iii) any net credit balance to which Tenant may be entitled pursuant to the provisions of Subsection 23.05 C. L. The term "Monthly Escalation Installment Notice" shall mean a notice given by Owner to Tenant which sets forth the current Monthly Escalation Installment; such Notice may be contained in a regular monthly rent bill, in an Owner's Operating Expense Statement, or otherwise, and may be given from time to time, at Owner's election. M. Owner has applied for a certificate of eligibility from the Department of Finance of the City of New York determining that Owner is eligible to apply for exemption from tax payments for the Real Property pursuant to the provisions of Section 11-256 through 11-267 (the "ICIP Program") of the Administrative Code of the City of New York and the regulations promulgated pursuant to the ICIP Program. Any such tax exemption for the Real Property is referred to as "Tax Exemption" and the period of such Tax Exemption is referred to as the "Tax Exemption Period". Owner agrees that Tenant shall not be required to (a) pay Taxes or charges which become due because of the willful neglect or fraud by Owner in connection with the ICIP Program -38- 41 or (b) otherwise relieve or indemnify Owner from any personal liability arising under the ICIP Program, except where imposition of such Taxes, charges or liability is occasioned by actions of Tenant in violation of this Lease. Tenant agrees to report to Owner, as often as is necessary under such regulations, the number of workers engaged in employment in the Demised Premises, the nature of each worker's employment and the residency of each worker and to provide access to the Demised Premises by employees and agents of the Department of Finance of the City of New York at all reasonable times at the request of Owner. Tenant represents to the Owner that, within the seven (7) years immediately preceding the date of this Lease, Tenant has not been adjudged by a court of competent jurisdiction to have been guilty of (x) an act, with respect to a building, which is made a crime under the provisions of Article 150 of the Penal Law of the State of New York or any similar law of another state, or (y) any act made a crime or violation by the provisions of Section 235 of the Real Property Law of the State of New York, nor is any charge for a violation of such laws presently pending against Tenant. Upon request of Owner, from time to time, Tenant agrees to update said representation when required because of the ICIP Program and regulations thereunder. Tenant further agrees to cooperate with Owner in compliance with such ICIP Program and regulations to aid Owner in obtaining and maintaining the Tax Exemption and, if requested by Owner, to post a notice in a conspicuous place in the Demised Premises and to publish a notice in a newspaper of general circulation in the City of New York, in such form as shall be prescribed by the Department of Finance stating that persons having information concerning any violation by Tenant of Section 235 of the Real Property Law or any Section of Article 150 of the Penal Law or any similar law of another jurisdiction may submit such information to the Department of Finance to be considered in determining Owner's eligibility for benefits. Tenant acknowledges that its obligations under the provisions of Subsection 23.02. A may be greater if Owner fails to obtain a Tax Exemption, and agrees that Owner shall have no liability to Tenant nor shall Tenant be entitled to any abatement or diminution of rent if Owner fails to obtain a Tax Exemption. N. Owner and Tenant acknowledge that Tenant may apply for a certificate of abatement from the Department of Finance of the City of New York pursuant to the provisions of Title 4 of the Real Property Law of the State of New York (the "Tax Abatement Program"). Owner agrees, at no cost or expense to Owner, to cooperate with Tenant in its efforts to procure a certificate of abatement including, if necessary, and if Owner approves of its contents, co-signing Tenant's application for a certificate of abatement. Pursuant to the Tax Abatement Program, Owner hereby informs Tenant that: "(1) an application for abatement of real property taxes pursuant to this title will be made for the premises; (2) the rent, including amount payable by the tenant for real property taxes, will accurately reflect any abatement of real property taxes granted pursuant to this title for the premises; (3) at least ten dollars per square foot or thirty-five dollars per square foot must be spent on improvements to the premises and the common areas, the amount being dependent upon the length of the lease and whether it is a new or a renewal lease; and (4) all abatements granted with respect to a building pursuant to this title will be revoked if, during the benefit period, real estate taxes or water or sewer charges are unpaid for more than one year, unless such delinquent amounts are paid as provided in subdivision four of section four hundred ninety-nine-f of this title." Tenant agrees that Owner shall have no liability to Tenant nor shall Tenant be entitled to any abatement or diminution of rent if Tenant fails to obtain a certificate of abatement under the Tax Abatement Program. SECTION 23.02. Taxes: A. The Fixed Rent for each Tax Escalation Year shall be increased by a sum equal to Tenant's Proportionate Share of Taxes for such Tax Escalation Year. -39- 42 B. Unless the Commencement Date shall occur on a July 1st, any increase in the Fixed Rent pursuant to the provisions of Subsection A of this Section 23.02 for the Tax Escalation Year in which the Commencement Date shall occur shall be apportioned in that percentage which the number of days in the period from the Commencement Date to June 30th of such Tax Escalation Year, both inclusive, bears to the total number of days in such Tax Escalation Year. Unless the Demised Term shall expire on a June 30th, any increase in the Fixed Rent pursuant to the provisions of said Subsection A for the Tax Escalation Year in which the date of the expiration of the Demised Term shall occur shall be apportioned in that percentage which the number of days in the period from July 1st of such Tax Escalation Year to such date of expiration, both inclusive, bears to the total number of days in such Tax Escalation Year. SECTION 23.03. CALCULATION AND PAYMENT OF TAXES: A. Owner shall render to Tenant, either in accordance with the provisions of Article 27 or by personal delivery at the Demised Premises, an Owner's Tax Statement or Statements with respect to each Tax Escalation Year, either prior to or during such Tax Escalation Year. Owner's failure to render an Owner's Tax Statement with respect to any Tax Escalation Year shall not prejudice Owner's right to recover any sums due to Owner hereunder with respect to such Tax Escalation Year nor shall it deprive Tenant of any credit to which it otherwise might be entitled to for any Tax Escalation Year pursuant to the provisions of subsection B of this Section 23.03. Tenant acknowledges that under present law, Taxes are payable by Owner (i) with respect to a fiscal year commencing July 1st and ending on the following June 30th, and (ii) in two (2) installments, in advance, the first of which is payable on July 1st, and the second and final payment of which is payable on the following January 1st. Within ten (10) days next following rendition of the first Owner's Tax Statement which shows an increase in the Fixed Rent for any Tax Escalation Year, Tenant shall pay to Owner one-half of the amount of the increase shown upon such Owner's Tax Statement for such Tax Escalation Year (including any apportionment pursuant to the provisions of subsection B of Section 23.02); and, subsequently, provided Owner shall have rendered to Tenant an Owner's Tax Statement, Tenant shall pay to Owner not later than thirty (30) days prior to the date on which the installment of Taxes is required to be paid by Owner a sum equal to one half (1/2) of Tenant's Proportionate Share of Taxes payable with respect to such Tax Escalation Year as shown on such Owner's Tax Statement. Tenant further acknowledges that it is the purpose and intent of this Section 23.03 to provide Owner with Tenant's Proportionate Share of Taxes thirty (30) days prior to the time such installment of Taxes is required to be paid by Owner without penalty or interest. Accordingly, Tenant agrees if the number of such installments and/or the date of payment thereof and/or the fiscal year used for the purpose of Taxes shall change then (a) at the time that any such revised installment is payable by Owner, Tenant shall pay to Owner the amount which shall provide Owner with Tenant's Proportionate Share of Taxes applicable to the revised installment of Taxes then required to be paid by Owner, and (b) this Article shall be appropriately adjusted to reflect such change and the time for payment to Owner of Tenant's Proportionate Share of Taxes as provided in this Article shall be appropriately revised so that Owner shall always be provided with Tenant's Proportionate Share of Taxes thirty (30) days prior to the installment of Taxes required to be paid by Owner. Notwithstanding the foregoing provisions of this subsection A to the contrary, in the event the holder of any mortgage affecting the Real Property shall require Owner to make monthly deposits on account of real estate taxes, then this Article shall be appropriately adjusted to reflect the requirement that Owner make monthly deposits on account of real estate taxes so that Owner shall always be provided with one-twelfth (1/12th) of Tenant's Proportionate Share of Taxes with respect to any Tax Escalation Year thirty (30) days prior to the payment by Owner of such monthly deposits on account of real estate taxes. B. If, as a result of any application or proceeding brought by or on behalf of Owner for reduction of the assessed valuation of the Real Property there shall be a decrease in Taxes for any Tax Escalation Year with respect to which Owner shall have previously rendered an Owner's Tax Statement, the next monthly installment or installments of Fixed Rent following such decrease shall include an adjustment of the Fixed Rent for such Tax Escalation Year reflecting a credit to Tenant equal to the amount by which (i) the Fixed Rent actually paid by Tenant with respect to such Tax Escalation Year (as increased pursuant to the operation of the provisions of subsection A of Section 23.02), shall exceed (ii) the Fixed Rent payable with respect to such Tax Escalation Year (as increased pursuant to the operation of the provisions of subsection A of Section 23.02) based -40- 43 upon such reduction of the assessed valuation. Tenant shall pay to Owner within thirty (30) days after demand, as additional rent under this Lease, a sum equal to Tenant's Proportionate Share of all reasonable costs and expenses, including, without limitation, reasonable counsel fees, actually paid or incurred by Owner in connection with any application or proceeding brought for reduction of the assessed valuation of the Real Property or any other contest of Taxes upon the Real Property for any Tax Escalation Year, whether or not such application, proceeding or other contest was commenced and/or settled and/or determined prior to the Tax Escalation Year in question, which counsel fees shall be consistent with counsel fees incurred for similar proceedings affecting First-Class buildings for the same period. SECTION 23.04. OPERATING EXPENSES: A. If Operating Expenses in any Escalation Year shall be in such an amount as shall constitute an increase above Base Operating Expenses, the Fixed Rent for such Escalation Year shall be increased by a sum equal to Tenant's Proportionate Share of any such increase. In the event that Base Operating Expenses shall be in excess of Operating Expenses in any Escalation Year, in no event shall Tenant be entitled to any such excess and the Fixed Rent shall not be reduced in any way. B. Unless the Commencement Date shall occur on a January 1st, any increase in the Fixed Rent pursuant to the provisions of Subsection A of this Section 23.04 for the Escalation Year in which the Commencement Date shall occur shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31st of such Escalation Year, both dates inclusive, bears to the total number of days in such Escalation Year. Unless the Demised Term shall expire on December 31st any increase in the Fixed Rent pursuant to the provisions of Subsection A of this Section 23.04 for the Escalation Year in which the date of the expiration of the Demised Term shall occur shall be apportioned in that percentage which the number of days in the period from January 1st of such Escalation Year to such date of expiration, both dates inclusive, bears to the total number of days in such Escalation Year. C. In the determination of any increase in the Fixed Rent pursuant to the foregoing provisions of this Section 23.04, if the Building shall not have been fully occupied during any Escalation Year, Operating Expenses for such Escalation Year shall be equitably adjusted (by including such additional expenses as Owner would have incurred) to the extent, if any, required to reflect full occupancy. SECTION 23.05. CALCULATION AND PAYMENT OF OPERATING EXPENSES: A. Owner shall render to Tenant, either in accordance with the provisions of Article 27 or by personal delivery at the Demised Premises, an Owner's Operating Expense Statement with respect to each Escalation Year on or before the next succeeding October 1st. Owner's failure to render an Owner's Operating Expense Statement with respect to any Escalation Year shall not prejudice Owner's right to recover any sums due to Owner hereunder with respect to such Escalation Year. B. Within twenty (20) days next following rendition of the first Owner's Operating Expense Statement which shows an increase in the Fixed Rent for any Escalation Year, Tenant shall pay to Owner the entire amount of such increase. In order to provide for current payments on account of future potential increases in the Fixed Rent which may be payable by Tenant pursuant to the provisions of Subsection 23.04.A, Tenant shall also pay to Owner at such time, provided Owner has given to Tenant a Monthly Escalation Installment Notice, a sum equal to the product of (i) the Monthly Escalation Installment set forth in such Notice multiplied by (ii) the number of months or partial months which shall have elapsed between January 1st of the Escalation Year in which such payment is made and the date of such payment, less any amounts theretofore paid by Tenant to Owner on account of increases in the Fixed Rent for such Escalation Year pursuant to the provisions of the penultimate sentence of this Subsection 23.05.B; thereafter Tenant shall make payment of a Monthly Escalation Installment throughout each month of the Demised Term, Monthly Escalation Installments shall be added to and payable as part of each monthly installment of Fixed Rent. Notwithstanding anything to the contrary contained in the foregoing provisions of this Article, prior to the rendition of the first Owner's Operating Expense Statement which shows an increase in the Fixed Rent for any Escalation Year, Owner may render to Tenant a pro- -41- 44 forma Owner's Operating Expense Statement containing a bona fide estimate of the increase in the Fixed Rent for the Escalation Year in which the Commencement Date shall occur and/or the subsequent Escalation Year. Following the rendition of such pro-forma Owner's Operating Expense Statement, Tenant shall pay to Owner a sum equal to one twelfth (1/12th) of the estimated increase in the Fixed Rent shown thereon for such Escalation Year or Years multiplied by the number of months which may have elapsed between the Commencement Date and the month in which such payment is made and thereafter pay to Owner, on the first day of each month of the Demised Term (until the rendition by Owner of the first Owner's Operating Expense Statement) a sum equal to one twelfth (1/12th) of the increase in the Fixed Rent shown on such pro-forma Owner's Operating Expense Statement. Any sums paid pursuant to the provisions of the immediately preceding sentence shall be credited against the sums required to be paid by Tenant to Owner pursuant to the Owner's Operating Expense Statement for the first Escalation Year for which there is an increase in the Fixed Rent pursuant to the provisions of Subsection A. C. Following rendition of the first Owner's Operating Expense Statement and each subsequent Owner's Operating Expense Statement a reconciliation shall be made as follows: Tenant shall be debited with any increase in the Fixed Rent shown on such Owner's Operating Expense Statement and credited with the aggregate amount, if any, paid by Tenant in accordance with the provisions of Subsection B of this Section on account of future increases in the Fixed Rent pursuant to Subsection 23.04. A, which has not previously been credited against increases in the Fixed Rent shown on Owner's Operating Expense Statements. Tenant shall pay any net debit balance to Owner within twenty (20) days next following rendition by Owner, either in accordance with the provisions of Article 27 or by personal delivery at the Demised Premises of an invoice for such net debit balance; any net credit balance shall be applied as an adjustment against the next accruing monthly installments of Fixed Rent. SECTION 23.06. DISPUTE RESOLUTION: A. In the event of any dispute between Owner and Tenant arising out of the application of the Operating Expense provisions of this Article, such dispute shall be determined by arbitration in New York City in accordance with the provisions of Article 36. Notwithstanding any such dispute and submission to arbitration, or any dispute with respect to the Tax Escalation provisions of this Article (which dispute shall not be subject to arbitration but which can only be prosecuted by the institution of legal proceedings by Tenant), any increase in the Fixed Rent shown upon any Owner's Operating Expense Statement or any Monthly Escalation Installment Notice or any Owner's Tax Statement shall be payable by Tenant within the time limitation set forth in this Article. If the determination in such arbitration or legal proceedings shall be adverse to Owner, any amount paid by Tenant to Owner in excess of the amount determined to be properly payable shall be credited against the next accruing installments of Fixed Rent due under this Lease. However, if there are no such installments, such amounts shall be paid by Owner to Tenant within thirty (30) days following such determination. B. In the event Tenant disagrees with any computation or other matter contained in any Owner's Operating Expense Statement or any Monthly Escalation Installment Notice, Tenant shall have the right to give notice to Owner within one hundred twenty (120) days next following rendition of such Statement or Notice setting forth the particulars of such disagreement. If the matter is not resolved within ninety (90) days next following the giving of such notice by Tenant, it shall be deemed a dispute which either party may submit to arbitration pursuant to the provisions of Subsection A of this Section. If (i) Tenant does not give a timely notice to Owner in accordance with the foregoing provisions of this Subsection disagreeing with any computation or other matter contained in any Owner's Operating Expense Statement or any Monthly Escalation Installment Notice and setting forth the particulars of such disagreement, or (ii) if any such timely notice shall have been given by Tenant, the matter shall not have been resolved and neither party shall have submitted the dispute to arbitration within ninety (90) days next following the giving of such notice by Tenant, Tenant shall be deemed conclusively to have accepted such Owner's Operating Expense Statement or Monthly Escalation Installment Notice, as the case may be, and shall have no further right to dispute the same. -42- 45 C. (1) Tenant or its usual auditors of its normal books and records (provided same are public accountants) in each case at Tenant's expense, shall have the right to examine those portions of Owner's records which are reasonably required to verify the accuracy of any amounts shown on any Owner's Operating Expense Statement provided Tenant shall notify Owner of its desire to so examine such records within sixty (60) days next following rendition of such Owner's Operating Expense Statement. Owner shall maintain such records for a period of three (3) years following the expiration of the Escalation Year to which they relate. Upon Tenant's timely request, Owner shall make such records available and any such examination shall be conducted at the office of Owner's accountants or at such other reasonable place designated by Owner during normal office hours. (2) Tenant acknowledges and agrees that not more than three (3) of its employees or three (3) persons employed by such auditors shall be entitled to entry to the offices of Owner at any one time for the purposes of such review and inspection. Tenant hereby recognizes the confidential, privileged and proprietary nature of such records and the information and data contained therein, as well as any compromise, settlement or adjustment reached between Owner and Tenant relating to the results of such examination, and Tenant covenants and agrees for itself, and its employees, agents and representatives (including, but not limited to, such auditors, and any attorneys or consultants retained by Tenant as hereinafter provided), that such books, records, information, data, compromise, settlement and adjustment will be held in the strictest confidence and not be divulged, disclosed or revealed to any other person except (x) to the extent required by law, court order or directive of any Governmental Authority or (y) to such auditors or any attorneys retained by Tenant or consultants retained by Tenant in connection with any action or proceeding between Owner and Tenant as to Operating Expenses or Owner's Operating Expense Statement and no examination of any such records shall be permitted unless and until such auditors, attorneys and consultants affirmatively agree and consent to be bound by the provisions of this Section 23.06C. (3) Tenant agrees that this Section 23.06C is of material importance to Owner and that any violation thereof shall result in immediate harm to Owner and Owner shall have all rights allowed by law or equity if Tenant, its employees, agents, and representatives (including, but not limited to, such auditors, attorneys or consultants) violate the terms of this Section 23.06, including, but not limited to, the right to terminate Tenant's right to audit Owner's records in the future pursuant to this Section 23.06C, and Tenant shall indemnify and hold Owner harmless of and from all loss, cost, damage, liability and expense (including, but not limited to counsel fees and disbursements) arising from a breach of the foregoing obligations of Tenant or any of its employees, agents and representatives, (including but not limited to, such auditors, attorneys or consultants). This obligation of Tenant and its employees, agents and representatives (including, but not limited to, any such auditors, attorneys or consultants) shall survive the expiration or sooner term of the Demised Term. SECTION 23.07. COLLECTION OF INCREASES IN FIXED RENT: The obligations of Owner and Tenant under the provisions of this Article with respect to any increase in the Fixed Rent, or any credit to which Tenant may be entitled, shall survive the expiration or any sooner termination of the Demised Term. All sums payable by Tenant under this Article shall be collectible by Owner in the same manner as Fixed Rent. ARTICLE 24 NO WAIVER SECTION 24.01 OWNER'S TERMINATION NOT PREVENTED: Neither any option granted to Tenant in this Lease or in any collateral instrument to renew or extend the Demised Term, nor the exercise of any such option by Tenant, shall prevent Owner from exercising any option or right granted or reserved to Owner in this Lease or in any collateral instrument or which Owner may have by virtue of any law, to terminate this Lease and the Demised Term or any renewal or extension of the Demised Term either during the original Demised Term or -43- 46 during the renewed or extended term. Any termination of this Lease and the Demised Term shall serve to terminate any such renewal or extension of the Demised Term and any right of Tenant to any such renewal or extension, whether or not Tenant shall have exercised any such option to renew or extend the Demised Term. Any such option or right on the part of Owner to terminate this Lease shall continue during any extension or renewal of the Demised Term. No option granted to Tenant to renew or extend the Demised Term shall be deemed to give Tenant any further option to renew or extend. SECTION 24.02. NO TERMINATION BY TENANT/NO WAIVER: No act or thing done by Owner or Owner's agents during the Demised Term shall constitute a valid acceptance of a surrender of the Demised Premises or any remaining portion of the Demised Term except a written instrument accepting such surrender, executed by Owner. No employee of Owner or of Owner's agents shall have any authority to accept the keys of the Demised Premises prior to the termination of this Lease and the Demised Term, and the delivery of such keys to any such employee shall not operate as a termination of this Lease or a surrender of the Demised Premises; however, if Tenant desires to have Owner sublet the Demised Premises for Tenant's account, Owner or Owner's agents are authorized to receive said keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby relieves Owner of any liability for loss of, or damage to, any of Tenant's property or other effects in connection with such subletting. The failure by Owner to seek redress for breach or violation of, or to insist upon the strict performance of, any term, covenant or condition of this Lease on Tenant's part to be observed or performed, shall not prevent a subsequent act or omission which would have originally constituted a breach or violation of any such term, covenant or condition from having all the force and effect of an original breach or violation. The receipt by Owner of rent with knowledge of the breach or violation by Tenant of any term, covenant or condition of this Lease on Tenant's part to be observed or performed shall not be deemed a waiver of such breach or violation. Owner's failure to enforce any Building Rule against Tenant or against any other tenant or occupant of the Building shall not be deemed a waiver of any such Building Rule. No provision of this Lease shall be deemed to have been waived by Owner unless such waiver shall be set forth in a written instrument executed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the aggregate of all Fixed Rent and additional rent then due under this Lease shall be deemed to be other than on account of the first accruing of all such items of Fixed Rent and additional rent then due, no endorsement or statement on any check and no letter accompanying any check or other rent payment in any such lesser amount and no acceptance of any such check or other such payment by Owner shall constitute an accord and satisfaction, and Owner may accept any such check or payment without prejudice to Owner's right to recover the balance of such rent or to pursue any other legal remedy. ARTICLE 25 MUTUAL WAIVER OF TRIAL BY JURY SECTION 25.01. Owner and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by Owner or Tenant against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of landlord and tenant, the use or occupancy of the Demised Premises by Tenant or any person claiming through or under Tenant, any claim of injury or damage, and any emergency or other statutory remedy; however, the foregoing waiver shall not apply to any action for personal injury or property damage. The provisions of the foregoing sentence shall survive the expiration or any sooner termination of the Demised Term. If Owner commences any summary proceeding, or any other proceeding of like import, Tenant agrees: (i) not to interpose any counterclaim based upon personal injury or property damage in any such summary proceeding, or any other proceeding of like import, unless failure to interpose such counterclaim would preclude Tenant from asserting such claim in a separate action or proceeding; and (ii) not to seek to remove to another court or jurisdiction or consolidate any such summary proceeding, or other proceeding of like import, with any action or proceeding which may have been, or will be, brought by Tenant. In the event the Tenant shall breach any of its obligations set forth in the immediately preceding sentence, Tenant agrees (a) to pay all of Owner's attorneys' -44- 47 fees and disbursements in connection with Owner's successful enforcement of such obligations of Tenant and (b) in all events, to pay all accrued, present and future Fixed Rent and increases therein and additional rent payable pursuant to the provisions of this Lease when and as same become due and payable hereunder. ARTICLE 26 INABILITY TO PERFORM SECTION 26.01. If, by reason of strikes or other labor disputes, fire or other casualty (or reasonable delays in adjustment of insurance), accidents, any Legal Requirements, any orders of any Governmental Authority or any other cause beyond Owner's reasonable control, whether or not such other cause shall be similar in nature to those hereinbefore enumerated, Owner is unable to furnish or is delayed in furnishing any utility or service required to be furnished by Owner under the provisions of Article 29 or any other Article of this Lease or any collateral instrument, or is unable to perform or make or is delayed in performing or making any installations, decorations, repairs, alterations, additions or improvements, whether or not required to be performed or made under this Lease or under any collateral instrument, or is unable to fulfill or is delayed in fulfilling any of Owners other obligations under this Lease or any collateral instrument, no such inability or delay shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. SECTION 26.02. If by reason of strikes or other labor disputes, fire or other casualty (or reasonable delays in adjustment of insurance) accidents, orders or regulations of any Federal, State, County or Municipal authority, or any other cause beyond Tenant's reasonable control, Tenant is unable to fulfill any of Tenant's obligations under this Lease or any collateral instrument (with the exception of any obligations on Tenant's part to pay any sum of money due Owner, including, without limitation, the payment of Fixed Rent or increases thereof, or any additional rent, which monetary obligation shall remain unaffected by the provisions of this Section 26.02), Tenant shall not be required to fulfill such non-monetary obligations during the period that Tenant is so unable to fulfill them by reason of the above, provided however, that Tenant shall employ reasonable diligence to attempt to eliminate the cause of such inability referred to in this Section 26.02. ARTICLE 27 NOTICES SECTION 27.01. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing, sent by registered or certified mail (return receipt requested optional), addressed as follows: (a) To Tenant (i) at Tenant's address set forth in this Lease if mailed prior to Tenant's taking possession of the Demised Premises, or (ii) at the Building if mailed subsequent to Tenant's taking possession of the Demised Premises, or (iii) at any place where Tenant or any agent or employee of Tenant may be found if mailed subsequent to Tenant's vacating, deserting, abandoning or surrendering the Demised Premises, or (b) To Owner at Owner's address set forth in this Lease, with a copy to Goldfarb & Fleece, 345 Park Avenue, New York, New York 10154, Attention: Partner-in-Charge, Rudin Management, or -45- 48 (c) addressed to such other address as either Owner or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Section. Any such bill, statement, notice, demand, request or other communication shall be deemed to have been rendered or given on the date when it shall have been mailed as provided in this Section. Nothing contained in this Section 27.01 shall preclude, limit or modify Owner's service of any notice, statement, demand or other communication in the manner required by law, including, but not limited to, any demand for rent under Article 7 of the New York Real Property Actions and Proceedings Law or any successor law of like import. ARTICLE 28 PARTNERSHIP TENANT SECTION 28.01. If Tenant is a partnership or professional corporation or limited liability company (or is comprised of two (2) or more persons, individually and as co-partners of a partnership or shareholders of a professional corporation or members of a limited liability company) or if Tenant's interest in this Lease shall be assigned to a partnership or professional corporation or limited liability company (or to two (2) or more persons, individually and as co-partners of a partnership or shareholders of a professional corporation or members of a limited liability company) pursuant to Article 11 (any such partnership, professional corporation, limited liability company and such persons are referred to in this Section as "Partnership Tenant"), the following provisions of this Section shall apply to such Partnership Tenant: (i) the liability of each of the persons comprising Partnership Tenant shall be joint and several, individually and as a partner or shareholder or member, with respect to all obligations of the Tenant under this Lease whether or not such obligations arose prior to, during, or after any period when any party comprising Partnership Tenant was a member or shareholder of Partnership Tenant, and (ii) each of the persons comprising Partnership Tenant, whether or not such person shall be one of the persons comprising Tenant at the time in question, hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed, changing, modifying or discharging this Lease, in whole or in part, or surrendering all or any part of the Demised Premises to Owner, and by any notices, demands, requests or other communications which may hereafter be given by Partnership Tenant or by any of the persons comprising Partnership Tenant, and (iii) any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant or to any of the persons comprising Partnership Tenant shall be deemed given or rendered to Partnership Tenant and to all such persons and shall be binding upon Partnership Tenant and all such persons, and (iv) if Partnership Tenant shall admit new partners or shareholders or members, all of such new partners or shareholders or members, as the case may be, shall, by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, and shall be liable for such performance, together with all other parties, jointly or severally, individually and as a partner or shareholder or member, whether or not the obligation to comply with such terms, covenants or conditions arose prior to, during or after any period when any party comprising Partnership Tenant was a member or shareholder of Partnership Tenant and (v) Partnership Tenant shall give prompt notice to Owner of the admission of any such new partners, or shareholders, or members, as the case may be, and, upon demand of Owner, shall cause each such new partner or shareholder or member to execute and deliver to Owner an agreement, in form satisfactory to Owner, wherein each such new partner or shareholder or member shall so assume performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed whether or not the obligation to comply with such terms, covenants or conditions arose prior to, during or after any period when any party comprising Partnership Tenant was a member or shareholder of Partnership Tenant (but neither Owner's failure to request any such agreement nor the failure of any such new partner, shareholder or member to execute or deliver any such agreement to Owner shall vitiate the provisions of subdivision (iv) or any other provision of this Section). -46- 49 ARTICLE 29 UTILITIES AND SERVICES SECTION 29.01. ELEVATORS: Owner, at Owner's expense, shall furnish necessary passenger elevator facilities twenty-four (24) hours per day on business days (as defined in Section 31.01) and on Saturdays from 8:00 A.M. to 6:00 P.M. and shall have a passenger elevator subject to call at all other times twenty-four (24) hours per day, seven (7) days per week. Tenant shall be entitled to the non-exclusive use of the freight elevator in common with other tenants and occupants of the Building from 8:00 A.M. to 6:00 P.M. on business days, subject to such reasonable rules as Owner may adopt for the use of the freight elevator. At any time or times all or any of the elevators in the Building may, at Owner's option, be automatic elevators, and Owner shall not be required to furnish any operator service for automatic elevators. If Owner shall, at any time, elect to furnish operator service for any automatic elevators, Owner shall have the right to discontinue furnishing such service with the same effect as if Owner had never elected to furnish such service. SECTION 29.02. HEAT: Owner, at Owner's expense, shall furnish heat to the Demised Premises, as and when required by law, twenty-four (24) hours per day. SECTION 29.03. AIR CONDITIONING AND VENTILATION: Owner, at Owner's expense, shall furnish and distribute to the Demised Premises (i) conditioned air at reasonable temperatures, pressures and degrees of humidity and in reasonable volumes and velocities, twenty-four (24) hours per day during the months of May, June, July, August, September and October when required for the comfortable occupancy of the Demised Premises; and (ii) mechanical ventilation through the Building air conditioning system twenty-four (24) hours per day throughout the year, except when conditioned air or heat is being furnished. Notwithstanding the foregoing provisions of this Section, Owner shall not be responsible if the normal operation of the Building air conditioning system shall fail to provide conditioned air at reasonable temperatures, pressures or degrees of humidity or in reasonable volumes or velocities in any portions of the Demised Premises (a) which, by reason of any machinery or equipment installed by or on behalf of Tenant or any person claiming through or under Tenant, shall have an electrical load in excess of four (4) watts per square foot of usable area for all purposes (including lighting and power), or which shall have a human occupancy factor in excess of one person per 100 square feet of usable area (the average electrical load and human occupancy factors for which the Building air conditioning system is designed) or (b) because of any rearrangement of partitioning or other Alterations made or performed by or on behalf of Tenant or any person claiming through or under Tenant. Whenever said air conditioning system is in operation, Tenant agrees to cause all the windows in the Demised Premises to be kept closed and to cause the venetian blinds in the Demised Premises to be kept closed if necessary because of the position of the sun. Tenant agrees to cause all the windows in the Demised Premises to be closed whenever the Demised Premises are not occupied. Tenant shall cooperate fully with Owner at all times and abide by all regulations and requirements which Owner may reasonably prescribe for the proper functioning and protection of the air conditioning and ventilating system. In addition to any and all other rights and remedies which Owner may invoke for a violation or breach of any of the foregoing provisions of this Section, Owner may discontinue heating, air conditioning and ventilating service during the period of such violation or breach, and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. SECTION 29.04. CLEANING: A. Tenant, at Tenant's expense, shall keep the Demised Premises in order, shall cause the Demised Premises to be cleaned and shall cause Tenant's refuse and rubbish to be removed, all at regular intervals in accordance with standards and practices adopted by Owner for the Building. Tenant shall cooperate with any waste and garbage recycling program of the Building and shall comply with all reasonable rules and regulations of Owner with respect thereto. Tenant, at Tenant's expense, shall cause all portions of the Demised -47- 50 Premises used for the storage, preparation, service or consumption of food or beverages to be cleaned daily in a manner satisfactory to Owner, and to be exterminated against infestation by vermin, roaches or rodents regularly and, in addition, whenever there shall be evidence of any infestation. B. Owner, at Owner's expense, shall clean the public portions of the Building at regular intervals in accordance with practices and standards adopted by Owner for the Building which shall be consistent with similar building in downtown Manhattan. C. The removal of refuse and rubbish and the furnishing of office cleaning services to Tenant by persons other than Owner and its contractors shall be performed in accordance with such regulations and requirements as, in Owner's judgment, are necessary for the proper operation of the Building, and Tenant agrees that Tenant will not permit any person to enter the Demised Premises or the Building for such purposes, or for the purpose of providing extermination services required to be performed by Tenant pursuant to Subsection A of this Section, other than persons first approved by Owner, such approval not unreasonably to be withheld. SECTION 29.05. ELECTRICITY: A. Owner shall redistribute or furnish electrical energy to or for the use of Tenant in the Demised Premises for the operation of the lighting fixtures and the electrical receptacles installed in the Demised Premises on the Commencement Date and the operation of the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Demised Premises are located. If either the quantity or character of electrical service is changed by the public utility corporation supplying electrical service to the Building or is no longer available or suitable for Tenant's requirements, or if any equipment supplementing or ancillary to such electrical service which is installed in the Building by or on behalf of said public utility corporation malfunctions or fails to operate for any reason while Tenant has made any connection to said equipment, no such change, unavailability, unsuitability, malfunction or failure to operate shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise. B. Owner represents that the electrical feeder or riser capacity serving the Demised Premises on the Commencement Date shall be adequate to serve the lighting fixtures and electrical receptacles installed in the Demised Premises on the Commencement Date. Any additional feeders or risers to supply Tenant's additional electrical requirements, and all other equipment proper and necessary in connection with such feeders or risers shall be installed by Owner upon Tenant's request, at the sole cost and expense of Tenant, provided, that, in Owner's judgment, such additional feeders or risers are necessary and are permissible under applicable laws and insurance regulations and the installation of such feeders or riders will not cause permanent damage or injury to the Building or the Demised Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to or interfere with or disturb other tenants or occupants of the Building. Tenant covenants that at no time shall the use of electrical energy in the Demised Premises exceed the capacity of the existing feeders or risers or wiring installations then serving the Demised Premises. C. Prior to the Commencement Date Owner, at Owner's expense, shall have installed a submeter or submeters in the Demised Premises to measure Tenant's actual consumption of electricity in the entire Demised Premises. Tenant shall pay to Owner, from time to time, upon demand, for the electricity consumed in the Demised Premises, as determined by such submeter or submeters, the actual cost to Owner of purchasing electricity for the Demised Premises (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the application of the Building's electric rate schedule per month to Tenant's usage. With respect to any period when any such submeter is not in good working order, Tenant shall pay Owner for electricity consumed in the portion of the Demised Premises served by such submeter at the rate paid by Tenant to Owner during the most recent comparable period when such submeter was in good working order. Tenant shall take good care of any such submeter and all submetering -48- 51 installation equipment, at Tenant's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Tenant or any person claiming through or under Tenant as and when necessary to insure that any such submeter is, at all times during the Demised Term, in good working order. With respect to the period (referred to as the "Interim Period"), if any, from the Commencement Date through the date immediately prior to the date upon which the submeter or submeters shall be operable, Tenant shall pay to Owner monthly on demand of Owner, for the electricity consumed in the Demised Premises, a sum equal to one-twelfth (1/12th) of the product of (x) $2.00 multiplied by (y) the Demised Premises Area. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be appropriately prorated. D. (1) Owner may, at any time, elect to discontinue the redistribution or furnishing of electrical energy. In the event of any such election by Owner, (i) Owner agrees to give reasonable advance notice of any such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive electrical service directly from the public utility corporation supplying electrical service to the Building and to permit the existing feeders, risers, wiring and other electrical facilities serving the Demised Premises to be used by Tenant for such purpose to the extent they are suitable and safely capable, (iii) Owner agrees to pay such charges and costs, if any, as such public utility corporation may impose in connection with the installation of Tenant's meters, (iv) the provisions of Subsection C of this Section 29.05 shall be deemed deleted from this Lease, and (v) this Lease shall remain in full force and effect and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (2) Notwithstanding anything to the contrary contained in subsection D(1) of this Section 29.05, Owner agrees that Owner shall not voluntarily discontinue the redistribution or furnishing of electrical energy until Owner shall have made or paid for all installations required to provide Tenant with electrical service similar to the electrical service which Tenant had in the Demised Premises immediately prior to such discontinuance and the public utility corporation supplying electrical service to the Building has agreed to furnish such service so that Tenant shall immediately upon such discontinuance be able to receive electrical service directly from such public utility corporation. Unless a shorter time is required by the public utility corporation supplying electrical service to the Building, Owner shall give Tenant at least sixty (60) days prior notice of any such discontinuance. E. Notwithstanding anything to the contrary set forth in this Lease, any sums payable or granted in any way by the public utility corporation supplying electricity to the Building resulting from the installation in the Demised Premises of energy efficient lighting fixtures, lamps, special supplemental heating, ventilation and air conditioning systems or any other Alterations, which sums are paid or given by way of rebate, direct payment, credit or otherwise, shall be and remain the property of Owner, and Tenant shall not be entitled to any portion thereof, unless such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations were installed by Tenant, solely at Tenant's expense, without any contribution, credit or allowance by Owner, in accordance with all of the provisions of this Lease. Nothing contained in the foregoing sentence, however, shall be deemed to obligate Owner to supply or install in the Demised Premises any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations. F. Tenant acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Demised Premises are located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the Demised Premises, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, fifty-two and 50/100 -49- 52 (52.50%) percent (hereinafter "Tenant's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. G. Tenant acknowledges that the light and power systems serving the public areas of the floor of the Building on which the Demised Premises are located (referred to herein as the "Floor Public Light and Power") shall not be connected to the submeter(s) serving the Demised Premises but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor Public Light and Power. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, Tenant's Electrical Share of all amounts shown on said separate meter(s) for such Floor Public Light and Power. SECTION 29.06. WATER: If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory and drinking purposes, Owner may install a hot water meter and a cold water meter and thereby measure Tenant's consumption of water for all purposes. Tenant shall pay to Owner the cost of any such meters and their installation, and Tenant shall keep any such meters and any such installation equipment in good working order and repair, at Tenant's cost and expense. Tenant agrees to pay for water consumed as shown on said meters, and sewer charges, taxes and any other governmental charges thereon, as and when bills are rendered. In addition to any sums required to be paid by Tenant for hot water consumed and sewer charges, taxes and any other governmental charges thereon under the foregoing provisions of this Section. Tenant agrees to pay to Owner, for the heating of said hot water, an amount equal to three (3X) times the total of said sums required to be paid by Tenant for hot water and sewer charges thereon. For the purposes of determining the amount of any sums required to be paid by Tenant under this Section, all hot and cold water consumed during any period when said meters are not in good working order shall be deemed to have been consumed at the rate of consumption of such water during the most comparable period when such meters were in good working order. SECTION 29.07. OVERTIME PERIODS: The Fixed Rent does not reflect or include any charge to Tenant for the furnishing or distributing of any necessary elevator facilities, (other than an elevator subject to call at all times) to the Demised Premises during periods (referred to as "Overtime Periods") other than the hours and days set forth above in this Article for the furnishing and distributing of such services. Accordingly, if Owner shall furnish any such elevator facilities to the Demised Premises at the request of Tenant during Overtime Periods, Tenant shall pay Owner for such services at the following rates as of the date of this Lease: $60.00 Dollars per hour for freight elevator service. Any increases above such rates shall be in an amount equal to the actual increases after the date of this Lease in the cost to Owner of furnishing such services. Owner shall not be required to furnish any such services during Overtime Periods, unless Owner has received reasonable advance notice from Tenant requesting such services. If Tenant fails to give Owner reasonable advance notice requesting such services during any Overtime Periods, then, failure by Owner to furnish any such services during such Overtime Periods shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise. If other tenants on the applicable floor of the Demised Premises where overtime heat, conditioned air or mechanical ventilation are requested by Tenant also request the same service for the same period, then the hourly charge shall be apportioned among the tenants requesting the same services during the same periods. SECTION 29.08. OWNER'S RIGHT TO STOP SERVICE: Owner reserves the right to stop the service of the heating, air conditioning, ventilating, elevator, plumbing, electrical or other mechanical systems or facilities in the Building when necessary by reason of accident or emergency, or for repairs, alterations, replacements or improvements, which, in the reasonable judgment of Owner are desirable or necessary, until said repairs, alterations, replacements or improvements shall have been completed. The exercise of such right by Owner shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's -49- 53 business, or otherwise. Owner shall employ reasonable diligence in attempting to restore the operation of any such system or facilities without any obligation, however, to employ labor at overtime or other premium pay rates, except that in cases where there is a material interference with Tenant's business or the health or safety of the occupants of the Demised Premises is adversely affected, Owner shall employ contractors or labor at overtime or other premium pay rates. SECTION 29.09. A. Tenant's Supplemental A/C Unit/Cooling Tower: Supplementing the provisions of Section 29.05, in the event (a) a separate air conditioning system to serve the Demised Premises is installed by or on behalf of Tenant in accordance with the provisions of this Lease (referred to herein as "Tenant's Supplemental A/C Unit"), (b) Tenant requests that such Unit be hooked up to any Building cooling tower and associated piping (referred to herein as the "Cooling Tower") and (c) Owner consents to such hookup, then, in those events, Owner agrees, subject to the provisions of Article 26 and Section 29.08, to supply condenser water to Tenant's Supplemental A/C Unit and Tenant agrees that (i) Tenant shall pay to Owner, upon demand, all costs and expenses incurred by Owner in connection with the hookup of such Unite to the Cooling Tower, including, but not limited to, the present Building standard hookup fee of $345.00 per ton for such Unit, and (ii) from and after the date the hookup is completed, which hookup shall be performed by Owner, at Owner's cost, the Fixed Rent reserved in this Lease shall be increased by a sum (referred to herein as the "Tenant's Cooling Tower Use Charge") equal to (x) the standard per ton charge then in effect in the Building, multiplied by (xx) the number of tons of Tenant's Supplemental A/C Unit. Such standard per ton charge is $75.00 per ton per annum as of the date hereof. B. If the regular hourly wage rate of operating engineers employed in the Building shall be increased in any Escalation Year (as defined in Article 23) over the rate in effect on the January 1st immediately preceding such hookup, the Fixed Rent for such Escalation Year shall be increased by a sum equal to that proportion of Tenant's Cooling Tower Use Charge which such increase in said hourly wage rate bears to the hourly wage rate in effect on the January 1st immediately preceding such hookup. The increase in Fixed Rent for any Escalation Year pursuant to the provisions of the immediately preceding sentence shall be shown on the Owner's Operating Expense Statement with respect to such Escalation Year rendered by Owner pursuant to the provisions of said Article 23, and shall be payable by Tenant as if it were an increase in the Fixed Rent pursuant to the provisions of said Article 23. C. Any increase in Fixed Rent for Tenant's Cooling Tower Use Charge shall be effective as of the date Tenant's Supplemental A/C Unit is hooked up to the Cooling Tower and shall be retroactive to such date if necessary. D. Tenant's Supplemental A/C Unit shall be repaired and maintained by Tenant at Tenant's cost and expense, pursuant to a service contract. SECTION 29.10 Tenant acknowledges that Owner has advised Tenant that it is Owner's intention to maintain at least the following services in the Building and, accordingly, Owner shall use reasonable diligence to supply and install all work and installations in the Building necessary to provide and maintain at least such services (referred to collectively as "Communication Facilities"): Telecommunications Infrastructure The base building network is comprised of: Voice Grade Services: Voice grade services are available on NEC Article 800, Type CMR, 24 AWG, twisted pair copper cable, terminated on a column mounted RJ21 block. Technical parameters of this Category 3 cable are: -51- 54 Mutual Capacitance 15.8 pF/ft. DC Resistance 25.7 ohms per 1000 ft. Characteristic Impedance 650 ohms @ 1 Khz Characteristic Impedance 105 ohms @ 1 MHz Attenuation @ 1 MHz 0.45 db/1000 ft.. Attenuation @ 1 MHz 6.8 db/100 ft. High Speed Copper Services: TI.5 service is available on individually shielded transmit and receive, 22 AWG cables for high reliability. These cables are terminated on wire-wrap blocks. Technical parameters of this Category 4 cable are: Mutual Capacitance 15.6 pF/ft. DC Resistance 17.6 ohms per 1000 ft. Characteristic impedance 600 ohms @ 1 Khz Characteristic impedance 110 ohms @ 1 MHz Attenuation @ 1 KHz 0.35 db/1000 ft.. Attenuation @ 1 MHz 5.0 db/100 ft. High Speed Internet Access: Available via hypergrade, Category 5, 24 AWG, Twisted Pair, Type CMR/MPR, with extended distance/extended frequency of 100 Mbps. Technical parameters of this Category 5 cable are: Mutual Capacitance 14 pF/ft. DC Resistance 27 ohms per 1000 ft. Characteristic Impedance 100 ohms +/- 15% from 1-100MHZ NVP: 72% Meets EIA/TIA-568 Category 5 and NEMA Extended Frequency Low Loss Requirements. Single Mode Ring Configured, Fiber Optic/cable: Fiber optic cable is MIC (Multifiber Indoor Cable) 10/125 micron OFNR (Riser) with a PVC jacket, manufactured by Siecor. Technical parameters of this Fiber Optic cable are: Attenuation @ 1310 nanometers: 1.0 dB/km Attenuation @ 1550 nanometers: 0.75 dB/km Maximum tensile load: 600 lb. Short Term Maximum tensile load: 225 lb. Long Term Multi-Mode Fiber Optic Cable: For use as intrabuilding, interfloor LAN connection, Internet access, and interLAN connections between diverse businesses. This stranded Multifiber building (MFB) cable may be as a backbone for fiber based data systems, or to connect different fiber based systems together. Fiber optic cable is MIC (Multifiber Indoor Cable) 62.5/125 micron, graded index, OFNR (Riser) with a PVC jacket manufactured by Siecor. Technical parameters of this Fiber Optic cable are: Attenuation @ 850 nanometers: 3.75 db/km Attenuation @ 1300 nanometers: 1.5 db/km Minimum Bandwith @ 850 nanometers: 160 MHz/Km Minimum Bandwith @ 1300 nanometers: 500 MHz/Km Maximum tensile load: 125 lb. Short Term Maximum tensile load: 560 lb. Long Term -52- 55 ARTICLE 30 TABLE OF CONTENTS, ETC. SECTION 30.01. TABLE OF CONTENTS/CAPTIONS: The Table of Contents and the captions following the Articles and Sections of this Lease have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision of this Lease. ARTICLE 31 MISCELLANEOUS DEFINITIONS, SEVERABILITY AND INTERPRETATION PROVISIONS SECTION 31.01. The term "business days" as used in this Lease shall exclude Saturdays, Sundays and holidays, the term "Saturdays" as used in this Lease shall exclude holidays and the term "holidays" as used in this Lease shall mean all days observed as legal holidays by either the New York State Government or the Federal Government. SECTION 31.02. The terms "person" and "persons" as used in this Lease shall be deemed to include natural persons, firms, corporations, associations and any other private or public entities, whether any of the foregoing are acting on their own behalf or in a representative capacity. SECTION 31.03. The term "prime rate" shall mean the rate of interest announced publicly by Chemical Bank, or its successor, from time to time, as Chemical Bank's or such successor's base rate, or if there is no such base rate, then the rate of interest charged by Chemical Bank or its successor to its most credit worthy customers on commercial loans having a ninety (90) day duration. SECTION 31.04. If any term, covenant or condition of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such term, covenant or condition shall not be affected thereby. SECTION 31.05. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. In the event of any action, suit, dispute or proceeding affecting the terms of this Lease, no weight shall be given to any deletions or striking out of any of the terms of this Lease contained in any draft of this Lease and no such deletion or strike out shall be entered into evidence in any such action, suit or dispute or proceeding given any weight therein. SECTION 31.06. The term "First-Class Building" shall mean a first-class office building in the vicinity of the Building used principally as an information technology center and if none exists, then a first-class office building in the downtown area of the Borough of Manhattan shall be the criteria. SECTION 31.07. Any financial information of Tenant given to Owner certified by a principal of Tenant as confidential shall be held by Owner in confidence. -53- 56 ARTICLE 32 ADJACENT EXCAVATION SECTION 32.01. If an excavation shall be made upon land adjacent to the Real Property, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the walls and other portions of the Building from injury or damage and to support the same by proper foundations and no such entry shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or said person. ARTICLE 33 BUILDING RULES SECTION 33.01. Tenant shall observe faithfully, and comply strictly with, and shall not permit the violation of, the Building Rules set forth in Schedule A annexed to and made a part of this Lease and such additional reasonable Building Rules as Owner may, from time to time, adopt. All of the terms, covenants and conditions of Schedule A are incorporated in this Lease by reference and shall be deemed part of this Lease as though fully set forth in the body of this Lease. The term "Building Rules" as used in this Lease shall include those set forth in Schedule A and those hereafter made or adopted as provided in this Section. In case Tenant disputes the reasonableness of any additional Building Rule hereafter adopted by Owner, the parties hereto agree to submit the question of the reasonableness of such Building Rule for decision to the Chairman of the Board of Directors of the Management Division of the Real Estate Board of New York, Inc., or its successor (the "Chairman"), or to such impartial person or persons as the Chairman may designate, whose determination shall be final and conclusive upon Owner and Tenant. Tenant's right to dispute the reasonableness of any additional Building Rule shall be deemed waived unless asserted by service of a notice upon Owner within ten (10) days after the date upon which Owner shall give notice to Tenant of the adoption of any such additional Building Rule. Owner shall have no duty or obligation to enforce any Building Rule, or any term, covenant or condition of any other lease, against any other tenant or occupant of the Building, and Owner's failure or refusal to enforce any Building Rule or any term, covenant or condition of any other lease against any other tenant or occupant of the Building shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. SECTION 33.02. Any Building Rule not enforced generally against other tenants of the Building shall not be enforced against Tenant. Wherever the Building Rules provide for a matter to be determined by Owner or its agents, Owner or its agents shall exercise their reasonable judgment with respect thereto and any determination to be made by Owner or its agents thereunder shall not be unreasonably withheld or delayed. -54- 57 ARTICLE 34 BROKER SECTION 34.01. Tenant represents and warrants to Owner that with the exception of Rudes Realty Company, Owner's consultant, Daren Hornig of The Galbreath Company is the sole broker with whom Tenant has negotiated or otherwise dealt with in connection with the Demised Premises or in bringing about this Lease. Tenant shall indemnify Owner from all loss, cost, liability, damage and expenses, including, but not limited to, reasonable counsel fees and disbursements, arising from any breach of the foregoing representation and warranty. ARTICLE 35 SECURITY SECTION 35.01. The sum of TWENTY THOUSAND FIVE HUNDRED SIXTY-TWO and 50/100 ($20,562.50) DOLLARS representing security (referred to as "Security") for the faithful performance and observance by Tenant of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed is due and payable at the time of the execution and delivery of this Lease. In the event of any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on the part of Tenant to be observed or performed including, but not limited to, any default in the payment when due of any monthly installment of the Fixed Rent or increase in the Fixed Rent payable pursuant to the provisions of Articles 23 or 29 or of any additional rent, Owner may use or apply all or any part of the Security for the payment to Owner for Tenant's account of any sum or sums due under this Lease, without thereby waiving any other rights or remedies of Owner with respect to such default. Tenant agrees to replenish all or any part of the Security so used or applied during the Demised Term. After (i) the Expiration Date or any other date upon which the Demised Term shall expire and come to an end, and (ii) the full observance and performance by Tenant of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, including, but not limited to, the provisions of Article 21, Owner shall return to Tenant the balance of the Security then held or retained by Owner. Owner agrees that, unless prohibited by law or by the general policies of lending institutions in New York City, Owner shall deposit the Security in an interest-bearing savings account with a bank selected by Owner, in which event all interest accruing thereon shall be added to and become part of the Security and shall be retained by Owner under the same conditions as the sum originally deposited as Security. Tenant agrees that Tenant shall not assign or encumber any part of the Security, and no assignment or encumbrance by Tenant of all or any part of the Security shall be binding upon Owner, whether made prior to, during, or after the Demised Term. Owner shall not be required to exhaust its remedies against Tenant or against the Security before having recourse to any other form of security held by Owner and recourse by Owner to any form of security shall not affect any remedies of Owner which are provided in this Lease or which are available to Owner in law or equity. In the event of any sale, assignment or transfer by Owner named herein (or by any subsequent Owner) of its interest in the Building as owner or lessee, Owner (or such subsequent owner) shall have the right to assign or transfer the Security to its grantee, assignee or transferee and, in the event of such assignment or transfer, Owner named herein, (or such subsequent Owner) shall have no liability to Tenant for the return of the Security and Tenant shall look solely to the grantee, assignee or transferee for such return. A lease of the entire Building shall be deemed a transfer within the meaning of the foregoing sentence. Notwithstanding anything to the contrary set forth in the foregoing provisions of this Article, Owner shall be entitled to retain the one (1%) percent administrative fee permitted by law to be retained by landlords with respect to security deposits. -55- 58 ARTICLE 36 ARBITRATION, ETC. SECTION 36.01. Any dispute (i) with respect to the reasonability of any failure or refusal of Owner to grant its consent or approval to any request for such consent or approval pursuant to the provisions of Sections 3.01 or 11.03 with respect to which request Owner has agreed, in such Sections, not unreasonably to withhold such consent or approval, or (ii) arising out of the application of the Operating Expenses provisions of Article 23, which is submitted to arbitration shall be finally determined by arbitration in the City of New York in accordance with the rules and regulations then obtaining of the American Arbitration Association or its successor. Any such determination shall be final and binding upon the parties, whether or not a judgment shall be entered in any court. In making their determination, the arbitrators shall not subtract from, add to, or otherwise modify any of the provisions of this Lease. Owner and Tenant may, at their own expense, be represented by counsel and employ expert witnesses in any such arbitration. Any dispute with respect to the reasonability of any failure or refusal of Owner to grant its consent or approval to any request for such consent or approval pursuant to any of the provisions of this Lease (other than Sections 3.01 and 11.03) with respect to which Owner has covenanted not unreasonably to withhold such consent or approval, and any dispute arising with respect to the increases in Fixed Rent due to the provisions of Section 23.02 shall be determined by applicable legal proceedings. If the determination of any such legal proceedings, or of any arbitration held pursuant to the provisions of this Section with respect to disputes arising under Sections 3.01 and 11.03 or the Operating Expense provisions of Article 23, shall be adverse to Owner, Owner shall be deemed to have granted the requested consent or approval, or be bound by any determination as to Taxes and Operating Expenses and the increases in Fixed Rent relating thereto, but that shall be Tenant's sole remedy in such event and Owner shall not be liable to Tenant for a breach of Owner's covenant not unreasonably to withhold such consent or approval, or otherwise. Each party shall pay its own counsel and expert witness fees and expenses, if any, in connection with any arbitration held pursuant to the provisions of this Section and the parties will share all other expenses and fees of any such arbitration. ARTICLE 37 PARTIES BOUND SECTION 37.01. The terms, covenants and conditions contained in this Lease shall bind and inure to the benefit of Owner and Tenant and, except as otherwise provided in this Lease, their respective heirs, distributees, executors, administrators, successors and assigns. However, the obligations of Owner under this Lease shall no longer be binding upon Owner named herein after the sale, assignment or transfer by Owner named herein (or upon any subsequent Owner after the sale, assignment or transfer by such subsequent Owner) of its interest in the Building as owner or lessee, and in the event of any such sale, assignment or transfer, such obligations shall thereafter be binding upon the grantee, assignee or other transferee of such interest, and any such grantee, assignee or transferee, by accepting such interest, shall be deemed to have assumed such obligations. A lease of the entire Building shall be deemed a transfer within the meaning of the foregoing sentence. Neither the partners (direct or indirect) comprising Owner, nor the shareholders (nor any of the partners comprising same), partners, directors or officers of any of the foregoing (collectively, the "Owner's Parties") shall be liable for the performance of Owner's obligations under this Lease. Tenant shall look solely to Owner to enforce Owner's obligations hereunder and shall not seek any damages against any of the Owner's Parties. Notwithstanding anything contained in this Lease to the contrary, Tenant shall look solely to the estate and interest of Owner, its successors and assigns, in the Real Property and Building for the collection or satisfaction of any judgment recovered against Owner based upon the breach by Owner of any of the terms, conditions or covenants of this Lease on the part of Owner to be performed, and no other property or assets of Owner or any of Owner's Parties shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to either this Lease, the relationship of landlord and tenant hereunder, or Tenant's use and occupancy of the Demised Premises. -56- 59 ARTICLE 38 SINGLE RIGHTS FOR ADDITIONAL OPTION SPACES SECTION 38.01. Commencing on the first (1st) day of the fourth (4th) anniversary of the Commencement Date and expiring on the day which is the date immediately the sixth (6th) anniversary of the Commencement Date and provided (a) Tenant is not then in default under any of the terms, covenants or conditions of this Lease on Tenant's part to be observed and performed after notice and the expiration of applicable cure periods, and (b) Tenant, in contradistinction to any subtenants or other occupants, shall then be in occupancy of at least eighty (80%) percent of the space leased to Tenant under this Lease (for the purposes of this Article 38, any space leased to Tenant under this Lease which has been eliminated from the Demised Premises pursuant to the provisions of Section 11.03 shall be deemed space leased to Tenant under this Lease), and subject to the rights of any other then tenant or occupant of the Building Tenant shall have the single option, subject to the provisions of this Article, exercisable in accordance with the provisions of Section 38.02, to lease and add to the Demised Premises any space on the entire seventeenth (17th) or parts of the fifteenth (15th) and fourteenth (14th) floors of the Building containing from 4,000 to 6,000 rentable square feet (measured in the same manner as the Demised Premises were measured) which, after the initial leasing by Owner of such space, becomes, or is about to become, available for leasing during the Demised Term. Tenant agrees that Owner may initially lease any space on the fifteenth (15th) or seventeenth (17th) floors of the Building for whatever term, and upon all other terms, covenants and conditions, and to whomever it desires in Owner's sole judgment. No such space shall be deemed "available for leasing" if (a) the then tenant of such space, or any assignee, successor, subtenant or other occupant holding through or under such tenant, shall enter into (i) any agreement with Owner extending the letting agreement affecting such space, or (ii) any new lease with Owner affecting such space, or (b) any other tenant in the Building, including, but not limited to Netcast Communications, Corp. (referred to as "Netcast") or any assignee or successor of such other tenant, shall exercise any contractual option or right which it has to lease such space. Accordingly, in amplification and not in limitation of the provisions of the preceding sentence, Tenant acknowledges and agrees that any options granted to Tenant pursuant to the provisions of this Article are subordinate to the options granted to Netcast, pursuant to its lease of space on the sixteenth (16th) floor of the Building, and that Tenant shall not have any option to lease any space on the fifteenth (15th) or seventeenth (17th) floors of the Building if Netcast exercises its option to lease such space in question. SECTION 38.02. In the event that any such space shall become or about to become available for leasing in accordance with the provisions of Section 38.01, Owner shall give notice thereof to Tenant (any such notice is referred to as an "Availability Notice"), which Notice may be given not earlier than eighteen (18) months prior to the date set forth in such Notice on which such space is expected to become vacant and available for leasing and, in such event, Tenant shall have the option, exercisable only by notice given to Owner within twenty (20) days next following the date of the giving of such Availability Notice to lease and add such space to the Demised Premises; (any such space is referred to as an "Additional Option Space"; any such date set forth in an Availability Notice is referred to as an "Applicable Expected Vacancy Date"; and any notice given by Tenant to Owner exercising any such option is referred to as an "Additional Option Notice"). In the event that any Additional Option Space shall become available for leasing sooner than the Applicable Expected Vacancy Date because of the termination of the term of the lease affecting such space, or a voluntary agreement to surrender resulting from the imminent bankruptcy of the tenant thereof, as opposed to the expiration of said lease prior to its original expiration date, Owner shall have the right to accelerate the Applicable Expected Vacancy Date by not less than thirty (30) days' prior notice to Tenant. Owner shall accompany any Availability Notice with a plan designating the location and size of the Additional Option Space. Any such space shall be leased and added to the Demised Premises at an annual rental rate equal to the fair market annual rental value of the applicable Additional Option Space on the commencement date of the term applicable thereto, as determined by agreement between Owner and Tenant or by arbitration in accordance with the provisions of Section 38.07 (but in no event shall the Fixed Rent per rentable square foot, from time to time, applicable to the Additional Option Space be less than the Fixed Rent per rentable 60 square foot in effect, from time to time, applicable to the original portion of the Demised Premises [before giving effect to any abatement or apportionment of such Fixed Rent]), and such Additional Option Space shall otherwise be leased and added to the Demised Premises upon the same executory terms, covenants and conditions as are contained in this Lease (including, but not limited to, the provisions of Article 23 and the definition of Base Operating Expenses set forth therein) except as otherwise provided in this Article, adjusted to reflect (x) the number of rentable square feet contained in the applicable Additional Option Space, (determined in the same manner as the rentable square feet were determined in the original portion of the Demised Premises), and (y) that the term shall commence on the Applicable Expected Vacancy Date, as the same may have been accelerated by Owner pursuant to the provisions of this Section 38.02, subject, however, to the provisions of Section 38.03. SECTION 38.03. Owner and Tenant acknowledge the possibility that all or any of the tenants or occupants of the Additional Option Space may not have vacated and surrendered all or any portions of the Additional Option Space to Owner by the Applicable Expected Vacancy Date. Accordingly, notwithstanding anything to the contrary contained in Sections 38.01 to 38.02 or in any Availability Notice, (a) the term of this Lease applicable to the Additional Option Space in question shall commence (i) on the Applicable Expected Vacancy Date with respect to those portions, if any, of the Additional Option Space which are vacant on the Applicable Expected Vacancy Date, and (ii) with respect to those portions, if any, of the Additional Option Space which are not vacant on the Applicable Expected Vacancy Date, on the respective later date or dates upon which such portions of the Additional Option Space become vacant and Owner gives notice to Tenant of such vacancy; (b) the Expiration Date shall not be affected thereby; (c) the increases in the Fixed Rent, the Demised Premises Area, Tenant's Electrical Share and all other modifications of this Lease resulting from the application of the provisions of this Article shall be equitably adjusted to reflect the fact that all or any portions of the Additional Option Space have not been leased and added to the Demised Premises on the Applicable Expected Vacancy Date; (d) except as set forth in this sentence, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected thereby; (e) Tenant waives any rights under Section 223-a of the Real Property Law of New York or any successor statute of similar import to rescind this Lease and further waives the right to recover any damages against Owner which may result from the failure of Owner to deliver possession of all or any portions of the Additional Option Space on the Applicable Expected Vacancy Date; and (f) Owner shall institute, within twenty (20) days after the Applicable Expected Vacancy Date, possession proceedings against any tenants or occupants who have not vacated and surrendered all or any portion of the Additional Option Space, and shall prosecute such proceedings to completion with reasonable diligence. SECTION 38.04. It is understood and agreed that time is of the essence with respect to the exercise of any option pursuant to this Article and that if Tenant does not exercise such option within the time limitation set forth in Section 38.02, any notice purporting to exercise such option given after the expiration of such time limitation shall be void and of no force and effect and the provisions of this Article shall be of no further force and effect to the end that Tenant shall have no right to lease any additional space pursuant to the provisions of this Article. SECTION 38.05. In the event that Tenant shall timely exercise the option set forth in this Article then Tenant shall have no further rights to lease any further additional space pursuant to the provisions of this Article and on the effective commencement date of the term applicable to such additional Option Space, this Lease shall be deemed modified as follows: A. The Demised Premises shall include the Additional Option Space (together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein upon the commencement of the term applicable to the Additional Option Space or at any time during said term, other than Tenant's Personal Property) for all purposes of this Lease. 61 B. The Fixed Rent shall be increased by the fair market annual rental value for the Additional Option Space as of the effective commencement date of the term applicable thereto as determined by agreement between Owner and Tenant or by arbitration as provided in Section 38.07; (but in no event shall such increase in the Fixed Rent per rentable square foot, from time to time, be less than the Fixed Rent per rentable square foot in effect, from time to time, applicable to the original portion of the Demised Premises [before giving effect to any abatement or apportionment of such Fixed Rent]) with respect to the period from the effective commencement date of the term applicable to the Additional Option Space to the Expiration Date, both dates inclusive, and the monthly installments of the Fixed Rent shall each be increased accordingly to conform with such increase in the Fixed Rent. In the event that the term applicable to the Additional Option Space shall commence on a date other than the first day of any month, the monthly installment of the Fixed Rent for the month during which the term applicable to the Additional Option Space shall commence shall be equitably apportioned to reflect such increase in the Fixed Rent; C. The Demised Premises Area, as defined in Section 23.01, shall be increased by the number of rentable square feet contained in the Additional Option Space (computed in the same manner as the number of rentable square feet contained in the original portion of the Demised Premises). D. The Tenant's Electrical Share for the Additional Option Space shall be the percentage obtained by dividing the number of rentable square feet contained in the Additional Option Space by 10,000 square feet; E. If, by the effective commencement date of the term applicable to the Additional Option Space, the Fixed Rent applicable thereto has not yet been determined, Tenant shall, until such determination, pay for the Additional Option Space the same Fixed Rent per rentable square foot then allocable to the original portion of the Demised Premises, and following any such determination, any additional sums shall be payable by Tenant to Owner. SECTION 38.06. Tenant agrees to accept the Additional Option Space in the condition which shall exist on the commencement date of the term applicable thereto "as is" and further agrees that Owner shall have no obligation to perform any work or make any installations in order to prepare such space for Tenant's occupancy except that Owner shall perform all work necessary so that Tenant's consumption of electricity therein shall be submetered. Owner may enter the Additional Option Space to perform such work and such entry shall be in accordance with the provisions of Article 13. SECTION 38.07. In the event Owner and Tenant are unable to agree as to the fair market annual rental value of the Additional Option Space, then, upon the demand of either Owner or Tenant, such fair market annual rental value shall be determined by arbitration as follows; (a) Owner and Tenant shall each appoint an arbitrator within thirty (30) days after notice by either party requesting arbitration of the issue. If either Owner or Tenant shall have failed to appoint an arbitrator within such period of time, then such arbitrator shall be appointed by the American Arbitration Association, or its successor, or if at such time such association is not in existence and has no successor, then by the presiding Justice of the Appellate Division, First Department, of the Supreme Court of the State of New York, or any successor court, upon request of either Owner or Tenant, as the case may be. (b) The two arbitrators appointed, as above provided, shall select a third arbitrator and if they fail to do so within thirty (30) days after their appointment, such third arbitrator shall be appointed as above provided for the appointment of an arbitrator in the event either party fails to do so. (c) All of such arbitrators shall be real estate appraisers or brokers having at least fifteen (15) years of experience in such field in the Borough of Manhattan, City of New York. -59- 62 (d) The three arbitrators, selected as aforesaid, forthwith shall convene and render their decision as promptly as practicable after the appointment of the third arbitrator. The decision of such arbitrators shall be in writing and the vote of the majority of them (or, if there be no majority decision, then the decision of the last appointed arbitrator) shall be the decision of all and binding upon Owner and Tenant whether or not a judgment shall be entered in any court. Duplicate original counterparts of such decision shall be sent by the arbitrators to both Owner and Tenant. (e) The arbitrators, in arriving at their decision, shall be entitled to consider all testimony and documentary evidence which may be presented at any hearing as well as facts and data which the arbitrators may discover by investigation and inquiry outside of such hearings. The arbitrators shall be bound by the provisions of this Lease, and shall not add to, subtract from, or otherwise modify such provisions. The cost and expense of such arbitration shall be borne equally by Owner and Tenant, except that each party shall pay its own counsel fees and expenses. (f) Notwithstanding any findings of the arbitrators, such fair market annual rental value from time to time per rentable square foot, and accordingly, the Fixed Rent applicable to the Additional Option Space, from time to time per rentable square foot, shall not be less than the Fixed Rent per rentable square foot in effect, from time to time, applicable to the original portion of the Demised Premises (before giving effect to any abatement or apportionment of such Fixed Rent). SECTION 38.08.A. Upon request of Owner or Tenant, the parties from time to time, shall execute and deliver to the other, instruments, in form reasonably satisfactory to the parties, stating whether or not Tenant has exercised any right to lease any Additional Option Space pursuant to the provisions of this Article. B. Upon the request of Owner or Tenant, the parties from time to time, shall execute and deliver to the other, instruments, in form reasonably satisfactory to the parties, setting forth all of the modifications to this Lease resulting from the exercise of any such option, including, but not limited to, the increases in the Fixed Rent resulting therefrom. C. Neither the failure of Owner or Tenant to request the execution of any such instrument nor Owner's or Tenant's failure to execute and deliver such instrument shall vitiate any of the provisions of this Article. D. Tenant acknowledges and agrees that it is the intention of the parties that Tenant shall have the single option, as set forth in this Article, to lease and add to the Demised Premises only one (1) piece of Additional Option Space and once Tenant so exercises such option in accordance with the provisions of this Article or fails to so exercise such option in accordance with the provisions of this Article, as the case may be. Tenant shall have no further right to lease any further additional space pursuant to the provisions of this Article. -60- 63 IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this Lease as of the day and year first above written. 55 BROAD STREET COMPANY Witness: /s/ illegible By: /s/ illegible - -------------------------------- -------------------------------- Owner Name: Title: Partner NYSERNet, INC. Witness: /s/ illegible By: /s/ Richard Mandelbaum - -------------------------------- -------------------------------- Tenant Name: Title: -61- 64 STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On this 2nd day of May, 1996, before me personally came Richard Mandelbaum, to me known, who being by me duly sworn, did depose and say that he resides in Queens, City of New York, State of New York, that he is the President of the corporation described in and which executed the foregoing Lease, as Tenant; and that he signed his name thereto by authority of the Board of Directors of said corporation. JEANNE S. CHU /s/ Jeanne S. Chu Notary Public, State of New York --------------------------- No. 41-4968211 Qualified in Queens County Notary Public Cert. Filed in Nassau County Commission Expires June 18, 1996 -62- 65 ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT -------------------------------------------- AGREEMENT made as of the 30 day of January, 1997, among 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, New York, New York 10154, as landlord (referred to herein as "OWNER"); NYSERNet.ORG, INC. (formerly-known-as NYSERNet, Inc.), a New York corporation having an office at 200 Elwood Davis Road, Suite 1013, Liverpool, New York, as tenant (referred to herein as "TENANT-ASSIGNOR"). and APPLIEDTHEORY COMMUNICATIONS, INC., a New York corporation having an office at 55 Broad Street, New York, New York (referred to herein as "ASSIGNEE"). W I T N E S S E T H: - - - - - - - - - - WHEREAS: 1. Under date of May 1, 1996, OWNER entered into a lease with TENANT-ASSIGNOR for a portion of the sixteenth (16th) floor in the building known as 55 Broad Street, New York, New York; and 2. The term demised in said lease is fixed to expire on September 30, 2006 unless sooner terminated pursuant to any of the terms, covenants or conditions of said lease or pursuant to law (the aforesaid lease, as modified by various written agreements, including, but not limited to an agreement dated January 10, 1997, is referred to as the "Lease"; and the premises demised therein, together with all appurtenances, fixtures, additions and other property attached thereto or installed therein are referred to herein as the "Demised Premises"); and 66 3. TENANT-ASSIGNOR now desires to assign its interest as Tenant under the Lease to ASSIGNEE and ASSIGNEE desires to succeed to the interest of TENANT-ASSIGNOR as Tenant under the Lease and is willing to assume the observance and performance of the obligations of Tenant under the Lease; and 4. OWNER is willing to consent to the proposed assignment, subject to the terms of this Agreement. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: FIRST: A. TENANT-ASSIGNOR and ASSIGNEE represent and warrant to Owner that both TENANT-ASSIGNOR and ASSIGNEE are affiliated companies under common control. B. TENANT-ASSIGNOR hereby assigns, transfers and sets over unto ASSIGNEE all of TENANT-ASSIGNOR'S right, title and interest as Tenant under the Lease as of the date of this Agreement. In addition, TENANT-ASSIGNOR hereby transfers and sets over to ASSIGNEE all of TENANT-ASSIGNOR's right, title and interest to all monies held by OWNER, if any, as security under Section 35.01 of the Lease. SECOND: ASSIGNEE, for the benefit of OWNER and TENANT-ASSIGNOR, hereby agrees to assume, keep, observe and perform each and every one of the terms, covenants and conditions of the Lease on Tenant's part to be observed or performed including, but not limited to, all obligations of the Tenant under the Lease originating or accruing before the date of this Agreement, all with the same force and effect as if ASSIGNEE had executed the Lease as the Tenant originally named therein. ASSIGNEE hereby agrees that the Demised Premises will be used solely for the purpose set forth in Article 2 of the Lease and for no other purpose and use. 67 THIRD: TENANT-ASSIGNOR and ASSIGNEE represent and warrant to OWNER that the Lease and Demised Premises are not encumbered by any prior transfer, assignment, mortgage, lien, assessment or encumbrance of whatever nature, and TENANT-ASSIGNOR and ASSIGNEE represent and warrant to OWNER that no broker is responsible for bringing about this Agreement. FOURTH: Subject to the provisions of this Agreement, OWNER hereby consents to the foregoing assignment. OWNER's consent shall not in any way be construed to relieve ASSIGNEE from obtaining the express consent, in writing, of OWNER to any further assignment of the Tenant's interest in the Lease. FIFTH: TENANT-ASSIGNOR, for the benefit of OWNER, (a) waives all notices of default which may be given to ASSIGNEE and all other notices of every kind or description now or hereafter provided in the Lease by statute or rule of law, and (b) agrees that, notwithstanding the foregoing assignment and OWNER's consent thereto, TENANT-ASSIGNOR's obligations with respect to the Lease shall not be discharged, released or impaired by (i) this assignment, (ii) any amendment or modification of the Lease, whether or not the obligations of Tenant are increased thereby, (iii) any further assignment or transfer of Tenant's interest in the Lease, (iv) any exercise, non-exercise or waiver by OWNER of any right, remedy, power or privilege under or with respect to the Lease, (v) any waiver, consent, extension, indulgence or other act or omission with respect to any other obligations of Tenant, under the Lease, (vi) any insolvency, bankruptcy, liquidation, reorganization, arrangement, dissolution, or similar proceeding involving or affecting ASSIGNEE or any further assignee, (vii) any act or thing which, but for the provisions of this assignment, might be deemed a legal or equitable discharge of a surety or assignor, to all of which TENANT-ASSIGNOR hereby consents in advance, and (c) TENANT-ASSIGNOR expressly waives and surrenders any defenses as assignor which may now or hereafter exist to its liability under the Lease, it being the purpose and intent of OWNER and 68 TENANT-ASSIGNOR that the obligations of TENANT-ASSIGNOR hereunder as assignor shall be absolute and unconditional under any and all circumstances. SIXTH: TENANT-ASSIGNOR and ASSIGNEE agree to pay to OWNER, upon demand, as additional rent under the Lease, reasonable counsel fees incurred by OWNER in connection with the assignment by TENANT-ASSIGNOR to ASSIGNEE of the Tenant's interest under the Lease and with the preparation and execution of this Agreement. SEVENTH: Except as expressly modified by the foregoing provisions of this Agreement the Lease is hereby ratified and confirmed in all respect by each of the parties to this Agreement. EIGHTH: The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. 69 IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written. 55 BROAD STREET COMPANY, Owner By: /s/ illegible ------------------------------------- NYSERNET.ORG, INC., Tenant-Assignor By: /s/ David A. Buckel ------------------------------------- David A. Buckel APPLIEDTHEORY COMMUNICATIONS, INC. Assignee By: /s/ David A. Buckel ------------------------------------- David A. Buckel 70 STATE OF NEW YORK) :ss.: COUNTY OF NEW YORK) On the 23rd day of Jan., 1997, before me personally came David A. Buckel, to me known, who, being by me duly sworn, did depose and say that he resides at Syracuse that he is the Secretary of NYSERNet.org, Inc., the corporation described in and which executed the foregoing Assignment and Assumption of Lease; as Tenant-Assignor; and that he signed his name thereto by authority of the Board of Directors of said corporation. /s/ Patricia J. Foster ---------------------------- Notary Public PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon, Co. No. 4755760 My Commission Expires Sept. 30, 1998 71 STATE OF NEW YORK) :ss.: COUNTY OF NEW YORK) On the 23rd day of Jan., 1997, before me personally came David A. Buckel, to me known, who, being by me duly sworn, did depose and say that he resides at Syracuse, that he is the Director of Finance of AppliedTheory Communications, Inc., the corporation described in and which executed the foregoing Assignment and Assumption of Lease as Assignee; and that he signed his name thereto by authority of the Board of Directors of said corporation. /s/ Patricia J. Foster ---------------------------- Notary Public PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon, Co. No. 4755760 My Commission Expires Sept. 30, 1998 EX-10.06 8 AGREEMENT OF LEASE 1 Exhibit 10.06 STANDARD FORM OF OFFICE LEASE THE REAL ESTATE BOARD OF NEW YORK, INC. AGREEMENT OF LEASE, made as of this _____________ day of May 1996, between CUTTERMILL REALTY CO., A New York Limited Partnership, having an office at 40 Cutter Mill Road, Great Neck, NY 11021 party of the first part, hereinafter referred to as OWNER, and NYSERNet, Inc., a New York Corporation, having an office at 40 Cutter Mill Road, Great Neck, NY 11021 party of the second part, hereinafter referred to as TENANT, WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner the portion of the fourth floor shown on Exhibit "A" annexed hereto (the "Premises") in the building known as 40 Cutter Mill Road (the "Building") Great Neck, New York, for the term of One Hundred Twenty-One (121) months (or until such term shall sooner cease and expire as hereinafter provided) to commence on the Commencement Date and to end on the Expiration Date (as such terms are hereinafter defined) both dates inclusive, at an annual rental rate of $183,066.00 - One Hundred Eighty-Three Thousand Sixty-Six Dollars which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first Two monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: RENT 1. Tenant shall pay the rent as above and as hereinafter provided. OCCUPANCY 2. Tenant shall use and occupy demised premises for general office purposes and for no other purpose. TENANT 3. Tenant shall make no changes in or to the demised premises ALTERATIONS: of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant at Tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises by using contractors or mechanics first approved by Owner. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by filing the bond required by law. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner, by notice to Tenant no later than twenty days later the date fixed as the termination of this lease, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the same shall be removed from the premises by Tenant promptly thereafter, at Tenant's expense. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed, by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the premises by Owner, at Tenant's expense. MAINTENANCE 4. Tenant shall, throughout the term of this lease, take good AND care of the demised premises and the fixtures and appurtenances REPAIRS therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible, using only the contractor for the trade or trades in question, selected from a list of at least two contractors per trade submitted by Owner. Any other repairs in or to the building or the facilities and systems thereof for which Tenant is responsible shall be performed by Owner at the Tenant's expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of its demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises. Tenant agrees to give prompt notice of any defective condition in the premises for which Owner may be responsible hereunder. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof. WINDOW 5. Tenant will not clean nor require, permit, suffer or allow CLEANING: any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. REQUIREMENTS 6. Prior to the commencement of the lease term, if Tenant is OF LAW, then in possession, and at all times thereafter, Tenant, at FIRE INSURANCE, Tenant's sole cost and expense, shall promptly comply with all FLOOR LOADS: present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, (including Tenant's permitted use) or, with respect to the building if arising out of Tenant's 2 use or manner of use of the premises or the ing (including the use permitted under the lease). Nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall,at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the building or demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's judgement, to absorb and prevent vibration, noise and annoyance. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall execute promptly any certificate that Owner may request. Property -- Loss, Damage, Reimbursement, Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence of Owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Owner's own acts, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel chosen by Tenant and approved by Owner in writing, such approval not to be unreasonably withheld. Destruction, Fire and Other Casualty: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner, subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, specifying a date for the expiration of the lease, which date shall not be more than 60 days after giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. Eminent Domain: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenant's entire interest in any such award. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. Electric Current: [Graphic of Hand with Pointing Finger] 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which, in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. Access to Premises: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times on notice to Tenant, to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the - ----------------------- [Graphic of hand with Pointing Finger] Rider to be added if necessary. * chosen by Tenant and ** on notice to Tenant 3 same to prospective purchasers or mortgag???? of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants. If Tenant is not present to open and permit an entry into the premises. Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom, Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligations hereunder. VAULT, 14. No Vaults, vault space or area, whether or not enclosed VAULT SPACE, or covered, not within the property line of the building is AREA: leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. OCCUPANCY: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. As of the Lease date, Owner has not been notified of any building or fire code violations in connection with the demised premises. BANKRUPTCY: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease including the covenants for the payment of rent or additional rent; or if the demised premises becomes vacant or deserted; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under Section 235 of Title 11 of the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or take possession of the premises within fifteen (15) days after the commencement of the term of this lease, then, in any one or more of such events, upon Owner serving a written thirty (30) days notice upon Tenant specifying the nature of said default and upon the expiration of said thirty (30) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said thirty (30) day period, and if Tenant shall not have diligently commenced during such default within such thirty (30) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written three (3) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said three (3) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such three (3) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required; upon Owner serving a written five(5) days notice upon Tenant specifying the default amount and upon the expiration of said five (5) days, if Tenant shall have failed to comply with or remedy such default, then and in any of such events Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF 18. In case of any such default, re-entry, expiration OWNER AND and/or dispossess by summary proceedings or otherwise, (a) WAIVER OF the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let, the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or convenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for which moth of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency of any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacement, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for an cause, or in the event of Owner obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. FEES AND 19. If Tenant shall default in the observance or EXPENSES performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to attorney's fees, in instituting, prosecuting or defending any action or proceeding, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within five (5) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. BUILDING 20. Owner shall have the right at any time without the same ALTERATIONS constituting an eviction and without incurring liability to AND Tenant therefore to change the arrangement and/or location MANAGEMENT: of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number of designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions and improvements. furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. NO REPRESENTATIONS 21. Neither Owner nor Owner's agents have made any BY OWNER: representations or promises with respect to the physical condition of the building, the land upon which * As of the Lease date, Owner has not been notified of any building or fire code violations in connection with the demised premises. ** thirty (30) days *** upon Owner serving a written five (5) days notice upon Tenant specifying the default, amount the expiration of said five (5) days, if Tenant shall have failed to comply with or remedy such default 4 it is erected or the demised premises, the re????????, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly set forth* and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in while or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. END OF TERM: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. QUIET ENJOYMENT 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. FAILURE TO GIVE POSSESSION: 24. If Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant or occupants or if the demised premises are located in a building being constructed, because such building has not been sufficiently completed to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession) until after Owner shall have given Tenant written notice that the premises are substantially ready for Tenant's occupancy. If permission is given to Tenant to enter into the possession of the demised premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except as to the covenant to pay rent. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. NO WAIVER: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver to such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. WAIVER OF TRIAL BY JURY: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by Jury in any action, proceeding** or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim** of whatever nature or description in any such proceeding including a counterclaim under Article 4. INABILITY TO PERFORM: 27. This Lease and the obligation of Tenant to pay rent hereinunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption in connection with a National Emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. BILLS AND NOTICES: 28. Except as otherwise in this lease provided, a bill, statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, sent by registered or certified mail addressed to Tenant at the building of which the demised premises form a part or at the last known residence address or business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant, mailed, or left at the premises as herein provided. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. SERVICES PROVIDED BY OWNERS 29. As long as Tenant is not in default under any of the covenants of this lease, Owners shall provide: (a) necessary elevator facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one elevator subject to call at all other times; (b) heat to the demised premises when and as required by law, on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes, but if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Owner shall be the sole judge), Owner may install a water meter at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense in good working order and repair to register such water consumption and Tenant shall pay for water consumed as shown on said meter as additional rent as and when bills are rendered; (d) cleaning service for the demised premises on business days at Owner's expense provided that the same are kept in order by Tenant. If, however, said premises are to be kept clean by Tenant, it shall be done at Tenant's sole expense, in a manner satisfactory to Owner and no one other than persons approved by Owner shall be permitted to enter said premises or the building of which they are a part for such purpose. Tenant shall pay Owner the cost of removal of any of Tenant's refuse and rubbish from the building; (f) Owner reserves the right to stop services of the heating, elevators, plumbing, air-conditioning, power systems or cleaning or other services, if any, when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in the judgment of Owner for as long as may be reasonably required by reason thereof. If the building of which the demised premises are a part supplies manually-operated elevator service, Owner at any time may substitute automatic-control elevator service and upon ten days' written notice to Tenant, proceed with alterations necessary therefor without in any wise affecting this lease or the obligation of Tenant hereunder. The same shall be done with a minimum of inconvenience to Tenant and Owner shall pursue the alteration with due diligence. CAPTIONS: 30. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. DEFINITIONS: 31. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 29 hereof), Sundays and *** - -------------- [hand graphic with finger pointing right] Rider to be added if necessary. * specifically in Article 15, ** except mandatory counterclaims *** New Year's Day, the date Washington's Birthday is generally celebrated, Memorial Day, July 4th, Labor Day, Christmas Day and Thanksgiving Day. 5 *(the Security Deposit) ADJACENT EXCAVATION -- SHORING: 32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. RULES AND REGULATIONS 33. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within ten (10) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agent, visitors or licensees. SECURITY 34. Tenant has deposited with Owner the sum of $15,255.50 as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the re-letting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lessee and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. ESTOPPEL CERTIFICATE 35. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. SUCCESSORS AND ASSIGNS: 36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. - -------------------------- [hand graphic with finger pointing right] Space to be filled in or deleted. SEE RIDER ATTACHED HERETO AND MADE A PART HEREOF IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. CUTTERMILL REALTY CO., Landlord, By: Belfer Development Corporation, G.P. Witness for Owner: ................................[CORP. SEAL] Andrew B. Belfer, V.P. ............................................ ......................................[L.S.] NYSERNet, Inc. Witness for Tenant: ................................[CORP. SEAL] /s/ Richard Mandelbaum ............................................ ......................................[L.S.] Richard Mandelbaum, President
ACKNOWLEDGMENTS CORPORATE OWNER STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in : that he is the - of the corporation described in and which executed the foregoing instrument, as OWNER: that he knows the seal of said corporation, that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ________________________________________________________________________________ INDIVIDUAL OWNER STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known and known to me to be the individual described in and who, as OWNER, executed the foregoing instrument and acknowledged to me that he executed the same. ________________________________________________________________________________ CORPORATE TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he is the of the corporation described in and which executed the foregoing instrument, as TENANT: that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ________________________________________________________________________________ INDIVIDUAL TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known and known to me to be the individual described in and who, as TENANT, executed the foregoing instrument and acknowledged to me that he executed the same. ________________________________________________________________________________ 6 ASSUMPTION AND ACCEPTANCE OF LEASE This Assumption and Acceptance of Lease (the "Agreement"), is made and entered into this 2nd day of December, 1996, by and among, Cuttermill Realty Co., having an office for the transaction of business at 40 Cuttermill Road, Great Neck, New York 11021 ("Landlord"), NYSERNet, Inc., having an office for the transaction of business at 40 Cuttermill Road, Great Neck, New York 11021 ("Tenant"), NYSERNet.net, Inc., NYSERNet.org, Inc. and AppliedTheory Communications, Inc. (each individually an "Assuming Party" and collectively the "Assuming Parties"). W I T N E S S E T H : WHEREAS, Landlord and Tenant entered into a certain Lease Agreement, dated May 8, 1996, (the "Lease") under the terms of which Landlord demised certain premises (the "Premises") to Tenant, such premises being more fully described in the Lease. WHEREAS, as of December 2, 1996 (the "Effective Date") the Tenant desires to have the Assuming Parties execute an assumption and acceptance of the Lease by granting a wholly undivided interest in all of Tenant's rights, title, estate and interest as tenant under the Lease, and each of the Assuming Parties, jointly and severally desire to assume all of Tenant's duties and obligations as tenant under the Lease, subject to the terms and conditions hereinafter set forth. WHEREAS, Landlord is willing to consent to this arrangement. NOW, THEREFORE, in consideration of this Agreement and the covenants and obligations hereinafter set forth, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Tenant hereby conveys, transfers and grants to each of the Assuming Parties a wholly undivided interest in all of Tenant's rights, title, estate and interest in and to the Lease and the leasehold estate created thereby effective as of the Effective Date. 2. Each of the Assuming Parties hereby jointly and severally assume and accept from Tenant, all of Tenant's right, title estate and interest in and to the Lease and leasehold estate created thereby and each Assuming Party hereby jointly and severally assumes all of the duties and obligations of the Tenant under the Lease arising on or after the Effective Date. -1- 7 3. The Assuming Parties, jointly and severally, hereby agree (i) to pay to Landlord, upon receipt of Landlord's invoice therefore, all rentals and other charges accruing under the Lease for any period on or prior to the Effective Date or relating to any period prior to the Effective Date and (ii) to perform, keep and observe all covenants, terms, conditions and provisions required to be performed, kept and/or observed by the Tenant under the Lease accruing or required to be performed, kept or observed prior to, or relating to the period prior to, the Effective Date. 4. The Assuming Parties, jointly and severally, hereby agree (i) to pay to Landlord all rentals and other charges accruing under the Lease on or after to the Effective Date and (ii) to perform, keep and observe all covenants, terms, conditions and provisions required to be performed, kept and/or observed by the Tenant under the Lease accruing or required to be performed, kept or observed on or after, or relating to the period commencing with, the Effective Date. 5. Landlord hereby consents to the Assuming Parties' assumption and acceptance of Tenant's rights and liabilities under the Lease. Nothing contained in the Agreement shall be construed as releasing Tenant from any liability under the Lease incurred or arising prior to or subsequent to the Effective Date, including, without limitation, any claim of any third party arising prior to or subsequent to the Effective Date. 6. For purposes of the Lease, each Assuming Parties' mailing address shall be 40 Cuttermill Road, Great Neck, New York 11021. 7. Persons signing this Agreement in a representative capacity warrant their authority to do so. 8. Each Assuming Party acknowledges receipt of a copy of the Lease. -2- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CUTTERMILL REALTY CO., Landlord NYSERNet, Inc., Tenant By: Belfer Development Corporation, General Partner By: /s/ Andrew B. Belfer By: /s/ Richard Mandelbaum ------------------------- ------------------------------ Andrew B. Belfer, Pres. Richard Mandelbaum, Pres. NYSERNet.net, Inc. By: /s/ David A. Buckel ----------------------------------- NYSERNet.org, Inc. By: /s/ David A. Buckel ----------------------------------- AppliedTheory Communications, Inc. By: /s/ David A. Buckel ----------------------------------- -3- EX-10.07 9 LEASE AGREEMENT 1 EXHIBIT 10.07 STANDARD OFFICE SPACE LEASE Name of Office Building: INTERSTATE PLACE 1 Location of Office Building: 125 ELWOOD DAVIS ROAD LIVERPOOL, NEW YORK 13088 Landlord: ELWOOD DAVIS ROAD COMPANY Tenant: NYSERNET, INC. 2 TABLE OF CONTENTS ARTICLE 1 ..................................................................2 Premises...............................................................2 ARTICLE 2 ..................................................................2 Term of Lease..........................................................2 ARTICLE 3 ..................................................................3 Rent, Taxes and Lease Year.............................................3 ARTICLE 4 ..................................................................5 Construction, Financing and Alterations................................5 ARTICLE 5 ..................................................................6 Use of Premises .......................................................6 ARTICLE 6 ..................................................................6 Operating Costs .......................................................6 ARTICLE 7 ..................................................................7 Energy Costs and Water ................................................7 ARTICLE 8 ..................................................................8 Repairs ...............................................................9 ARTICLE 9 ..................................................................9 Indemnity .............................................................10 ARTICLE 10 .................................................................10 Insurance .............................................................10 ARTICLE 11 .................................................................11 Fire and Other Casualties .............................................11 ARTICLE 12 .................................................................11 Eminent Domain ........................................................11 ARTICLE 13 .................................................................12 Bankruptcy and Default Provisions .....................................12 ARTICLE 14 .................................................................13 Mechanic's Liens ......................................................14 ARTICLE 15 .................................................................14 Mortgages, Assignments, Subleases and Transfers of Tenant's Interest ..14 ARTICLE 16 .................................................................15 Subordination of Lease ................................................15 ARTICLE 17 .................................................................16 Entry of Premises .....................................................16 ARTICLE 18 .................................................................16 Notices and Certificates ..............................................16 ARTICLE 19 .................................................................17 Covenant of Quiet Enjoyment ...........................................18 ARTICLE 20 .................................................................18 Services ..............................................................18 ARTICLE 21 .................................................................18 Certain Rights Reserved to Landlord ...................................18 ARTICLE 22 .................................................................19 Miscellaneous Provisions ..............................................19 3 STANDARD OFFICE SPACE LEASE AGREEMENT made this 13th day of February, 1996, by and between the following parties: Landlord: ELWOOD DAVIS ROAD COMPANY --------------------------------------------------------------------- (Correct Legal Name of Landlord) a partnership organized and existing under the laws of the State of New York with its mailing address for notices and principal office at: 5786 WIDEWATERS PARKWAY P.O. BOX 3 DEWITT, NEW YORK 13214-0003 Attention: THE WIDEWATERS GROUP, INC. (MANAGEMENT DIVISION) hereinafter referred to as the "Landlord", and Tenant: NYSERNET, INC. ----------------------------------------------------------------------- (Correct Legal Name of Tenant) a corporation organized and existing under the laws of the State of New York with its principal office at: 125 ELWOOD DAVIS ROAD - ------------------------------------------------------------------------------- (Street Address) LIVERPOOL ONONDAGA NEW YORK 13088 - -------------------------------------------------------------------------------- (City or Town) (County) (State) (Zip Code) Attention: Patricia Foster ------------------------------------------------ (Name of Person or Office to Receive Notices) SSN or Fed. Tax ID # --------------------------------------- Tenant has made an application for a Federal Tax Identification Number and hereby agrees that it shall provide Landlord with said number within five (5) days of Tenant's receipt of the same. hereinafter referred to as the "Tenant." Landlord has appointed The Widewaters Group, Inc. the Managing Agent, and Landlord has granted to The Widewaters Group, Inc. the authority to rent, operate and manage the Building on behalf of and in the name of Landlord. 1 4 WITNESSETH: ARTICLE 1 Premises 1.01 - Premises Landlord hereby leases to Tenant and Tenant hereby leases and hires from Landlord those certain premises in THE INTERSTATE PLACE 1 OFFICE BUILDING (hereinafter called the "Building") which is located in the County of Onondaga and State of New York, which premises are located on the 1st and 2nd floor(s) of the Building and are outlined on the floor plan(s) attached hereto and made a part hereof as Exhibit "A", together with the right to use, in common with others, the Building Common Areas and Outside Common Areas as hereinafter defined. For purposes of this paragraph 1.01, the sum of the square feet in the Premises and Tenant's share of Building Common Areas (as defined in paragraph 1.02 hereof) shall be 17,770 leaseable square feet, 14,732 square feet of which are to be improved by Landlord in accordance with the provisions of Exhibit "C", attached hereto and made a part hereof, and 3,038 square feet of which shall be accepted by Tenant in their "AS IS" condition (such premises are collectively hereinafter referred to as the "Premises"). Upon execution of this Lease, the Building contains 21,242 leaseable square feet of space. The Premises shall include the area bounded by: the center line of any walls common to adjacent tenants, the Building Common Area side of any wall adjoining Building Common Areas (but not the surface thereof), the line established by the exterior face of the exterior walls of the Building, the concrete floor surface and the lower surface of the next higher floor (or roof). Landlord reserves unto itself, its successors and assigns, the right to install, maintain, use, repair and replace pipes, ducts, conduits, wires and structural elements leading through the Premises in locations which will not materially interfere with Tenant's use of the Premises. No right to use any part of the exterior of the Building and no easement for light or air are included in the lease of the Premises hereby made. 1.02 - Definition of Building Common Areas "Building Common Areas" shall be defined to mean all areas, space, equipment, signs and special services provided by Landlord specifically for the Building or for the common or joint use and benefit of all the tenants in the Building, their employees, agents, customers, visitors and other invitees, including without limitation, hallways, corridors, trash rooms, mechanical and electrical rooms, storage rooms, stairways, entrances, elevators, rest rooms, lobbies, stairs, loading docks, pedestrian walks, roofs and basements, janitor's and storage closets within the Building and all other common rooms and common facilities within the Building. 1.03 - Definition of Outside Common Areas The term "Outside Common Areas" is defined to mean the land described on Exhibit "B" attached hereto and made a part hereof, or such portion thereof as is from time to time devoted to uses associated with the Building, and any adjacent, contiguous or other land which may from time to time be devoted to uses associated with the Building, together with such improvements as may from time to time be erected upon or under any of such lands, including, but not limited to, parking areas, lighting facilities, utility lines, sidewalks, covered walkways, underground walkways, driveways, plazas, courts, retaining walls, access roads, truck serviceways and landscaped areas, signs and equipment. ARTICLE 2 Term of Lease 2.01 - Initial Term The initial term of this Lease shall be one hundred and twenty (120) months. 2.02 - Construction Completed In the event construction of the Premises is completed at the date of execution of this Lease, the aforesaid initial term of this Lease shall commence on the ______ day of ___________, 19___ and shall end on the ______ day of ___________, 19___. If the preceding blanks are not filled in, this shall mean that paragraph 2.03 applies and this paragraph 2.02 shall be disregarded. 2.03 - Construction Not Completed In the event construction of the Premises is not completed at the date of execution of this Lease, the initial term of this Lease shall commence on the date when the Premises are ready for occupancy, provided however, that if Tenant takes possession of the Premises earlier than the date so determined, the term of this Lease shall commence upon the date Tenant first occupies the Premises. 2 5 THE PARTIES AGREE TO EXECUTE AND DELIVER A WRITTEN STIPULATION OF TERM OF LEASE IN THE FORM ATTACHED HERETO AS EXHIBIT "G" PREPARED BY LANDLORD EXPRESSING THE COMMENCEMENT AND TERMINATION DATES OF THE INITIAL TERM HEREOF WHEN SUCH DATES HAVE BEEN DETERMINED. The Premises shall be deemed "ready for occupancy" on the date that there is delivered to Tenant a statement in writing by Landlord stating that possession of the Premises is available to Tenant and certifying that the following conditions have been fulfilled: (a) That the Landlord has substantially completed all of Landlord's work mentioned in Exhibit "C" hereto annexed. Substantially completed shall mean that Tenant may commence the installation of its fixtures and equipment without significant interference from Landlord's workmen and that facilities shall have been installed in the Premises to insure reasonable security of said fixtures and equipment. (b) That adequate facilities exist for safe and convenient access to and egress from the Premises by persons for the purposes of readying the Premises for the conduct of Tenant's business therein. 2.04 - Term Commencement Date The date of commencement of the term of this Lease as determined under paragraph 2.02 or 2.03, whichever is applicable, is herein referred to as the "Term Commencement Date." The word "term" shall, unless otherwise expressly provided to the contrary, be deemed to include the initial and any renewal term. 2.05 - Condition of Premises Tenant's taking possession shall be conclusive evidence as against Tenant that the Premises were in good order and satisfactory condition when Tenant took possession, EXCEPTING MINOR PUNCH-LIST ITEMS TO BE COMPLETED BY LANDLORD WITHIN A REASONABLE PERIOD OF TIME FOLLOWING THE DATE OF DELIVERY, AND LATENT DEFECTS. At the termination of this Lease, Tenant shall return the Premises broom clean and in as good condition as when Tenant took possession, ordinary wear and loss by fire or other casualty excepted, failing which the Landlord may restore the Premises to such condition and Tenant shall pay the cost thereof. 2.06 - Tenant's Trade Fixtures and Personal Property Upon the expiration or sooner termination of this Lease, Tenant shall remove all of its trade fixtures and other property from the Premises and shall promptly repair any damage caused to the Premises or to the Building by such removal. If the Tenant fails to so remove any trade fixtures or other property of Tenant prior to vacating the Premises, such fixtures and/or other property shall be deemed abandoned by Tenant and shall become the property of Landlord or, at Landlord's option, Landlord may cause the fixtures or property to be removed at Tenant's expense. 2.07 - Expiration Date The expiration date of the term of this Lease shall be the last day of the month in which the term is to expire. ARTICLE 3 Rent, Taxes and Lease Year 3.01 - Fixed Monthly Rent Tenant agrees to pay to Landlord at the offices of Landlord, or at such other place designated by Landlord, without any prior demand therefor and without any deduction or set-off whatsoever, fixed monthly rent in accordance with the following schedule: MONTH OF LEASE TERM: FIXED MONTHLY RENT: -------------------- ------------------ Months 01-02, inclusive: $18,981.51 Months 03-60, inclusive: $21,639.76 Months 60-120, inclusive: $21,639.76 (each monthly installment sometimes referred to herein as "fixed monthly rent"), payable in advance upon the first day of each calendar month during the term hereof. The monthly installment shall be deemed to have been paid upon such first day only if actually received by such first day. If the term shall commence or terminate upon a day other than the first (or in the case of termination the last) day of a calendar month, Tenant shall pay, upon the Term Commencement Date, and on the first day of the last calendar month, a pro rata portion of the fixed monthly rent for the first and last fractional calendar month, respectively, prorated on a per diem basis with respect to such fractional calendar month. 3 6 3.02 - Taxes (a) Landlord shall, in the first instance, pay during the term of this Lease, to the public officers charged with the collection thereof, all Building Taxes as hereinafter defined. The term "Building Taxes" shall be deemed to include (i) all real property taxes (which shall be deemed to include all property taxes and assessments, water and sewer rates and charges, which may be levied or assessed by any lawful authority against the Building, the Building Common Areas and the Outside Common Areas. The amounts required to be paid by Landlord or any tenant or occupant of the Building pursuant to any Payment in Lieu of Tax Agreement entered into with a taxing authority having jurisdiction over the Building shall be considered for the purposes of this Lease to be included within the definition of Building Taxes. (b) During the term of this Lease, Tenant agrees to pay to Landlord as additional rent, Tenant's Allocable Share (computed pursuant to paragraph 22.10(b) hereof) of the amount by which Building Taxes payable by Landlord under paragraph 3.02(a) above for each lease year exceeds said Building Taxes payable during the Tax Base Year as hereinafter defined. The term "Tax Base Year" for purposes of this Lease shall mean THE 1995-1996 SCHOOL TAX YEAR for School Taxes and THE 1996 CALENDAR YEAR for State, Town and County Taxes. At the beginning of each lease year, Landlord will submit to Tenant Landlord's estimate of the increases in Building Taxes for the following lease year. Within ten (10) days after receipt of such estimate, (and thereafter on the first day of each month without invoice) Tenant shall pay to Landlord an amount equal to one twelfth (1/12) of Tenant's Allocable Share of such estimated increase. At the end of each lease year or partial lease year, Landlord will furnish to Tenant a statement setting forth the actual Building Taxes payable during such lease year, comparing such actual Building Taxes with the Building Taxes for the Tax Base Year and also comparing Tenant's Allocable Share of the increase as estimated by Landlord and paid by Tenant with Tenant's Allocable share of the actual increase in Building Taxes for such lease year. Any overpayment or underpayment by Tenant shall be promptly adjusted by payment within fifteen (15) days of the balance of any underpayment for such year by Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment for such year, or at Landlord's election by applying such overpayment by Tenant as a credit to the next succeeding monthly installments of increases in Building Taxes, or to offset any then existing monetary default by Tenant under this Lease. A copy of a tax bill or assessment bill submitted by Landlord to Tenant shall at all times be sufficient evidence of the amount of Building Taxes levied or assessed against the property to which such bill relates. (c) Tenant shall at all times be responsible for and pay, before delinquency, all municipal, county, state or federal taxes assessed against its leasehold interest or any fixtures, furnishing, equipment, stock-in-trade or other personal property of any kind owned, installed or used in or on the Premises. (d) Should any governmental taxing authority acting under any present or future law, ordinance or regulation, levy, assess or impose a tax, excise, surcharge and/or assessment (other than a tax on net rental income or franchise tax) upon or against the rents payable by Tenant to Landlord, or upon or against the Building, the Building Common Areas or the Outside Common Areas, either by way of substitution for or in addition to any existing tax on land or buildings or otherwise, Tenant shall be responsible for and shall pay Tenant's Allocable Share of such tax, excise, surcharge and/or assessment in the manner provided in subparagraph (b) above. (e) Landlord may seek a reduction in the assessed valuation (for real estate tax purposes) of the Building in which the Premises are situate by administrative or legal proceeding. Tenant shall pay to Landlord Tenant's Allocable Share of Landlord's costs for said proceedings including but not limited to, special counsel, counsel's reimbursable expenses, and special appraisers if required, Tenant's Allocable Share of Landlord's costs being computed under paragraph 22.1(b). In the event that the assessed valuation of the Building is reduced as aforementioned or in any other manner, all future computations of Tenant's Allocable Share of Building Taxes shall be made with respect to the new assessed valuation. Upon receipt of any refund resulting from any proceeding for which Tenant has paid Tenant's Allocable Share of Landlord's costs and has paid Tenant's Allocable Share of excess Building Taxes under paragraph 3.02(b) above, Landlord shall recompute the amount that would have been due from Tenant and pay to Tenant the amount by which Building Taxes originally paid by Tenant exceed such recomputed amount. (f) Should any alternative or improvement performed by Tenant during the term of this Lease cause an increase in assessment, AS EVIDENCED BY A LETTER FROM THE TOWN OF SALINA TAX ASSESSOR, OR OTHER MUNICIPAL AUTHORITY HAVING APPROPRIATE JURISDICTION, Tenant shall pay to Landlord the cost of all taxes resulting from such increase in assessment. Any amount paid separately hereunder by Tenant to Landlord shall be in addition to any amounts paid by Tenant pursuant to paragraph 3.02(b) above. 7 3.03 - Past Due Rent If, during the term of this Lease, Tenant shall fail to pay any installment of fixed monthly rent or additional rent or any other charge hereunder when the same is due and payable, Tenant shall pay Landlord, in addition to such installment of fixed monthly rent or additional rents or any charge, without notice or demand by Landlord, a sum equal to one-tenth (1/10) of the payment due, said additional sum payable as herein required being the agreed liquidated damages for Tenant's late payment of any installment not paid when due. If Tenant's failure to pay any such installment continues for more than thirty (30) days from the original date such installment was due,Landlord shall have the right to impose as additional liquidated damages a sum equal to one-tenth (1/10) of the amount then due. Nothing contained in the paragraph 3.03 shall be construed to be a limitation of or in substitution of Landlord's rights and remedies under Article 13. Any payments by Tenant to Landlord shall first be applied to satisfy any past due rent charges under this Section, THEN USED, APPLIED OR RETAINED, THE WHOLE OR ANY PART OF THE BALANCE OF THE PAYMENTS RECEIVED, TO THE EXTENT REQUIRED, TOWARD THE PAYMENT OF ANY FIXED MONTHLY RENT AND ADDITIONAL RENT OR ANY OTHER SUM WHICH MAY BE DUE UNDER THE LEASE FROM TENANT (WHETHER BY ACCELERATION OR OTHERWISE), OR FOR ANY SUM WHICH LANDLORD MAY EXPEND OR MAY BE REQUIRED TO EXPEND BY REASON OF TENANT'S DEFAULT IN RESPECT OF ANY OF THE TERMS, COVENANTS AND CONDITIONS OF THE LEASE, before being applied by Landlord for any other purpose. Tenant shall pay to Landlord an administrative fee of $100.00 for each and every check submitted by Tenant which is dishonored. If Landlord receives form Tenant two or more checks which have been dishonored, all checks from Tenant thereafter shall, at Landlord's option, be either certified or cashier's checks. NOTWITHSTANDING THE FOREGOING, TENANT SHALL NOT BE OBLIGATED TO PAY THE FOREGOING LIQUIDATED DAMAGES WITH RESPECT TO THE FIRST THREE (3) LATE PAYMENTS OF ANY CHARGE HEREUNDER DURING ANY TWELVE (12) MONTH PERIOD, PROVIDED THAT LANDLORD RECEIVES SAID PAYMENT WITHIN FIVE (5) DAYS OF ITS DUE DATE. 3.04 - Definition of Lease Year and Partial Lease Year The term "lease year" is defined to mean a period of twelve (12) consecutive calendar months, the first full lease year commencing on the first day of January following the Term Commencement Date, and each succeeding lease year commencing on the anniversary of the commencement of the first full lease year. Any portion of the term which is less than a lease year shall be deemed a "partial lease year" and computations requiring proration shall be pro rated on a per diem basis using a 365 day year. Landlord reserves the right to designate and change the beginning and ending day of the lease year, notice of which shall be given to Tenant. 3.05 - Security Deposit Intentionally deleted. 3.06 - Place for Payments (a) Tenant shall deliver to Landlord all payments of fixed monthly rent, additional rent, and other sums at the office of Landlord shown on page 1 of this Lease or such other place as may be designated by Landlord. Checks should be made payable to The Widewaters Group, Inc. (b) Intentionally deleted. ARTICLE 4 Construction, Financing and Alterations 4.01 - Landlord's Obligation Landlord shall, at its cost and expense (except as otherwise specified in Exhibit "C"), construct the Premises for Tenant's use and occupancy in accordance with plans and specifications prepared by Landlord or Landlord's architect, incorporating in such construction all items of work described in Exhibit "C" attached hereto and made part hereof. LANDLORD AND TENANT ACKNOWLEDGE THAT LANDLORD SHALL BE OWNER OF THE IMPROVEMENTS DESCRIBED IN EXHIBIT "C". LANDLORD FURTHER ACKNOWLEDGES THAT LANDLORD SHALL BE RESPONSIBLE FOR REPORTING DEPRECIATION FOR SUCH IMPROVEMENTS TO THE INTERNAL REVENUE SERVICE OVER THE APPLICABLE SCHEDULED TIME PERIOD. Any work in addition to any of the items specifically enumerated in said Exhibit "C" shall be performed by Tenant at its own cost and expense, or if Landlord installs or constructs any of such additional work in the Premises at Tenant's request it shall be paid for by Tenant within fifteen (15) days after receipt of a bill therefor. 4.02 - Financing If Landlord can obtain mortgage financing or refinancing only upon the basis of modifications of the terms and provisions of this Lease, Landlord shall have the right to cancel this Lease if Tenant refuses to approve in writing any such modifications within thirty (30) days after Landlord's request thereof. The lease modifications referred to herein shall not relate to those provisions pertaining to length of the term on the Lease, amount of rent, additional rent, and other charges, NOR SHALL SUCH MODIFICATIONS EITHER INCREASE TENANT'S LIABILITIES NOR DECREASE 8 ITS RIGHTS HEREUNDER. If such right to cancel is exercised, this Lease shall thereafter be null and void, any money or prepaid rent deposited hereunder shall be returned to Tenant, and neither party shall have any liability to the other by reason of such cancellation. In the event of a refinancing or a bona fide sale of the Building by Landlord, Tenant shall, immediately upon request therefor, provide to Landlord a balance sheet and a statement of income and expenses for Tenant's last fiscal year. 4.03 - Tenant's Obligation Tenant shall, at its cost and expense, perform the work described in Exhibit "D" attached hereto and made a part hereof (herein referred to as "Tenant's Work"). Tenant acknowledges its ability to perform such work and no delay in its performance shall cause or be deemed to cause any delay or postponement of the Term Commencement Date, UNLESS ANY SUCH DELAY(S) IN TENANT'S PERFORMANCE IS SHOWN TO BE CAUSED WHOLLY OR IN PART BY LANDLORD. Tenant agrees, at Tenant's expense, to obtain and maintain for so long as Tenant's Work continues, insurances of the type and in the amounts set forth in Exhibit "D" to fully protect Landlord as well as Tenant from and against any and all liability for death and personal injury or damage to property caused in or about the Premises by reason of the performance of Tenant's Work. Tenant shall furnish to Landlord certificates evidencing said coverage prior to the commencement of Tenant's Work. 4.04 - Alterations, Additions and Improvements Tenant shall not make any alterations, additions or improvements in or to the Premises without the prior written consent of Landlord, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED, and then only by contractors approved by Landlord. If Landlord shall grant its consent, Tenant shall provide Landlord with certificates evidencing the insurance coverages and limits required by Exhibit "D" prior to the commencement of any such work. Tenant shall not make nor permit any defacement, injury or waste in, to or about the Premises or any part of the Building. Tenant agrees that any improvements as may be installed within the Premises by Tenant pursuant to this paragraph 4.04 shall, at the option of Landlord, remain as part of the Premises at the expiration of the Lease or any extension or renewal thereof. Landlord, however, shall have the right to require Tenant to remove any alterations, additions or improvements so made. Tenant shall, at its expense, repair or cause to be repaired any damage to the Premises caused by such removal. UPON TENANT'S WRITTEN INQUIRY, LANDLORD SHALL NOTIFY TENANT AT THE TIME OF TENANT'S MAKING OF SUCH IMPROVEMENTS AS TO WHETHER OR NOT LANDLORD SHALL REQUIRE SUCH REMOVAL OF ANY ALTERATION, ADDITION OR IMPROVEMENT AT THE END OF THE LEASE TERM. IT IS HEREBY STIPULATED THAT TENANT SHALL NOT BE REQUIRED TO REMOVE IMPROVEMENTS MADE TO THE PREMISES BY LANDLORD AS PART OF LANDLORD'S WORK OR BY TENANT PRIOR TO THE TERM COMMENCEMENT DATE. ARTICLE 5 Use of Premises 5.01 - Use of Premises Tenant agrees to use the Premises for general office purposes and for no other purpose whatsoever. Tenant further agrees to comply with the rules and regulations set forth in Exhibit "E" attached hereto and made a part hereof, and with such reasonable modifications thereof and additions thereto as Landlord may hereafter from time to time make for the Building, the Building Common Areas or the Outside Common Areas. Landlord shall not be responsible for the non-observance by any other tenant of any of said rules and regulations and shall not be responsible to Tenant for any violation of the rules and regulations, or the covenants or agreements contained in any other lease, by any other tenant of the Building, or its agents or employees. ARTICLE 6 Operating Costs 6.01 - Definitions (a) The term "Operating Costs" shall be deemed to include (i) the costs of operating, managing, and maintaining the Building, the Building Common Areas and the Outside Common Areas, including, but without limiting the generality of the foregoing, the cost of: gardening and landscaping; parking lot repair, maintenance and line restriping; janitorial and cleaning services (which shall be deemed to include labor, materials and supplies for cleaning any office space in the Building, whether or not leased to tenants, including the Premises); insurance premiums; repairs to the Building and roof; painting and caulking; refinishing; glass repair; the maintenance and repair of lighting, utilities, sanitary control facilities, and heating, ventilating and air-conditioning systems and equipment; removal of snow, ice, trash, waste and refuse in compliance with any and all recycling laws, rules and regulations imposed by the municipality in which the Building is located and specifically excluding any hazardous or toxic wastes (including but not limited to petroleum products, medical waste, etc.) which shall be disposed of by 6 9 Tenant at Tenant's own cost and expense; traffic control and policing; fire and security protection; SUBJECT TO SECTION 6.01(b)(iv) BELOW, the cost, as reasonably amortized by Landlord, with annual interest at the prime rate in existence at the time of completion of the improvement ("Prime Interest Rate"), of any capital improvement made after calendar year 1996 in compliance with the requirements of any federal, state or local law or governmental regulation; the cost, as reasonably amortized by Landlord, with interest with annual interest at the Prime Interest Rate, of any other capital improvement made after calendar year 1996; maintenance, replacement and rental of signs and equipment; depreciation of the capital cost of any machinery, equipment and vehicles used in connection with the operation and maintenance of the Outside Common Areas and Building Common Areas; repair of on-site water lines, sanitary and storm sewer lines; personnel costs; holiday and other decorations; and related costs to implement such services. (b) Operating Costs shall not include (i) franchise or income taxes imposed on Landlord, except to the extent hereinbefore provided, (ii) the cost to Landlord for any work or service performed in any instance for any tenant (including Tenant( at the cost of such tenant, (iii) the cost of improvements performed for tenants as Landlord's work or (iv) REPAIRS OR REPLACEMENTS WHICH, UNDER SOUND ACCOUNTING PRINCIPALS AND PRACTICES CONSISTENT WITH THE OPERATION OF COMMERCIAL OFFICE BUILDINGS, SHOULD BE CLASSIFIED AS CAPITAL EXPENDITURES (EXCEPT THAT IF ANY SUCH REPAIR OR REPLACEMENT IS OF SUCH A NATURE THAT IT SHOULD BY CONSIDERED UNDER GOOD ACCOUNTING PRACTICE A DEFERRED EXPENSE AND SPREAD OVER A PERIOD OF NOT OVER TEN (10) YEARS, THE OPERATING COST FOR A LEASE YEAR SHALL INCLUDE ONLY THE PROPORTIONATE SHARE OF SUCH DEFERRED EXPENSES, APPROPRIATELY ALLOCATED TO SUCH YEAR). 6.02 - Tenant to Share Increases in Operating Costs (a) Tenant agrees to pay to Landlord, as additional rent, monthly (or less frequently as Landlord shall determine) within ten (10) days after receipt of Landlord's estimate therefor (and thereafter on the first day of each month without invoice) an amount equal to one twelfth (1/12) of Tenant's Allocable Share (computed pursuant to paragraph 22.10(a) hereof) of the estimated amount by which Operating Costs for each lease year exceed the Operating Costs for the Base Period as hereinafter defined. The "Base Period" for purposes of this Lease shall mean that period consisting of twelve (12) consecutive calendar months, the first of which shall be the month following the month in which the TENANT first takes occupancy of the Building or any part thereof. In determining the amount of Operating Costs for any lease year or partial lease year, (1) if less than 100% of the square feet leasable in the Building shall have been occupied by tenants at any time during a lease year or partial lease year, Operating Costs shall be deemed, for purposes of this Article 6, to be increased to an amount equal to like operating costs which would normally be expected to be incurred, had such occupancy been 100% during the entire period, or (2) if Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute Operating Costs) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Costs shall be deemed for the purposes of this Article to be increased by an amount equal to the additional Operating Costs which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished which work or service to such tenant. (b) Following the end of each lease year (or partial lease year), Landlord shall furnish to Tenant a comparative statement showing Tenant's Allocable Share of the Operating Costs during such year and the amounts paid by Tenant (based on Landlord's estimate of increases in Operating Costs) attributable to such year. Any overpayment or underpayment by Tenant shall be promptly adjusted by payment, within fifteen (15) days, of the balance of any underpayment for such year by Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment for such year, or at Landlord's election by applying such overpayment by Tenant as a credit to succeeding monthly installments of increases in Operating Costs, or to offset any then existing monetary default by Tenant under this Lease. Landlord and Tenant shall use their best efforts to minimize such costs of operation, management and maintenance in a manner consistent with generally accepted office building practices. (c) Tenant covenants and agrees to promptly pay Landlord as additional rent, upon demand, the amount of any increase in costs for trash removal from the Premises or any other part of the Building that results by reason of Tenant's extraordinary trash removal requirements, including but not limited to the removal of Tenant's purged files, the disposal of boxes, and any governmental fines resulting from Tenant's non-compliance with local recycling laws, rules or regulations. ARTICLE 7 Energy Costs and Water 7.01 - Definitions As used in this Lease "Occupant HVAC Energy" shall mean the cost of all energy of any kind which is consumed for purposes of hearing, ventilating and/or air conditioning all leasable space within the Premises during the normal operating hours for the Building. "Occupant Extra HVAC Energy" shall mean the cost of all energy of any kind which is consumed for the purposes of heating, ventilating and/or air conditioning all leasable space within the Premises during hours which are in addition to the normal operating hours for the Building as set forth in Section 20.01 of this Lease. "Occupant Lights and Outlets Energy" shall mean the cost of all energy of any kind which is consumed by the lighting fixtures and electrical convenience plugs and outlets in all leasable space 7 10 within the Building during all hours of each day. "Building Energy Costs and Water" shall mean (i) the cost of all energy of any kind consumed within the Building Common Areas and the Outside Common Areas, and (ii) the Occupant HVAC Energy. 7.02 - Tenant to Share Increases in Building Energy Costs and Water (a) Tenant agrees to pay Landlord as additional rent, monthly, within ten (10) days after receipt of Landlord's estimate therefore (and thereafter on the first day of each month, without invoice) an amount equal to one-twelfth (1/12) of Tenant's Allocable Share (computed under paragraph 22.10(a)hereof) of the estimated amount by which Building Energy Costs and Water for each lease year exceed the Base Amount as hereinafter defined. The term "Base Amount" for purposes of this Lease shall be (i) the amount computed by applying the electrical rate in effect during the month following the month in which the TENANT takes occupancy of the Building or any part thereof to the total kilowatt hours of usage (computed monthly) during the twelve (12) consecutive month period commencing with the month following the Term Commencement Date and (ii) the actual cost of all water used in the Building during the aforementioned twelve (12) month period. In determining the amount of Building Energy Costs and Water for the purpose of this Article 7 for any lease year or partial lease year, (1) if less than 100% of the square feet leasable in the Building shall have been occupied by tenants at any time during a lease year or partial lease year, Building Energy Costs and Water shall be deemed for the purposes of this Article to be increased to an amount equal to the like Building Energy Costs and Water which would normally be expected to be incurred, had such occupancy been 100% during the entire period, or (2) if Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute Building Energy Costs and Water) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Building Energy Costs and Water shall be deemed for the purposes of this Article to be increased by an amount equal to the additional Building Energy Costs and Water which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. (b) Following the end of each lease year (or partial lease year), Landlord shall furnish to Tenant a comparative statement showing Tenant's Allocable Share of the Building Energy Costs and Water during such year and the amounts paid by Tenant (based on Landlord's estimates of increases in Building Energy Costs and Water) attributable to such year. Any overpayment or underpayment by Tenant shall be promptly adjusted by payment, within (30) days, of the balance of any underpayment for such year by Tenant to Landlord, or by Landlord to Tenant of the balance of any overpayment for such year, or at Landlord's election by applying such overpayment for such year as a credit to succeeding monthly installments of increases in Building Energy Costs and Water, or to offset any then existing monetary default by Tenant under this Lease. The Building Energy Costs and Water hereinabove described in this Article 7 shall be subject to review by Tenant at Landlord's office, and Landlord and Tenant shall use their best efforts to minimize such Building Energy Costs and Water. 7.03 - Charge for Occupant Lights and Outlets Energy Tenant agrees to pay to Landlord, as additional rent, a monthly charge for Occupant Lights and Outlets Energy in the sum of $1,258.71 being payable in advance on the first day of each calendar month during the term. The monthly charge for Occupant Lights and Outlets Energy as herein set forth was calculated by Landlord based upon the presumed usage by Tenant of (2) watts of electrical energy for each square foot of the Premises, during the normal operating hours of the Building and at the electric rate schedule referred to in the definition of Base Amount in paragraph 7.02(a). FOLLOWING THE END OF EACH LEASE YEAR (OR PARTIAL LEASE YEAR), LANDLORD SHALL FURNISH TO TENANT A COMPARATIVE STATEMENT SHOWING TENANT'S ACTUAL CONSUMPTION OF ELECTRIC ENERGY AND THE AMOUNTS PAID BY TENANT FOR THE SAME UNDER THIS SECTION 7.03 ATTRIBUTABLE TO SUCH YEAR. BASED ON TENANT'S ACTUAL USAGE, ANY OVERPAYMENT OR UNDERPAYMENT BY TENANT SHALL BE PROMPTLY ADJUSTED BY PAYMENT, WITHIN THIRTY (30) DAYS, OF THE BALANCE OF ANY UNDERPAYMENT FOR SUCH YEAR BY TENANT TO LANDLORD, OR BY LANDLORD TO TENANT OF THE BALANCE OF ANY OVERPAYMENT FOR SUCH YEAR, OR AT LANDLORD'S ELECTION BY APPLYING SUCH OVERPAYMENT BY TENANT AS A CREDIT TO SUCCEEDING MONTHLY INSTALLMENTS OF AMOUNTS DUE PURSUANT TO THIS SECTION 7.03, OR TO OFFSET ANY THEN EXISTING MONETARY DEFAULT BY TENANT UNDER THIS LEASE. In the event that tenant's consumption of energy or the cost thereof shall increase, Landlord shall adjust the monthly charge herein set forth so as to reflect such change, and Tenant agrees to pay to Landlord, as additional rent, the amount of such monthly charge, as adjusted, within thirty (30) days following Tenant's receipt of notice of the adjustment, and on the first day of each calendar month thereafter without notice or invoice. 7.04 - Separate Metering of the Premises (a) LANDLORD SHALL CAUSE THE OCCUPANT LIGHTS AND OUTLETS ENERGY, AS WELL AS THE HVAC ENERGY CONSUMED FOR THE PURPOSES OF HEATING, VENTILATING AND/OR AIR CONDITIONING TENANT'S MACHINE AND EQUIPMENT ROOM(S) LOCATED ON THE FIRST FLOOR OF THE PREMISES, TO BE SEPARATELY METERED FROM BOTH (i) THE BUILDING ENERGY COSTS AND WATER, AND (ii) THE OTHER PREMISES IN THE BUILDING WHICH ARE EITHER LEASED OR LEASEABLE TO OTHER TENANTS. (b) UPON THIRTY (30) DAYS ADVANCE WRITTEN NOTICE TO LANDLORD, TENANT MAY ELECT TO CONTRACT DIRECTLY WITH THE APPROPRIATE LOCAL AUTHORITY, MUNICIPALITY OR OTHER GOVERNMENTAL AGENCY TO OBTAIN SERVICE FOR TENANT'S OCCUPANT LIGHTS AND OUTLETS ENERGY REQUIREMENTS. TENANT COVENANTS AND AGREES THAT ALL TIMES DURING THE LEASE TERM, ITS USE OF ANY UTILITY SERVICE SHALL NEVER EXCEED THE CAPACITY OF THE MAINS, FEEDERS, DUCTS, CONDUITS AND LINES BRINGING THE SAME TO THE PREMISES, PROVIDED, HOWEVER, THAT TENANT MAY INCREASE THE 8 11 CAPACITY OF THE AFORESAID, WITH LANDLORD'S PRIOR WRITTEN APPROVAL, IF TENANT PAYS FOR AND PERFORMS ALL NECESSARY WORK THEREFOR (INCLUDING MAINTENANCE AND REPAIR OF SAME) AND, PROVIDED FURTHER, THAT NO WORK PERFORMED BY TENANT WILL RESULT IN ANY INCREASED EXPENSE TO LANDLORD IN ANY MANNER WHATSOEVER. 7.05 - Charge for Occupant Extra HVAC Energy In the event Tenant shall operate the heating, ventilating and/or air conditioning equipment within the Premises during hours which are in addition to the normal operating hours for the Building as set forth in Section 20.01 of this Lease to THE EXTENT SUCH EQUIPMENT SHALL NOT BE METERED SEPARATELY PURSUANT TO SECTION 7.04, ABOVE, Tenant agrees to pay to Landlord, as additional rent, the Occupant Extra HVAC Energy consumed during such period of time. Tenant agrees to pay such charge to Landlord within ten (10) days following Tenant's receipt of Landlord's invoice therefor. ARTICLE 8 Repairs 8.01 - Repairs Tenant shall give to Landlord prompt notice of any damage to, or defective condition in any Part of or appurtenance to the Building's plumbing, electrical, heating, air-conditioning or other systems serving, located in, or passing through the Premises. Subject to the provisions of Article 11, Tenant shall, at Tenant's own expense, keep the Premises, including everything therein (except the heating and air-conditioning systems), in good order, condition and repair during the term. Landlord shall, as part of the Operating Costs set forth in Article 6, maintain the heating and air-conditioning systems throughout the Building (including the Premises) and the outside walls, outside windows, roof and foundation of the Building containing the Premises in good order and repair. Repairs made by Landlord required due to negligence or fault of Tenant, its contractors, agents or employees shall be made at Tenant's expense, plus nineteen percent (19%) administrative charge. EXCEPTING ANY OF TENANT'S OBLIGATIONS AS MAY BE SPECIFICALLY SET FORTH IN THIS LEASE AND SUBJECT TO ANY REIMBURSEMENT WHICH MAY BE PERMITTED PURSUANT TO THE PROVISIONS OF ARTICLE 6, ABOVE, LANDLORD SHALL REPLACE THE ROOF, THE HVAC, PLUMBING AND ELECTRICAL SYSTEMS, AND STRUCTURAL PORTIONS THE BUILDING AND PREMISES AS THE SAME MAY BECOME NECESSARY. Tenant, at Tenant's expense, shall comply with all laws or ordinances, and all rules and regulations of all governmental authorities and of all insurance bodies at any time in force, applicable to the Premises or to Tenant's use thereof, except that Tenant shall not hereby be under any obligation to comply with any law, ordinance, rule or regulation requiring any structural alteration of or in connection with the Premises, unless such alteration is required by reason of a condition which has been created by, or at the instance of, Tenant, or is required by reason of a breach of any of Tenant's covenants and agreements hereunder. All repairs made by Tenant shall be made using contractors approved by Landlord, which approval shall not be unreasonably withheld. If Tenant fails or neglects to comply with any laws or ordinances, rules and regulations of any governmental authority or insurance body as herein required of Tenant, then Landlord or its agents may enter the Premises and make said repairs and comply with any laws or ordinances, or the rules and regulations of any governmental authority or insurance body at the cost and expense of the Tenant, plus a 19% administrative charge, and in case Tenant fails to pay therefor upon notice within five (5) days thereafter, the said cost and expenses shall be added to the next month's installment of fixed monthly minimum rent and be due and payable as such or Landlord may deduct the same from any balance remaining in Landlord's hands. This provision is in addition to the right of Landlord to terminate this Lease by reason of default on the part of Tenant. 8.02 - Hazardous Materials Tenant shall, at all times, comply with all local and federal laws, rules and regulations governing the use, handling and disposal of Hazardous Materials in the Premises including, but not limited to Section 1004 of the Federal Reserve Conservation and Recovery Act, 42 U.S.C. Section 6901 et. seq. (42 U.S.C. Section 6903) and any additions, amendments, or modifications thereto. As used herein, the term "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste including but not limited to petroleum products, which is, or becomes, regulated by any local or state government authority in which the Premises is located or the United States Government. Landlord and its agents shall have the right, but not the duty, to inspect the Premises at any time to determine whether Tenant is complying with the terms of this Section. If Tenant is not in compliance with this Section, Landlord shall have the right to immediately enter upon the Premises and take whatever actions reasonably necessary to comply including, but not limited to, the removal from the Premises of any Hazardous Materials and the restoration of the Premises to a clean, neat, attractive, healthy and sanitary condition. Tenant shall pay all such costs incurred by Landlord within ten (10) days of receipt of a bill therefor, plus nineteen percent (19%) administrative charge. LANDLORD ACKNOWLEDGES AND AGREES THAT IT SHALL BE RESPONSIBLE FOR THE PRESENCE OF ANY HAZARDOUS MATERIALS LOCATED IN OR AT THE BUILDING AND/OR THE BUILDING AND OUTSIDE COMMON AREAS WHICH ARE SHOWN TO HAVE BEEN PRESENT PRIOR TO THE TERM COMMENCEMENT DATE. 9 12 ARTICLE 9 Indemnity 9.01 - Indemnification by Tenant Tenant does hereby indemnify Landlord, Landlord's managing agent (and such other persons as are in privity of estate with Landlord) defend and save it harmless from and against any and all claims, actions, damages, liability and expense in connection with loss of life, personal injury and/or damage to property arising from or out of any occurrence in, upon or at the Premises, from or out of the occupancy or use by Tenant of the Premises, the Building Common Areas and/or Outside Common Areas or any part thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, lessees or concessionaires IN, UPON OR AT THE PREMISES, THE BUILDING COMMON AREAS AND/OR OUTSIDE COMMON AREAS OR ANY PART THEREOF. HOWEVER, NOTHING HEREIN SHALL BE DEEMED TO RELIEVE LANDLORD OF LIABILITY FOR ITS ACTS, OMISSIONS OR NEGLIGENCE OR THE ACTS, OMISSIONS OR NEGLIGENCE OF LANDLORD'S AGENTS, EMPLOYEES OR CONTRACTORS AND LANDLORD HEREBY INDEMNIFIES AND AGREES TO HOLD TENANT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DAMAGES, LIABILITY AND EXPENSE IN CONNECTION WITH THE LOSS OF LIFE, PERSONAL INJURY AND/OR DAMAGE TO PROPERTY ARISING FROM OR OUT OF SUCH ACTS, OMISSIONS OR NEGLIGENCE. IN CASE EITHER PARTY SHALL, WITHOUT FAULT ON ITS PART, BE MADE A PARTY TO ANY LITIGATION COMMENCED BY OR AGAINST THE OTHER, THEN SUCH PARTY AGREES TO PROTECT AND HOLD THE OTHER HARMLESS AND TO PAY ALL COSTS, EXPENSES AND REASONABLE ATTORNEY'S FEES INCURRED OR PAID BY SUCH PARTY IN CONNECTION WITH SUCH LITIGATION. THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER ALL COSTS, EXPENSES AND REASONABLE ATTORNEY'S FEES THAT MAY BE INCURRED OR PAID BY SUCH PARTY ENFORCING THE COVENANTS AND AGREEMENTS IN THIS LEASE. ARTICLE 10 Insurance 10.01 - Liability Insurance At all times during the term of this Lease, Tenant shall, at its sole cost and expense, maintain personal injury and property damage liability insurance, naming the Landlord as an additional insured party, against claims for personal injury, death or property damage occurring on, in or about the Premises during the term of this Lease of not less than Two Million Dollars ($2,000,000.00) with respect to personal injury, death or property damage, and including contractual liability coverage. In the event that Tenant shall not have delivered to Landlord a policy or certificate evidencing such insurance fifteen (15) days prior to the Term Commencement Date and fifteen (15) days prior to the expiration dates of each expiring policy, Landlord may obtain such insurance as it may reasonably require to protect its interest, and the cost of such policies shall be paid by Tenant to Landlord as additional rent upon demand, plus nineteen percent (19%) administrative charge. 10.02 - All Risks and Difference in Conditions Insurance At all times during the term of this Lease, Landlord shall keep the Building insured for the benefit of Landlord against loss or damage by risks now or hereafter embraced by "All Risks", "Difference in Conditions", and loss of rent coverages, and against such other risks as Landlord from time to time reasonably may designate in amounts sufficient to prevent Landlord from becoming a coinsurer. In any event, the amount applicable to "All Risks" shall be ninety percent (90%) of the then full replacement cost (being the cost of replacing the Building, exclusive of the costs of excavations and footings below the lowest grade level). Such full replacement cost shall be determined from time to time (but not more frequently than once in any twelve (12) calendar months) by an appraiser, architect or other person or firm designated by Landlord. 10.03 - Insurance on Common Areas At all times during the term of this Lease, Landlord shall keep the Common Areas insured for personal injury and property damage liability, "All Risk" property coverage, "Difference in Conditions", workers' compensation, employee's liability and any other casualty or risk insurance which Landlord or Landlord's insurance carrier deems necessary or appropriate. 10.04 - Increase in Fire Insurance Premium Tenant covenants and agrees to promptly pay to Landlord as additional rent, upon demand, the amount of any increase in the rate of insurance on the Premises or on any part of the Building that (but for Tenant's act(s) or Tenant's permitting certain activities to take place which result in an increase in said rate of insurance) would otherwise have been in effect. 10.05 - Waiver of Subrogation Each party hereto waives on behalf of the insurers of such party's property, any and all claims or rights of subrogation of any such insurer against the other party hereto for loss of or damage to the property so 10 13 insured other than loss or damage resulting from the willful act of such other party, and each party hereby agrees to maintain insurance upon its property, it being understood, however, (a) that such waiver shall be ineffective as to any insurer whose policy of insurance does not authorize such waiver, (b) that it shall be the obligation of each party seeking the benefit of the foregoing waiver to request the other party (i) to submit copies of its insurance, and (ii) in case such waiver results in an additional charge from the insurer thereunder, the additional charge for such waiver shall be paid by the party requesting the benefit of said waiver; and (c) that no party shall be liable to the other under clause (b) hereof except for willful failure to comply with any request pursuant to said clause (b). 10.06 - Tenant's Property At all times during the term of this Lease, Tenant shall, at Tenant's sole cost and expense, carry "all-risk" insurance coverage for Tenant's trade fixtures, furnishings, equipment and other personal property of Tenant. ARTICLE 11 Fire and Other Casualties 11.01 - Untenantability If the Premises are made untenantable in whole or in part by fire or other casualty, the fixed monthly rent, additional rent and other charges, until repairs shall be made or the Lease terminated as hereinafter provided, shall be apportioned on a per diem basis according to the part of the Premises which is usable by Tenant, if, but only if, such fire or other casualty ARE NOT SHOWN TO HAVE BEEN caused by Tenant's FAILURE TO PROPERLY MAINTAIN ITS fixtures or equipment or by fault or negligence of Tenant, its contractors, agents or employees. If such damage shall be so extensive that the Premises cannot be restored by Landlord within a period of nine (9) months, either party shall have the right to cancel this Lease by notice to the other given at any time within thirty (30) days after the date of such damage, except that if such fire or casualty ARE SHOWN to be due to Tenant's FAILURE TO PROPERLY MAINTAIN ITS fixtures or equipment or due to Tenant's fault or negligence Tenant shall have no right to cancel. If a portion of the Building other than the Premises shall be so damaged that in the opinion of Landlord the Building should be restored in such a way as to alter the Premises materially, Landlord may cancel this Lease by notice to Tenant given at any time within thirty (30) days after the date of such damage. In the event of giving effective notice pursuant to this paragraph, this Lease and the term and the estate hereby granted shall expire on the date fifteen (15) days after the giving of such notice as fully and completely as if such date were the date hereinbefore set for the expiration of the term of this Lease. If this Lease is not so terminated, Landlord will promptly (taking into account the time necessary to obtain required permits and approvals and the time necessary to effectuate a satisfactory settlement with Landlord's insurance company) restore the damage insured by Landlord pursuant to paragraph 10.02. Tenant hereby expressly waives the provisions of Section 227 of the New York Real Property Law and agrees that the foregoing provisions of this paragraph 11.01 shall govern and control in lieu thereof. 11.02 - Loss of Property and Water Damage Landlord shall not be responsible to Tenant for any loss or theft of property in or from the Premises, or for any loss or theft or damage of or to any property left with any employee of Landlord, however occurring, UNLESS THE SAME SHALL BE SHOWN TO BE DUE TO THE NEGLIGENCE OF LANDLORD. Landlord shall not be liable for any damage caused by water, rain, snow or ice, or by breakage, stoppage or leakage of water, gas, heating, air-conditioning, sewer or other pipes or conduits, or arising from any other cause, in, upon, about or adjacent to the Premises or the Building, UNLESS THE SAME SHALL BE SHOWN TO BE DUE TO THE NEGLIGENCE OF LANDLORD. ARTICLE 12 Eminent Domain 12.01 - Eminent Domain (a) In the event that title to the whole or any part of the Premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title, and Landlord shall be entitled to receive the entire award, Tenant hereby assigning to Landlord Tenant's interest therein, if any. ANYTHING CONTAINED IN THE FOREGOING TO THE CONTRARY NOTWITHSTANDING, TENANT MAY SEPARATELY PURSUE THE CONDEMNING AUTHORITY FOR MOVING EXPENSES, THE TAKING OF PERSONAL PROPERTY OF TENANT, ANY IMPROVEMENTS CONSTRUCTED BY TENANT, OR FOR THE INTERRUPTION OF OR DAMAGE TO TENANT'S BUSINESS, PROVIDED, HOWEVER, THAT THE SAME DOES NOT THEREBY DIMINISH LANDLORD'S AWARD. (b) In the event that title to a part of the Building other than the Premises shall be so condemned or taken, and if in the opinion of Landlord, the Building should be restored in such a way as to alter the Premises materially, or in the event that title to all or a material part of the Outside Common Areas shall be so condemned or taken, Landlord may terminate this Lease and the term and estate hereby granted by notifying Tenant of such termination within sixty (60) days following the date of vesting of title, and this Lease and the term and estate hereby granted shall expire on the date specified in the notice of termination, which date shall not be less than sixty 11 14 (60) days after the giving of such notice, as fully and completely as if such date were the date hereinbefore set for the expiration of the term of this Lease, and the fixed monthly rent, additional rent, and other charges hereunder shall be apportioned as of such date. In such event, Tenant shall not be entitled to any portion of Landlord's award hereunder, if any, nor shall Tenant have any claim against Landlord for the value of the unexpired portion of the term. ARTICLE 13 Bankruptcy and Default Provisions 13.01 - Conditional Limitations (a) This Lease and the demised term are subject to the limitation that if, at any time prior to or during the term, any one or more of the following events (herein called an "event of default") shall occur, that is to say: (i) If Tenant shall make an assignment for the benefit of its creditors; or (ii) If the leasehold estate hereby created shall be taken on execution or by other process of law; or (iii) If any petition shall be filed against Tenant in any court, whether or not pursuant to any statute of the United States or of any State, in any bankruptcy, reorganization, composition, extension, arrangement, or insolvency proceedings, and Tenant shall thereafter be adjudicated bankrupt, or such petition shall be approved by the court, or the court shall assume jurisdiction of the subject matter and if such proceedings shall not be dismissed within ninety (90) days after the institution of the same, or if any such petition shall be so filed by the Tenant; or (iv) If in any proceedings a receiver or trustee be appointed for Tenant's property, and such receivership or trusteeship shall not be vacated or set aside within ninety (90) days after the appointment of such receiver or trustee; or (v) If Tenant shall fail to pay any installment of the fixed monthly rent or any part thereof when the same shall become due and payable, and such failure shall continue for TEN (10) DAYS AFTER notice from Landlord; or (vi) If Tenant shall fail to EITHER (a) pay any other charge required to be paid by Tenant hereunder, OR (b) FAIL TO CAUSE A GUARANTY OF LEASE TO BE EXECUTED AS MAY BE REQUIRED BY LANDLORD PURSUANT TO SECTION 22.22, BELOW, and either such failure shall continue for TEN (10) DAYS after notice from Landlord; or (vii) Tenant fails to perform or observe any other requirement of this Lease (not hereinbefore specifically referred to) on the part of Tenant to be performed or observed and such failure continues for thirty (30) days after receipt of notice from Landlord to Tenant. NOTWITHSTANDING THE FOREGOING, IN THE EVENT THAT THE CURE OF TENANT'S FAILURE TO PERFORM SHALL BE OF SUCH A NATURE SO AS TO REASONABLY REQUIRE MORE THAN THIRTY (30) DAYS, LANDLORD AGREES THAT TENANT SHALL NOT BE DEEMED IN DEFAULT OF THIS SUBSECTION 13.01(a)(vii) OF THE LEASE IF TENANT SHALL PROVIDE LANDLORD WRITTEN NOTICE OF ITS INTENTION TO CURE AND SHALL COMMENCE THE SAME WITHIN THIRTY (30) DAYS, AND SHALL THEREAFTER DILIGENTLY PROSECUTE THE CURE TO COMPLETION WITHIN A REASONABLE TIME, NOT TO EXCEED SIXTY (60) DAYS. (b) This Lease and the term are expressly subject to the conditional limitation that upon the happening of any one or more of the aforementioned events of default, Landlord, in addition to the other rights and remedies it may have, shall have the right to immediately declare this Lease terminated and the term ended, in which event all of the right, title and interest of Tenant hereunder shall wholly cease and expire upon service by Landlord of a Notice of Termination. Tenant shall then quit and surrender the Premises to Landlord in the manner and under the conditions as provided for under this Lease, but Tenant shall remain liable as hereinafter provided. (c) If the Landlord shall not be permitted to terminate this Lease as hereinabove provided because of Title 11 of the United States Code, as amended, relating to Bankruptcy (the "Bankruptcy Code"), then Tenant or any trustee for Tenant agrees promptly, within no more than fifteen (15) days after the request of Landlord to the Bankruptcy Court to assume or reject this Lease and Tenant agrees not to seek or request any extension or adjournment of any application to assume or reject this Lease so made by Landlord. In such event, Tenant or any trustee for Tenant may only assume this Lease if it (1) cures or provides adequate assurance that the trustee will promptly cure any default hereunder, (2) compensates or provides adequate assurance that the Tenant will promptly compensate Landlord for any actual pecuniary loss to Landlord resulting from Tenant's default, and (3) provides adequate assurance of future performance under this Lease by Tenant. In no event after the assumption of this Lease by Tenant or any trustee for Tenant shall any then existing default remain uncured for a period in excess of ten (10) days. Adequate assurance of future performance of this Lease shall include, without limitation, adequate assurance (a) of the source of the fixed monthly rent required to be paid to Landlord hereunder and (b) that the assumption or any permitted assignment of this Lease will not constitute a breach of any provision of this Lease. In order to adequately assure the source of payments due under this Lease in such event, each person owning, directly or indirectly, individually or through one or more entities, a five percent (5%) or greater interest in Tenant or any assignee whether through ownership of stock, partnership interest or otherwise, shall personally guarantee the obligations of Tenant hereunder by executing a Guaranty Agreement in form and substance as set forth in Exhibit F attached hereto. 12 15 13.02 - Landlord's Remedies (a) If this Lease shall be terminated as provided in paragraph 13.01, Landlord or Landlord's agents or employees may immediately or at any time thereafter re-enter the Premises and remove therefrom Tenant, its agents, employees, licensees, and any subtenants and other persons, firms or corporations, and all or any of its or their property therefrom either by summary dispossess proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damages therefor, and repossess and enjoy the Premises, together with all alterations, additions and improvements thereto. (b) In case of any such termination, re-entry or dispossession by summary proceedings or otherwise, the rents and all other charges required to be paid up to the time of such termination, re-entry or dispossession, shall be paid by Tenant, and Tenant shall also pay to Landlord all expenses which Landlord may then or thereafter incur for legal expenses, attorneys' fees, brokerage commissions and all other costs paid or incurred by Landlord for restoring the Premises to good order and condition and for altering and otherwise preparing the same for reletting thereof. Landlord may, at any time and from time to time, relet the Premises, in whole or in part, for any rental then obtainable either in its own name or as agent of Tenant, for a term or terms which, at Landlord's option, may be for the remainder of the then current term of this Lease or for any longer or shorter period. (c) If this Lease be terminated as aforesaid, Tenant nevertheless covenants and agrees, notwithstanding any entry or re-entry by Landlord, whether by summary proceedings, termination, or otherwise, to pay and be liable for on the days originally fixed herein for the payment thereof, amounts equal to the several installments of fixed monthly rent, additional rent and other charges as they would, under the terms of this Lease, become due if this Lease had not been terminated or if Landlord had not entered or re-entered as aforesaid, whether the Premises be relet or remain vacant in whole or in part for a period less than the remainder of the term or for the whole thereof, but in the event the Premises be relet by Landlord, Tenant shall be entitled to a credit in the net amount of rent received by Landlord in reletting the Premises after deduction of all expenses and costs incurred or paid as aforesaid in reletting the Premises and in collecting the rent in connection therewith. As an alternative, at the election of Landlord, Tenant shall pay to Landlord as damages, such a sum as at the time of such termination represents the amount of the then present value of the total fixed monthly rent and additional rent and other benefits which would have accrued to Landlord under this Lease for the remainder of the term (including all renewal terms whether or not Tenant had elected to renew) if the Lease terms had been fully complied with by Tenant. (d) Tenant hereby expressly waives, so far as permitted by law, for and on behalf of itself and all persons claiming through or under Tenant also waives any and all rights of redemption or re-entry or repossession under present or future laws, including specifically but without limitation, Section 761 of the New York Real Property Actions and Proceeding Law including and amendments hereafter made thereto, and Tenant further waives any and all rights to restore the operation of this Lease and further waives any right under Article 63 of the Civil Practice Law and Rules. In case Tenant shall be dispossessed by a judgment or by warrant of any court or judge, or in case of re-entry or repossession by Landlord, or in case of any expiration or termination of this Lease, Landlord and Tenant, so far as permitted by law, waive and will waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of said Premises, or any claim of injury or damage. The terms "enter," or "re-entry" as used in this lease are not restricted to their technical legal meaning. (e) No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No waiver of any breach shall affect or alter this Lease, but each and every covenant, agreement, term and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installments of rent or additional rent stipulated in this Lease shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or letter accompanying a check for payment of rent be deemed any accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or to pursue any other remedy provided by this Lease. (f) In the event of any breach or threatened breach by Tenant of any of the covenants, agreements, terms or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right or remedy allowed at law or in equity or by statute or otherwise. (g) Each right or remedy of Landlord provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease, or now or hereafter existing at law or in equity or by statute or otherwise. 13 16 ARTICLE 14 Mechanic's Liens 14.01 - Mechanic's Liens Tenant agrees to pay when due all sums of money that may become due for, or purporting to be due for, any labor, services, materials, supplies or equipment alleged to have been furnished or to be furnished to or for Tenant in, upon or about the Premises and/or Landlord's interest therein. If any mechanic's lien shall be filed against the Premises or the Building based upon any act of Tenant or anyone claiming through Tenant, Tenant, after notice thereof from Landlord (or any person in privity of estate with Landlord), shall forthwith take whatever action by bonding, deposit, payment or otherwise, as will remove or satisfy such lien within ten (10) days. In the event Tenant does not remove or satisfy said lien within said ten (10) day period, Landlord shall have the right to do so by posting a bond or undertaking, and Tenant agrees to reimburse Landlord for any and all expenses incurred by Landlord in connection therewith within five (5) days after receipt by Tenant of Landlord's invoice therefor. These expenses shall include, but not be limited to, filing fees, legal fees and bond premiums. However, nothing in this Article 14 shall be deemed or construed as (a) Landlord's consent to any person, firm or corporation for the performance of any work or services, or the supply of any materials to the Premises, or (b) giving Tenant or any other person, firm or corporation any right to contract for or to perform or supply any work, services or materials that would permit or give rise to a lien against the Premises of the Building. ARTICLE 15 Mortgages, Assignments, Subleases and Transfers of Tenant's Interest 15.01 - Limitation on Tenant's Rights Except as hereinafter otherwise provided, during the term of this Lease, neither this Lease nor the interest of Tenant in this Lease, or in any sublease, or in any rentals under any sublease shall be sold, assigned, transferred, mortgaged, pledged, hypothecated or otherwise disposed of, whether by operation of law or otherwise, unless Landlord's prior written consent is obtained in each case, nor shall the Premises be sublet in any case unless such prior written consent is obtained. SO LONG AS TENANT IS NOT IN DEFAULT UNDER THIS LEASE, LANDLORD'S CONSENT SHALL NOT BE UNREASONABLY WITHHELD FOR THE USE SET FORTH IN SECTION 5.01 HEREOF, PROVIDED, HOWEVER, THAT THE PROPOSED ASSIGNEE OR SUBLESSEE MEETS SUCH STANDARDS AS LANDLORD, USING ITS REASONABLE BUSINESS JUDGMENT, MAY REASONABLY IMPOSE, INCLUDING, BUT NOT LIMITED TO THE FOLLOWING: (a) THE FINANCIAL STRENGTH OF THE PROPOSED ASSIGNEE/SUBTENANT MUST BE AT LEASE EQUAL TO THAT OF TENANT AT THE TIME THAT EITHER (i) TENANT ENTERED INTO THIS LEASE, OR (ii) SUCH ASSIGNMENT OR SUBLEASE IS PROPOSED, WHICHEVER IS GREATER; (b) THE BUSINESS REPUTATION AND CREDIT WORTHINESS OF THE POSED ASSIGNEE/SUBTENANT MUST BE IN ACCORDANCE WITH GENERALLY ACCEPTABLE STANDARDS; (iii) THE USE OF THE PREMISES BY THE PROPOSED ASSIGNEE/SUBTENANT MUST EITHER BE THE SAME USE PERMITTED BY THE LEASE, OR A USE THAT IN THE LANDLORD'S SOLE DISCRETION IS COMPATIBLE WITH THE OTHER OCCUPANTS OF THE BUILDING AT THE TIME OF SUCH ASSIGNMENT OR SUBLEASE; AND (iv) THE USE OF THE PREMISES BY THE PROPOSED ASSIGNEE/SUBTENANT WILL NOT VIOLATE OR CREATE ANY POTENTIAL VIOLATIONS OF ANY LAWS, AND WILL NOT VIOLATE ANY OTHER AGREEMENTS AFFECTING THE PREMISES, THE BUILDING, THE LANDLORD OR OTHER TENANTS IN THE BUILDING. TENANT SHALL NOT BE RELEASED BY ANY SUCH ASSIGNMENT OR SUBLET BUT SHALL CONTINUE TO BE FULLY RESPONSIBLE FOR THE DUE PERFORMANCE OF THE OBLIGATIONS HEREUNDER. It is understood and agreed between the parties that, should Tenant request Landlord's consent to a proposed assignment of this Lease or a subletting of all or any portion of the Premises, Landlord will, in addition to any other requirements which may be imposed as conditions to Landlord's consent, require that Tenant execute and deliver to Landlord an agreement whereby Tenant obligates itself, as additional rent, to pay over to Landlord the amount, if any, of all rent, additional rent and any other consideration paid by such assignee or sublessee to Tenant pursuant to such assignment or sublease which is in excess of the rent and additional rent due and payable from time to time from Tenant to Landlord pursuant to this Lease. Should Tenant request Landlord's consent to a proposed assignment of this Lease or a subletting of all or part of the Premises, Landlord shall have the right at Landlord's option to recapture THAT PORTION OF the Premises PROPOSED TO BE ASSIGNED, SUBLET OR OTHERWISE TRANSFERRED, by written notice given to Tenant within thirty (30) days after Landlord's receipt of Tenant's request for Landlord's consent. If Landlord exercises its right to recapture the Premises, or any part thereof, this Lease shall be cancelled an terminated as of the date that is proposed by Tenant for the request assignment or subletting as fully and effectively as if such date were the date originally specified herein for the expiration of this Lease. If this Lease shall be cancelled with respect to less than the entire Premises, the fixed monthly rent reserved herein shall be prorated on the basis of the number of leaseable square feet retained by Tenant in proportion to the number of leasable square feet contained in the Premises, and this Lease shall continue thereafter in full force and effect with respect to the portion of the Premises retained by Tenant, and the parties shall execute an amendment of this Lease to provide for the reduction in square footage and rental. 14 17 No consent by Landlord to an assignment of this Lease and no assignment made as hereinafter permitted, shall be effective until there shall have been delivered to Landlord (a) an agreement, in recordable form, executed by Tenant and the proposed assignee, wherein and whereby such assignee assumes due performance of the obligations on Tenant's part to be performed under this Lease to the end of the term hereof, and (b) the written consent to such assignment by the holder of any fee or leasehold mortgage to which this Lease is then subject shall have been obtained and delivered to Landlord if so required by the terms of such fee or leasehold mortgage. Notwithstanding the assumption by such assignee of due performance, Tenant shall continue to be fully responsible for the due performance of Tenant's obligations hereunder in the same manner and to the same extent as if no such assignment had been made. Any assignment, mortgage, pledge, sublease or hypothecation of this Lease, or of the interest of Tenant hereunder, without full compliance with any and all requirements set forth in this Lease shall be a breach of this Lease and a default hereunder, shall be null and void, and shall confer no rights upon any third party. 15.02 - Effect of Landlord's Consent Any consent by Landlord to a sale, assignment, sublease, mortgage, pledging, hypothecation, or transfer of this Lease, shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from the requirement of obtaining the prior written consent of Landlord to any further sale, assignment, sublease, mortgage, pledge, hypothecation, or transfer of this Lease. In instances where the consent of Landlord is required here under to any proposed assignment or sublease of this Lease, or to the mortgaging, pledging or hypothecation of this Lease, contemporaneously with the request of Tenant therefor, Tenant shall submit in writing information reasonably sufficient to enable Landlord to decide with respect thereto including, but not limited to, (i) the name and address of the proposed transferee, (ii) a current financial statement of the proposed transferee, (iii) the consideration to be paid by the proposed transferee to Tenant, and (iv) the use intended to be made of the Premises by the proposed transferee. Landlord shall reply to Tenant within ten (10) days after receipt of the request and information as aforementioned. 15.03 - Sale of Stock or Partnership Interest Tenant agrees that if (i) Tenant or any Guarantor of Tenant's obligations under this Lease is a corporation and there shall be a sale of stock constituting a controlling interest in Tenant or any Guarantor of Tenant's obligations under this Lease (whether such sale occurs at one time or at intervals so that, in the aggregate, over the term of this Lease, such a sale shall have occurred), or (ii) Tenant or any Guarantor of Tenant's obligations under this Lease is a partnership and there shall be a sale of a partnership interest constituting a controlling interest in Tenant or any Guarantor of Tenant's obligations under this Lease (whether such sale occurs at one time or at intervals so that, in the aggregate, over the term of this Lease, such a sale shall have occurred), then and in any of such events, Landlord shall have the right, at its sole election, to deem such sale a default pursuant to Article 13 of this Lease and to cancel and terminate this Lease at any time thereafter by giving notice of Landlord's intention to do so and this Lease shall terminate upon the expiration of thirty (30) days after such notice of intention from Landlord to Tenant, but Tenant shall remain liable for its obligations under this Lease as provided in Article 13 hereof. The term "sale" shall include any transfer of the stock or partnership interest in Tenant or its Guarantor, as the case may be, other than a transfer by operation of law occurring upon the death of a stockholder or partner and the devolution of the stock or partnership interest held by such stockholder or partner to his legal representative, heirs or legatees, but shall not include a stock offering whereby an aggregate of greater then fifty percent (50%) of Tenant's stock shall be offered publicly, to parties who are nonstockholders as of the date of this Lease, through a recognized security exchange. ARTICLE 16 Subordination of Lease 16.01 - Subordination to Mortgages and Ground Leases This Lease and all the rights of Tenant hereunder are and shall be subject and subordinate to the lien of any ground or underlying leases and to any mortgage or mortgages, whether fee or leasehold mortgages, which may now or hereafter affect the Premises or the Building or the land under the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof, and advances thereunder. ANYTHING CONTAINED IN THE FOREGOING TO THE CONTRARY NOTWITHSTANDING, SO LONG AS TENANT SHALL NOT HAVE DEFAULTED WITH RESPECT TO ANY OF THE TERMS AND CONDITIONS OF THIS LEASE, THE HOLDER OF ANY SUCH GROUND LEASE, UNDERLYING LEASE OR MORTGAGE SHALL (i) ACKNOWLEDGE THIS LEASE AND TENANT'S RIGHTS HEREUNDER, AND (ii) NOT DISTURB THE TENANCY HEREBY CREATED. 15 18 Tenant will not do, suffer or permit any act, happening or occurrence or any condition to occur or remain which may be prohibited under the terms or provisions of any ground or underlying lease or mortgage to which this Lease is subject or which will create a default thereunder except that Tenant shall not be obligated to pay the principal indebtedness or any installment thereof or interest thereon. So long as any such mortgage or lease shall remain a lien on the Premises, Tenant agrees simultaneously with the giving of any notice to Landlord which is required to be given by this Lease, to give a duplicate copy thereof to any mortgage or ground lessor, notice or whose name and address have been given to Tenant. Further, Tenant agrees that if Landlord defaults in the performing of any of its covenants under this Lease and if such default allows Tenant to cancel or surrender said Lease, the mortgagee or ground lessor may cure said default with the same effect as if cured by Landlord, and if necessary, enter upon the Premises for the purpose of curing any such default, provided that the mortgagee or ground lessor must cure the default within the time in which Landlord is obligated to cure such default under this Lease. The giving of any such notice to Landlord shall not be properly given under the terms of this Lease and shall be of no force and effect until a duplicate copy thereof shall also have been given to the mortgagee or ground lessor pursuant to this paragraph. ARTICLE 17 Entry to Premises 17.01 - Entry to Premises by Landlord Landlord shall have the right to enter the Premises at all reasonable terms AND UPON TWENTY-FOUR (24) HOURS NOTICE (EXCEPT IN EVENT OF EMERGENCY, AND THEN, WITHOUT NOTICE) for the purposes of: (a) inspecting the same, and/or (b) making any repairs to the Premises and performing any work therein that may be necessary by reason of Tenant's default under the terms of this Lease continuing beyond any applicable period of grace, and/or (c) exhibiting the Premises for the purpose of sale, ground lease or mortgage. ARTICLE 18 Notices and Certificates 18.01 - Notices and Certificates Any notice, statement, certificate, request or demand required or permitted to be given under this Lease shall be in writing sent either by an overnight express mail service (such as Federal Express) of by registered or certified mail, postage prepaid, return receipt requested, addressed, as the case may be, to the Landlord in care of Landlord's Managing Agent (see Page 1) at the address shown at the beginning of this Lease, and to Tenant at the address shown at the beginning of this Lease or to such other addresses as Landlord or Tenant shall designate in the manner herein provided. Such notice, statement, certificate, request or demand shall be deemed to have been given on the date mailed as aforesaid by such express mail service or on the date deposited in any post office or branch post office regularly maintained by the United States Government, except for notice of change of address or revocation of a prior notice, which shall only be effective upon receipt or refusal to accept receipt of such notice. At any time or times when Tenant's interest herein shall be vested in more than one person, firm or corporation, jointly, in common or in severalty, a notice given by Landlord to any one such person, firm or corporation shall be conclusively deemed to have been given to all such persons, firms or corporations. Any notice by Tenant pursuant to the provisions hereof shall be void and ineffective unless signed by all such persons, firms and corporations shall have previously given notice to Landlord, signed by each of them designating and authorizing one or more of them to give the notice referred to, and such notice shall then be unrevoked be any notice to Landlord. 18.02 - Certificate by Tenant Within fifteen (15) days after request by Landlord, Tenant, from time to time and without charge, shall deliver to Landlord or to a person, firm or corporation, specified by Landlord, a duly executed and acknowledged instrument certifying: (a) that this Lease is unmodified and in full force and effect, or if there has been any modification, that the Lease is in full force and effect, as modified, and identifying the date of any such modification; and (b) whether Tenant knows or does not know, as the case may be, of any default by Landlord in the performance by Landlord of the terms, covenants, and conditions of this Lease, and specifying the nature of such defaults, if any; and (c) whether or not there are any then existing set-offs or defenses by Tenant to the enforcement by Landlord of the terms, covenants, and conditions of this Lease and any modification thereof, and if so, specifying them; and 16 19 (d) the date to which the fixed monthly rent has been paid. 17 20 ARTICLE 19 Covenant of Quiet Enjoyment 19.01 - Covenant of Quiet Enjoyment Tenant, subject to the terms and provisions of this Lease, on payment of the rent and observing, keeping and performing all the terms and provisions of this Lease on its part to be observed, kept and performed, shall lawfully, peaceably and quietly have, hold and enjoy the Premises during the term hereof on and after the Term Commencement Date without hindrance or ejection by Landlord and any persons lawfully claiming under Landlord, subject nevertheless to the terms and conditions of this Lease and to any ground or underlying lease and/or mortgage(s); but it is understood and agreed that this covenant, and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its and their respective ownership of Landlord's interest hereunder. ARTICLE 20 Services 20.01 - Services During the term of this Lease, while Tenant is not in default hereunder, Landlord shall furnish to the Premises electricity, lighting, heating, ventilating, air conditioning, elevator service and water to the plumbing fixtures, if any, on Monday through Friday from 7:00 a.m. to 6 p.m., principal legal holidays excepted (herein referred to as the "Normal Operating Hours"). SUCH SERVICES SHALL BE MADE AVAILABLE TO TENANT SEVEN (7) DAYS A WEEK ON A TWENTY-FOUR (24) HOUR BASIS. Landlord shall also furnish janitorial services consisting of cleaning floors, removing waste paper each business day and window cleaning. 20.02 - Interruption of Service No diminution or abatement of rent or other compensation shall be claimed or allowed for inconvenience or discomfort arising from the making of repairs or improvements to the Premises, the Building or its appurtenances. There shall be no diminution or abatement of rent or any other compensation for interruption or curtailment of any service or utility herein expressly or impliedly agreed to be furnished by Landlord when such interruption or curtailment shall be due to accident, alterations, repairs (desirable or necessary), or to inability or difficulty in securing supplies or labor, or to some other cause not resulting from gross negligence on the part of Landlord. No such interruption or curtailment shall be deemed a constructive eviction. Tenant agrees that Landlord shall not be responsible for interruption of utility service caused by any utility company or governmental regulatory agency. NOTWITHSTANDING THE FOREGOING, IN THE EVENT THAT ANY INTERRUPTION OF UTILITY SERVICE SHALL CONTINUE FOR A PERIOD OF MORE THAN THREE (3) CONSECUTIVE BUSINESS DAYS. LANDLORD AGREES THAT THERE SHALL BE AN EQUITABLE ABATEMENT OF THE RENT RESERVED HEREIN UNTIL SUCH TIME AS THE INTERRUPTED SERVICE SHALL BE RESTORED IN FULL. ARTICLE 21 Certain Rights Reserved to Landlord 21.01 - Certain Rights Reserved to Landlord Landlord reserves the following rights: (a) To name the Building and to change the name or street address of the Building; (b) To install and maintain a sign or signs on the exterior or interior of the Building; (c) To designate all sources furnishings sign painting and lettering, ice, drinking water, towels, toilet supplies, shoe shining, vending machines, mobile vending service, catering, and like services used on the Premises; (d) During the last ninety (90) days of the term, if during or prior to that time Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for reoccupancy, including the placing of a notice of reasonable size on or in the Premises offering the Premises "For Rent" or "For Lease", all without affecting Tenant's obligation to pay rental for the Premises; (e) To constantly have pass keys to the Premises; (f) At any time in the event of an emergency, or otherwise at reasonable times, to take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or the Landlord's interests, or as may be necessary or desirable in the operation or improvement of the Building or in order to comply with all laws, orders and requirements of governmental or other authority; 18 21 (g) At any reasonable time and from time to time throughout the term of the Lease to show the Premises to persons wishing to rent same or to purchase the Building. ARTICLE 22 Miscellaneous Provisions 22.01 - Holdover (a) Should Tenant continue to occupy the Premises after the expiration of the term hereof or after a forfeiture incurred, and if Landlord consents to such continued occupancy, such tenancy shall be from month-to-month, and such month-to-month tenancy shall be under all the terms, covenants and conditions of this Lease, except at ONE AND ONE HALF TIMES the monthly rent reserved herein. (b) Should Tenant continue to occupy the Premises without Landlord's consent after the expiration of the term hereof or after a forfeiture incurred, such continued occupancy shall confer no rights whatsoever upon Tenant and Tenant hereby consents in advance to the immediate entry of an order, warrant and judgment by any court of competent jurisdiction directing the removal of Tenant and all of Tenant's personal property from the Premises. Such continued occupancy by Tenant shall in no event be deemed or construed to be a month-to-month tenancy or a tenancy at will or by sufferance, even if Landlord accepts rent from Tenant for the period of such continued occupancy after the expiration of the term hereof or after a forfeiture incurred, or for any preceding period. 22.02 - Limitation on Personal Liability (a) It is understood and agreed that Tenant shall look solely to the estate and property of Landlord in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord and any other obligation of Landlord created by or under this Lease, and no other property or assets of Landlord or of its partners, beneficiaries, co-tenants, shareholders, or principals (as the case may be) shall be subject to levy, execution or other enforcement procedures. (b) The term "Landlord," as used in subparagraph 22.02(a) above and throughout this Lease, so far as covenants and agreements on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the Building and Lease. Further, in the event of any transfer or transfers of the title to the Lease and/or the Building, Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor), including each of its partners, beneficiaries, co-tenants, shareholders, or principals (as the case may be), shall be automatically freed and relieved from and after the date of such transfer and conveyance of all liability as respects the performance of any covenants and agreements on the part of Landlord. Landlord or the grantor shall turn over to the grantee all monies and security, if any, then held by Landlord or such grantor on behalf of Tenant, Landlord thereby being relieved of and from all responsibility for such monies and security, and shall assign to such grantee all right, title and interest of Landlord or such grantor thereto, it being intended that the covenants and agreements contained in this Lease on the part of Landlord to be performed shall, subject as aforesaid, be binding on Landlord, its successors and assigns. 22.03 - No Representations by Landlord Landlord and Landlord's agents have made no representations or promises with respect to the Building, the land upon which the Building is erected or the Premises except as herein expressly set forth, and no rights, easements, or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. 22.04 - Lease Binding All covenants in this Lease which are binding upon Tenant shall be construed to be equally applicable to and binding upon Tenant's agents, employees and others claiming the right to be in the Premises or in the Building through or under Tenant. If more than one individual, firm or corporation shall join as Tenant, the singular context shall be construed to be plural wherever necessary, and the covenants of Tenant shall be the joint and several obligations of each party signing as Tenant; and, when the parties signing as Tenant are partners, it shall be the joint and several obligations of the firm and of the individual members thereof. 22.05 - Failure to Give Possession (a) If Landlord shall be unable to give possession of the Premises on the Term Commencement Date by reason of the fact that the Premises are located in a building being constructed which has not been sufficiently completed to make the Premises ready for occupancy or by reason of the fact that a certificate of occupancy has not been procured or for any other reason, then, EXCEPT AS SPECIFICALLY SET FORTH IN SECTION 22.05(b), BELOW, Landlord shall not be subject to any liability for the failure to give possession on said date. Under such circumstances the rent reserved and covenanted to be paid herein shall not commence until possession of the Premises is given or the Premises are available for occupancy by Tenant, and no such failure to give possession on the Term 19 22 Commencement Date shall in any way affect the validity of this Lease or the obligations of Tenant hereunder, nor shall same be construed in any way to extend the term of this Lease. If the Building is not in the course of construction, and Landlord is unable to give possession of the Premises on the Term Commencement Date by reason of the holding over or retention of possession by any tenant, tenants, or occupants, or for any other reason, or if repairs, improvements or decoration of the Premises or of the Building are not completed, such inability by Landlord shall not constitute a default under this Lease but the Term Commencement Date shall be postponed until such date as such holdover tenant or occupant shall give up possession of the Premises, and/or the repairs, improvements or decorations have been completed, and the term of this Lease shall be deemed to commence on such Term Commencement Date as postponed (and the termination date of the term of the Lease shall be extended by the same period as the Term Commencement Date is postponed). (b) LANDLORD AGREES THAT LANDLORD SHALL USE ITS BEST EFFORTS TO DELIVER THE PREMISES TO TENANT ON OR BEFORE THE EXPIRATION OF THE TWELVE (12) WEEKS FOLLOWING FULL EXECUTION OF THIS LEASE. ANYTHING CONTAINED IN SECTION 22.05(a) TO THE CONTRARY NOTWITHSTANDING, IN THE EVENT LANDLORD SHALL FAIL TO DELIVER POSSESSION OF THE PREMISES TO TENANT WITHIN THIRTY (30) DAYS FOLLOWING THE EXPIRATION OF SAID TWELVE (12) WEEK PERIOD (THE THIRTIETH DAY OF SAID PERIOD BEING HEREINAFTER REFERRED TO AS THE "OUTSIDE DELIVERY DATE") FOR ANY REASON OTHER THAN TENANT DELAY OR DELAY RESULTING FROM LANDLORD'S FAILURE TO RECEIVE EQUIPMENT NECESSARY TO PERFORM AND COMPLETE LANDLORD'S WORK. TENANT SHALL BE ENTITLED TO AND SHALL RECEIVE TWO (2) DAYS OF FREE RENT FOR EACH TWENTY-FOUR (24) HOUR PERIOD EXPIRING FROM 11:59 P.M. ON THE OUTSIDE DELIVERY DATE THROUGH THE ACTUAL DATE ON WHICH LANDLORD SHALL DELIVER THE PREMISES TO TENANT, EXCLUSIVE. 22.06 - Relocation of Tenant Intentionally deleted. 22.07 - Force Majeure The period of time during which either party is prevented or delayed in the performance or the making of any improvements or repairs or fulfilling any obligation other than the payment of fixed monthly rent or additional rent required under this Lease due to unavoidable delays caused by fire, catastrophe, strikes or labor trouble, civil commotion, Acts of God or the public enemy, governmental prohibitions or regulation or inability to obtain materials or labor by reason thereof, or other causes beyond such party's reasonable control, shall be added to such party's time for performance thereof, and such party shall have no liability by reason thereof. 22.08 - Attornment by Tenant If at any time during the term of this Lease the Building is sold through a mortgage foreclosure proceeding, or if Landlord hereunder shall be the holder of a leasehold estate covering premises which include the Premises and if such leasehold estate shall be cancelled or otherwise terminated prior to the expiration date thereof and prior to the expiration of the term of this Lease, or in the event of the surrender thereof whether voluntary, involuntary or by operation of law, Tenant shall make full and complete attornment to the purchaser at the foreclosure sale or to the lessor of such leasehold estate for the balance of the term of this Lease upon the same covenants and conditions as are contained herein so as to establish direct privity between such purchaser or lessor and Tenant and with the same force and effect as though this Lease was made directly from such purchaser or lessor to Tenant. Tenant shall make all rent payments thereafter directly to such purchaser or lessor. 22.09 - Landlord May Pay Tenant's Obligations All costs and expenses which Tenant assumes or agrees to pay under the provisions of this Lease shall at Landlord's election be treated as additional rent, and in the event of non-payment, Landlord shall have all the rights and remedies herein provided for in case of non-payment of rent or of a breach of covenant. If Tenant shall default in making any payment required to be made by Tenant (other than the payment of rent as provided by Article 3 above) or shall default in performing any term, covenant or condition of this Lease on the part of Tenant to be performed which shall involve the expenditure of money by Tenant, Landlord or Landlord's option may, but shall not be obligated to, make such payment or, on behalf of Tenant, expend such sums as may be necessary to perform and fulfill such term, covenant or condition, and any and all sums so expended by Landlord, with interest thereon at the rate of one and one-half percent (1 1/2%) per month from the date of such expenditure, shall be and be deemed to be additional rent, in addition to the rent provided in Article 3 and shall be repaid by Tenant to Landlord on demand, but no such payment or expenditures by Landlord shall be deemed a waiver of Tenant's default nor shall it affect any other remedy of Landlord by reason of such default. 22.10 - Definition of "Tenant's Allocable Share" (a) For purposes of determining Tenant's Allocable Share herein, except as provided in subparagraph (b) below, such share shall be the percentage resulting from dividing the number of square feet CONTAINED IN THE PREMISES, by the total number of square feet LEASEABLE in the Building as of the beginning of each lease year or partial lease year. (b) For purposes of determining Tenant's Allocable Share for paragraph 3.02, such share shall be the percentage resulting from dividing the number of square feet set forth CONTAINED IN THE PREMISES 20 23 above, by the total number of square feet leasable in the Building as of the beginning of each lease year or partial lease year. 22.11 - Division of Costs Landlord may construct and operate other office buildings located within the office park in which the Building is located. Tenant agrees that Landlord may treat the Building and the adjacent office buildings as one unit for the purpose of purchasing and providing energy and water, insurance and the common services included within Operating Costs. Landlord shall equitably divide such costs between the Building and the adjacent office buildings for each lease year (or partial lease year) and the allocation of such costs shall be subject to verification by Tenant at Landlord's offices. 22.12 - Effect of Captions The captions or legends on this Lease are inserted only for convenient reference or identification of the particular paragraphs. They are in no way intended to describe, interpret, define or limit the scope, or extent or intent of this Lease, or any paragraph or provision thereof. 22.13 - Tenant Authorized to Do Business Tenant represents and covenants that it is and throughout the term of this Lease shall be authorized to do business in the state in which the Building is located. In the event Tenant hereunder is a corporation, the persons executing this Lease on behalf of the Tenant hereby covenant and warrant that: the Tenant is a duly constituted corporation qualified to do business in the state in which the Building is located, all Tenant's franchise and corporate taxes have been paid to date; and such persons are duly authorized by the governing body of such corporation to execute and deliver this Lease on behalf of the corporation. 22.14 - Execution in Counterparts This Lease may be executed in one or more counterparts, any one or all of which shall constitute but one agreement. 22.15 - Memorandum of Lease Upon request by either party, Landlord and Tenant agree to execute a Memorandum or Notice of Lease in recordable form pursuant to applicable state law. Upon the expiration or earlier termination of this Lease, the party who shall have recorded such Memorandum or Notice of Lease from the public records, and upon failure to do so, the other party, upon ten (10) days prior notice to the party who recorded the aforesaid instrument, is hereby appointed attorney-in-fact to execute any such instrument in the recording party's name, place and stead. The requesting party shall pay for all recording fees and attorney's fees in connection with the preparation and recording of the Memorandum or Notice of Lease. 22.16 - Law Governing, Effect and Gender This Lease shall be construed in accordance with the laws of the state in which the Building is located and shall be binding upon the parties hereto and their respective legal representatives, successors and assigns except as expressly provided otherwise. Should any provisions of this Lease require judicial interpretation, it is agreed that the court interpreting or construing the same shall not apply a presumption that the terms of any such provisions shall be more strictly construed against one party or the other by reason of the rule of construction that a document is to be construed most strictly against the party who itself or its agent prepared the same, it being agreed that the agents of all parties have participated in the preparation of this Lease. Use of the neuter gender shall be deemed to include the masculine or feminine, as the sense requires. Any reference to successors and assigns of Tenant is not intended to constitute a consent to any assignment by Tenant but has reference only to those instances in which Landlord may later give consent to a particular assignment as required by the provisions of Article 15 hereof. 22.17 - Security Agreement Intentionally deleted. 22.18 - Amendments The parties hereto mutually agree that so long as a mortgage or any extension thereof shall be a lien upon the Premises, they will not reduce the rents from that provided for in this Lease, provided for payments of rents prior to time herein provided for, not terminate said Lease prior to the end of the term, except as otherwise provided in this Lease, without first obtaining the consent of the mortgagee in writing, and that any such proposed modification or termination without said mortgagee's consent shall be void as against said mortgagee. 21 24 22.19 - Brokerage Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease and covenants and agrees to pay any commission, compensation or charge claimed by any real estate broker, salesman or agent with respect to this Lease or the negotiation thereof. ANYTHING TO THE CONTRARY CONTAINED IN THE FOREGOING NOTWITHSTANDING, AND PROVIDED THAT THIS LEASE SHALL HAVE BEEN FULLY EXECUTED, LANDLORD AGREES THAT IN THE EVENT TENANT SHALL SUBLEASE ITS PREMISES OR ASSIGN ITS LEASEHOLD INTEREST, AS THE CASE MAY BE, UNDER THAT CERTAIN LEASE BY AND BETWEEN TENANT AND UNIGARD INSURANCE COMPANY, FOR PREMISES LOCATED AT 200 ELWOOD DAVIS ROAD IN THE VILLAGE OF LIVERPOOL, COUNTY OF ONONDAGA AND STATE OF NEW YORK (THE "UNIGARD LEASE"), LANDLORD SHALL REIMBURSE TENANT FOR THE PAYMENT OF ONE (1) REASONABLE BROKERAGE COMMISSION, IF ANY, WHICH SHALL HAVE BEEN PAID BY TENANT TO ANY REAL ESTATE BROKER, SALESMAN OR AGENT IN CONNECTION WITH SUCH SUBLEASE OR ASSIGNMENT OF THE UNIGARD LEASE. 22.20 - Complete Agreement This Lease contains and embraces the entire Agreement between the parties hereto and it or any part of it may not be changed, altered, modified, limited, terminated, or extended orally or by any agreement between the parties unless such agreement be expressed in writing, signed and acknowledged by the parties hereto, their legal representative, successors or assigns, except as may be expressly otherwise provided herein. 22.21 - Arbitration Any controversy or claims arising or relative to any matter in connection with this Lease, with reference to which this Lease shall expressly provide that this section governs, shall be settled by arbitration in the City of Syracuse, New York, in accordance with the rules of the American Arbitration Association or its successor organization, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction hereof. 22.22 - Guaranty of Lease IN THE EVENT THAT LANDLORD SHALL IN ITS REASONABLE ESTIMATION AND GOOD FAITH JUDGMENT DETERMINE THAT THE FINANCIAL STRENGTH OF TENANT SHALL HAVE DECREASED FROM THAT WHICH EXISTED UPON TENANT'S EXECUTION OF THIS LEASE, SUCH THAT LANDLORD SHALL REASONABLY REQUIRE ADEQUATE ASSURANCE OF FUTURE PERFORMANCE UNDER THIS LEASE BY TENANT, LANDLORD RESERVES THE RIGHT TO REQUIRE ANY ONE (1) OF THE FOLLOWING ENTITIES TO EXECUTE THE GUARANTY OF LEASE IN THE FORM SET FORTH IN EXHIBIT "F", ATTACHED HERETO AND MADE PART HEREOF: (A) ANY CORPORATION THAT IS A PARENT, SUBSIDIARY OR AFFILIATE OF TENANT; (B) ANY CORPORATION RESULTING FROM A MERGER OR CONSOLIDATION AFFECTING TENANT; OR (C) ANY CORPORATION ACQUIRING ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF TENANT; In the event that Landlord shall request the Guaranty of any of the foregoing, Tenant represents and covenants that it will cause said Guaranty of Lease to be duly executed and delivered to Landlord not later than ten (10) days after receipt of Landlord's request. The guarantor under such Guaranty of Lease is herein referred to as "Guarantor." If Tenant or Tenant's Guarantor is a partnership or other business organization, the members of which are subject to personal liability, the liability of each such member, or Guarantor, where there is more than one Guarantor, shall be deemed to be joint and several. Any present or future partner of Tenant or Tenant's Guarantor(s) who is no longer a partner of Tenant or its Guarantor(s) at the time of any default under this Lease shall, nevertheless, remain liable for the obligations of Tenant under this Lease, as if any such partner had been a partner on the date of such default. 22.23 - Invalidity of Particular Provisions If any term or provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 22.24 - Execution of Lease by Landlord The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises and this document becomes effective and binding only upon the execution and delivery hereof by Landlord and by Tenant. All negotiations, considerations, representations and understandings between Landlord and Tenant are incorporated herein and may be modified or altered only by an agreement in writing between Landlord and Tenant, and no act or omission of any employee or other agent of Landlord shall later, change or modify any of the provisions hereof. 22 25 22.25 - Relationship of the Parties Nothing contained herein shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent nor any other provision herein contained, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than Landlord and Tenant. 22.26 - Tenant's Option to Lease Additional Premises Landlord hereby grants Tenant the option, to be exercised as hereinafter provided, to lease additional square footage of office premises which may be available in the Building from time to time, and located in an area of the Building designated by Landlord (such space is hereinafter referred to as the "Additional Premises"). However, if the square footage of premises requested by Tenant is not available in the Building, then Landlord may designate that the Additional Premises be located within the neighboring Interplace II Office Building located at 100 Elwood Davis Road in the Village of Liverpool, County of Onondaga and State of New York (the "IP2 Building") which will accommodate Tenant's additional office premises requirements. (a) Tenant may exercise its option hereunder to lease the Additional Premises by giving Landlord written notice of such exercise at any time DURING THE INITIAL TERM OF THIS LEASE at least nine (9) months prior to the date Tenant specifies in its notice that possession of the Additional Premises is to be delivered to Tenant. If such option shall be duly exercised by Tenant, Landlord shall inform Tenant in writing within three (3) months of Landlord's receipt of Tenant's notice as to whether or not Landlord shall be able to make the Additional Premises available to Tenant upon the date specified in said notice ("Landlord's Notice of Availability"). (b) If Tenant duly exercises its option to lease the Additional Premises under this Section 22.26, and the Additional Premises shall be available either in the Building or the IP2 Building, the leasing of the Additional Premises by Tenant shall be upon the same terms and conditions as provided in this Lease for the Premises (the "Existing Terms"), except that: (i) IN THE EVENT THAT THE ADDITIONAL PREMISES SHALL BE LOCATED IN THE BUILDING, THE FIXED MONTHLY RENT FOR THE ADDITIONAL PREMISES SHALL BE EQUAL TO THIRTEEN AND 95/100 DOLLARS ($13.95) PER SQUARE FOOT OF LEASEABLE PREMISES PLUS AN AMOUNT EQUAL TO THE COST OF ANY WORK PERFORMED BY LANDLORD (IF ANY) IN ORDER TO PREPARE THE ADDITIONAL PREMISES FOR TENANT'S OCCUPANCY AMORTIZED OVER THE REMAINING TERM OF THE LEASE, AS MAY BE EXTENDED FROM TIME TO TIME ("ADDITIONAL PREMISES BASE RENT"); AND (ii) IN THE EVENT THAT THE ADDITIONAL PREMISES SHALL BE LOCATED IN THE IP2 BUILDING, the amounts payable under the Lease, including, but not limited to, the fixed monthly rent, base periods (i.e. Tax Base Year, Base Periods for Common Area Costs, Base Amounts for Building Energy Costs and Water), charges for Building Utilities Tenant Electric Energy, and charges for Extra Tenant Electric (and any other charges or costs under the lease) shall be "Fair Market Rents, Terms and Conditions for office space of comparable size, class and quality in the Village of Liverpool as of the date Tenant exercises its option under this Section 22.26. Anything to the contrary contained in this Lease notwithstanding, the per square foot rent under the lease for the Additional Premises shall not be less than the per square foot rent payable for the Premises hereunder. IF THE ADDITIONAL PREMISES ARE LOCATED IN THE BUILDING, LANDLORD AND TENANT SHALL PROMPTLY EXECUTE A LEASE MODIFICATION AGREEMENT WHEREBY THE PARTIES INCORPORATE THE ADDITIONAL PREMISES INTO THE PREMISES AND MODIFY THE LEASE SO AS TO REFLECT AND INCORPORATE THE PAYMENT OF THE ADDITIONAL PREMISES BASE RENT, AND SUCH OTHER TERMS AND CONDITIONS UPON WHICH LANDLORD AND TENANT SHALL MUTUALLY AGREE. IN THE EVENT THAT THE ADDITIONAL PREMISES ARE TO BE LOCATED IN THE IP2 BUILDING AND LANDLORD AND TENANT AGREE ON THE FAIR MARKET RATE, TERMS AND CONDITIONS, THE PARTIES AGREE THAT THEY SHALL PROMPTLY EXECUTE A LEASE ON LANDLORD'S STANDARD OFFICE LEASE, INCORPORATING THE EXISTING TERMS AND SUCH FAIR MARKET TERMS AND CONDITIONS FOR THE ADDITIONAL PREMISES. (c) If Landlord and Tenant are unable to agree upon the Fair Market Rents, Terms and Conditions for the Additional Premises in the IP2 Building within twenty (20) days following Tenant's receipt of Landlord's Notice of Availability, (i) the dispute shall proceed to arbitration or (ii) TENANT, AT ITS OPTION, MAY WITHDRAW ITS EXERCISE OF THIS OPTION UPON WRITTEN NOTICE GIVEN WITHIN TWO (2) BUSINESS DAYS FOLLOWING THE EXPIRATION OF SAID TWENTY (20) DAYS, WITHOUT PREJUDICE. IN THE EVENT THAT TENANT DOES NOT WITHDRAW ITS EXERCISE, THEN IN SUCH CASE, and within five (5) business days after the expiration of such twenty (20) day period, each party shall appoint an arbitrator and notify the other party of such appointment by identifying the appointee. Each party hereto agrees to select as its respective appointee a licensed real estate broker, who is an individual of substantial experience with respect to office building ownership, management and marketing in the general geographic area of the greater Syracuse area, which person shall not be regularly employed or have been retained during the last two (2) years as a consultant 23 26 by the party selecting such person. Neither party may consult directly or indirectly with any arbitrator regarding the Fair Market Rents, Terms and Conditions prior to appointment, or after appointment, outside the presence of the other party. The arbitration shall be conducted in the City of Syracuse under the provisions of the commercial arbitration rules of the American Arbitration Associations and the laws of the State of New York. (d) Not later than five (5) business days after both arbitrators are appointed, each party shall separately, but simultaneously, submit in a sealed envelope to each arbitrator their separate suggested Fair Market Rents, Terms and Conditions for the Additional Premises and shall provide a copy of such submission to the other party. After reviewing such submissions, the selected arbitrators shall determine whether Landlord's or Tenant's estimate of the Fair Market Rent, Terms and Conditions is closer to the actual Fair Market Rent, Terms and Conditions and shall declare such closer estimate to be the Fair Market Rent, Terms and Conditions. It is hereby acknowledged and agreed that the decision of the arbitrators shall be final and binding upon the parties and that the parties shall promptly enter into a new lease prepared by counsel for the Landlord on Landlord's Standard Office Lease for the Additional Premises for a term to be agreed upon, and setting forth (i) the Existing Terms and (ii) the Fair Market Rent, Terms and Conditions as determined by arbitration. h) Each party shall be responsible for the costs, charges and/or fees of its respective appointee, and the parties shall share equally in the costs, charges and/or fees of the third arbitrator, if any. The decision of the arbitrator(s) may be entered in any court having jurisdiction thereof. j) For purposes of this paragraph, the term "Fair Market Rents, Terms and Conditions" shall mean the annual amount per rentable square foot and additional charges that a willing, comparable, non-equity, non-renewal, non-expansion new tenant would pay and a willing, comparable landlord of a first class office building in the Village of Liverpool would accept at arm's length, giving appropriate consideration to annual rental rates per rentable square foot, the type of escalation clauses including, but without limitation, operating expense and real estate tax escalation clauses, the extent of liability under such escalation clauses (e.g., whether determined on a net lease basis or by increases over a particular base year or base dollar amount), abatement provisions reflecting free rent and/or no rent during the period of construction or any other period during the lease term, brokerage commissions, if any, length of lease term, size and location of the premises being leased, Building Standard work letter and/or tenant improvement allowances, if any, and other generally applicable terms and conditions of tenancy for a single floor or the space in question, if smaller. k) Anything to the contrary contained in this Section 22.26 or the Lease to the contrary notwithstanding, provided Tenant shall not be in default of any of the terms or conditions of this Lease (as defined in Section 13.01(a) as an event of default), then, UPON THE EXPIRATION OF THE EIGHTY-FOURTH (84TH) FULL CALENDAR MONTH OF THE INITIAL LEASE TERM ("84TH MONTH"), in the event THAT LANDLORD SHALL BE UNABLE TO ACCOMMODATE additional square footage requirements of Tenant as exercised pursuant to the terms of this Section 22.26 FROM AND AFTER THE EXPIRATION OF SAID 84TH MONTH. Landlord shall so inform Tenant within Landlord's requisite Notice of Availability, and Tenant may thereafter elect to terminate this Lease by written notice to Landlord ("Notice of Termination") given within sixty (60) days following Tenant's receipt of said Notice of Availability, which termination shall be effective upon the expiration of ninety (90) days following Landlord's receipt of Tenant's Notice of Termination. In the event Tenant shall duly exercise its option to terminate the Lease pursuant to the provisions of this Section 22.26(k), this Lease shall terminate upon the later to occur of (i) the expiration of ninety (90) days following Landlord's receipt of Tenant's Notice of Termination; and (ii) the date set forth in said Notice of Termination as the effective date of the same (the "Termination Date"), and Landlord and Tenant shall be released from the accrual of any further obligation or liability to the other under this Lease from and after said Termination Date. In the event Tenant shall fail to timely give notice to Landlord within sixty (60) days following its receipt of Landlord's Notice of Availability informing Tenant that Additional Premises are not available, Tenant shall be deemed to waived such right to terminate, and this Lease shall continue in full force and effect. l) Landlord hereby represents and warrants that it has reserved the right under each of its representative leases with ACC Communications and Interim Personnel, being tenants of premises located in the Building, to relocate each of said tenants upon SIXTY (60) days prior written notice. In the event Tenant shall at any time during the term of this Lease desire to lease the respective premises of any of the tenants heretofore named, and provided Tenant shall not be in default of the terms or conditions of this Lease (as defined in Section 13.01(a) as an event of default), Landlord hereby agrees that it negotiate in good faith with Tenant for the leasing of the desired premises and, upon reaching a business deal with Tenant regarding said desired premises, Landlord shall exercise its right to relocated the tenant(s) thereof and enter into a lease with Tenant for the same. TENANT AGREES THAT ANY SUCH RELOCATION OF TENANT(S) BY LANDLORD SHALL BE AT TENANT'S SOLE COST AND EXPENSE, AND THAT TENANT SHALL REIMBURSE LANDLORD FOR ANY SUCH COSTS INCURRED BY LANDLORD WITHIN THIRTY (30) DAYS OF TENANT'S RECEIPT OF AN INVOICE THEREFOR. 24 27 22.27 - Tenant's Right of First Option PROVIDED THAT TENANT SHALL NOT DEFAULT IN ANY OF THE TERMS OR CONDITIONS OF THIS LEASE, LANDLORD AGREES THAT TENANT SHALL HAVE THE FIRST OPTION TO LEASE ADDITIONAL PREMISES LOCATED IN THE BUILDING CURRENTLY UNDER LEASE WITH ANY OTHER TENANT ("OTHER TENANT PREMISES"), SUCH OPTION TO ACCRUE UPON THE DATE THAT THE OTHER TENANT PREMISES SHALL BECOME AVAILABLE. THE LEASING OF THE OTHER TENANT PREMISES SHALL BE UPON ALL OF THE TERMS AND CONDITIONS OF THIS LEASE, EXCEPT THAT THE FIXED MONTHLY RENT FOR THE OTHER TENANT PREMISES SHALL BE EQUAL TO THIRTEEN AND 95/100 DOLLARS ($13.95) PER SQUARE FOOT OF LEASEABLE PREMISES PLUS AN AMOUNT EQUAL TO THE COST OF ANY WORK PERFORMED BY LANDLORD (IF ANY) IN ORDER TO PREPARE THE OTHER TENANT PREMISES FOR TENANT'S OCCUPANCY AMORTIZED OVER THE REMAINING TERM OF THE LEASE, AS MAY BE EXTENDED FROM TIME TO TIME ("OTHER TENANT PREMISES BASE RENT"). LANDLORD SHALL NOTIFY TENANT IN WRITING OF THE AVAILABILITY OF ANY OTHER TENANT PREMISES UPON THE EARLIER TO OCCUR OF (I) AT LEAST SIX (6) MONTHS PRIOR TO THE EXPIRATION OF THE RESPECTIVE LEASE ON SAID PREMISES AS OF THE DATE OF EXECUTION OF THIS LEASE; AND (II) UPON SUCH OTHER DATE THAT OTHER TENANT PREMISES MAY BECOME AVAILABLE, AND TENANT SHALL THEREAFTER HAVE THIRTY (30) DAYS FROM RECEIPT OF LANDLORD NOTICE WITHIN WHICH TO SERVE LANDLORD IRREVOCABLE NOTICE (TIME BEING OF THE ESSENCE) OF TENANT'S INTENTION TO LEASE OTHER TENANT PREMISES ("TENANT'S FIRST OPTION NOTICE"). IN THE EVENT THAT TENANT SHALL TIMELY EXERCISE ITS RIGHT OF FIRST OPTION, LANDLORD AND TENANT SHALL PROMPTLY EXECUTE A LEASE MODIFICATION AGREEMENT WHEREBY THE PARTIES INCORPORATE THE OTHER TENANT PREMISES INTO THE PREMISES AND MODIFY THE LEASE SO AS TO REFLECT AND INCORPORATE THE PAYMENT OF THE OTHER TENANT PREMISES BASE RENT, AND SUCH OTHER TERMS AND CONDITIONS UPON WHICH LANDLORD AND TENANT SHALL MUTUALLY AGREE. IN THE EVENT THAT LANDLORD SHALL NOT TIMELY RECEIVE TENANT'S FIRST OPTION NOTICE, TENANT SHALL BE DEEMED TO HAVE WAIVED ITS FIRST OPTION RIGHT TO LEASE THE RESPECTIVE OTHER TENANT PREMISES, AND LANDLORD MAY LEASE THE SAME TO ANOTHER TENANT WITHOUT FIRST OFFERING IT AGAIN TO TENANT. IN WITNESS WHEREOF, the parties hereto have executed this Lease on the date first above written. LANDLORD: TENANT: ELWOOD DAVID ROAD COMPANY NYSERNet, INC. By: Joseph T. Scuderi By: David A. Buckel --------------------------------- ---------------------- Joseph T. Scuderi Name: David A. Buckel Member of the Executive Committee Title: Controller 25 28 (Acknowledgment of Landlord) STATE OF NEW YORK } SS.: } COUNTY OF ONONDAGA On this 13th day of February, 1996, before me personally came Joseph T. Scuderi to me personally known, who being by me duly sworn, did dispose and say that he resides in Fayetteville, NY, that he is a Member of the Executive Committee of ELWOOD DAVIS ROAD COMPANY, the partnership described in and which executed the within Lease as Landlord; and who further acknowledged to me that he executed said Lease for, on behalf and in the name of such partnership by the authorization thereof. MARGO M. McCAFFERY Margo McCaffery Notary Public, State of New York __________________ No. 01MC5056553 Notary Public Qualified in Madison County Commission Expires March 4, 98 (Acknowledgment of Tenant) STATE OF NEW YORK } SS.: COUNTY OF ONONDAGA } On this 30th day of May, 1996, before me personally came David Buckel, to me personally known, who, being by me duly sworn, did dispose and say that he resides at Syracuse, NY, that he is the Assistant Secretary of NYSERNet, INC., the corporation described in, and which executed the within Lease as Tenant; and who further acknowledged to me that he executed said Lease for, on behalf and in the name of said corporation by order of the Board of Directors thereof. Patricia J Foster ___________________ Notary Public PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No.4755760 My Commission Expires Sept. 30, 1996 29 ASSIGNMENT OF LEASE AND ASSUMPTION AGREEMENT THIS AGREEMENT ("Agreement") is made this 17 day of January, 1997, by and between ELWOOD DAVID ROAD COMPANY, a general partnership organized and existing pursuant to the laws of the State of New York with a principal office at c/o The Widewaters Group, Inc., P. O. Box 3, 5786 Widewaters Parkway, Dewitt, New York 13214-0003 ("Landlord"); NYSERNet, INC., a New York corporation with Federal Tax Identification # 13-3378833 and a principal office at 125 Elwood Davis Road, Liverpool, New York 13088 ("Prior Tenant"); and APPLIED THEORY (TM) COMMUNICATIONS, INC., a not-for-profit corporation with Federal Tax Identification # 16-149-1253 and principal office at 125 Elwood Davis Road, Syracuse NY, 13212 ("Tenant"). WITNESSETH: WHEREAS, Landlord and Prior Tenant entered into a Standard Office Space Lease dated February 13, 1996, as modified by Lease Modification Agreement #1 dated December 20, 1996, for 21,246 leasable square feet of office premises located in the Interstate Place I Office Building at 125 Elwood Davis Road, Liverpool, New York (collectively, the "Lease"); and WHEREAS, there has been a sale of all, or substantially all assets from Prior Tenant to Tenant. WHEREAS, in conjunction with said sale, Prior Tenant desires to assign to Tenant all of Prior Tenant's leasehold estate, rights, title, interest, covenants, duties, liabilities and obligations under the Lease upon the terms and conditions set forth herein (the "Assignment"); WHEREAS, under the terms of the Lease, the Prior Tenant may not assign, sublease or otherwise transfer its interest under the Lease without the prior consent of Landlord; WHEREAS, Prior Tenant has requested that Landlord consent to the Assignment; and WHEREAS, Landlord agrees to grant its consent to said Assignment only upon the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual entry into this Agreement by the parties hereto and for other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged by the parties, the parties hereto agree as follows: 1. Landlord hereby consents to the assignment of Prior Tenant's leasehold estate, rights, title, interest, covenants, duties, liabilities and obligations under the Lease upon the terms and conditions set forth herein. 2. Prior Tenant does hereby assign, transfer, convey and grant to Tenant, its successors and assigns, forever, its entire right, title and interest in the Lease. 1 of 4 30 3. Tenant hereby: (a) acknowledges that it has received and reviewed a true and complete copy of the Lease; (b) accepts Prior Tenant's assignment of the Lease; and further (c) hereby assumes and covenants and agrees to perform from and after the Effective Date hereof, as a direct obligation to the Landlord, all of the obligations of "Tenant" arising under the Lease. 4. Anything contained in the Lease or this Agreement to the contrary notwithstanding, and further notwithstanding the assumption by Tenant of such obligations, Prior Tenant is and shall not be released under the Lease, but shall continue to be fully responsible for the due performance of the obligations of "Tenant" under the Lease, in the same manner and to the same extent as if no such assignment or assumption had been made. 5. As of the Effective Date of this Agreement, the Lease shall be deemed modified by deleting the definition of Tenant on page 1 thereof, and inserting the following in its place and stead: "Tenant: APPLIED THEORY (TM) COMMUNICATIONS, INC. ______________________________________________________________ (Correct Legal Name of Tenant) a not-for-profit corporation organized and existing under the laws of the State of New York with principal office at: ________ 125 Elwood Davis Road _____________________________________ Syracuse, NY, 13212 _____________________________________ Attention: Mr. David A. Buckel _____________________________________________ (Name of Person or Officer to receive Notices) Fed. Tax ID # 16-149-1253 ____________________________ hereinafter referred to as "Tenant"." 6. Landlord's consent set forth herein is not and shall not be construed as a consent by Landlord to any further assignment or subletting by Prior Tenant or Tenant. Further assignment or subletting, if any, shall be subject to all relevant provisions of the Lease. 7. Prior Tenant and Tenant hereby certify to Landlord that as of the date hereof (i) the Lease is in full force and effect; (ii) there currently exist no defaults by Landlord under the Lease, nor any condition which with the giving of notice or the passage of time, or both, would constitute a default under the Lease on the part of Landlord; (iii) Tenant has no existing set-offs, counterclaims or defenses against Landlord under the Lease; and that (iv) the Lease as modified hereby contains the entire agreement between the parties hereto with respect to the Premises, the Lease and the Office Building. 8. Prior Tenant and Tenant jointly and severally represent and warrant to Landlord that each has taken all necessary corporate, partnership or other action necessary to execute and deliver this Agreement, and that this Agreement constitutes the legally binding obligation of each such party and is enforceable in accordance with its terms. Both Prior Tenant and Tenant further represent and warrant that each has full and complete authority to enter into and execute this Agreement and acknowledge that Landlord is relying upon the herein made representations of Prior Tenant's and Tenant's respective authority to execute this Agreement and both Tenant and Prior Tenant shall indemnify save and hold Landlord harmless from any 2 of 4 31 claims, or damages including reasonable attorneys' fees arising from any misrepresentation herein made by either Prior Tenant or Tenant. 9. This Agreement may be executed in one or more counterparts, any one or all of which constitute one document. 10. Terms not defined in this Agreement shall have the meaning ascribed to them in the Lease. 11. The Effective Date of this Agreement for all purposes shall be upon its full execution, and this Agreement shall not be binding unless and until signed on behalf of all parties hereto. 12. Except as herein modified and amended, all the other terms and conditions of the Lease shall continue in full force and effect. 13. As of the Effective Date, this Agreement shall be attached to and made a part of the Lease. IN WITNESS WHEREOF, each party hereto has executed this Agreement or caused it to be executed on its behalf by its duly authorized representatives, the day and year first above written. PRIOR TENANT: NYSERNet, INC. By: /s/ David A. Buckel ------------------------------ Printed name: David A. Buckel -------------------- Title: Director of Finance --------------------------- TENANT: APPLIED THEORY (TM) COMMUNICATIONS, INC. By: /s/ David A. Buckel ------------------------------ Printed name: David A. Buckel -------------------- Title: Director of Finance --------------------------- LANDLORD ELWOOD DAVIS ROAD COMPANY By: /s/ Joseph R. Scuderi -------------------------------- Joseph R. Scuderi Member of the Executive Committee 3 of 4 32 ACKNOWLEDGMENTS STATE OF NEW YORK } COUNTY OF ONONDAGA } ss.: On this 17th day of January, 1997, before me personally came Joseph R. Scuderi, to me personally known, who, being by me duly sworn, did depose and say that he resides at Manlius, New York, that he is a Member of the Executive Committee of Elwood Davis Road Company, the partnership described in, and which executed the within instrument as Landlord; that he executed the same on behalf of and in the name of such Partnership. Margo M. McCaffery ---------------------------------- Notary Public MARGO M. McCAFFERY Notary Public, State of New York No. 01MC5056553 Qualified in Madison County Commission Expires March 4, 1998 STATE OF NEW YORK } COUNTY OF ONONDAGA } ss.: On this 10th day of January, 1997, before me personally came David A. Buckel, to me personally known, who, being by me duly sworn, did depose and say that he/she resides in Syracuse, NY, that he/she is the Director of Finance of NYSERNet, Inc., the corporation described in and which executed the within instrument as Prior Tenant; and that he/she signed his/her name thereto by order of the Board of Directors of said corporation. Patricia J. Foster ---------------------------------- Notary Public PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1998 STATE OF NEW YORK } COUNTY OF ONONDAGA } ss.: On this 10th day of January, 1997, before me personally came David A. Buckel, to me personally known, who, being by me duly sworn, did depose and say that he/she resides in Syracuse, NY, that he/she is the Secretary/Treasurer of APPLIED Theory (TM) Communications, Inc., the not-for-profit corporation described in and which executed the within instrument as Tenant; and that he/she signed his/her name thereto by order of the Board of Directors of said corporation. Patricia J. Foster ---------------------------------- Notary Public PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1998 4 of 4 33 [THE WIDEWATERS GROUP Letterhead] December 23, 1996 VIA FIRST CLASS MAIL Mr. David Buckel NYSERNet, Inc. 125 Elwood Davis Road Liverpool, NY 13088 Re: Lease Modification Agreement #1 Dear Mr. Buckel: Enclosed, for your files, please find one (1) fully executed duplicate original of the above-referenced document. Feel free to contact Susan Scuderi should you have any questions with regard to the enclosed. Very truly yours, /s/ Michelle L. Smith Michelle L. Smith Paralegal THE WIDEWATERS GROUP, INC. cc: William S. Holstein, Vice President Charles G. Sangster, Director of Leasing Susan M. Scuderi, Esq. Kaye Habib, Manager-Internal Audit Dave Mooney, Property Manager 34 LEASE AGREEMENT This Lease Agreement ("Lease") dated this 8 day of September 1998, is by and between ELWOOD DAVIS ROAD COMPANY, a general partnership organized and existing pursuant to the laws of the State of New York with a principal office at c/o The Widewaters Group, In., P.O. Box 3, 5786 Widewaters Parkway, Dewitt, New York 13214-0003 Attn.: Lease Administration ("Landlord"), and APPLIEDTHEORY (TM) COMMUNICATIONS, INC. (successor-in-interest to NYSERNet, Inc.), a corporation with a principal office at 125 Elwood Davis Road, Liverpool, New York 13088 Attn.: Patricia Foster ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and NYSERNet, Inc. entered into a Standard Office Space Lease February 13, 1996, as modified by Lease Modification Agreement #1 dated December 20, 1996, relating to office space in the office building located at 125 Elwood Davis Road, Liverpool, New York 13088 (the building is herein referred to as "IP1"). The Standard Office Space Lease February 13, 1996, excluding the Lease Modification Agreement #1 dated December 20, 1996 is hereinafter referred to as the "IP1") Original Lease"; WHEREAS, Tenant assumed the rights, title, and interest in the lease from NYSERNet, Inc., as evidenced by the Assignment of Lease and Assumption Agreement dated January 17, 1997; WHEREAS, Tenant desires to lease from Landlord premises in an office building that is adjacent to IP1 and has an address of 100 Elwood Davis Road, Liverpool, New York 13088 (hereinafter referred to as the "Building"); WHEREAS, Landlord is owner of IP1 and the Building; WHEREAS, Landlord has agreed to enter into a lease agreement with Tenant upon the terms and conditions contained set forth below; and NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Article 1 through and including Article 22 of the IP1 Original Lease and Exhibits attached thereto, without any subsequent modifications, are hereby incorporated into this Lease and made a part hereof by reference, except as otherwise set forth below: A. The following replaces Section 1.01 of the IP1 Original Lease: 1.01 - Premises Landlord hereby leases to Tenant and Tenant hereby leases and hires from Landlord those certain premises in the Interstate Place II Office Building (hereinafter called the "Building") which is located in the County of Onondaga and State of New York, which premises are located on the 2nd floor of the Building and are outlined on the floor plan(s) attached hereto and made a part hereof as Exhibit "A", together with the right to use, in common with others, the Building Common Areas and Outside Common Areas as hereinafter defined. For purposes of this paragraph 1.01, the sum of the square feet in the Premises and Tenant's share of Building Common Areas (as defined in paragraph 1.02 hereof) shall be 5,789 leaseable square feet. Upon execution of this Lease, the Building contains 40,220 leaseable square feet. The Premises shall include the area bounded by: the center line of any walls common to adjacent tenants, the Building Common Area side of any wall adjoining Building Common Areas (but not the surface thereof), the line established by the exterior face of the exterior walls of the Building, the concrete floor surface and the lower surface of the next higher floor (or roof). Landlord reserves unto itself, its successors and assigns, the right to install, maintain, use, repair and replace pipes, ducts, conduits, wires and structural elements leading through the Premises in locations which will not materially interfere with Tenant's use of the Premises. No right to use any part of the exterior of the Building and no easement for light or air are included in the lease of the Premises hereby made. B. The rent schedule in the first paragraph of Section 3.01 of the IP1 Original Lease is hereby replaced with the following schedule: MONTH OF LEASE TERM: FIXED MONTHLY RENT -------------------- ------------------ Months 01-60, inclusive: $7,212.13 14.95 Months 61-120, inclusive: $7,694.55 15.95 C. The following replaces Section 4.01 of the IP1 Original Lease: 4.01 - Landlord's Obligation Landlord shall, at its cost and expense (except as otherwise specified), construct the Premises for Tenant's use and occupancy in accordance with plans and specifications prepared by Landlord or Landlord's architect, incorporating in such construction all items of work described in Exhibit "C" attached hereto and made a part hereof. Any work in addition to any of the items specifically enumerated in said Exhibit "C" shall be performed by Tenant at its own cost and expense, or if Landlord installs or constructs any of such 1 35 additional work in the Premises at Tenant's request it shall be paid for by Tenant within fifteen (15) days after receipt of a bill therefor. C. Tenant's monthly charge for Occupant Lights and Outlets Energy as set forth in Section 7.03 shall be $410.05, payable in accordance with, and subject to the provisions of said section. D. Section 22.05(b), and the second paragraph of Section 22.19 of the IP1 Original Lease shall not apply to this Lease. E. Tenant shall have no Option to Lease Additional Premises a provided in Section 22.26 of the IP1 Original Lease. 2. All references to Exhibits "A", "B", and "C" in the IP1 Original Lease shall be deemed to respective exhibits A, B, And C, attached hereto and made a part hereof. 3. Tenant represents and warrants that it has taken all necessary corporate, partnership or other action necessary to execute and deliver this Lease, and that this Lease constitutes the legally binding obligation of Tenant enforceable in accordance with its terms. Tenant further represents and warrants that it has full and complete authority to enter into and execute this Lease and acknowledges that Landlord is relying upon Tenant's representation of its authority to execute this Lease and Tenant shall save and hold Lease harmless from any claims, or damages including reasonable attorneys' fees arising from Tenant's misrepresentation of its authority to enter into and execute this Lease. 4. The effective date of this Lease for all purposes shall be upon its full execution and it shall not be binding unless and until executed on behalf of both parties hereof. 5. This Agreement may be executed in one or more counterparts, any one or all of which constitute one document. LANDLORD: Elwood Davis Road Company By: /s/ Joseph T. Scuderi ------------------------------------- Joseph T. Scuderi Member of the Executive Committee WITNESS: TENANT: AppliedTheory (TM) Communications, Inc. - ------------------------------------ Name: By: ------------------------------- ------------------------------------- Date: Name: ------------------------------- Title: STATE OF NEW YORK ) SS.: COUNTY OF ONONDAGA ) On this 8 day of September 1998, before me personally came Joseph T. Scuderi, to me personally known, who, being by me duly sworn, did depose and say that he resides in Fayetteville, N.Y.; that he is a Member of the Executive Committee of Elwood Davis Road Company; that he is known to me to be one of the Members of the Executive Committee of the partnership that executed the within instrument; and he acknowledged to me that he executed the same on behalf of and in the name of such partnership. /s/ Michelle L. Smith ---------------------------------------- NOTARY PUBLIC Michelle L. Smith Notary Public, State of New York Qualified in Onondaga Cty No. 5014751 My Commission Expires July 6, 1999 STATE OF NEW YORK ) SS.: COUNTY OF NASSAU ) On this 31 day of August 1998, before my personally came David Buckel to me personally known, who, being by me duly sworn, did depose and say that s/he resides in Freehold, N.J.; that s/he is the CFO of AppliedTheory (TM) Communications, Inc., the corporation described in and which executed the within Lease; and that s/he signed his name thereto by order of the Board of Directors of said corporation. /s/ Diane Barker ---------------------------------------- DIANE BARKER NOTARY PUBLIC Notary Public, State of New York No. 01BA6003556 Qualified in Nassau County Commission Expires 3/9/2000 2 EX-10.10 10 CONSULTING AGREEMENT 1 Exhibit 10.10 CONSULTING AGREEMENT CONSULTING AGREEMENT dated as of October 5, 1996 between APPLIEDTHEORY COMMUNICATIONS, INC., a New York corporation (hereinafter referred to as the "Company"), and SHELLEY A. HARRISON (hereinafter referred to as the "Consultant"). W I T N E S S E T H WHEREAS, the Consultant possess certain skills and abilities that would be useful to the Company in connection with its operations, financing and business planning; and WHEREAS, the Company is desirous of being able to avail itself of the Consultant's experience on the terms and conditions hereinafter set forth; and WHEREAS, the Consultant is willing to render advisory and consulting services to the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, the mutual promises of the parties, and other good and valuable consideration, it is hereby agreed as follows: 1. Consulting Period. (a) The Company shall retain the Consultant, and the Consultant shall serve the Company, in an advisory and consulting capacity for the period commencing on the date hereof and ending on October 5, 2000 (such period, as extended pursuant to Section 1(b) or as shortened pursuant to Section 1(c), being hereinafter referred to as the "Consulting Period"). 2 (b) The Consulting Period shall automatically be renewed for successive additional one-year periods on the same terms and conditions unless written notice is provided to the other party hereto at least 90 days prior to the end of the Consulting Period (as extended, if applicable). (c) The Consulting Period may be terminated prior to the end of its stated term by either party upon at least 90 days prior written notice (an "Early Termination"). In the event of an Early Termination, the consulting fee payable pursuant to Section 3(a) hereof shall terminate as of such date, but any of the stock options set forth in Section 3(b) hereof that are not then vested shall fully vest on the date that the Company concludes, contracts for, or the Board of Directors of the Company approves a sale of equity securities or securities convertible into equity securities, a merger, or consolidation, issuance of a majority of its stock, a sale of a majority of its assets or a similar transaction at any time during the Consulting Period or within a period of two years from an Early Termination, provided, however, that (i) the transaction or a similar transaction (the "Transaction") was introduced or proposed by the Consultant or (ii) the Company consulted with the Consultant regarding the Transaction prior to the Early Transaction. 2. Consulting Services. The Consultant agrees to render advisory and consulting services during the Consulting Period, as mutually agreed, with respect to the Company's operations, financing and business planning. In particular, the Company agrees that, in all cases, it shall consult with the Consultant regarding any proposed transaction of the type specified in Section 1(c) that arises or is under investigation or review by the Company or its advisors during the Consulting Period. 2 3 3. Payments. (a) The Company will pay the Consultant a fee of Five Thousand Dollars ($5,000) per month for each month during the Consulting Period. (b) The Company has also issued a non-statutory stock option for 100,000 shares of the Company's Common Stock at an option price of $1.00 per share on the terms set forth in the Non-Statutory Stock Option Contract attached hereto as Exhibit A, as modified by the provisions of Section 1(c) hereof. 4. Disclosure of Information. The Consultant recognizes and acknowledges that the trade secrets and proprietary information and processes of the Company and its affiliates, as they may exist from time to time, are valuable, special and unique assets of the Company. The Consultant will not, in whole or in part, disclose such secrets, information and processes to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Consultant make use of any such secrets, information and processes for its own purposes or for the benefit of any person, firm, corporation or other entity (except the Company) under any circumstances, provided that these restrictions shall not apply to such secrets, information and processes which are then in the public domain (provided that the Consultant was not responsible, directly or indirectly, for such secrets, information or processed entering the public domain without the Company's consent) or to disclosure of any such secrets, information or processes as required by law or pursuant to court order. The Consultant agrees that the restrictions in this Section shall extend to any confidential proprietary information contained in all memoranda, books, papers, letters and other data, and all copies thereof and therefrom, in any way relating to the Company's business and affairs, whether made by the Consultant or otherwise coming into the Consultant's possession. 3 4 5. Independent Contractor. Nothing contained herein shall constitute the Consultant an employee or agent of the Company, and the relationship of the Consultant to the Company for all purposes, including, without limitation, tax purposes, shall be one of the independent contractor. Without limitation of the forgoing, it is understood that, unless otherwise expressly agreed in writing, the Consultant shall have no power or authority to execute any agreement or instrument on behalf of the Company or otherwise bind the Company contractually or legally. 6. Notices. All communications and notices pursuant to this Agreement shall by in writing and shall be deemed given if and when delivered personally or mailed certified or registered mail, postage prepaid, addressed as follows: If to the Consultant: Dr. Shelley A. Harrison 5 Norma Lane Dix Hills, NY 11746 If to the Company: Applied Theory Communications, Inc. 40 Cutter Mill Road, Suite 405 Great Neck, NY 11021 Attention: Richard Mandelbaum Chairman & CEO Any party may, be written notice to the others, change the address to which notices to such party are to be delivered to mailed, provided that any such change of address shall only be effective upon receipt. 7. Parties in Interest and Assignment. This Agreement shall insure to the benefit of and be binding upon the successors and assigns of the parties hereto. Neither party may assign its rights under this Agreement without the written consent of 4 5 the other. 8. Representing. Each of the Consultant and the Company hereby represents to the other that it has full power and authority to enter into this Agreement and to perform its obligations hereunder and that this Agreement constitutes a legal, valid and binding obligation of such party, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally. 9. Complete Agreement. This Agreement, together with the Non-Stock Option Contract attached hereto as Exhibit A, contains the entire agreement between the parties with respect to the subject matter hereof, and supersedes all previous negotiations, commitments and writings with respect thereto. 10. Amendment and Waivers. This Agreement may be amended, modified, altered or terminated, and any of its provisions, waived, only in a writing signed on behalf of the parties hereto. 11. Governing Law and Severability. This Agreement shall be governed by and construed and enforced in accordance with laws of the State of New York. If any provision of this Agreement is void, or is so declared, such provision shall be deemed, and hereby is, severed from this Agreement, which otherwise shall remain in full force and effect. 12. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5 6 13. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 6 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the 5th day of October, 1996. COMPANY: APPLIEDTHEORY COMMUNICATIONS, INC. By: /s/ Richard Mandelbaum ------------------------------- Richard Mandelbaum Chairman & CEO CONSULTANT: /s/ Shelley A. Harrison -------------------------------- Shelley A. Harrison 7 EX-10.12 11 NOTE WITH DAVID A. BUCKEL 1 Exhibit 10.12 NOTE July 30, 1998 FOR VALUE RECEIVED, David A. Buckel, residing at 4015 Foothill Path, Syracuse, NY 13215 (the "Maker") hereby promises to pay to AppliedTheory Communications, Inc., a corporation organized under the laws of the State of New York (the "Payee), the principal amount of $264,000.00 (two hundred and sixty-four thousand Dollars and zero Cents). Except as specified in Section 3 of this Note, interest shall accrue on the outstanding principal beginning on the date hereof and shall continue to accrue to and including the day upon which the principal is required to be paid in full, as herein specified. 1. Interest. Except as specified in Section 4 of this Note, interest shall accrue daily at an annual rate of five point fifty six percent (5.56%), which corresponds to the Applicable federal rate for a note of this kind and duration made in July of 1998, as published in Revenue Ruling 98-33, in Internal Revenue Bulletin 9826. Except as specified in Section 4 of this Note, accrued interest shall be payable annually. 2. Payments. Maker shall pay the entire outstanding principal balance, plus all accrued and unpaid interest thereon, on the earlier of (i) the date which is thirty-six (36) months from the date of this Note, or (ii) another date to be described in any security agreement which relates to this note and is concluded by and among the Maker and the Payee. All payments shall be made in the lawful money of the United States, and shall be applied first to accrued interest and then to the outstanding principal balance. Payments shall be made at the offices of Payee at 125 Elwood Davis Road Syracuse, N.Y. 13212-4311 or at such other place as Payee or any subsequent holder of the Note may designate to Maker in writing. 3. Prepayments. The indebtedness evidenced by this Note may be prepaid at any time and from time to time, without advance notice to Payee, in whole or in part, with interest accrued to the date of prepayment on such principal amount so prepaid. 4. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing, Payee may, by notice to Maker, declare this Note, all interest hereon, and all other amounts payable hereunder to be due and payable, whereupon the same shall become immediately due and payable with interest to accrue daily at an annual rate of fifteen percent (18%): (a) There is a failure to make any payment of principal of, interest on, or any other amount payable under this Note, when due; (b) Maker breaches any other obligation to Payee hereunder, or Maker breaches or defaults under any other agreement with Payee whatsoever; (c) Maker shall become insolvent or admit in writing his inability to pay his debts as they become due, or shall make a general assignment for the benefit of creditors; 2 (d) Any proceedings shall be instituted by or against Maker seeking either (i) an order for relief with respect to, or reorganization, arrangement, adjustment composition of, his debts under the United States Bankruptcy Code or under any other law relating to bankruptcy, insolvency, reorganization or relief of debtors, or (ii) appointment of a trustee, receiver or similar official for Maker or for any substantial part of his property; and, with respect only to a proceeding instituted against Maker, such proceedings is not dismissed within thirty (30) days thereafter; (e) There shall be any default or event of default under any guarantee of, or subordination agreement relating to, or mortgage, security or other agreement securing, this Note; (f) Maker's death; (g) Maker fails to execute a security agreement and pledge collateral on terms and conditions acceptable to the Payee as specified in Section 14 of this Note. 5. No Waiver, etc. No delay or omission on the part of Payee in exercising any right hereunder or under any guarantee or subordination agreement relating to or mortgage, security or other agreement securing, this Note shall operate as a waiver of such right or of any other right of Payee, nor shall any delay, omission or waiver on any one occasion be deemed to be a bar to or waiver of the same or any other right on any future occasion. Maker, and every guarantor and endorser of this Note, regardless of the time, order or place of signing, waives presentment, demand, protest and notices of every kind with respect to this Note and assents (i) to any extension or postponement of the time of payment and to any other indulgence, (ii) to the addition or release of, or any compromise or settlement with, any guarantor or endorser or other party or person primarily or secondarily liable hereunder, and (iii) to the addition or release of, the failure to take or perfect an interest in, any compromise or settlement with respect to, or any delay in proceeding or failure to proceed against, any collateral or other security for this Note. 6. Payee's Expenses. Maker also agrees to pay on demand all costs and expenses (including fees and expenses of counsel) incurred by Payee in determining its rights under this Note and any and all security agreements, mortgages and guarantees securing this Note and under all subordination agreements relating to this Note; in administering and/or enforcing this Note and any and all security agreements, mortgages and guarantees securing this Note and under all subordination agreements relating to this Note; and in taking, holding, insuring, appraising, preparing for sale and selling, or otherwise realizing on, any collateral securing this Note. All such costs and expenses shall bear interest, payable on demand, form the date of payment thereof by Payee until paid in full by Maker, at the rate(s) from time to time applicable to the principal of this Note, including any rate applicable during the existence of an Event of Default or any event which with notice or passage of time or both would constitute an Event of Default. 7. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York, applicable to contracts made and to be performed wholly within the State of New York, without giving effect to conflict of laws principles. 2 3 8. Notices. Any notice or other communication required or permitted under this Note shall be in writing and shall be deemed to have been duly served (i) upon hand delivery, or (ii) on the third day following delivery to the United States Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (iii) on the first day following delivery to a nationally recognized United States overnight courier service, fee prepaid, return receipt or other confirmation of delivery requested, or (iv) when telecopied or sent by facsimile transmission if an additional notice is also delivered or mailed, or communication shall be delivered or directed to a party at its address set forth above or, as to each such party or any holder hereof, at the address set forth above or, as to each such party or any holder hereof, at such other address as may be designated by such party or holder in a notice given to the other parties hereto in accordance with the provisions of this paragraph. 9. Maximum Interest. Notwithstanding any other provisions of this Note, Payee does not intend to charge, and Maker shall not be required to pay, any interest or other fees or charges in excess of the maximum permitted by applicable law. Any payments in excess of such maximum shall be refunded to Maker or credited against unpaid principal. 10. Security and Setoff. As security for this Note, and any renewal or extension hereof, the Maker gives the Payee a security interest in all sums now or hereafter standing to the Maker's credit on the books of Payee and/or any affiliate of Payee, including, but not limited to, amounts due for unpaid wages and expense reimbursements (the "Credit Amounts"). The Payee may at its option and at any time(s), with or without notice to the Maker, after the occurrence of an event of default hereunder, set off or realize upon any and all Credit Amounts, and apply them to the payment or reduction of all or any of the principal of and interest accrued upon this Note then due, whether by maturity, acceleration or otherwise, in such manner as the Payee may determine, in its sole discretion. The Payee shall not be obligated to assert or enforce any rights under this paragraph or to take any action in reference thereto, and the Payee may, in Payee's discretion, at any time(s) relinquish Payee's rights under this paragraph without thereby affecting or invalidating Payee's right thereafter to assert such rights. 11. Modifications Waiver. No modification or waiver of this Note or any part hereof shall be effective unless made in writing and signed by Maker and Payee. No course of dealing between Maker and Payee, or between Payee and any other party, will be deemed effective to modify, amend, waive or discharge any part of this Note or of the rights or obligations of Maker hereunder. 12. Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Note, Maker specifically consents and agrees that: (i) the courts of the State of New York and/or the United States Federal Courts sitting in the State of New York shall have exclusive jurisdiction over Maker and over the subject matter of any such proceedings; and (ii) the venue of any such action shall be in Onondaga County, New York and/or the United States District Court for the Northern District of New York and/or Nassau County, New York and/or the United States District Court for the Eastern District of New York and/or New York County, New York and/or the United States District Court for the Southern District of New York. 13. Severability. Any provision of this Agreement which is prohibited or 3 4 unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Security. The Maker shall, within five (5) days of a written demand from the Payee, execute a security agreement with the Payee or any other documents required by the Payee in order for the Maker to pledge: (a) the twelve thousand (12,000) shares of common stock of the Payee which are subject to and more particularly identified in the Option Agreement by and among the Maker, NYSERNet.net, Inc., IXC Internet Services, Inc., a Delaware corporation and Grumman Hill Investments III, L.P., a Delaware limited partnership. IN WITNESS WHEREOF, David A. Buckel has executed this Note as of the date first above written. /s/ David A. Buckel ------------------------------------- David A. Buckel 4 EX-10.13 12 NOTE WITH JAMES D. LUCKETT 1 Exhibit 10.13 NOTE July 30, 1998 FOR VALUE RECEIVED, James D. Luckett, residing at 6065 Lisi Gardens Drive, North Syracuse,, NY 13212 (the "Maker") hereby promises to pay to AppliedTheory Communications, Inc., a corporation organized under the laws of the State of New York (the "Payee"), the principal amount of $30,000.00 (thirty thousand Dollars and zero Cents). Except as specified in Section 3 of this Note, interest shall accrue on the outstanding principal beginning on the date hereof and shall continue to accrue to and including the day upon which the principal is required to be paid in full, as herein specified. 1. Interest. Except as specified in Section 4 of this Note, interest shall accrue daily at an. annual rate of five point fifty six percent (5.56%), which corresponds to the Applicable federal rate for a note of this kind and duration made in July of 1998, as published in Revenue Ruling 98-33, in Internal Revenue Bulletin 98-26. Except as specified in Section 4 of this Note, accrued interest shall be payable annually. 2. Payments. Maker shall pay the entire outstanding principal balance, plus all accrued and unpaid interest thereon, on the earlier of (i) the date which is thirty-six (36) months from the date of this Note, or (ii) another date to be described in any security agreement which relates to this note and is concluded by and among the Maker and the Payee. All payments shall be made in the lawful money of the United States, and shall be applied first to accrued interest and then to the outstanding principal balance. Payments shall be made at the offices of Payee at 125 Elwood Davis Road Syracuse, N.Y. 13212-4311 or at such other place as Payee or any subsequent holder of the Note may designate to Maker in writing. 3. Prepayments. The indebtedness evidenced by this Note may be prepaid at any time and from time to time, without advance notice to Payee, in whole or in part, with interest accrued to the date of prepayment on such principal amount so prepaid. 4. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing, Payee may, by notice to Maker, declare this Note, all interest hereon, and all other amounts payable hereunder to be due and payable, whereupon the same shall become immediately due and payable with interest to accrue daily at an annual rate of fifteen percent (18 %): (a) There is a failure to make any payment of principal of, interest on, or any other amount payable under this Note, when due; (b) Maker breaches any other obligation to Payee hereunder, or Maker breaches or defaults under any other agreement with Payee whatsoever; 2 (c) Maker shall become insolvent or admit in writing his inability to pay his debts as they become due, or shall make a general assignment for the benefit of creditors; (d) Any proceedings shall be instituted by or against Maker seeking either (i) an order for relief with respect to, or reorganization, arrangement, adjustment composition of, his debts under the United States Bankruptcy Code or under any other law relating to bankruptcy, insolvency, reorganization or relief of debtors, or (ii) appointment of a trustee, receiver or similar official for Maker or for any substantial part of his property; and, with respect only to a proceeding instituted against Maker, such proceedings is not dismissed within thirty (30) days thereafter; (e) There shall be any default or event of default under any guarantee of, or subordination agreement relating to, or mortgage, security or other agreement securing, this Note; (f) Maker's death; (g) Maker fails to execute a security agreement and pledge collateral on terms and conditions acceptable to the Payee as specified in Section 14 of this Note. 5. No Waiver. etc, No delay or omission on the part of Payee in exercising any right hereunder or under any guarantee or subordination agreement relating to or mortgage, security or other agreement securing, this Note shall operate as a waiver of such right or of any other right of Payee, nor shall any delay, omission or waiver on any one occasion be deemed to be a bar to or waiver of the same or any other right on any future occasion. Maker, and every guarantor and endorser of this Note, regardless of the time, order or place of signing, waives presentment, demand, protest and notices of every kind with respect to this Note and assents (i) to any extension or postponement of the time of payment and to any other indulgence, (ii) to the addition or release of, or any compromise or settlement with, any guarantor or endorser or other party or person primarily or secondarily liable hereunder, and (iii) to the addition or release of, the failure to take or perfect an interest in, any compromise or settlement with respect to, or any delay in proceeding or failure to proceed against, any collateral or other security for this Note. 6. Payee's Expenses. Maker also agrees to pay on demand all costs and expenses (including fees and expenses of counsel) incurred by Payee in determining its rights under this Note and any and all security agreements, mortgages and guarantees securing this Note and under all subordination agreements relating to this Note; in administering and/or enforcing this Note and any and all security agreements, mortgages and guarantees securing this Note and under all subordination agreements relating to this Note; and in taking, holding, insuring, appraising, preparing for sale and selling, or otherwise realizing on, any collateral securing this Note. All such costs and expenses shall bear interest, payable on demand, form the date of payment thereof by Payee until paid in full by Maker, at the rate(s) from time to time applicable to the principal of this Note, including any rate applicable during the existence of an Event of Default or any event which with notice or passage of time or both would constitute an Event of Default. 2 3 7. Governing Law. This note shall be governed by and construed in accordance with the laws of the State of New York, applicable to contracts made and to be performed wholly within the State of New York, without giving effect to conflict of laws principles. 8. Notices. Any notice or other communication required or permitted under this Note shall be in writing and shall be deemed to have been duly served (i) upon hand delivery, or (ii) on the third day following delivery to the United States Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (iii) on the first day following delivery to a nationally recognized United States overnight courier service, fee prepaid, return receipt or other confirmation of delivery requested, or (iv) when telecopied or sent by facsimile transmission if an additional notice is also delivered or mailed, or communication shall be delivered or directed to a party at its address set forth above or, as to each such party or any holder hereof, at the address set forth above or, as to each such party or any holder hereof, at such other address as may be designated by such party or holder in a notice given to the other parties hereto in accordance with the provisions of this paragraph. 9. Maximum Interest. Notwithstanding any other provisions of this Note, Payee does not intend to charge, and Maker shall not be required to pay, any interest or other fees or charges in excess of the maximum permitted by applicable law. Any payments in excess of such maximum shall be refunded to Maker or credited against unpaid principal. 10. Security and Setoff. As security for this Note, and any renewal or extension hereof, the Maker gives the Payee a security interest in all sums now or hereafter standing to the Maker's credit on the books of Payee and/or any affiliate of Payee, including, but not limited to, amounts due for unpaid wages and expense reimbursements (the "Credit Amounts"). The Payee may at its option and at any time(s), with or without notice to the Maker, after the occurrence of an event of default hereunder, set off or realize upon any and all Credit Amounts, and apply them to the payment or reduction of all or any of the principal of and interest accrued upon this Note then due, whether by maturity, acceleration or otherwise, in such manner as the Payee may determine, in its sole discretion. The Payee shall not be obligated to assert or enforce any rights under this paragraph or to take any action in reference thereto, and the Payee may, in Payee's discretion, at any time(s) relinquish Payee's rights under this paragraph without thereby affecting or invalidating Payee's right thereafter to assert such rights. 11. Modifications; Waiver. No modification or waiver of this Note or any part hereof shall be effective unless made in writing and signed by Maker and Payee. No course of dealing between Maker and Payee, or between Payee and any other party, will be deemed effective to modify, amend, waive or discharge any part of this Note or of the rights or obligations of Maker hereunder. 12. Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Note, Maker specifically consents and agrees that: (i) the courts of the State of New York and/or the United States Federal Courts sitting in the State of New York shall have exclusive jurisdiction over Maker and over the subject matter of any such proceedings; and (ii) the venue of any such action shall be in 3 4 Onondaga County, New York and/or the United States District Court for the Northern District of New York and/or Nassau County, New York and/or the United States District Court for the Eastern District of New York and/or New York County, New York and/or the United States District Court for the Southern District of New York. 13. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Security. The Maker shall, within five (5) days of a written demand from the Payee, execute a security agreement with the Payee or any other documents required by the Payee in order for the Maker to pledge: (a) one thousand four hundred (1,400) of the of the forty thousand (40,000) shares of common stock of the Payee which are subject to and more particularly identified in the Option Agreement by and among the Maker, NYSERNet.net, Inc., IXC Internet Services, Inc., a Delaware corporation and Grumman Hill Investments III, L.P., a Delaware limited partnership. IN WITNESS WHEREOF, James D. Luckett has executed this Note as of the date first above written. /s/ James D. Luckett -------------------------------- James D. Luckett 4 EX-10.14 13 ASSIGNMENT, SOFTWARE DEVELOPMENT AND LICENSE 1 Exhibit 10.14 ASSIGNMENT, SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT BETWEEN NYSERNET.ORG, INC. AND APPLIEDTHEORY COMMUNICATIONS, INC. OCTOBER 1, 1996 2 TABLE OF CONTENTS ----------------- Page ---- I. DEFINITIONS A. Assignment B. Consideration C. Representations, Warranties and Indemnification D. Delivery of AJB Software II. SOFTWARE DEVELOPMENT A. Development B. Progress Reports and Acceptance C. Deficiency Letter D. User Documentation E. Payment F. Transfer of the New AJB Software G. Term H. Termination I. Noninfringement Warranty J. Software Warranty K. Year 2000 Standards L. No Undocumented Features III. LICENSE A. Grant B. Ownership of Derivatives Works C. Indemnification IV. MISCELLANEOUS PROVISIONS A. Indemnification B. Notices C. Disputes, Choice of Law D. Independent Contractor Status E. Security, No Conflicts F. Insurance, Indemnity G. Miscellaneous LIST OF SCHEDULES ----------------- Schedule A List of AJB Software by Module or File Schedule B America's Job Bank Contract Amendment with NYSDOL Schedule C Software Development Specifications Schedule D Software Development Fees 3 This Agreement is made as of October 1, 1996 by and between NYSERNet.org, Inc., a not-for-profit corporation organized and existing under the laws of the State of New York, with its principal offices at 125 Elwood Davis Road, Syracuse, New York 13212, hereinafter referred to as "NYSERNet," and AppliedTheory Communications, Inc., with its principal office at 40 Cuttermill Road, Great Neck, New York 11201, hereinafter referred to as "AppliedTheory." W I T N E S S E T H: WHEREAS, NYSERNet has developed and authored the original and later versions of the proprietary software known as RDBMS.a; and WHEREAS, NYSERNet has developed and authored the original and later versions of the proprietary software known as AJB WWW SERVER SOFTWARE and AJB WWW SERVER/AGENT SOFTWARE including the additional modules listed on Schedule A for the non-profit purpose of working with the New York State Department of Labor ("NYSDOL") to establish a world wide web version of the America's Job Bank system; and WHEREAS, NYSERNet has entered into a further agreement with NYSDOL to modify and update the AJB Software (as defined below), pursuant to America's Job Bank Contract Amendment #3 dated October 25, 1996 that is attached as Schedule B ("NYSDOL AMENDMENT"), under which NYSDOL agreed to pay NYSERNet $446,600 for software development services; and WHEREAS, NYSERNet must seek experienced personnel to aid in fulfilling its obligations under the NYSDOL AMENDMENT; and WHEREAS, NYSERNet is further interested in generating for its non-profit purposes a stream of income from the AJB Software and later versions, but does not want to spend its own funds to commercialize the AJB Software; and WHEREAS, AppliedTheory wishes to acquire the AJB Software for the purpose of modifying the AJB Software for commercialization in other markets; and WHEREAS, AppliedTheory has developed expertise relating to the AJB Software and has experienced personnel capable of aiding NYSERNet to fulfill NYSERNet's obligations under the NYSDOL AMENDMENT; and WHEREAS, AppliedTheory will have to expend a considerable amount of its own financial and time resources to commercialize the AJB Software to suit the needs of other markets; -Page 1- 4 NOW THEREFORE in consideration of the promises and the mutual covenants herein contained, and for good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: DEFINITIONS ----------- A. AJB SOFTWARE means the software application originally written by NYSERNet that consists, as of October 1, 1996, of the files and modules identified on Schedule A. B. EFFECTIVE DATE - The effective date of this Assignment, Software Development and License Agreement (this "Agreement") shall be October 1, 1996. C. MATERIAL DEVIATION means a failure of the New AJB Software to perform a function on Schedule B or C, such as to cause one or more of its functional components not to perform or cause an important system not to work, or to fail to adequately perform repetitively on a variety of data, or to reflect inaccurate data. D. NEW AJB SOFTWARE means the AJB Software plus any adaptations, derivatives, or original works authored by AppliedTheory based upon the AJB Software and any adaptations, derivatives, modifications and enhancements made by NYSERNet pursuant to the license contained in Article III. I. ASSIGNMENT ---------- A. Assignment. Subject to the further provisions of this Agreement, NYSERNet hereby sells, assigns and transfers to AppliedTheory and its successors and assigns the entire right, title and interest of NYSERNet in and to all versions of the AJB Software, including but not limited to all rights in any and all original authorship, copyrights, trade secrets, inventions, ideas, concepts, algorithms, routines, screens, patentable ideas and information which relate to the AJB Software. This assignment includes the right to sue and collect for any and all past infringements of the AJB Software. NYSERNet hereby further agrees that: (i) it will not execute any writing or do any act whatsoever conflicting with these presents; (ii) NYSERNet and its assigns, successors and legal representatives will at any time upon request without additional consideration, but at the expense of AppliedTheory, execute any documents or applications that AppliedTheory may determine as necessary or desirable in the enjoyment of this grant; and (iii) NYSERNet will cooperate, at the expense of AppliedTheory, in any proceedings or transactions involving the assigned AJB Software. -Page 2- 5 B. Consideration. 1. In consideration of the above assignment, AppliedTheory agrees to pay NYSERNet two percent (2%) of all revenues derived from sales of licenses or sublicenses of the AJB Software, in whole or in part, as well as such licenses of the New AJB Software. AppliedTheory shall pay NYSERNet the required percentage thirty (30) days after AppliedTheory receives payment from a commercial corner. Payments shall cease when two (2) years have elapsed after AppliedTheory first licenses the AJB Software to a commercial customer. The revenues derived from sales, licenses or sublicenses of the AJB Software and the New AJB Software shall be the gross revenues to AppliedTheory from the sale or license of any product or service which includes the AJB Software or the New AJB Software, in whole or in part, determined in accordance with generally accepted accounting principles consistently applied; provided that the revenues from bundled transactions, including the sales or licenses of such products or services and other products or services, shall be prorated based upon the list price (or, if there is no list price, the fair value) of the products and services so bundled. 2. AppliedTheory is under no obligation to make any minimum payments. The parties agree that if AppliedTheory's efforts to commercialize the AJB Software fail to yield any license fees, then NYSERNet is not entitled to any additional payments under this Agreement. Further, NYSERNet is not entitled to any proceeds from the licensing of any AppliedTheory product that does not incorporate or use any AJB Software code. 3. The parties agree that nothing in this payment arrangement indicates a failure fully to assign all rights in the AJB Software or that NYSERNet has retained any interest in the assigned AJB Software, except those license rights set forth in Article III. C. Representations, Warranties and Indemnification. NYSERNet represents and warrants that, to the best of its knowledge, it has all right, title and interest in the AJB Software, subject to the rights granted to the NYSDOL, and that it has authority to assign these rights. NYSERNet further represents and warrants that, to the best of its knowledge, the AJB Software does not infringe upon any third party's intellectual property rights including copyrights, trademarks, trade secrets or patents. NYSERNet shall have no liability under this Agreement, including but not limited to this Section I.C., in excess of the aggregate amounts paid to it by AppliedTheory under this Agreement. -Page 3- 6 D. Delivery of AJB Software. Upon execution of this Agreement, NYSERNet shall deliver to AppliedTheory copies of the source code and executable object code of the AJB Software on an appropriate medium, and a hard copy of each. NYSERNet shall also deliver copies of any documentation, notes, charts or other materials in its possession or under its control relating to or useful in connection with the programming, functionality or instructions for use of the AJB Software. II. SOFTWARE DEVELOPMENT A. Development. AppliedTheory agrees to develop and provide software to NYSERNet that meets the requirements and specifications of the NYSDOL AMENDMENT, and which will meet the further specifications for phased work set forth in the Software Development Specifications that are attached as Schedule C. AppliedTheory will be solely responsible for, and will indemnify NYSERNet and hold NYSERNet harmless with respect to, the performance of and any claims made by the NYSDOL or any third party under or with respect to such agreement and specifications. B. Progress Reports and Acceptance. Immediately upon the completion of each phase of development enumerated and described in Schedule C, AppliedTheory shall deliver and install the software developed in that phase, and shall also provide a progress report. In the progress report AppliedTheory shall inform NYSERNet of the readiness for testing of the particular phase of software. The progress report shall also contain a breakdown of costs expended to complete the task in sufficient detail to satisfy the needs of the NYSDOL. The date of the progress report shall be the installation date for that particular phase of software. In addition, AppliedTheory shall provide all other reports which are necessary to comply with NYSDOL requirements and any other such interim or final reports which may be reasonably requested by NYSERNet. 1. Promptly after the installation date of each phase of development, NYSERNet shall test the particular phase of software to determine if it meets the specifications and requirements set forth in Schedule C. If and when the acceptance tests establish that the developed software delivered upon completion of any phase of development is performing in accordance with the provisions of Schedules B and C, and the software is duly accepted by NYSDOL, NYSERNet shall promptly notify AppliedTheory that it accepts the software developed in that phase, and the date of such notification shall be the date on which NYSERNet shall be obligated to make the applicable payment specified below. -Page 4- 7 2. Unless NYSERNet provides a deficiency letter detailing Material Deviations of the developed software from Schedule B or C within thirty (30) business days after delivery and installation of that particular phase of the software, the phase of New AJB Software so delivered shall be deemed accepted. C. Deficiency Letter. Should NYSERNet provide a deficiency, letter to AppliedTheory within the thirty (30) day period, AppliedTheory shall act promptly to exert its best efforts to correct the perceived deficiency at no extra cost to NYSERNet. At such time as AppliedTheory believes it has corrected the reported deficiency, it shall so state in writing to NYSERNet and NYSERNet shall again have a thirty (30) business day period to provide a deficiency letter or else such phase of the New AJB Software shall be deemed accepted. This process shall continue until NYSERNet does not provide a deficiency letter within such period, at which point that particular phase of the New AJB Software shall be deemed to have been accepted. NYSERNet shall not unreasonably withhold or delay acceptance. D. User Documentation. AppliedTheory shall, no later than sixty (60) calendar days after final delivery and NYSERNet's acceptance of the New AJB Software, provide NYSERNet five (5) copies of "Documentation" describing in reasonable detail understandable by an operator of general proficiency the use and operation of the New AJB Software. The Documentation shall be supplied in magnetic and printed form and may be reproduced by NYSERNet for purposes authorized herein. E. Payment. NYSERNet agrees to pay AppliedTheory for delivery of the NEW AJB Software in accordance with this section. Upon the acceptance of each phase of the New AJB Software and receipt of the progress report provided for in Section II.B, NYSERNet shall pay to AppliedTheory the price of such phase as specified in Schedule D, Software Development Fees. In the event development of the software is terminated by NYSERNet on account of AppliedTheory's default under Section II.H, NYSERNet shall be under no obligation to make any further payments for any undelivered phases of software. NYSERNet's rights under this Section are in addition to such other remedies as it may have with respect to AppliedTheory's default. F. Transfer of the New AJB Software. AppliedTheory shall provide NYSERNet with each phase of the New AJB Software in both source code and object code formats on an appropriate medium, as well as a had copy of the source code. -Pate 5- 8 1. NYSERNet hereby acknowledges that the New AJB Software (including any Documentation, source code, translations, compilations, partial copies and derivative works) contains and will contain confidential and proprietary information belonging exclusively to AppliedTheory or such third party as may be identified on the New AJB Software or applicable Documentation ("AppliedTheory Confidential & Proprietary Information"). AppliedTheory Confidential & Proprietary Information does not include: (i) information in the public domain through no wrongful act of NYSERNet of (ii) information received by NYSERNet from a third party who was free to disclose it. NYSERNet agrees to protect the AppliedTheory Confidential Information from disclosure to third parties by taking all reasonable precautions not less than NYSERNet employs to protect its own Confidential Information. NYSERNet acknowledges that violation of this provision would cause irreparable harm not adequately compensable by monetary damages. In addition to other relief, it is agreed that injunctive relief shall be available without necessity of posting bond to prevent any actual or threatened violation of such provision. 2. AppliedTheory owns and shall own all right, title, and interest to the New AJB Software, subject to the provisions of this Agreement and the agreements between NYSERNet and the NYSDOL, and NYSERNet expressly acknowledges and agrees that none of the New AJB Software shall be deemed to be "work for hire" under the Federal Copyright Laws (17 U.S.C. #101). 3. NYSERNet agrees to take all necessary measures, including use of a proper copyright notice whenever appropriate, to protect and preserve AppliedTheory's copyright in the AJB Software. G. Term. The software development agreement described in this Section II and the license described in Section III shall commence on the Effective Date and shall continue in full force and effect in perpetuity, unless terminated earlier in accordance with Section II.H. H. Termination. Either party may, in addition to other relief, terminate this Agreement if the other party breaches any material provision hereof and fails within ten (10) days after receipt of notice of default to correct such default or to commence corrective action reasonably acceptable to the aggrieved party and proceed with due diligence to completion. Either party shall be in default hereof if it becomes insolvent, makes an assignment for the benefit of its creditors, and/or a receiver is appointed or a petition in bankruptcy is filed with respect to the party and is not dismissed within thirty (30) days. Termination shall have no effect on the parties' rights or obligations to safeguard and respect Confidential & Proprietary Information under Section II.F. In the event NYSERNet shall terminate this Agreement, title to the AJB Software and the New AJB Software shall revert to NYSERNet, and AppliedTheory shall (a) immediately upon such termination cease to use, sublicense or otherwise deal in or with the AJB Software and the New AJB Software and (b) deliver to NYSERNet all copies of AJB Software and the New AJB Software and all related -Page 6- 9 documentation in its possession or under its control. Notwithstanding the provisions of the preceding sentence, any licenses granted by AppliedTheory prior to the date upon which notice of termination is given by NYSERNet shall remain in full force and effect. I. Noninfringement Warranty. AppliedTheory represents and warrants that those aspects of the New AJB Software which AppliedTheory authors (hereinafter "AppliedTheory Authorship"), when properly used as contemplated herein, will not infringe or misappropriate any United States copyright, trademark, patent, or the trade secrets of any third persons. Upon being notified of such a claim, AppliedTheory shall (i) defend through litigation or obtain through negotiation the right of NYSERNet to continue using the AppliedTheory Authorship; (ii) rework the AppliedTheory Authorship so as to make it noninfringing while preserving the original functionality; or (iii) replace the AppliedTheory Authorship with functionally equivalent software. If none of the foregoing alternatives provides an adequate remedy, NYSERNet may terminate all or any part of this agreement and recover amounts paid for the infringing AppliedTheory Authorship. The above remedies do not apply to any of the code assigned by NYSERNet pursuant to Section I. J. Software Warranty. AppliedTheory warrants that, for twelve (12) months following the acceptance, as described in Section II.B, of the New AJB Software: (i) the New AJB Software shall be free from material programming errors and from defects in workmanship and materials; (ii) the New AJB Software shall conform to the performance capabilities, characteristics, specifications, functions and other descriptions set forth in Schedules B and C; and (iii) the development services to be performed by AppliedTheory shall be generally performed in a timely and professional manner by qualified persons familiar with New AJB Software. In the event that material defects are discovered during the warranty period, AppliedTheory shall promptly remedy such defects at no additional expense to NYSERNet. K. Year 2000 Standards. AppliedTheory represents and warrants it will ensure the New AJB Software records, stores, recognizes, interprets, processes and presents both 20th and 21st century dates using four digit years substantially according to formats and assumptions specified in the Documentation. This warranty is subject to the conditions described in the preceding subsection, and does not apply insofar as the New AJB Software derives date functions from other programs (e.g., operating system run-time libraries, databases or firmware (nor does it require AppliedTheory to work around or accommodate other programs that are not compliant with year 2000 standards. -Page 7- 10 L) No Undocumented Features. AppliedTheory represents and warrants that (i) the New AJB Software will not contain any timer, counter, lock or similar device (other than security features specifically approved by NYSERNet in the specifications) that inhibits or in any way limits its ability to operate, and (ii) it will scan the New AJB Software with commercially available anti-virus software and shall use due diligence to remove viruses capable of being detected with such software. All corrections shall be as fully warranted as the original work through expiration of the original warranty period. III. LICENSE A. GRANT. AppliedTheory hereby grants NYSERNet a non-exclusive, royalty-free, perpetual license to: (1) install, store, load, execute and display (collectively, "Use") as many copies of the New AJB Software, in whole or in part, as NYSERNet deems necessary in support of its operations as a not-for-profit corporation; (2) provide to any U.S. federal, state or local government agency, including but not limited to, NYSDOL, a sublicense to the New AJB Software, in whole or in part, and user documentation in machine-readable or printed form as is necessary to support the government agency's or NYSDOL's use of the New AJB Software pursuant to the terms of Schedule B; and (3) adapt, modify or create derivative works, or sublicense others to do the same on its behalf, with respect to the New AJB Software, and sublicense the New AJB Software, related documentation and such adaptations, modifications and derivative works, in whole or in part, in order to build upon and fulfill government contracts and in order to engage in such other not-for-profit business as NYSERNet, in its sole discretion, may deem appropriate. B. Ownership of Derivatives Works. NYSERNet hereby acknowledges that it does not have and shall not have an ownership interest or title in any adaptations, modifications or derivative works. To that end, NYSERNet shall provide AppliedTheory with all source and object code relating to NYSERNet derivative authorship within ten (10) days of providing an executable version to the end user. C. Indemnification. AppliedTheory hereby agrees to indemnify and hold harmless NYSERNet from all claims that the AppliedTheory Authorship when used within the scope of this license infringes upon a patent, trademark, copyright, trade secret or other proprietary right of any third party. AppliedTheory shall defend at its own expense against any such infringement or misappropriation claim. AppliedTheory shall pay all costs, damages, and any attorneys' fees awarded to any such third party in an infringement action against NYSERNet; provided NYSERNet promptly notifies AppliedTheory in writing of the lawsuit and gives AppliedTheory sole conduct of the defense and all related settlement negotiations. -Page 8- 11 IV. MISCELLANEOUS PROVISIONS A. Indemnification. a) AppliedTheory shall indemnify, defend and hold NYSERNet and its officers, directors, agents, employees and sublicensees harmless from and against any and all liabilities, damages, losses, expenses, claims, demands, suits, fines or judgments, including reasonable attorney's fees and costs and expenses incidental thereto, which may be suffered by, accrued against, charged to or recoverable from any of them by reason the breach of any of its obligations or the falsity of any of its [their] representations and warranties contained herein. b) AppliedTheory shall indemnify, defend and hold NYSERNet and its officers, directors, agents and employees harmless from and against any and all liabilities, damages, losses, expenses, claims, demands, suits, fines or judgments, including reasonable attorneys' fees, costs and expenses incidental thereto, which may be suffered by, accrued against, charged to or recoverable from any of them arising out of a claim that any product sold, licensed or sublicensed or any service provided by AppliedTheory infringes or misappropriates any patent, copyright, trade secret or other proprietary right of a third party. The foregoing obligation of AppliedTheory does not apply to the extent that the alleged infringement would have occurred solely through the use of unmodified version of the AJB Software as licensed to AppliedTheory, without its combination with other hardware or software. B. Notices. Notices set to either party shall be effective: (i) when delivered in person or transmitted by telecopier ("fax") machine; (ii) one (1) day after being sent by overnight courier; or (iii) two (2) days after being sent by first class mail postage prepaid. A facsimile of this Agreement and notices generated in good form by a fax machine (as well as a photocopy thereof) shall be treated as "original" documents admissible into evidence unless a document's authenticity is genuinely place in question. C. Disputes, Choice of Law. Except for certain emergency judicial relief authorized under Section III.F which may be brought at any time, the parties agree that all disputes between them shall first be subject to the procedures in Section III.H. Any remaining disputes shall be submitted to a panel of three (3) arbitrators, with each party choosing one (1) panel member and the third member chosen by the first two (2) panel members. The proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The award of the arbitrators shall be binding and shall include a written explanation of their decision and be limited to remedies otherwise available in court. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAW OF THE UNITED STATES AND THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. -Page 9- 12 D. INDEPENDENT CONTRACTOR STATUS. Each party and its agents are independent contractors in relation to the other party with respect to all matters arising under this Agreement. Nothing herein shall be deemed to establish a partnership, joint venture, association or employment relationship between the parties. Each party shall remain responsible, and shall indemnify and hold harmless the other party, for the withholding and payment of all federal, state and local personal income, wage, earnings, occupation, social security, workers' compensation, unemployment, sickness and disability insurance taxes, payroll levies or employment benefit requirements (under ERISA, state law or otherwise) now existing or hereafter enacted and attributable to the responsible party. E. SECURITY, NO CONFLICTS. Each party agrees to inform the other party of any information made available to the other party that is classified or restricted data, agrees to comply with the security requirements imposed by any state or local government, or by the U.S. Government, and shall return all such material upon request. Each party represents and warrants that is participation in this Agreement does not conflict with any contractual or other obligation of the party or create any conflict of interest prohibited by the U.S. Government or any other government and shall promptly notify the other party if any such conflict arises during the term of this Agreement. F. INSURANCE, INDEMNITY. Each party shall maintain adequate insurance protection covering its respective activities hereunder, including coverage for statutory workers' compensation, comprehensive general liability for bodily injury and tangible property damage, as well as adequate coverage for vehicles. Each party shall indemnify and hold the other harmless from liability for bodily injury, death and tangible property damage resulting from the negligent or willfully injurious acts or omissions of its officers, agents, employees or representatives acting within the scope of their work. G. MISCELLANEOUS. This document and the accompanying attachments specifically referenced herein constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all other communications, whether written or oral. This Agreement may be modified or amended only by a writing signed by the party against whom enforcement is sought. Except as specifically permitted herein, neither this Agreement nor any rights or obligations hereunder may be transferred or assigned by NYSERNet without AppliedTheory's prior written consent and any attempt to the contrary shall be void. AppliedTheory reserves all rights not specifically granted herein. Neither party shall be liable for delays caused by events beyond its reasonable control. Any provision hereof found by a tribunal of competent jurisdiction to be illegal or unenforceable shall be automatically conformed to the minimum requirements of law and all other provisions shall remain in full force and effect. Waiver of any provision hereof in one instance shall not preclude enforcement thereof on future occasions. Headings are for reference purposes only and have no substantive effect. -Page 10- 13 IN WITNESS WHEREOF, for adequate consideration and intending to be legally bound, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. NYSERNet.ORG, INC. By: /s/ James D. Luckett -------------------------------- JAMES D. LUCKETT PRESIDENT APPLIEDTHEORY COMMUNICATIONS, INC. By: /s/ Richard Mandelbaum -------------------------------- RICHARD MANDELBAUM PRESIDENT -Page 11- EX-10.15 14 JOINT MARKETING AND SERVICES AGREEMENT 1 Exhibit 10.15 JOINT MARKETING AND SERVICES AGREEMENT This JOINT MARKETING AND SERVICES AGREEMENT (this "Agreement") is made and entered into as of the 26th day of January 1999 (the "Effective Date"), by and between IXC Internet Services, Inc., a Delaware corporation ("IXC"), and Applied Theory Communications, Inc., a New York corporation ("ATC"). WHEREAS, IXC has acquired a portion of the stock of ATC per a Stock Purchase Agreement dated May 19, 1998, by and among IXC, Grumman Hill Investments III, L.P., ATC, NYSERNet, Inc., and Richard Mandelbaum, David Buckel, James Luckett, Denis Martin and Mark Oros, (the "Stock Purchase Agreement"); WHEREAS, ATC is in the business of providing Internet connectivity and related services to business, wholesale, and end-user customers; WHEREAS, IXC is in the business of providing network-based information delivery solutions to business, wholesale, and end-user customers; WHEREAS, pursuant to the Stock Purchase Agreement, IXC and ATC have agreed to work together in good faith to negotiate an agreement to cover the resale by each company of the others' products and services; WHEREAS, IXC and ATC desire to create and market various service offerings to customers incorporating or consisting entirely of their respective services and an Internet services component; and WHEREAS, IXC and ATC are willing to provide their service offerings each to the other; and are willing to purchase such services each from the other on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants of this Agreement, the Parties agree as follows: 1. DEFINITIONS. For purposes of this Agreement, certain terms have been defined below and elsewhere in this Agreement (including the attached Schedules) to encompass meanings that may differ from, or be in addition to, the normal connotation of the defined word. Unless the context clearly indicates otherwise, any term defined or used in the singular shall include the plural. A defined word intended to convey its special meaning is capitalized when used. "Affiliate" of a Party means any other party which directly or indirectly controls, is under common control with, or is controlled by, such entity, where "control" means the power and ability to direct the management and policies of the controlled entity through the ownership of voting shares of the controlled entity or by contract or otherwise. Notwithstanding the foregoing, Trustees of General Electric Pension Trust and Grumman Hill Investments, L.P. and Grumman Hill Associates, Inc. shall not be deemed to "control" or be "under common control" with, or to be Affiliates of IXC and ATC shall not be deemed to be "controlled by" or "under common control with" IXC. "Agreement" has the meaning set forth in the preamble. "ATC" has the meaning set forth in the preamble. "Buying Party" means the party reselling the Services of the Supplying Party to Customers. -1- 2 "Claim" means any pending or threatened claim, action, proceeding or suit by any Third Party. "Confidential Information" has the meaning set forth in Section 10.1. "Cure Period" has the meaning set forth in Section 9.2.1. "Customer" means any purchaser of a service offering that includes Services provided by the Selling Party under this Agreement. As used in this Agreement, a "Customer" shall include (i) any customer with which the Buying Party enters into an agreement relating to the sale of services that include Services, (ii) any customer that purchases Services for which billing is provided by the Buying Party, (iii) any party that purchases Value-Added Services from the Buying Party, and (iv) any purchaser of services that include Services from a Buying Party Reseller. In cases where Buying Party uses Services provided by Selling under the Agreement for is own internal purposes, Buying Party shall be deemed a "Customer" for purposes of this Agreement. "Customer Information" shall mean all information relating to each Customer collected in connection with the provision of Services to such Customer, including without limitation the name, address, usage, features and services purchased, locations served, payment history and all other information identifiable to a particular customer. "Damages" means any loss, debt, liability, damage, obligation, claim, demand, judgment or settlement of any nature or kind, known or unknown, liquidated or unliquidated, including without limitation all reasonable costs and expenses incurred (legal, accounting or otherwise). "Documentation" shall mean Reseller Documentation and End User Documentation. "Documents" has the meaning set forth in Section 5.1. "Effective Date" has the meaning set forth in the preamble. "End-User Documentation" shall mean all documentation provided by a Party for use by end-users of its services in connection with the use and operation of the materials describing such services, as such documentation may be amended, modified or supplemented from time to time. "Infrastructure" has the meaning set forth in Section 6.1. "Intellectual Property Rights" shall mean all intangible property rights protectable by law throughout the world including all copyrights (including, without limitation, the exclusive right to reproduce, distribute copies of, display and perform the copyrighted work and to prepare derivative works), copyright registrations and applications, trademark rights (including trade dress), trademark registrations and applications, service mark rights, service mark registrations and applications, patent rights (including the right to apply therefor), patent applications therefor (including the right to claim priority under applicable international conventions) and all patents issuing thereon, and inventions, whether or not patentable, together with all utility and design, know-how, specifications, trade names, mask-work rights, trade secrets, moral right, author's rights, algorithms, rights in packaging, goodwill and other intangible property rights, as may exist now and/or hereafter come into existence, and all renewals and extensions thereof, regardless of whether any of such rights arise under the laws of the United States or of any other state, country or jurisdiction. "Internet" means the global collection of networks interconnected via a cooperative infrastructure employing the TCP/IP suite of protocols. "IXC" has the meaning set forth in the preamble. -2- 3 "IXC Point of Presence" shall mean one of the points of presence representing a point of interconnection on the IXC network. The initial IXC Points of Presence are listed in Schedule 6.2 to this Agreement, and IXC shall promptly update such schedule during the Term on reasonable notice to ATC. At any time during the term of this Agreement, IXC Points of Presence could be collocated with points of presence on the ATC network pursuant to Section 6.1. "Managed Connectivity Services" or "MCS" has the meaning set forth in Section 2.1.1. "Marks" shall mean trade names, logos, trademarks, trade devices, trade dress, service marks, symbols, abbreviations or registered marks, or contractions or simulations thereof, or any other indicia or origin as well as VAS Marks and such other Marks as are used by a Party to promote, advertise and market the Services, and such other Marks as the Parties shall agree upon in writing. "Material Provision" shall mean any provision of this Agreement (including, without limitation, payment provisions) the breach of which by one Party is determined by an arbitration pursuant to Section 9.2.1 to constitute a material adverse effect on the use and enjoyment by the other Party of the benefits of this Agreement. "Multiple End-User Restrictions" has the meaning set forth in Section 5.12. "Network Communications Services" or "NCS" has the meaning set forth in Section 2.1.4. "Opportunity Consulting Services" or "OCS" has the meaning set forth in Section 2.1.3. "Party" means ATC, individually, or IXC, individually. "Parties" means ATC and IXC, collectively. "Releasing Party" has the meaning set forth in Section 12.2. "Reseller" means a third party authorized and contracted by a Party to sell to end-users on behalf of the Party. "Reseller Documentation" shall mean all documentation made available by either Party for use by any reseller or distributor of services of the type comprising the Services to describe the methods and procedures used by either Party in the provisioning and support of users of services of the type comprising any of the Services provided under this Agreement, as such documentation may be amended, modified or supplemented from time to time. "Sales Support Group" has the meaning set forth in Section 3.2. "Sales Support Services" has the meaning set forth in Section 3.1. "Selling Party" means the Party supplying Services to the Buying Party. "Services" means Managed Connectivity Services, Value Added Services, Opportunity Consulting Services, and Network Communications Services. "Term" has the meaning set forth in Section 9.1. "Third Party" means an entity other than a Party or any Affiliate of a Party; "Value Added Services" or "VAS" has the meaning set forth in Section 2.1.2. -3- 4 2. SERVICE DESCRIPTION(S). 2.1 Description of Services Provided by the Parties. From and after the Effective Date, on the terms and subject to the conditions set forth in this Agreement, The Parties shall provide to each other, and the Parties shall have the right to purchase each from the other, the following services as more specifically detailed in the attached Schedules (the "Service Descriptions") which are incorporated herein by reference: 2.1.1 Managed Connectivity Services ("MCS"), consist of the provision of dial-up and dedicated access to the Internet and data transport to customers and all related products and services now or hereafter offered or provided by the Parties that deliver or facilitate such access. The MCS shall comply with the applicable descriptions so forth on Schedule 2.1.1.A as applies to ATC and Schedule 2.1.1.B as applies to IXC, including, without limitation, the functional, technical and performance requirements set forth in such Schedules. From time to time, the Parties may agree on modifications to the functional, technical and performance requirements for MCS as are necessary to address Customer requirements. At such times Supplying Party provides enhanced versions of MCS, Supplying Party shall make such enhanced versions of MCS available to the Buying Party, and the Parties may agree, for purposes of this Agreement, upon the functional, technical and performance requirements for such services, which requirements shall, at a minimum, ensure that such services comply with the applicable minimum requirements in Section 2.2. 2.1.2 Value Added Services ("VAS"), consist of services and products now or hereafter offered by a Supplying Party or a controlled Affiliate such as: (i) voice or fax over IP, (ii) Internet Security Services, (iii) World Wide Web services, including web-enabled solutions and software development, (iv) any other services or products developed jointly by the Parties, and (v) any other services or products now or hereafter marketed or offered by a Supplying Party as a generally available service or product offering other than MCS which are not subject to exclusive marketing relationships with Third Parties. The VAS shall comply with the applicable descriptions set forth on Schedule 2.1.2.A as applies to ATC and Schedule 2.1.2.B as applies to IXC, including, without limitation, the functional, technical and performance requirements set forth in such Schedules. From time to time, the Parties may agree on modifications to the functional, technical and performance requirements for VAS as are necessary to address requirements of customers. At such times as a Supplying Party provides enhanced versions of VAS, such Supplying Party shall make such enhanced versions of VAS available to the Buying Party, and the Parties may agree, for purposes of this Agreement upon the functional, technical and performance requirements for such services, which requirements shall, at a minimum, comply with the applicable minimum requirements in Section 2.2. 2.1.3 Opportunity Consulting Services ("OCS"), will consist of pre-sales technical support and post-sales development and/or implementation support to address specific market opportunities. At such times as the situation warrants, the Parties may agree, for purposes of this Agreement, upon the functional, technical and performance requirements for such services, which requirements shall, at a minimum, comply with the applicable minimum requirements in Section 2.2. Joint teaming efforts of the Parties shall be conducted in accordance with the Master Teaming Agreement executed by the Parties on May 11, 1998, attached hereto as Schedule 2.1.3. 2.1.4 Network Communications Services ("NCS"), consist of services and products now or hereafter offered by a Supplying Party or a controlled Affiliate such as: (i) voice communications, (ii) data communications, (iii) communications value-added products; such as calling cards, 800-service, etc., (iv) any other services or products developed jointly by the Parties, and (v) any other services or products now or hereafter marketed or offered by a Supplying Party as a generally available service or product offering other than MCS or VAS which are not subject to exclusive marketing relationships with Third Parties. The NCS shall comply with the applicable descriptions set forth on Schedule 2.1.4.A as applies to ATC and Schedule 2.1.4.B as applies to IXC, including, without limitation, the functional, technical and performance requirements set forth in such Schedules. From time to time, the Parties may agree on such modifications to the functional, technical and performance requirements for NCS as are necessary to address Customer requirements. From time to time, the Parties may agree on such modifications to the functional, technical and performance requirements for NCS as are necessary to address requirements of customers. At such -4- 5 times as a Supplying Party provides enhanced versions of NCS, such Supplying Party shall make such enhanced versions of NCS available to the Buying Party, and the Parties may agree, for purposes of this Agreement, upon the functional, technical and performance requirements for such services, which requirements shall, at a minimum, comply with the applicable minimum requirements in Section 2.2. 2.1.5 Either Party shall have the right and option to have any other Service of the other included under this Agreement on terms and conditions reasonably consistent herewith. In addition, unless specifically defined in Schedules, Exhibits, Services Descriptions, and attachments hereto, upon such time that a Supplying Party discontinues a service generally among its customers, such Supplying Party may remove such service from this Agreement, but only after providing the Buying Party with at least 90 days' prior written notice of its intention to do so. If a Supplying Party so removes a service, Such Supplying Party will continue to honor all existing Customer and Reseller service agreements with end customers by continuing to make such service available to such Customers through the shorter of (i) the end of the term of their respective service agreements, and (ii) the end of the two-year period commencing on the expiration of the 90-day notice period aforementioned. 2.1.6 Notwithstanding anything to the contrary contained herein, the Parties reserve the right to modify, alter, improve or change any and all of the services comprising the Services they offer each other which are covered by this Agreement, and this Agreement will cover the sales of Services as they may be modified, altered, improved or changed by either Party from time to time. Subject to Section 2.1, in all cases where such modification, alteration or change will reduce the functionality of any service component comprising the Services, the Supplying Party will not effect such modifications, alterations or changes without the Buying Party's specific written approval. Such approval will not be unreasonably withheld, delayed or conditioned. 2.1.7 When both Parties agree to change a Service Description, the initiating Party will prepare a written description of the agreed change (a "Change Authorization"). Acceptance of the proposed change will be indicated by authorized signature on the Change Authorization by both parties. The terms of a Change Authorization prevail over those of the Service Description and any of its previous Change Authorizations. Any change in the Service Description may affect the charges or other terms. When additional charges are necessary, the Supplying Party will provide a written estimate and begin work only if authorized by Buying Party. 2.2 Minimum Requirements. The Services provided under this Agreement, as described in Schedules 2.1.1.A, 2.1.1.B, 2.1.2.A, 2.1.2.B, 2.1.3, 2.1.4.A, and 2.1.4.B, as many be amended by mutual agreement from time to time, shall at all times meet the following minimum requirements: 2.2.1 The Services provided under this Agreement shall be offered and provided with features and a level of features that, on average and taken as a whole, equal or exceed that provided by other leading providers of services offering comparable services in a substantial portion of the geographic area in which Services are available pursuant to this Agreement. The Parties agree to work together on a broader range of service offerings and Service functionality as needed to address market demand. For purposes of this Agreement, Services shall be deemed to be available in any geographic area in which a Supplying Party provides services to customers or, subject to the last sentence of Section 2.7, in which a Supplying Party has an Affiliate, strategic partner or other cooperating provider providing services in such area of the type made available under this Agreement. 2.2.2 The Services provided under this Agreement shall be offered and provided with features and an overall level of quality that equals or exceeds that which a Supplying Party offers or provides any Customer. 2.2.3 The Services provided under this Agreement shall comply with all stated service level guarantees relating to such Service as offered or provided by a Supplying Party as of the Effective Date and as updated from time to time; provided that no such update my operate to have a material adverse -5- 6 impact on (i) any Service (including without limitation the level or quality of service provided to Customers), taken as a whole, without the prior written consent of the Buying Party (which shall not be unreasonably withheld, delayed or conditioned), except to the extent necessary to deal with network emergencies and other circumstances beyond the control of the Supplying Party, in which case the Supplying Party shall consult with the Buying Party concerning such change as soon as reasonably practicable, or (ii) any other Services without providing the Buying Party with advance written notice of such changes as soon as reasonably practicable. 2.2.4 The Supplying Party shall not make any changes (i) to any Service that may reasonably be expected to have a material adverse impact on such Service (including without limitation the level or quality of service provided to the Buying Party's Customers), taken as a whole, without the prior written consent of the Buying Party, except to the extent necessary to deal with network emergencies and other circumstances beyond the control of the Supplying Party, in which case the Supplying Party shall consult with the Buying Party concerning such change as soon as reasonably practicable, or (ii) to any OCS Services provided without providing the Buying Party with advance written notice of such changes as soon as reasonably practicable. 2.2.5 The OCS provided shall be performed by employees or its subcontractors of Supplying Party as deemed by the Supplying Party to be best qualified and available to perform the task at hand as identified by the Buying Party. Under no circumstances may Supplying Party change subcontract relationships in effect at the time of proposal submission without the Buying Party's specific written approval. Such approval shall not be unreasonably withheld, delayed or conditioned. A Supplying Party's officers supervising the performance of the services will be empowered to commit the resources of that Supplying Party to the extent and scope of such officer's authority. 2.2.6 In the event that Services, as defined herein, or portions of Services, are provided to the Buying Party via a contractual relationship with a Third Party, the Supplying Party is obligated to maintain such a relationship to the extent practicable. Should such relationship require that the Buying Party enter into a similar agreement with the Third Party, the Supplying Party shall use commercially reasonable efforts to assist the Buying Party in establishing the relationship and securing rates and levels of service of at least those provided to the Supplying Party by the Third Party. 2.2.7 In the event Supplying Party determines the necessity to interrupt Services for the performance of routine maintenance, Supplying Party shall provide Buying Party with a minimum of 48 hours notice of such service interruption and will conduct such maintenance during non-peak hours. In no event shall interruption for system maintenance, if property performed to Supplying Party standards, constitute a Failure of Performance by Supplying Party. This Section 2.2.7 is limited exclusively to routine maintenance and in no way limits the responsibility of Supplying Party to take necessary remedial maintenance and corrective actions to restore service in the event of unplanned outage. Such remedial actions may involve interruption of Services; in such case, Supplying Party will use reasonable efforts to provide notification in accordance with procedures as may be defined in applicable Service Descriptions. 2.2.8 Periodically, Buying Party may request maintenance and/or trouble shooting of Buying Party's equipment and/or circuits in Supplying Party's facilities. Provision of such services by Supplying Party shall be governed by the following: (A) Maintenance services shall be defined as all work performed by Supplier on equipment provided by or on behalf of the Buying Party, or supervision of the Buying Party's work within Supplying Party's facilities, specifically excluding troubles found within that facility provided by Supplying Party, (B) Supplying Party may charge a fee not to exceed (1) $75 per hour (with a four hour minimum when dispatch is required) Monday though Friday during business hours of 8:00 a.m.-5:00 p.m. local time exclusive of national holidays and Supplying Party's published Company holidays or (2) $95 per hour with a four (4) hour minimum at any other time; (C) To enable addressing such maintenance with telephone request, Buying Party shall supply Supplying Party with the names of persons authorized to make such requests for service and shall bear all responsibility for keeping supplying party aware of such authorization granting; (D) Supplying Party shall provide Buying Party with a number to call to request such -6- 7 service and shall be responsible for opening and closing the necessary transactions to assure proper billing for such service. Except for emergencies, Supplying Party shall not be obligated to dispatch personnel except as described in this Section 22.8. 2.3 Documentation. The Parties represent that (i) Schedule 2.3.A - ATC Theory Documentation and Schedule 2.3.B - IXC Documentation, contain a true and complete list of all Documentation relating to the Services offered or provided as of the Effective Date, and (ii) true and complete copies of all such Documentation have been provided to prior to the Effective Date. In the event Supplying Party amends, modifies or supplements any such Documentation, or creates new Documentation in connection with enhanced versions of Services pursuant to Section 1.1, this Supplying Party shall as soon as practicable provide the Buying Party with written notice of any such amendments, modifications, supplements or new Documentation, including copies of the foregoing. 2.4 License to Documentation and Other Intellectual Property Rights. 2.4.1 Each Party grants the other and its Resellers a limited, non-exclusive, royalty-free, license, in the geographic area in which Services are available pursuant to this Agreement, throughout the Term, to (i) copy, but not modify, sales literature and product descriptions (Schedule 2.3 list) in any form, (ii) integrate the Documentation, or any part thereof, into catalogs, price lists, brochures and related sales materials, and (iii) demonstrate, market, distribute and solicit orders for the Services and warrants that it has such right to grant. The grant of the foregoing license shall not entitle or in any way be construed to entitle a Party to (a) use the other's Marks in connection with it's sales, advertisements and promotion of the Services, except in materials provided (or approved by the owning Party prior to use; (b) distribute any Services outside the United States of America in violation of any United States export restrictions; (c) distribute any Services outside of the geographic areas in which Services are then available pursuant to this Agreement; (d) sublicense any of its rights under this Agreement, except as expressly permitted by this Agreement; or (e) make any agreement or incur any liability for or on behalf of the other Party except as expressly contemplated by this Agreement. 2.4.2 Except for the limited license specifically granted in this Agreement, each Party shall at all times retain full and exclusive right, title and ownership interest in and to the Services, its Marks and any and all other Intellectual Property Rights or trade secret rights thereto. Each Party shall notify the other Party of any action by any Third Party known or suspected by a Party to constitute an infringement of the other's proprietary rights. Each Party shall honor all reasonable requests by the other, other than engaging as a party in litigation, to perfect and protect, at it's own expense, any rights of the other Party in the Services or such Intellectual Property Rights or trade secret rights. 2.4.3 The Parties represent that no further licenses to Intellectual Property Rights are needed to market, offer, provision or use Services as contemplated by this Agreement, in the geographic area in which Services are available pursuant to this Agreement. 2.5 Liabilities for Affiliate Obligations. To the extent that a Supplying Party's performance of its obligations hereunder causes it to assign or delegate all or part of its liabilities, obligations and commitments hereunder to any of its Affiliates, said Supplying Party covenants and agrees that it shall cause any such Affiliate to perform such liabilities, obligations and commitments in accordance with the terms and provisions hereof. In the event of such an assignment or delegation, each Party shall remain liable for all of its liabilities, obligations and commitments hereunder. 2.6 Forecasts. The Parties agree to coordinate in estimating the level and location of demand and traffic for Services during the term of this Agreement. In that connection, no later than the 15th day of the first month of each calendar quarter during the term of this Agreement, Buying Party will provide Supplying Party with its projected requirements for each Service, indicating amounts, types and location during each of the following four calendar months. In the event that there should be a material change in -7- 8 proposed requirements as set forth in the most recent forecast, the Buying Party, as promptly as practicable, shall update such forecast in order to reflect such change. These forecasts shall be used for the planning convenience and shall not be binding upon the Parties, but the Parties intend to use the forecasts to estimate needed staffing, network provisioning and product levels for its performance of the terms of this Agreement and shall only be responsible for using commercially reasonable efforts to satisfy demand to the extent it materially exceeds such forecasts. The Parties shall provide their initial projected requirements for Services within 15 business days after the Effective Date. All forecasts provided under this Section 2.6 shall be treated as Confidential Information pursuant to Section 10. 2.7 Geographic Scope. It is the intent of the Parties that the Buying Party be permitted to provide Services to Customers, on the terms and subject to the conditions of this Agreement, in all of the geographic areas in which the Supplying Party is now, or at anytime during the Term is then, providing services to its Customers. Notwithstanding the foregoing, the Parties acknowledge and understand that each is not now capable of independently providing certain services in certain geographic areas. To the extent that either Party desires to provide Services to customers situated in such geographic areas and the Supplying Party has an Affiliate, strategic partner or cooperating provider offering services therein, the Buying Party may request that the Supplying Party obtain a quote from such Affiliate, strategic partner or cooperating provider for such Services. Within five business days after such request, the Supplying Party shall contact the appropriate Affiliate, strategic partner or cooperating provider for purposes of obtaining such quote. The provision of services under this Section 2.7 by such Affiliate, strategic partner or cooperating partner to the Buying Party shall be the subject of negotiation and, if reached by such parties, agreement. In the event that such an Affiliate, strategic partner or cooperating provider agrees to provide services under this Section 2.7, the Supplying Party shall use its reasonable efforts to cause any such Affiliate, strategic partner or cooperating provider to provide such services to the Buying Party at a cost no more than that which such services are typically provided by such Affiliate, strategic partner or cooperating provider to the Supplying Party. Notwithstanding anything in Section 7 to the contrary, the Supplying Party shall make such services available to the Buying Party at the Supplying Party's cost of obtaining the service from the Affiliate, strategic partner or cooperating provider. Notwithstanding anything in this Agreement to the contrary, the Supplying Party shall not be obligated to provide Services to a Buying Party's customer or Third Party in those geographic areas in which the Supplying Party is not offering services unless (i) it has an Affiliate, strategic partner or cooperating provider in a particular geographic area, and (ii) such Affiliate, strategic partner or cooperating provider agrees to provide such services on terms and conditions to the Buying Party's satisfaction. 2.8 Service Contracts. To the extent that the Services are standard and not customized to the specifications of the other Party, each Party shall execute the other Party's standard reseller agreement for services, on the terms and subject to the conditions set forth in such agreement except that the terms and conditions of this Agreement shall have precedence. 2.9 Credit Worthiness. So long as IXC is a shareholder in ATC, the Parties shall deem each other credit worthy and no financial statements shall be required of each other except as required by the Stock Purchase Agreement. In the event that such shareholder relationship terminates, Buying Party shall provide Supplying Party with financial statements including a consolidated balance sheet of Buying Party as of the end of the most recent quarter and consolidated statements of income and retained earnings of such quarter and the fiscal year to date through such quarter, all in reasonable detail and certified by Supplying Party's chief financial officer as having been prepared in accordance with generally accepted accounting principles, consistently applied. Buying Party shall provide updated financials as reasonably requested by Supplying Party. 2.10 Additional Assurances. If at any time during the term of this Agreement there is a material and adverse change in Buying Party's financial condition or business prospects, which shall be determined by Supplying Party in its sole and absolute discretion, then Supplying Party may demand that Buying Party deposit with Supplying Party a security deposit (the "Security Deposit"), pursuant to Supplying Party's standard terms and conditions, as security for the full and faithful performance of Buying Party of the terms, -8- 9 conditions and covenants of this Agreement; provided, however, that in no event shall the amount of the Security Deposit ever exceed the sum of the previous two (2) months actual invoiced amount payable by Buying Party to Supplying Party. 2.11 Certification. Each Party hereby represents and warrants that it is certified to do business in all jurisdictions in which it conducts business and is in good standing in all such jurisdictions. Each Party further represents and warrants that it is certified and licensed by the proper regulatory agencies to provide services to End-Users in those jurisdictions where such services are to be provided as Buying Party. Buying Party shall keep all such certificates and licenses (the "Service Compliance Certificates") current. Supplying Party may request copies of such certificates and licenses and Buying Party shall furnish such documentation within ten (10) days of such request. In the case of Certificates of Good Standing, the Supplying Party will request such certificates from appropriate jurisdiction and will supply them to Buying Party upon receipt. Supplying Party reserves the right to refuse or withhold service in any jurisdiction for which such certifications and licenses are not current or supplied. Buying Party shall defend and indemnify Supplying Party from any losses, expenses, demands and claims in connection with Buying Party's failure to provide Supplying Party with such Service Compliance Certificates. Such Indemnification includes costs and expenses (including reasonable legal fees) incurred by Supplying Party in settling, defending or appealing any claims or actions brought against it relating to Buying Party's failure to provide such Service Compliance Certificates. 2.12 Bankruptcy. In the event of the bankruptcy or insolvency of either party hereto or if either party hereto shall make an assignment for the benefit of creditors or take advantage of any act or law for relief of debtors, the other party to this Agreement shall have the right to terminate this Agreement without further obligation or liability on its part except for payments for all services rendered. 2.13 Insurance. Throughout the term of this Agreement and any extension thereof, each party shall maintain and, upon written request, shall provide to the other proof of adequate liability insurance: (i) Worker's compensation insurance up to the amount of statutory limit in the state or states where work is to be performed; (ii) Employer's liability insurance with a limit of not less than $200,000 per claim with an all-states endorsement; (iii) Comprehensive general liability insurance with a limit of not less than $1,000,000 per occurrence for bodily injury liability and property damage liability, including coverage extensions for blanket contractual liability, personal injury liability and products and completed operations liability; and, (iv) Comprehensive Auto Liability insurance with a limit of not less than $1,000,000 per accident for Bodily Injury Liability and Property Damage Liability arising out of the ownership, maintenance or use of any vehicle in the performance of this Agreement. 3. SALES SUPPORT SERVICES AND TRAINING. 3.1 Pre-Sale Support and Post-Sale Implementation Support. From the Effective Date, the Supplying Party shall offer and provide pre-sale support and post-sale implementation support services ("Sales Support Services") to the Buying Party's sales and technical personnel as specified in Schedule 3.1.A as applies to ATC and Schedule 3.1.B as applies to IXC. 3.2 Dedicated Sales Support Department. The Supplying Party shall create and manage a sales support group ("Sales Support Group") for the purpose of providing Sales Support Services under Section 3.1. The Sales Support Group shall be adequately staffed with knowledgeable, experienced and trained subject-area professionals capable of providing support to Buying Party's sales and technical personnel and customer care to Customers consistent with Schedules 3.1.A and 3.1.B. 3.3 Funding the Sales Support Group. During the Term, each Party shall staff their Sales Support Group with a minimum of three (3) full-time professionals at no charge to the other Party. Any additional support requested by Buying Party shall be considered as Opportunity Consulting Services as defined in Section 2.1.3. Buying Party shall reimburse Supplying Party for reasonable travel and other out-of- -9- 10 pocket expenses incurred in connection with Sales Support Services requested, provided that the Supplying Party shall use good business judgement to minimize such expenses. 3.4 Training. The Supplying Party shall provide training at reasonable times and locations and at nominal expense to the Buying Party. The specific training requirements, if any, for the Services will be addressed in the applicable Service Description. 4. CUSTOMER SUPPORT SERVICES AND CUSTOMER SERVICE RATES. 4.1 Unless otherwise agreed to in the applicable Schedule, the Buying Party will retain ownership of the Customer relationship, and will be responsible for providing Customer Support services to end-user Customers. The applicable Schedule for each Service will define procedures for escalation and hand-off of Customer problems to the Supplying Party. 4.2 Should the Supplying Party Include Customer support in its description for any Service, the Supplying Party will provide customer support through its customer support group or through a Third Party (as determined by the Supplying Party In its sole discretion) for the Services sold to Customers as contemplated by this Agreement; provided that the Supplying Party will not be responsible for providing customer support to any Customer purchasing Services under a private label which exceeds the level of support which the Supplying Party is obligated to provide to its customers pursuant to it's service agreements for the applicable Services, as such agreements may be amended from time to time. 4.3 Notwithstanding the foregoing, Buying Party shall be responsible for all pricing and service plans, billing and collections with respect to Customers. 5. RIGHTS AND RESPONSIBILITIES. 5.1 Buying Party's Use and Sales of Services. 5.1.1 Buying Party may use the Services made available to it pursuant to this Agreement on the terms and subject to the conditions hereof, (i) for its own account, (ii) subject to Section 5.1.2, for resale to Customers, or (iii) subject to Section 5.1.2, for resale to Third Parties for further resale or distribution (such Third Parties which, notwithstanding the definition of "Third Parties" herein, include, without limitation Customers (including those which are Affiliates of Buying Party) are referred to herein as "Resellers"), either alone or in combination with any other products and services. Services offered by Buying Party that incorporate MCS, VAS, and NCS made available to it pursuant to this Agreement shall, at Buying Party's discretion, be branded exclusively as Buying Party services or otherwise as Buying Party shall determine. Buying Party shall specify the design of any user interface associated with any MCS, VAS, or NCS, consistent with the preceding sentence. Buying Party will have complete discretion to determine the prices to be charged to Customers for the Services provided under this Agreement and Buying Party shall be solely responsible for establishing and collecting customer charges for services it or its Customers offer and for preparing and mailing invoices to Buying Party's Customers. In addition, Buying Party shall be responsible for payment of the total amounts invoiced it by Supplying Party (except for any amounts disputed by Buying Party in good faith) regardless of whether its customers pay Buying Party. Subject to the provisions of Section 5.4, Buying Party shall also have complete discretion to determine the other terms and conditions on which Buying Party makes such Services available to Customers; provided that neither Buying Party nor its customers may offer warranties or representations for the Services that would obligate or otherwise bind Supplying Party beyond those stated in the applicable service agreements. Except as otherwise provided in this Agreement, except as reasonably necessary for Supplying Party to assist Buying Party during the introduction of Services under this Agreement, Buying Party shall provide the primary interface to its Customers in connection with the marketing, offering or provision of Buying Party services that incorporate the Services, including (a) providing first tier support for non-MCS and non-VAS Buying Party services and (b) handling communications to and business relations with Buying Party Customers related to contractual -10- 11 agreements, handling invoicing and payment matters, and handling inquiries and questions from Buying Party Customers about Services. 5.1.2 Notwithstanding anything In Section 5.1.1 to the contrary, the Parties agree that the determination of customer interfaces, marketing, provisioning and delivery for jointly developed new product or services offerings incorporating Buying Party services or Services as described herein will be determined by mutual agreement. 5.1.3 Periodic Audit Rights. Supplying Party shall have the right, upon reasonable notice and at a date and time mutually agreed upon by the Parties, to enter the premises of Buying Party for the purpose of auditing any of Buying Party's books of accounts, documents, records (in any media), papers and files (the "Documents") relating to its compliance with the provisions of this Agreement. Supplying Party shall bear the expense of the audit unless the audit reveals that (i) the amounts collected by Supplying Party from Buying Party hereunder are more than two (2) percent less than that which should have been paid by Buying Party to Supplying Party, or (ii) Buying Party has not complied with either or both of the first two sentences of Section 5.1.2, in which case, the entire cost of the audit shall be borne by Buying Party. Payment of any amounts found due and owing Supplying party shall be made promptly by Buying Party upon demand by Supplying Party. 5.2 Use of Marks. Except as provided herein or by advance written consent of the other, each of ATC and IXC agrees not to (i) display or use, in advertising or otherwise, any of the other's Marks, (ii) permit any Affiliate to display or use any of the other's Marks, or (iii) give permission to display or use any of the other's Marks to any Third Party. Any use by one Party of any of the other's Marks shall be subject to such other Party's advance approval in writing, in its discretion, subject to compliance with guidelines provided by it. Neither Party shall claim ownership or any other rights in any of the other's Marks. Upon termination or expiration of this Agreement, any and all rights or privileges granted by ATC or IXC to use any Marks shall immediately expire and each Party shall immediately discontinue the use of such Marks. Nothing herein shall preclude either Party from making factual references to the other in government filings, disclosure documents and other public statements. 5.3 Introductory Marketing Campaign. Buying Party shall have complete discretion regarding its marketing of the Services provided that such Services are offered under Buying Party's own brand, and provided that neither Buying Party nor its customers may offer warranties or representations for the Services that would obligate or otherwise bind Supplying Party beyond those stated in the applicable standard service agreements or Schedule or to make any other warranties, promises or representations with respect to the Services. In connection with such private label marketing activities, Buying Party shall prominently mention Supplying Party's role in the provision of such services in an Introductory press release, the content of which shall be mutually agreed to by the Parties. 5.4 Provisions Applicable to End-Users 5.4.1 Buying Party's Use of Services. Buying Party's use of Services in Buying Party's capacity as end-user of Services for its own account shall be governed by this Agreement and any additional terms and conditions of the applicable Schedule. 5.4.2 Agreements with Buying Party Customers Other than Buying Party. Buying Party's agreements with Buying Party Customers (other than Buying Party) to provision Services shall comply with applicable Supplying Party standard terms, rules, and conditions with respect to Services unless specifically amended by mutual consent and the terms and conditions of this Agreement generally. 6. INFRASTRUCTURE. 6.1 Use of IXC Equipment and Facilities. Except as otherwise agreed to by the Parties, in providing the Services to IXC under this Agreement, ATC grants IXC right of first refusal for infrastructure, -11- 12 equipment, facilities and services necessary for the transmission of data (collectively, "Infrastructure") provided (i) ATC is not restricted from purchasing such Infrastructure from IXC under contractual obligations binding on ATC at the time the purchase decision is being considered, (ii) such Infrastructure meets ATC's functional, technical and performance requirements, and (iii) IXC offers such Infrastructure to ATC at a price and on terms and conditions that, on average or taken as a whole, are competitive as compared to those offered to ATC in good faith by other leading providers of infrastructure, equipment, facilities, and services similar to those at the time IXC makes its offer. 6.2 Use of ATC Support and Product Components. Except as otherwise agreed to by the Parties, in providing the Services to ATC under this Agreement, IXC grants ATC right of first refusal for support and product components necessary for the delivery of Service provided (i) IXC is not restricted from purchasing such support and product component from ATC under contractual obligations binding on IXC at the time the purchase decision is being considered, (ii) such support and product component meets IXC's functional, technical and performance requirements, and (iii) ATC offers such support and product component to IXC at a price and on terms and conditions that, on average or taken as a whole, are competitive as compared to those offered to IXC in good faith by other leading providers of support and product components similar to those at the time ATC makes its offer. 6.3 Provisioning of Customers. The roles, responsibilities and processes for the provisioning of Customer local loops and CPE will be described in the appropriate Service Descriptions. 6.4 Interconnection of Facilities. ATC and IXC shall coordinate with respect to (i) the definition of the interfaces between Customer, the ATC network and the IXC network at Points of Presence, (ii) the management of traffic routed from the premises of Customers to Points of Presence, and (iii) access to each other's networks for the purposes of providing Services under this Agreement. Each Party shall be responsible for the day-to-day management of its network relating to the provision of Services, including monitoring and taking actions necessary to remedy problems with, or disruption of, the Services, establishment and maintenance of routing tables and routing policies at Points of Presence, and establishment and maintenance of peering points with the global Internet. 6.5 Customer Transfers. At any time, Buying Party shall have the right to migrate its Customers to services as provided by itself or on its behalf by a Third Party. The Parties shall provide all reasonable cooperation in support, to the extent practicable, of a seamless, minimally disruptive migration of such Customers in connection with such services (including without limitation all Customer Information and, to the extent practicable, any necessary transfer of customer addresses). 6.6. Interfaces. The Parties shall develop methods, procedures and associated interfaces for cooperating on a "seamless" basis in all areas relating to the marketing and provision of the Services, including without limitation order processing, customer care, network monitoring and maintenance, and problem escalation and resolution; provided, however, that, unless mutually agreed upon, neither Party shall be obligated to provide services or support of any kind to Customers which exceeds that which it is required to provide to its own customers pursuant to its service agreements for the applicable comparable services, as such agreements may be amended from time to time. The Parties shall use commercially reasonable efforts to agree on an initial plan to accomplish the foregoing, including appropriate training of each other's employees, by no later than 30 days after the Effective Date. At any time during the Term, the Parties will cooperate in good faith in connection with inquiries concerning potential problems affecting any aspect of the provision of Services. 7. PRICING AND PAYMENT 7.1 Services Pricing. The Parties shall at all times make sure that all fees and other charges charged to the other Party for each of the individual service components comprising the Services, are such that Buying Party may maintain a gross margin when compared to normal competition. Notwithstanding the foregoing, neither party shall be obligated to supply prices below cost. -12- 13 7.2 Independent End-Customer Pricing and Payments. Each of the Parties will have complete discretion regarding the prices that it charges to its customers for its services and will be completely responsible for billing to and payment collection from its respective Customers. Supplying Party will invoice the Buying Party in accordance with the terms and pricing contained in the applicable Schedule. Buying Party assumes all bad debt associated with non-payment of any of its respective Customers. 7.3 Credits/Adjustments. Customers shall be granted service disruption credits and adjustments, quality of service commitment credits and adjustments, and the like as may be established by the applicable Schedules. In the event that Buying Party, as promptly as practicable, notifies Supplying Party after learning of the failure of Supplying Party to deliver any of the Services to any Customer, Buying Party will be entitled to a credit representing any reasonable adjustment requested by Buying Party and approved in advance by Supplying Party as a result of such failure to meet customer service expectations. 7.4 Late Payment. Supplying Party invoices for amounts payable under this Agreement shall be due within 30 days of the date of invoice. Payments not received within thirty (30) days of the date of invoice will be considered past due. If a dispute arises as to any portion of an invoice, Buying Party shall pay the undisputed amount of such invoice when due and shall notify Supplying Party in writing of the disputed amount no later than 30 days from the date of invoice. If Buying Party does not report a dispute within the thirty (30) day period, Buying Party shall have waived its dispute rights for that invoice. 7.5 Billing Dispute Resolution. In the event Buying Party in good faith disputes any portion of any Supplier invoice, the IXC Authorized Representative and the ATC Authorized Representative (as such capitalized terms are defined herein) will first attempt in good faith to promptly resolve the dispute. If the dispute has not been resolved by the Authorized Representatives within 14 days after notice, or if either Party will not agree to meet within such 14-day period, the matter will be referred to the Chief Executive Officer of IXC and the Chief Executive Officer of ATC who will in good faith attempt to resolve the dispute. If the dispute remains unresolved within an additional 14-day period, the dispute shall be submitted to arbitration. Any disputed amounts resolved in favor of Buying Party shall be credited to Buying Party's account on the next invoice following resolution of the dispute. Any disputed amounts determined to be payable to Supplying Party shall be due within ten (10) days of resolution of the dispute. In the event that any amount remains unpaid after its due date, such amount shall be subject to an interest charge equal to the lesser of one and one-half percent of the unpaid balance per month or the maximum rate allowed under applicable state law and, if such amount shall not have been paid in full within five business days of the applicable due date when no bona fide dispute exists, Supplying Party may, without any liability to Buying Party at its option, suspend the provision of services under this Agreement until such amount is paid in full. 8. NO RESTRICTIONS. Notwithstanding any other provision of this Agreement, except as provided in Section 2.7, nothing in this Agreement shall limit or in any way affect (i) the performance of any Party's obligations under a binding agreement in effect as of the Effective Date (and each Party shall disclose to the other such agreements that, to such Party's knowledge, are in effect as of such date to the extent possible consistent with any obligations of confidentiality owing to Third Parties), (ii) IXC's right to provide Internet services for its own account directly to any end user or wholesale customer (subject to section 10) or otherwise to engage in services involving packet frame relay, asynchronous transfer mode or other Internet services, (iii) ATC's right to build, operate and maintain its own global network, and (iv) either Party's right in any way to market, offer or provide any products and services that are not, generally, marketed principally as Internet services. 9. TERM AND TERMINATION. 9.1 Term. The term of this Agreement shall commence on the Effective Date and shall end on -13- 14 the earlier of (i) the disposition by IXC of 100% of its equity in ATC, and (ii) such earlier date as of which this Agreement expires or is terminated pursuant to Section 9.2. In the event of termination per 9.1.(i) preceding, IXC shall provide ATC with written notification of such and continue to provide Services it has committed to as Supplying Party for a period of one year from the date of such notification. 9.2 Termination. 9.2.1 Notwithstanding paragraph 9.1 preceding, either Party may deliver to the other Party a written "Notice of Default" in the event that the other Party has breached any Material Provision hereunder. Such Notice of Default must prominently contain the following sentences in capital letters: "THIS IS A FORMAL NOTICE OF A BREACH OF CONTRACT. FAILURE TO CURE SUCH BREACH WILL HAVE SIGNIFICANT LEGAL CONSEQUENCES." A Party that has received a Notice of Default shall have thirty (30) days to cure the alleged breach (and, if the defaulting Party shall have commenced actions in good faith to cure such defaults which are not susceptible of being cured during such 30-day period, such period shall be extended (but not in excess of 90 additional days) while such Party continues such actions to cure (the "Cure Period"). If such Party fails to cure the breach within the Cure Period, as long as such default shall be continuing, the non-defaulting Party shall have the right to either (i) suspend its performance or payment obligations under this Agreement and/or any of the Transaction Documents, (ii) seek an order of specific performance, and/or (iii) seek the award of compensatory damages. 9.2.2 Supplying Party shall terminate, or use commercially reasonable efforts to terminate, the access rights of any Customer as soon as is reasonably practicable upon written notice from Buying Party to do so or upon mutually agreed upon electronic process with receipt confirmed, but shall have no liability in connection therewith. 9.2.3 Supplying Party shall have the right to terminate any Customer on written notice to Buying Party (or sooner, if required by law, provided, however that Supplying Party should thereafter provide written notice to Buying Party) in the event of any use or alleged use by such Customer of the Services or the infrastructure supporting Services which is in violation of any law, regulation or treaty, any of the Usage Restrictions, either Party's Net Abuse Policy (available at their respective web sites), any community standard or accepted Internet policy or which results in the receipt by either Party of any formal or informal complaint. 10. CONFIDENTIAL INFORMATION. 10.1 Nondisclosure. If either Party acquires Confidential Information of the other, such receiving Party shall maintain the confidentiality of the disclosing Party's Confidential Information, shall use such Confidential Information only for the purposes for which it is furnished and shall not reproduce or copy it in whole or in part except for use as authorized in this Agreement. Without limiting the generality of the foregoing, neither Party shall use the Confidential Information of the other Party to solicit the other Party's customers or to otherwise compete unfairly with the other Party. "Confidential Information" shall mean all information of the disclosing Party which it treats as confidential or proprietary including, without limitation, all of the following: (i) information concerning customers and the contractual terms under which services are being provided to such customer by a Party; and (ii) all customer lists and other information regarding the customers of a Party. Confidential Information shall not include information which is or hereafter becomes generally available to others without restriction or which is obtained by the receiving Party without violating the disclosing Party's rights under this Article 10 or any other obligation of confidentiality. The terms and conditions of this Agreement shall constitute Confidential Information. IXC and ATC shall cooperate to request confidential treatment as may be mutually agreed by them with respect to certain terms of this Agreement and the transactions contemplated hereby in any filing with the Securities and Exchange Commission, any other government authority or any securities exchange or stock market. 10.2 Duration. With respect to all Confidential Information, the Party's rights and obligations under this Article shall remain in full force and effect following the termination of this Agreement. -14- 15 10.3 Ownership. All materials and records which constitute Confidential Information, other than service orders and copies of this Agreement, shall be and remain the property of, and belong exclusively to, the disclosing Party, and the receiving Party agrees either to surrender possession of and turn over or to destroy and certify to the other Party the destruction of all such Confidential Information which it may possess or control upon request of the disclosing Party or upon the termination of this Agreement. 10.4 Injunctive Relief. The Parties acknowledge and agree that, in the event of a breach or threatened breach by any Party of any provision of this Article; the other Party will have no adequate remedy in money or damages and, accordingly, shall be entitled to an injunction against such breach. However, no specification in this Section of a specific legal or equitable remedy shall be construed as a waiver or prohibition against any other legal or equitable remedies in the event of a breach of this Section of this Agreement. 10.5 Legal Obligation to Disclose. Each Party shall be released from its obligations under this Section 10 with respect to information which such Party is required to disclose to others pursuant to obligations imposed by law, rule or regulation or securities exchange or stock market rule; provided, however, that prior to any such required disclosure, such Party shall, to the extent practicable, provide written notice and consult with the other Party. 11. REPRESENTATIONS AND WARRANTIES. 11.1 By IXC. IXC represents and warrants to ATC that (i) it is a corporation duly organized, validly existing and in good standing in the State of Delaware; (ii) it has full corporate power and authority to own and operate the Services it provides pursuant to this Agreement and the IXC network and to carry on its business as presently conducted; (iii) it has, or has licensed, sufficient right title and interest in and to the Services it provides pursuant to this Agreement, the IXC Marks (within the United States) and the IXC network; (iv) it has all requisite authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby, (v) this Agreement is a valid and binding obligation of IXC, enforceable against IXC in accordance with its terms except as such enforceability may be limited by laws relating to creditors' rights generally and the exercise of judicial discretion in accordance with general equitable principles; and (vi) the licenses granted and obligations owed to ATC hereunder do not conflict with the rights granted or obligations owed by IXC to any Third Party. 11.2 By ATC. ATC represents and warrants to IXC that (i) it is a corporation duly organized, validly existing and in good standing in the State of New York; (ii) it has full corporate power and authority to own and operate the Services it provides pursuant to this Agreement and to carry on its business as presently conducted; (iii) it has, or has licensed, sufficient night title and interest in and to the Services it provides pursuant to this Agreement and the ATC Marks (within the United States), (iv) it has all requisite authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby, (v) this Agreement is a valid and binding obligation of ATC, enforceable against ATC in accordance with its terms except as such enforceability may be limited by laws relating to creditors' rights generally and the exercise of judicial discretion in accordance with general equitable principles and (vi) the licenses granted or obligations owed to IXC hereunder do not conflict with the rights granted or obligations owed by ATC to any Third Party. 11.3 BY IXC AND ATC. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY SET FORTH IN SECTIONS 11.1 By IXC AND 112 By ATC. THE PARTIES MAKE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY, AND THE PARTIES EXPRESSLY DISCLAIM AND EXCLUDE ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, NEITHER PARTY MAKES ANY WARRANTY TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY, WHETHER EXPRESS, IMPLIED OR STATUTORY, AS TO THE DESCRIPTION, QUALITY, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY INTERNET SERVICE OR ANY OTHER SERVICE PROVIDED -15- 16 HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY OTHER MATTER, ALL OF WHICH WARRANTIES ARE HEREBY EXCLUDED AND DISCLAIMED. 12. LIMITATION OF LIABILITY. 12.1 Limitation of Liability. Except for direct damages otherwise specifically provided for in this Agreement, in no event shall ATC or IXC be liable for any special, incidental, direct, indirect, punitive, reliance or consequential damages, whether foreseeable or not, arising under this Agreement or from any breach or partial breach of the provisions of this Agreement or occasioned by any defect in the Services or other service provided hereunder, delay in availability of the Services or any service provided hereunder, failure of the Services or other service provided hereunder, interruptions or outages of the IXC network or any other cause whatsoever or arising out of any act or omission by ATC or IXC, as applicable, its employees, servants and/or agents, including but not limited to, damage or loss of data, property or equipment, loss of profits or revenue, cost of capital, cost of replacement services, or claims of customers for service interruptions or transmission problems. 12.2 Release; Indemnification. Each Party (each Party in such capacity being referred to as the "Releasing Party) releases, assumes and agrees to indemnify defend, protect and save the other Party harmless from and against any claim, damage, loss, liability, cost and expense (including reasonable attorneys' fees) in connection with any loss or damage to any physical property or facilities of the Releasing Party or any injury to or death of any Person arising out of or resulting in any way from the negligence or misconduct of the Releasing Party or its employees, servants, contractors and/or agents. 13. INDEMNIFICATION. 13.1 Indemnification Obligations. ATC and IXC (hereinafter where either has undertaken the action or inaction to be indemnified against shall be known as the "Indemnifying Party") agree to assume all liability for and indemnify, defend, release, and hold harmless the other Party or any third Party claiming through the other Party, from and against all liability, loss, cost, damage, expense or cause of action, of whatsoever character, or injury or death of any Person and damage to or destruction of any property, including, without limitation, third Parties and all related expenses, including, but not limited to, reasonable attorneys' fees, investigators' fees and litigation expenses and costs of enforcing this Section 13 arising out of or relating to, in whole or in part, any of the following: (i) claims for libel, slander, infringement of copyright or unauthorized use of a trade secret, trade name or service mark that results from the transmission of material over the ATC or IXC network by the Indemnifying Party, authorized representatives of the Indemnifying Party or other Persons not associated with, or related to, either ATC or IXC; or (ii) claims of any Third Party arising out of the negligent or willful act or omission of the Indemnifying Party or its agents, servants, employees, contractors or representatives (other than ATC, if IXC is the Indemnifying Party, or IXC, if ATC is the Indemnifying Party); or (iii) claims for patent infringement arising out of the use of the ATC or IXC network by the Indemnifying Party or any Person authorized by the Indemnifying Party or resulting from the acts of the Indemnifying Party or the Indemnifying Party's representatives in combining the ATC or IXC network with the facilities of the Indemnifying Party or others, or using the ATC or IXC network either alone or in connection with that of the Indemnifying Party or others; or (iv) claims, except as otherwise set forth herein, for the material breach of or failure to comply, in any material respect, with any term or condition of this Agreement by the -16- 17 Indemnifying Party or its officers, employees or invitees; or (v) claims resulting from patent or trade secret infringement or infringement or unauthorized use of trade secrets or trade name by the Indemnifying Party in connection with this Agreement. In addition, IXC will defend, indemnify and hold ATC harmless from and against any claim or threat of claim by an ATC Customer or an ATC Reseller which is based on any warranty, promise or representation made by ATC as part of a service agreement and for which IXC is responsible in accordance with the terms of this Agreement. Similarly, ATC will defend, indemnify and hold IXC harmless from and against any claim or threat of claim which is based on any warranty, promise or representation made by ATC to a Third Party for which IXC is not responsible in accordance with the terms of this Agreement. PROVIDED, HOWEVER, NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER (OR TO ANY THIRD PARTY CLAIMING THROUGH SUCH OTHER PARTY) FOR CONSEQUENTIAL INCIDENTAL, EXEMPLARY OR PUNITIVE DAMAGES AND THE FOREGOING INDEMNITIES SHALL NOT APPLY WITH RESPECT TO SUCH DAMAGES. 13.2 Notices and Defense. The Indemnifying Party shall provide the other Party with notice of any such claim by a Third Party and assure the defense of such claim, on the terms and subject to Sections 13.1 preceding. 14. NON-SOLICITATION: a. From the date hereof until three years after the termination of this Agreement, neither IXC nor any of its Affiliates will, directly or indirectly, either alone or in association with others in any part of the world induce, request, encourage or assist any employee of ATC or its Affiliates to terminate his or her employment with ATC or to join with or become employed by, render services to or otherwise be engaged by IXC or any of their Affiliates in any direct or indirect capacity. b. From the date hereof until three years after the termination of this Agreement, neither ATC nor any of its Affiliates will, directly or indirectly, either alone or in association with others in any part of the world induce, request, encourage or assist any employee of IXC or its Affiliates to terminate his or her employment with IXC, or to join with or become employed by, render services to or otherwise be engaged by ATC or any of its Affiliates in any direct or indirect capacity. c. If, at the time of enforcement of Section 14, a court shall hold that the duration, scope, geographic area or other restrictions stated herein are unreasonable under circumstances then existing, the Parties agree that the maximum duration, scope, geographic area or other restrictions deemed reasonable under such circumstances by such court shall be substituted for the stated duration, scope, geographic area or other restrictions. d. In the case that a Party receives a legitimate, self-initiated request for consideration of employment by any employee of the other Party, the receiving Party shall immediately notify the other Party. Nothing in this Section 14 shall be deemed to prohibit the employees of either Party from free-will execution of their rights. e. Notwithstanding the foregoing, in the event the authorized representatives of the Parties determine that it is in their mutual best interests to terminate an employee of one party so that such employee may be hired by the other in a role furthering the purposes of this Agreement, and agree to such actions in writing, such actions will not be construed as violation of this Section 14. -17- 18 15. MISCELLANEOUS. 15.1 Independent Contractors. The Parties are acting as independent contractors and under no circumstances shall any of the employees of one Party be deemed the employees of the other for any purpose. Except as otherwise expressly provided in this Agreement, this Agreement does not constitute ether Party as the agent or legal representative of the other Party and does not create a partnership or joint venture between the Parties. Except as otherwise expressly provided in this Agreement, neither Party shall have any authority to act for the other Party in any agency or other capacity, to make commitments of any kind for the account of, or on behalf of, the other Party or to contract for or bind the other Party in any manner whatsoever. This Agreement confers no rights of any kind upon any Third Party. 15.2. Force Majeure. Notwithstanding any provision in this Agreement to the contrary, neither Party shall be liable for failure to fulfill its obligations hereunder (except with respect to payment or other monetary obligation or as otherwise specifically set forth herein) if such failure is due to causes beyond its reasonable control, including, without limitation, actions or failures to act of the other Party or, acts of God, flood, fire, storm, catastrophe, governmental prohibitions or regulations, viruses which did not result from the acts or omissions of such Party, its employees or agents, national emergencies, acts of public enemies, national emergency, insurrections, riots or wars, breakdown of or damage to plants or equipment or facilities (other than arising out of the neglect of or mishandling by such Party), the relevant portion of the Internet is down due to a technology failure (other than arising out of the neglect of or mishandling by such Party), failure of a supplier to supply necessary materials or equipment in a timely manner, destruction of property, embargoes, boycotts, governmental legislation or regulations, orders or acts of civil or military authorities, governmental acts or orders of courts or administrative agencies, or strikes, lockouts, work stoppages or other labor difficulties. The time for any performance required hereunder shall be extended by the delay incurred as a result of such act of force majeure and each Party shall act with diligence to correct such force majeure. 15.3 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to a Party under this Agreement shall impair any such right, power or remedy of such Party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of either Party of any breach or default under this Agreement, or any waiver on the part of either Party of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to a Party, shall be cumulative and not alternative. 15.4 Binding Agreement. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns. No Person or entity other than the Parties hereto (and their respective successors and permitted assigns) is or shall be entitled to bring any action to enforce any provision of this Agreement against either of the Parties, and the covenants and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the Parties or their respective successors and assigns as permitted hereunder. 15.5 Additional Actions, Documents and Information. Each of the Parties agrees that it will, at any time, prior to, at or after the date hereof, take or cause to be taken such further actions, and execute, deliver and file or cause to be executed, delivered and filed such further documents and instruments and obtain such consents, as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement 15.6 Notices. (a) All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by certified or registered mail (return receipt requested), express air courier, charges prepaid, or facsimile addressed as follows: -18- 19 TO IXC with a copy to: IXC Internet Services, Inc. Riordan & McKinzie 1122 S. Capital 695 Town Center Drive, Suite 1500 Austin, TX 78746-6426 Costa Mesa, California 92626 Attn: Senior Counsel Attention: Michael P. Whalen Facsimile: (512) 328-7902 Facsimile: (714)433-2637 To ATC: With copy to: Applied Theory Communications, Inc. Dewey Ballantine LLP 125 Elwood Davis Road 1301 Avenue of the Americas Syracuse, NY 13212 New York, NY 10019-6092 Attn: Contracts Manager Attention: Denis Fawley Facsimile (315)453-3052 Facsimile: (212)259-6333 or to such other address as either Party shall have furnished to the other in writing. (b) If a notice is given by either Party by certified or registered mail, it will be deemed received by the other Party on the fifth business day following the date on which it is deposited for mailing. If a notice is given by either Party by air express courier, it will be deemed received by the other Party on the next business day following the date on which it is provided to the air express courier. If a notice is given by facsimile, it will be deemed received by the other Party after confirmation of receipt. Notwithstanding the foregoing, any payments made under this Agreement shall be deemed received only when actually received. 15.7 Attorneys' Fees. If any arbitration is commenced between the Parties regarding the performance of this Agreement, the prevailing Party shall be entitled, in addition to such other relief as may be granted, to a reasonable sum for its attorneys' fees in such proceeding and for the expenses and costs of such proceeding as the arbitrator may determine. 15.8 Assignment. No assignment of this Agreement or of any rights or obligations hereunder may be made by either Party without the prior written consent of the other Party hereto and any attempted assignment without the required consent shall be void; provided, however, that notwithstanding the foregoing, (i) each Party shall have the right to pledge, assign or otherwise transfer this Agreement and its rights hereunder, in whole or in part, as collateral security to any lender, and (ii) each Party shall have the right to assign or transfer this Agreement and its rights hereunder, in whole or in part, to any direct or indirect wholly-owned subsidiary of that Party or to any Person into which that Party may be merged or consolidated or which purchases all or substantially all of the assets of that Party, provided, however, that (a) such subsidiary or Person agrees to be bound by the terms of this Agreement and (b) any such assignment or transfer shall not relieve that Party from any liability or obligation under this Agreement. 15.9 No Third Party Beneficiaries. No provision to this, Agreement is intended, nor shall any be interpreted, to provide or create any Third Party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner of any Party or any other Third Party; unless specifically provided otherwise herein, and except as so provided, all provisions hereof, shall be personal solely between the Parties to this Agreement. 15.10 Export Controls. The Parties agree and acknowledge that any export of the Services and the subsequent use thereof is subject to U.S. export control laws and regulations. The Buying Party shall not -19- 20 directly or indirectly transfer the Services, or the documentation relating thereto, to any country or location outside of the United States without obtaining the prior written consent of the Supplying Party. 15.11 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, such provision shall be construed so as to render it enforceable and effective to the maximum extent possible in order to effectuate the intention of this Agreement; and the validity, legality and enforceability of the remaining provisions hereof shall not in anyway be affected or impaired thereby. 15.12 Public Announcements. Each Party shall have the right to review, comment upon and approve any publicity materials, press releases or other public statements by the other that refer to, or that describe any aspect of, this Agreement made prior to, or within 90 days after, the Effective Date; provided, however, that with respect to disclosure documents required under the Securities Exchange Act of 1934, as amended, subject to the last sentence of this Section 15.12, each Party shall only have the right to prior review and to comment upon the other Party's disclosure documents. Each Party agrees that it will not issue any such publicity materials, press releases or public statements without the prior written approval of the other Party. The provisions of this section shall survive termination of this Agreement for a period of two years, except for the last sentence hereof, which shall survive as may be mutually agreed by them for the Term. 15.13 Expenses. Each Party shall pay its own legal and other costs incurred in connection with this Agreement and in the preparation for and consummation of the transactions provided for herein. 15.14 Taxes. Buying Party shall be liable for and shall reimburse Supplying Party for all taxes and related charges, however designated, resulting from the provision of Services as contemplated hereby, including federal, state, provincial or local sales; use or value-added taxes (VAT); excise taxes, imposed in connection with or arising from the provision of Services; Universal Service Fund and Lifeline Assistance Charges (Presubscribed line charges) set forth in the National Exchange Carrier Association (NECA) Tariff FCC#5; sections *.5, 8.5.2 and 17.1.4(A) & B), as the same may be amended from time to time, or any successor tariffs or sections, with respect to any ANI's subscribed to; any telecommunications relay service charges required by the Americans with Disabilities Act or otherwise (both federal and state); interexchange carrier fees payable to the FCC under the Omnibus Budget Reconciliation Act of 1993 or otherwise; payphone service provider compensation as determined by the FCC in CC Docket No. 96-128; universal service fund charges, intraLata compensation charges; and other federal or state fees or charges imposed on Supplying Party. Supplying Party shall furnish documentation to support the fees or charges payable by Buying Party pursuant to this Section 15.14. In no event shall either party be obligated to pay income taxes levied upon the other's not income or any real or personal property assessed against Supplying Party or Supplying Party's, property, including any gross receipts taxes asses in lieu of net income or property taxes, provided that, if the terms of the relevant statute or ordinance imposes such gross receipts tax upon Buying Party. then Buying Party shall be liable for such tax. 15.15 Tax Exemption Certificates. Buying Party shall furnish to Supplying Party valid and appropriate tax exemption certificates for all applicable jurisdictions (federal, state and local) in which it performs customer billing. Buying Party is responsible for properly charging tax to its subscribers and for the proper and timely reporting and payment of applicable taxes to the taxing authorities and shall defend and indemnity Supplying Party from payment and reporting of all applicable federal, state and local taxes, including, but not limited to, gross receipts taxes, surcharges, franchise fees, occasional, excise and other taxes (and penalties and interest thereon), relating to the Services. Such indemnification includes costs and expenses (including reasonable attorneys fees) incurred by Supplying Party in settling, defending or appealing any claims or actions brought against it relating to said taxes. If Buying Party fails to provide and maintain the required certificates, Supplying Party may charge Buying Party and Buying Party shall pay such applicable taxes. The amounts payable by Buying Party under this Agreement do not include any state or local sales or use taxes, or utility taxes, however designated, which may be levied on the goods and services provided by Supplying Party hereunder. With respect to such taxes, if applicable, Buying Party shall furnish Supplying Party with an appropriate exemption certificate or pay to Supplying Party upon, timely presentation -20- 21 of invoices therefore, such amounts thereof as Supplying Party may be by law required to collect of pay. Any and all other taxes, including but not limited to franchise, net or gross income, license, occupation, and real or personal property taxes shall be timely paid by Supplying Party. Buying Party shall pay to Supplying Party any such taxes that Supplying Party may be required to collect or pay. 15.15 Survival of Obligations. The Parties' rights and obligations that, by their nature, would continue beyond the termination, cancellation, or expiration of this Agreement, shall survive such termination, cancellation or termination. 15.16 Titles and Subtitles. The titles of the Articles and Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 15.17 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Texas without reference to its principles of conflicts of laws. 15.18 Subject to Laws. This Agreement and the Services provided are subject to, and the parties agree to comply with, all applicable federal, state, and local laws, and regulations, rulings and orders of governmental agencies, including, but not limited to, the Communications Act of 1934, the Telecommunications Act of 1996, the Rules and Regulations of the Federal Communications Commission ("FCC") and state public utility or services commissions ("PSC"), tariffs and the obtaining and continuance of any required certification, permit, license approval or authorization of the FCC and PSC or any governmental body, including, but not limited to regulations applying to feature group termination and Letter of Agencies ("LOAs"). 15.19 Permits, Authorizations and Filings. Supplying Party shall take all necessary and appropriate steps, as soon as possible, to procure the appropriate permits, approvals, and/or authorizations, if any, to deliver Services hereunder to Buying Party from FCC, PSC or other federal or state agency. In the event that Supplying Party cannot obtain all necessary federal, state or local authority to provide Services hereunder, Supplying Party shall promptly give written notice thereof to Buying Party and such notice shall constitute termination, without liability of either party hereto, of obligations to provide the affected Service(s). 15.20 Dispute Resolution (a) If any controversy or claim arises out of or relates to this Agreement or with respect to an alleged breach of the terms hereof, subject to Section 15.11, above, ATC and IXC shall seek to resolve the matter amicably through discussions between themselves. The parties shall attempt to resolve all controversies, claims or breaches at the operational level, and in the event a resolution cannot be reached, such controversy, claim or breach will be referred progressively to higher levels within each party, to their respective chairpersons. It the parties fall to resolve such controversy, claim or breach within thirty (30) days by amicable arrangement and compromise, either party may seek arbitration as set forth below but only within four years of the occurrence of the events giving rise to, or the accrual of, such controversy, claim or breach. (b) Except as provided in Section 15.11, above, any controversy or claim arising out of or in relating to this Agreement or a breach of this Agreement, shall be finally settled by binding arbitration IN CHICAGO, ILLINOIS in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures ("Endispute Rules"), as amended by this Agreement. If possible, the parties shall appoint by mutual agreement, as the arbitrator, an attorney experienced in telecommunications, securities law and transactional matters. If such agreement cannot be reached, the arbitrator shall be such type of attorney and shall be chosen under the Endispute Rules. The parties shall share the costs of arbitration, including the fees and expenses of the arbitrator, equally unless the arbitration award provides otherwise or except as provided in Section 7.2. Each party shall bear the cost of preparing and presenting its case. The parties agree that this provision and the arbitrator's authority to grant relief shall be subject to the United States Arbitration Act, 9 U.S.C. 1-16 at seq. ("USAA"), the provisions of this Agreement, and the ABA-AAA -21- 22 Code of Ethics for Arbitrators in Commercial Disputes. The parties agree that the arbitrator shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement, and in no event shall the arbitrator have the authority to make any award that provides for punitive or exemplary damages. The arbitrator's decision shall follow the plain meaning of relevant documents, and shall be final and binding. The award may be confirmed and enforced in any court of competent jurisdiction. All post-award proceedings shall be governed by the USAA. 15.21 Entire Agreement/Amendments. This Agreement and the Reciprocal Confidentiality Agreement constitutes the full and entire understanding and agreement between the Parties with regard to the subjects hereof and supersedes all prior oral and written agreements, commitments and understandings with respect to such matters. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Parties hereto. 15.22 Legal Construction. In the event one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. In the event of any conflict between the provisions of these Terms & Conditions and the applicable Supplements, Exhibits, Schedules, and Service Descriptions, the conflict shall be resolved by reference to the following order of priority of interpretation: 1) Service Descriptions, 2) Schedules, 3) Exhibits, 4) Supplements; and 5) Terms & Conditions. Not withstanding the foregoing, no Exhibit requiring execution shall be binding unless and until an officer of Buying Party has executed such Exhibit. 15.23 No Personal Liability. Each action or claim of any party arising under or relating to this Agreement shall be made only against the other party as a corporation, and any liability relating thereto shall be enforceable only against the corporate assets of such party. No party shall seek to pierce the corporate veil or otherwise seek to impose any liability relating to, or arising from, this Agreement against any shareholder, employee, officer or director of the other party. Each of such persons is an intended beneficiary of the mutual promises set forth in this Section and shall be entitled to enforce the obligations of this Section. 15.24 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each counterpart shall be deemed to be an original, and all counterparts individually or together shall constitute one and the same instrument. 15.25 Schedules. Schedules 2.1.1.A, 2.1.1.B, 2.1.2.A, 2.1.2.B, 2.1.3, 2.1.4.A, 2.1.4.B, 2.3.A, 2.3.B, 3.1.A, 3.1.B, and 6.2 to this Agreement, attached hereto, and as may be modified from time to time by mutual consent, are incorporated herein by reference, BOTH Parties represent and warrant that the Person whose signature appears below is duly authorized to enter into this Agreement on behalf of the Party. IN WITNESS WHEREOF, THE PARTIES HAVE ENTERED INTO THIS AGREEMENT AS OF THE EFFECTIVE DATE: AppliedTheory Communications, Inc. IXC Internet Services, Inc. By: /s/ Lawrence B. Helft By: /s/ Jeffrey D. Balling ------------------------------ --------------------------- Name: Lawrence B. Helft Name: Jeffrey D. Balling --------------------------- --------------------------- Title: President and COO Title: Vice President -------------------------- --------------------------- Date: 1/26/99 Date: 1/26/99 -------------------------- --------------------------- -22- EX-10.16 15 RESALE AGREEMENT 1 Exhibit 10.16 RESALE AGREEMENT This Agreement ("Agreement"), effective as of the 1st day of October, 1996, is entered into by and between NYSERNet.com, INC., having corporate offices at 200 Elwood Davis Road, Liverpool, New York 13088-6147 (herein referred to as "COM") and NYSERNet.org, INC., having corporate offices at 125 Elwood Davis Road, Syracuse, New York 13212-4311 (herein referred to as "ORG"). WHEREAS, ORG desires COM to provide various services and products, to be resold by ORG to its Authorized Customers, as hereinafter defined; and WHEREAS, COM desires to provide such services and products, on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the terms and conditions contained herein, COM and ORG hereby mutually agree as follows: Section 1 - DEFINITIONS 1.1 For the purpose of this Agreement, the following terms shall have the following meanings: 1.1.1 "Authorized Customers" shall mean governmental, educational, scientific and other not-for-profit organizations primarily located within the State of New York. 1.1.2 "Products" shall mean those Internet access products and services and other products and services related thereto which, at any time during the term of this Agreement, are sold, installed and supported by COM or any agent, distributor or reseller of COM. Section 2 - APPOINTMENT 2.1 Subject to the terms and conditions contained herein, ORG shall purchase the Products from COM and resell the Products to its Authorized Customers. During the term hereof, ORG shall not purchase any product or service which is the same as, or substantially similar to, the Products from any third person, nor shall ORG offer any such product for sale to any third person. Moreover, during the term hereof, ORG shall not purchase or sell to third parties any products or services which provide Internet access, or which relate to the providing of such access (even if COM does not then offer a competitive Product) from any third party, unless ORG first gives notice to COM of its intention to do so -1- 2 and COM fails to agree, within one hundred twenty (120) days of such notice, to provide products or services which are substantially identical in terms of functionality to the products or services proposed to be purchased or sold by ORG, on the same or more favorable terms, and thereafter to provide such Products within a reasonable period of time. Section 3 - TERM 3.1 This Agreement shall be effective from the date set forth above for a period of five (5) years. 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. Section 4 - OBLIGATIONS OF ORG 4.1 ORG shall negotiate with and market the Products to Authorized Customers and, in furtherance thereof, shall 4.1.1 Diligently develop and increase the sale of the Products during the term of this Agreement in accordance with the terms hereof. 4.1.2 Require its customers to complete an order form and agree to the standard terms and conditions contained in COM's agreements relating to any services to be provided by COM, as such agreements may exist from time to time, ORG will be responsible for the collection and remittance of all applicable sales tax. 4.2 ORG is an independent contractor and shall pay all of its expenses incurred in connection with the Services. ORG accepts and assumes full and exclusive liability for and shall hold COM harmless from the payment of all contributions required under state and federal law, providing for state and federal payroll taxes or contributions for unemployment insurance or old age pensions, or annuities which are measured by the wages, salaries, or other remuneration paid to ORG or by ORG to its employees for any and all activities in connection with this Agreement. Section 5 - OBLIGATIONS OF COM During the term of this Agreement, COM shall provide ORG with the Products according to the following conditions: 5.1 COM will cooperate with ORG in developing a marketing plan for the marketing by COM, and for the joint marketing by ORG and COM, of the Products to Authorized Customer. 5.2 COM shall provide ORG with all such sales support and assistance as ORG may reasonably request, and, including but not limited to authorizing and encouraging its -2- 3 sales personnel to sell the Products to Authorized Customers on behalf of ORG, and providing them with all information, training and materials reasonably necessary to enable them to do so. ORG hereby authorizes COM to use ORG's name in marketing the Products on ORG's behalf and otherwise as COM deems reasonably necessary in conjunction with other sales of COM's products and services, subject to the reasonable approval of ORG. 5.3 COM shall sell the Products to ORG at a price which is not greater than the average sales price by COM to third parties for the same Products at approximately the same period of time, on similar terms, excluding for purposes of determining the average sales price of a Product special promotions made for a limited period of time to a limited group of prospective customers. 5.4 COM shall provide first tier support for customers, in the same manner and to the same extent as it provides support to its own customers. 5.5 COM shall provide to ORG such support by way of information, advice and assistance as ORG and COM deem reasonable and necessary, appropriate and advisable in order for ORG to resell the Products. 5.6 COM will provide ORG with such advertising, product literature and promotional support with respect to the Products as COM deems reasonable and necessary, appropriate and advisable in order for ORG to remain knowledgeable of the Products. 5.7 COM hereby authorizes ORG to use COM's name in marketing the Products in conjunction with the resale of COM's products and services, subject to the reasonable approval of COM. 5.8 COM shall supply product and related sales training to ORG employees, in the same manner as it provides its own sales force. Such training will occur at mutually agreeable times and locations, provided, however, that if training sessions occur at a location other than a COM Facility, ORG shall pay COM's reasonable travel expenses in connection with such sessions. 5.9 Regular updates and training for new ORG employees will be provided by COM at no charge to ORG, at a mutually agreeable time and location, provided, however, that if training sessions occur at a location other than a COM Facility, ORG shall pay COM's reasonable travel expenses in connection with such updates. 5.10 COM will provide ORG customers with the same products, of the same quality and at the same times as they are provided by COM to its other resellers or to its own customers. -3- 4 Section 6 - BILLING AND TERMS OF PAYMENT 6.1 ORG shall provide billing and collections services for its customers for the Products. 6.2 COM will invoice ORG on a monthly basis for the Products provided to ORG for resale during the previous month. ORG shall pay all such invoices within thirty (30) days of receipt. Past due invoices shall be subject to interest charges at the rate of 1.5% per month. 6.3 At ORG's request, COM will bill Authorized Customers for sales of the Products, and, if requested to do so, will bill such Authorized Customers in the name of ORG and require that payment be made to such address as ORG may request. Section 7 - CONFIDENTIALITY 7.1 It is understood that, in the performance of this Agreement, each party may have access to private or confidential information relating to the other party's customers and their respective businesses (collectively, the "Information"). 7.2 With respect to all Information and any other information or data which is treated as proprietary by either party or its customers, the other party agrees (i) that it will remain the disclosing party's exclusive property; (ii) that it will not be copied, published or disclosed to others without the disclosing party's express consent; (iii) that the disclosing party may conduct such audits as it deems necessary to ensure compliance with this paragraph; (iv) that the disclosing party is permitted to monitor any data access both on-line and in person at the other party's premises; (v) that the Information will be used solely in the performance of this Agreement; and (vi) any originals and all copies of the Information will be returned to the disclosing party upon termination or expiration of this Agreement. Section 8 - MISCELLANEOUS 8.1 ORG and COM will perform their obligations pursuant to this Agreement subject to (i) all applicable tariffs, if any; (ii) all applicable existing and future laws; and (iii) rules, regulations, and orders of any governmental authority. 8.2 Each party represents and warrants to the other that (i) it has all the necessary power and authority to enter into and perform this Agreement in accordance with its terms; and (ii) the making or performance of this Agreement by such party does not violate the provisions of any other agreement to which such party is a party or by which it is bound. Section 9 - PERIODIC REVIEW 9.1 The parties shall periodically review their relationship to determine if other services should be provided under this Agreement. -4- 5 9.2 The parties shall discuss in these periodic reviews proposed revisions to procedures and changes to the scope of their relationship. Section 10 - INDEMNIFICATION AND LIABILITY 10.1 Each party shall indemnify, defend and hold harmless each other from and against any and all claims, loss, damage, cost or expense (including attorneys fees) arising out of or alleged to have been caused by their respective negligent, willful or unauthorized acts, failures to act or misrepresentations. Section 11 - FORCE MAJEURE 11.1 Neither party will be in default of this Agreement to the extent failure or delay in performance is caused by an act of God, fire, flood, severe weather conditions, material shortage or unavailability of transportation, government ordinance, laws, regulations or restrictions, war or civil disorder, or any other cause beyond the reasonable control of such party. Section 12 - TERMINATION 12.1 Either party shall have the right to terminate this Agreement effective upon delivery of written notice thereof if: 12.1.1 The other party makes an assignment for the benefit of creditors, the other party is adjudicated a bankrupt, either through voluntary or involuntary proceedings, or a trustee or receiver of any substantial part of the other party's assets is appointed by any court, and, in any such event any proceeding commenced against such party is not dismissed within thirty (30) days; or 12.1.2 The other party (1) attempts to make an unauthorized assignment of this Agreement, or (2) fails to make any payment due hereunder or to comply with any provision of this Agreement and does not correct such failure within thirty (30) days after written notice of such failure is delivered by the other party, or (3) receives a notice of violation of the terms and conditions of any license or permit required of that party of its employees in the conduct of that party's business and falls to correct such violations within thirty (30) days. No waiver by a party of any deficiencies in one or more instances shall constitute a waiver of that party's right to terminate this Agreement in subsequent instances. 12.2 In addition to its right to terminate this Agreement as provided above, the nondefaulting party shall have the right to pursue any and all remedies available at law or in equity upon the default of the other party. 12.3 Termination of this Agreement for any cause shall not release either party from any liability which at the time of termination has already accrued to the other party or which thereafter may accrue in respect of any ct or omission prior to termination, or from any -5- 6 obligation which is expressly stated herein to survive termination. 12.4 Upon termination of this Agreement, COM shall continue to provide and ORG shall continue to purchase the Products for the sole purpose of reselling the Products to ORG customers for the remainder of the term of such customers' agreements with ORG in effect as of the date of such termination, not to exceed five (5) years. ORG shall not have the right to resell the Products to any additional new customers after the effective date of the termination of this Agreement. Section 13 - GENERAL TERMS. 13.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto, their personal representatives, and permitted successors and assigns. 13.2 This Agreement may not be assigned, in whole or in part, by either party hereto without the prior written consent of the other. 13.3 This Agreement contains the entire understanding between the parties hereto and supersedes any prior understanding, memoranda or other written or oral agreements between them respecting the within subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between them relating to the subject matter of this Agreement which are not fully expressed herein. 13.4 No modification or waiver of this Agreement or any part hereof shall be effective unless in writing and signed by the party sought to be charged therewith. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. No course of dealing between the parties hereto will be deemed effective to modify, amend or discharge any part of this Agreement or the rights or obligations of either party hereunder. 13.5 None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any person or entity not a party hereto. 13.6 If any provision of this Agreement shall be held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear. The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 13.7 Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given (i) upon hand delivery, or (ii) on the third day following delivery to the U.S. Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (iii) on the first day following delivery -6- 7 to a nationally recognized United States overnight courier service, fee prepaid, return receipt or other confirmation of delivery requested, or (iv) when telecopied or sent by facsimile transmission or by electronic mail if an additional notice is also given under (i), (ii) or (iii) above within three days thereafter. Any such notice or communication shall be delivered or directed to a party at its address set forth below or at such other address as may be designated by a party in a notice given to the other party in accordance with the provisions of this paragraph. Notice to NYSERNet.com, Inc. shall be sent to: NYSERNet.com, Inc. 125 Elwood Davis Road Syracuse, NY 13212-4311 with a copy to: Underberg & Kessler LLP 1800 Chase Square Rochester, NY 14606 Attn: Robert F. Mechur, Esq. Notice to NYSERNet.org, Inc. shall be sent to: NYSERNet.org, Inc. 125 Elwood Davis Road Syracuse, NY 13212-4311 with a copy to: Underberg & Kessler LLP 1800 Chase Square Rochester, NY 14606 Attn: Robert F. Mechur, Esq. 13.8 This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York pertaining to contracts made and to be wholly performed within such state, without taking into account conflicts of laws principles. 13.9 The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 13.10 This Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of said counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement, as of the date first set forth above. NYSERNet.org, INC. NYSERNet.com, INC. By: /s/ James D. Luckett By: /s/ Richard Mandelbaum ------------------------------- ------------------------------- -7- EX-10.17 16 RESOURCE SHARING AGREEMENT 1 Exhibit 10.17 RESOURCE SHARING AGREEMENT AGREEMENT made the 1st day of October, 1996, between NYSERNet.com, Inc., a New York corporation, having an office at 125 Elwood Davis Road, Syracuse, New York 13212-4311 (hereinafter referred to as "COM") and NYSERNet.org, Inc., a New York corporation, having an office at 125 Elwood Davis Road, Syracuse, New York 13212-4311 (hereinafter referred to as "ORG"). WITNESSETH: WHEREAS, COM, as lessee, entered into a lease with ___________________, as lessor, dated ___________________, leasing certain space in a building located at 125 Elwood Davis Road, Syracuse, New York and into a lease with ___________________, as lessor, dated ___________________, leasing certain space on the first floor of the building at ___________________, Great Neck, New York; and WHEREAS, COM may hereafter lease other space, either in addition to or in substitution for the premises currently being leased by COM (such additional or substituted space, together with the space currently leased by COM being referred to herein as the COM Premises and each lease relating to the COM Premises being referred to herein as a "Prime Lease"); and WHEREAS, COM wishes to permit ORG to use so much of such the COM Premises as ORG requires for the operation of its business, subject to the business requirements of COM with respect to such premises, subject to payment by ORG for the use of such space as provided herein and to the adherence by COM to the provisions of this Agreement; and WHEREAS, COM has, and will in the future have, certain computers, furniture, fixtures, equipment and supplies on the COM Premises (the "Equipment") and wishes to permit ORG to use the Equipment in connection with the operation of its business, subject to the business requirements of COM with respect to the Equipment, the payment by ORG for the use of the Equipment as provided herein and the adherence by ORG to the provisions of this Agreement; and WHEREAS, certain of the personnel now or hereafter employed by COM are able to perform services required by ORG in the operation of its business, and COM wishes to provide such personnel to ORG to perform such services, subject to payment by ORG for such services and to the adherence by COM to the provisions of this Agreement; NOW, THEREFORE, the parties hereto hereby covenant and agree as follows: 1. Sharing of COM Premises. -1- 2 1.1. Availability of Premises. COM agrees that it shall provide ORG with such office space within the COM Premises as ORG may reasonably require for the conduct of its business. Such space shall be at such location within the COM Premises as the parties may agree or, in the absence of such agreement, as COM may in its sole judgment determine. Such space shall be exclusively dedicated to the use of ORG or shared between ORG and COM, as the parties may agree or, in the absence of such agreement, as COM may in its sole judgment determine. Notwithstanding the foregoing, COM shall have no obligation to provide space to ORG within the COM Premises to the extent that providing such space would unduly interfere with the operation of the business of COM in the ordinary course. ORG shall have no obligation to use any space within the COM Premises. Subject to the foregoing, in the event COM shall provide to ORG and ORG shall use space within the COM Premises, the terms and conditions set forth in this Section 1 shall apply to the payment for and use of such space. 1.2. Right to Use Premises. ORG shall have the right to use space allocated within the COM Premises from and after the date upon which the parties hereafter agree that it may do so, or from and after the date upon which it actually occupies such space with the consent of COM, whichever is earlier. ORG shall have the right to continue to use such space until the last day of the month next succeeding the month in which ORG gives notice to COM that ORG will not continue to occupy a portion of the COM Premises, specifying the portion of the COM Premises which will no longer be occupied by ORG, and in the event such notice is given, ORG's right to use such space and its obligation to pay therefor shall terminate as of the date set forth in the notice given by ORG. 1.3. Payments. Each month, ORG shall pay COM its Pro Rata Share of all rent, additional rent and other charges which COM is required to pay during such month to the landlord of the COM Premises, or to any other person (including, but not limited to, utility companies) with respect to the COM Premises. Such payments shall be made at least five (5) days prior to the date upon which COM must make such payments without incurring any penalty, provided that COM has given ORG notice of the amount due at least ten (10) days prior to the date on which it is obligated to make its payment to COM. For purposes of this Section 1.3, ORG's Pro Rata Share shall be calculated on a monthly basis, and shall be determined by dividing the square footage occupied by ORG within the COM Premises by the total number of square feet within the COM Premises. If any portion of the COM Premises is occupied by both ORG and COM (or by employees of COM who also render services to ORG pursuant to the provisions of Section 3 of this Agreement), then the square footage in question shall be prorated based upon the time during which each of them occupies such square footage (or, in the case of shared employees, the time for which services are employed by each of them), and the resulting amount attributable to ORG shall be employed in making the calculation described in the preceding sentence. Notwithstanding the foregoing, if any such rent or sums shall be due to additional use by ORG of electrical current in excess's of ORG's proportionate use in of the COM Premises, such excess shall be paid in entirety by ORG. If ORG shall procure any additional services from the building, such as alterations or after-hour air conditioning, ORG shall pay for same -2- 3 at the rates charged therefor by the person providing such services, and shall make such payment to COM or the person providing such services, as COM shall direct. If COM shall receive any refund of rent, based upon recalculation of payments due, contest of assessment or otherwise, ORG shall be entitled to the return of so much thereof as shall be attributable to prior payments by ORG. 1.4. Use of Premises. ORG may use that portion of the COM Premises which it may from time to time occupy for its operation of a not-for-profit business which, among other things, provides Internet access to non-profit and other similar organizations and engages in research and educational activities relating to computer networking. Its activities may include, but shall not necessarily be limited to, computer programming, marketing, sales and general administrative purposes. ORG's rights to use the COM Premises are subject and subordinate to each Prime Lease, and ORG shall comply with the terms of each Prime Lease in connection with its use of any COM Premises. Without limiting the generality of the foregoing, ORG shall promptly observe and comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations of the Federal, State, County and Town governmental authorities affecting the COM Premises; shall not use or permit the COM Premises to be used for any illegal or unlawful purpose; and shall not do anything in, or bring anything into, the COM Premises which will in any way increase the rate of fire insurance. The only services or rights to which ORG is entitled hereunder are those to which COM is entitled under a Prime Lease, but COM will not be liable for any failure of a lessor under a Prime Lease to provide any services. Provided that ORG has received a copy of each Prime Lease, ORG shall neither do nor permit anything to be done which would cause a Prime Lease to be terminated or forfeited, and ORG shall indemnify and hold COM harmless from and against all claims of any kind whatsoever by reason of any action or inaction on the part of ORG by reason of which a Prime Lease may be terminated or forfeited. ORG acknowledges receipt of a copy of each Prime Lease relating to the premises currently occupied by COM and enumerated in the first recital to this Agreement. 1.5. Modifications and Improvements. ORG shall at all times during the term of this Agreement, at its own cost and expense, keep and maintain, or cause to be kept and maintained, that portion of the COM Premises occupied by ORG. ORG shall not make any changes, alterations and improvements to the COM Premises without written approval and authorization by COM. If any changes, alterations or improvements are authorized by COM, ORG shall be responsible for the payment of the cost thereof. All such alterations authorized by COM and made by ORG shall be made in conformity with applicable code and insurance requirements. All capital improvements installed in or on the COM Premises by ORG shall be the property of COM (unless they become the property of the Lessor pursuant to a Prime Lease) from the time of construction or installation and shall not be removed or injured by ORG. If permitted by the applicable Prime Lease, trade fixtures belonging to ORG may be removed from the Leased Premises by ORG, and if any damage is done to the COM Premises, ORG shall repair the same. If ORG fails to make such repairs, COM may do so, in which event ORG shall reimburse COM for the cost thereof. -3- 4 1.6. Indemnification. ORG shall indemnify COM from and against all liability arising from any loss of life, personal injury or property damage sustained in or about the COM Premises, to the extent such loss of life, personal injury or property damage has been caused by the negligent or other acts or ORG, its employees, agents or invitees. ORG shall maintain policies of general liability insurance in amounts not less than One Million Dollars ($1,000,000.00) per person or occurrence for personal injury and Fifty Thousand Dollars ($50,000.00) for property damage. COM shall be named as an additional insured under said policies, and ORG shall furnish proof of such insurance coverage to COM upon demand. Such policies shall provide for ten (10) days' notice to COM of cancellation. 1.7. Insurance. ORG shall, throughout the term of this Agreement, keep all of ORG's property located on or within the COM Premises insured against all loss or damage by fire, with extended coverage, in an amount equal to the full replacement cost thereof. ORG shall furnish COM with certificates evidencing such insurance on demand. ORG shall use its best efforts to include in such fire insurance policies appropriate clauses pursuant to which the insurance companies waive all right of subrogation against COM and the lessors under each Prime Lease with respect to losses payable under such policies and/or agree that such policies shall not be invalidated should ORG waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies. If ORG is unable to obtain in such policies either of the clauses described in the preceding sentence, ORG shall if possible have COM and the lessor of each COM Premises named in such policies as an additional insured, at ORG's own expense. Provided that ORG's right of full recovery under the aforesaid policies is not adversely affected or prejudiced, ORG hereby waives any and all right of recovery which it might otherwise have against COM or each lessor of the COM Premises, their servants, agents and employees, for loss or damage to ORG' property to the extent that same is covered by ORG' insurance, notwithstanding that such loss or damage may result from the negligence or fault of COM, such landlord or their servants, agents or employees. ORG shall notify COM promptly of any cancellation or change of the terms of any policies referred to in this Section 1.7. All such policies shall, to the extent available, contain agreements by the insurers that such policies shall not be canceled without at least ten (10) days' notice to COM, ORG and the applicable lessors of the COM Premises. All such policies which name both COM and ORG as insureds shall, to the extent available, contain agreements by the insurers to the effect that no act or omission of any named insureds will invalidate the policies as to the other named insureds. 1.8. Liability of COM. COM shall not be liable for any damage or injury to any person, property or business or for any interruption of business of ORG resulting from any condition relating to or event occurring in the COM Premises, other than those conditions or events resulting from the gross negligence or wilful conduct of COM, its agents, servants or employees. 1.9. Condemnation. In the event of the taking, condemnation, purchase in lieu thereof or any similar proceeding with respect to any COM Premises, the rights and obligations of ORG with respect to such COM Premises shall be the same as the rights of -4- 5 COM thereto; provided, that without regard to the terms of any Prime Lease, ORG shall have no right to receive any portion or any award of proceeds resulting from such a proceeding. 1.10. Estoppel Certificates. ORG shall at any time and from time to time during the term hereof execute, acknowledge and deliver to COM or to the lessor of any COM Premises such estoppel certificates as may be required by any such lessor pursuant to the provisions of any Prime Lease. 2. Use of Equipment. 2.1. Access to Equipment. COM agrees that ORG may use such of the Equipment as may, from time to time, be located within the COM Premises, in connection with the conduct of ORG's business. It may use such Equipment at such times and for such purposes as the parties may agree or, in the absence of such agreement, as COM may in its sole judgment determine. Any item of Equipment shall be used exclusively by ORG or shared between ORG and COM, as the parties may agree or, in the absence of such agreement, as COM may in its sole judgment determine. Notwithstanding the foregoing, ORG shall have no right to use any of the Equipment to the extent its doing so would unduly interfere with the operation of the business of COM in the ordinary course. 2.2. Payments. Each month, ORG shall pay COM its Pro Rata Share of (a) the fair rental value of all Equipment used by ORG during the preceding month and (b) the actual cost to COM of maintaining, or keeping maintenance contracts in effect with respect to, such Equipment. Such payments shall be made within ten (10) days of the date upon which COM submits to ORG its invoice for such use of the Equipment, calculated in accordance with this Section 2.2. For purposes of this Section 2.2, (x) ORG's Pro Rata Share of the fair rental value of the Equipment used by it shall be determined by multiplying number of hours such Equipment is used by ORG by the total number of hours such Equipment is used by both ORG and COM and (y) the fair rental value of each item of equipment shall be based upon the charge made by commercial lessors to unrelated third parties for the rental of the same equipment for a term equivalent to its anticipated useful life. 2.3. Manner of Use. ORG shall use the Equipment in accordance with good business practices, and shall honor both the instructions of the manufacturers of the Equipment and the reasonable instructions of COM. If any damage is done to the Equipment as a result of the use thereof by ORG (other than reasonable wear and tear to the equipment resulting from its proper use in the ordinary course of business), ORG shall repair the same. If ORG fails to make repairs, COM may do so, in which event ORG shall reimburse COM for the cost thereof. 3. Sharing of Employees -5- 6 3.1. Availability of Employees. COM and ORG acknowledge that certain of the employees or COM may be able to provide services which ORG requires. COM agrees that it shall provide ORG with the services of such employees, at the reasonable request of ORG, to render such services to or for the benefit of ORG as ORG may reasonably require. ORG shall request the services of such employees in advance of the dates upon, or periods for, which their services are required, and COM shall promptly notify ORG whether such employees are available as requested. During periods when services are being rendered by such employees for either ORG or COM, they shall be under the exclusive control and direction or ORG and COM, respectively. The parties acknowledge that there may be periods when employees are rendering services to ORG and COM concurrently, and, for such periods, ORG and COM shall use their best efforts to coordinate the services of such employees. Notwithstanding the foregoing, COM shall have no obligation to provide the services of any of its employees to ORG, to the extent that doing so would unduly interfere with the operation of the business of COM in the ordinary course. ORG shall have no obligation to use the services of any COM employee. 3.2. Compensation of Employees. COM shall be responsible for paying all of the salary and benefits for each of its employees. 3.3. Payments to COM. ORG shall pay COM its Pro Rata Share of the salary and benefits of each such employee who renders services to or for the benefit of ORG. Such payments shall be made within ten (10) days of the date upon which COM submits to ORG its invoice for the services of such employees, calculated in accordance with this Section 3.3. For purposes of this Section 3.3, ORG's Pro Rata Share of the salary and benefits of each employee shall bear the same relationship to the total salary and benefits of such employee as the number of hours worked by such employee on matters for ORG bears to the total number of hours worked by such employee for both ORG and COM during the period in question. 4. General Terms. 4.1. Term and Termination. The term of this Agreement shall commence on the date first set forth above and shall terminate on December 31, 1999. In the event COM shall terminate this Agreement for any reason other than the failure of ORG to make the payments required of it pursuant to the terms hereof, then, in addition to such other remedies as ORG shall have resulting from such termination, COM shall pay ORG, on demand, an amount equal to the sum of the payments made by ORG to COM pursuant to this Agreement for the six (6) months preceding the effective date of such termination. 4.2. Force Majeure. The period of time during which either party is prevented or delayed in the performance of any obligation required under this Agreement due to delays caused by fire, catastrophe, strikes or labor trouble, civil commotion, acts of God or the public enemy, governmental prohibitions or regulations, or inability or difficulty to obtain -6- 7 materials, or other causes beyond such party's control, shall be added to its time for performance thereof, and such party shall have no liability by reason thereof. 4.3. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their personal representatives, successors and permitted assigns. 4.4. Assignment. This Agreement may not be assigned, in whole or in part, by either party hereto without the prior written consent of all other parties. 4.5. Entire Agreement. This Agreement contains the entire understanding between the parties hereto and supersedes any prior understanding, memoranda or other written or oral agreements between them respecting the within subject matter. There are no representations, agreements, arrangements or understandings, oral or written, between the parties relating to the subject matter of this Agreement which are not fully expressed herein. 4.6. Modifications: Waiver. No modification or waiver of this Agreement or any part hereof shall be effective unless in writing and signed by the party sought to be charged therewith. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. No course of dealing between the parties hereto will be deemed effective to modify, amend or discharge any part of this Agreement or the rights or obligations of either party hereunder. 4.7. No Third Party Beneficiary. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any person or entity not a party hereto. 4.8. Partial Invalidity. If any provision of this Agreement shall be held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear. The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 4.9. Arbitration. In the event that any disagreement or dispute should arise between the parties hereto with respect to this Agreement, then such disagreement or dispute shall be submitted to arbitration in accordance with the rules then pertaining to the American Arbitration Association with respect to commercial disputes. Judgment upon any resulting award may, after its rendering, be entered in a court of competent jurisdiction by any party. 4.10. Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given (i) upon hand delivery, or (ii) on the third day following delivery to the U.S. Postal Service as certified or registered mail, return receipt requested and postage prepaid, or (iii) on the first day -7- 8 following delivery to a nationally recognized United States overnight courier service, fee prepaid, return receipt or other confirmation of delivery requested, or (iv) when telecopied or sent by facsimile transmission if an additional notice is also given under (i), (ii) or (iii) above within three days thereafter. Any such notice or communication shall be delivered or directed to a party at its address set forth below or at such other address as may be designated by a party in a notice given to all other parties hereto in accordance with the provisions of this paragraph. Notice to NYSERNet.com, Inc. shall be sent to: NYSERNet.com, Inc. 125 Elwood Davis Road Syracuse, NY 13212-4311 with a copy to: Underberg & Kessler LLP 1800 Chase Square Rochester, NY 14604 Attention: Robert F. Mechur, Esq. Notice to NYSERNet.org, Inc. shall be sent to: NYSERNet.org, Inc. 125 Elwood Davis Road Syracuse, NY 13212-4311 with a copy to: Underberg & Kessler LLP 1800 Chase Square Rochester, NY 14604 Attention: Robert F. Mechur, Esq. 4.11. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York pertaining to contracts made and to be wholly performed within such state, without taking into account conflicts of laws principles. 4.12. Headings. The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 4.13. Fair Meaning. This Agreement shall be construed according to its fair meaning, the language used shall be deemed the language chosen by the parties hereto to express their mutual intent, and no presumption or rule of strict construction will be applied against either party hereto. 4.14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and all of said counterparts together shall constitute but one and the same instrument. 4.15. Further Assurances. The parties hereto shall execute and deliver any and all additional writings, instruments and other documents and shall take all such further actions -8- 9 as shall be reasonably required in order to effect the terms and conditions of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NYSERNet.com, Inc. By: /s/ David A. Buckel --------------------------- NYSERNet.org, Inc. By: /s/ James D. Luckett --------------------------- STATE OF NEW YORK) COUNTY OF ONONDAGA) ss: On this __________________ day of __________________, 1996, before me personally came __________________ to me known, who, being by me duly sworn, did depose and say that he is the __________________ of NYSERNet.com, Inc. and that he executed the foregoing instrument for and on behalf of said Corporation. --------------------------- Notary Public STATE OF NEW YORK) COUNTY OF ONONDAGA) ss: On this __________________ day of __________________, 1996, before me personally came __________________ to me known, who, being by me duly sworn, did depose and say that he is the __________________ of NYSERNet.org, Inc. and that he executed the foregoing instrument for and on behalf of said Corporation. --------------------------- Notary Public -9- EX-10.18 17 AGREEMENT 1 Exhibit 10.18 STATE OF NEW YORK DEPARTMENT OF LABOR STATE OFFICE BUILDING CAMPUS ALBANY, NEW YORK 12240-0052 THIS AGREEMENT, made this twenty-seventh day of September in the year one thousand nine hundred and ninety-four by and between New York State Education And Research Network (NYSERNET) Suite 103, 200 Elwood Davis Road, Liverpool, NY 13088-6147, party of the first part and Department of Labor, State of New York party of the second part. WITNESSETH, that the party of the first part, in consideration of the agreements made by the party of the second part, and the party of the second part, in consideration of the agreements herein made by the first do hereby as follows: ARTICLE I. The party of the first part shall provide the party of the second part Software, to establish an Internet connection for the national job bank through the party of the second part, and to provide the necessary access, technical support services, registration and other protocols related to The Internet. The party of the first part shall also provide software customization, consultation services, installation, training and on-going software maintenance. (See Attachment "A") 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: One hundred sixteen thousand four hundred sixty-eight dollars and no cents ($116,468.00). This amount will be adjusted to reflect additional costs for software, customization, consultation and any additional training, if required, as per Attachment "B". ARTICLE III. The contract shall be in effect from Tuesday, September 27, 1994 and shall terminate in accordance with Article IV incorporated herein. ARTICLE IV. This contract is subject to cancellation by the party of the second part, upon fifteen (15) days notice in writing to the party of the first part. 2 -2- ARTICLE VII. It is agreed that this contract shall be void and of no effect unless the party of the first part shall secure compensation for the benefit of and keep insured during the life of the contract, such employees' engaged thereon as are required to be insured by the provisions of the Workers' Compensation Law. IN WITNESS WHEREOF: the parties to these presents have set their hand and seals, the day and year first above written. STATE OF NEW YORK COUNTY OF, ONONDAGA ss: ON the 30th Day of September, nineteen hundred 94 and before me personally came James D. Luckett to me known, who being by me duly sworn, did depose and say that he resides at Liverpool, NY that he is the Vice President of NYSERNet, Inc. 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/ Patricia J. Foster ------------------------ NOTARY PUBLIC (Signature) County of Onondaga Reg #01F04755760 3 NEW YORK STATE DEPARTMENT OF LABOR SIGNATURE SHEET Contract Number: C000525 ------- 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." Contractor Signature Agency Signature /s/ James Luckett - ---------------------------- ---------------------------------- Dated: 9/29/94 Dated: ---------------------- ---------------------------- Attorney Generals Signature Comptrollers Signature - ---------------------------- ---------------------------------- Dated: Dated: ---------------------- ---------------------------- 4 - --- --- STATE OF NEW YORK | NYS | DEPARTMENT OF LABOR | Dept of Labor | | Logo | GOVERNOR W. AVERELL HARRIMAN - --- --- STATE OFFICE BUILDING CAMPUS ALBANY, NEW YORK 12240 APR 23 1996 March 19, 1996 Nysernet 200 Elwood Davis Road Suite 103 Liverpool, New York 13088-6147 Re: Proposed Amendment to Contract #C000525 Internet T-1 Connection Term: 9/27/94 through 9/26/00 Attention: James Luckett Gentlemen: Enclosed are five (5) copies of the subject amendment drawn for the current years T-1 connection & one additional dial-up access. Please complete acknowledgement which must be notarized. Please sign and return all five (5) copies as soon as possible to: NYS Department of Labor Mrs. Laurel Dawson State Campus, Bldg #12 Room 432 Albany, New York 12240 so that we may process them through various State Agencies involved. When the Comptroller has approved the contract, a copy will be returned to you for your file. Very truly yours, /s/ Laurel L. Dawson -------------------- Laurel L. Dawson Purchasing Agent LLD:acb Enclosure 5 AMENDMENT TO C000525 This Amendment made this eighteenth day of March in the year nineteen hundred and ninety-six by and between New York State Education and Research Network (NYSERNET) and the New York State Department of Labor increases the contract amount to $408,462.12. This modification includes the annual service agreement to provide the TI Connection to the Internet for the period 4/08/96 to 4/07/97 at a cost of $26,694.12 for AJB and Dial up access for the Mine Safety Unit at $300.00 per year. The scope of work statement, incorporated herein, describes the detailed tasks, along with the associated costs, and becomes part of this agreement. All other terms and conditions remain the same. In Witness Whereof: The parties to these presents have set their hand and seal, the day and year first above written. STATE OF NEW YORK, COUNTY OF, ONONDAGA SS: David A. Buckel On the 24th Day of May ,Nineteen hundred and Ninety-six to me known, who being by me duly sworn, did depose and say that he/ resides at: Syracuse, New York; that he/ is the Controller Of NYSERNet, Inc. 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/ Patricia J. Foster ---------------------- NOTARY PUBLIC (affix stamp) PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1996 Accepted by: State of New York Department of Labor /s/ David A. Buckel - -------------------------------- -------------------------------- Authorized Signature Authorized Signature David A. Buckel - -------------------------------- -------------------------------- Printed Name Printed Name Controller - ------------------------------- -------------------------------- Title Title May 24, 1996 - -------------------------------- -------------------------------- Date Date State Attorney General's Signature Office of State Comptroller's Signature -------------------------------- ------------------------------- 6 AMENDMENT TO C000525 This Amendment made this twenty-seventh day of August in the year nineteen hundred and ninety-five by and between New York State Education and Research Network (NYSERNET) and the New York State Department of Labor increases the contract amount to $381,468.00. This modification includes support charges, hardware/software, consulting services, development, programming, testing and installation of the new programs for the Americas Job Bank. The scope of work statement, incorporated herein, describes the detailed tasks, along with the associated costs, and becomes part of this agreement. All other terms and conditions remain the same. In Witness Whereof: The parties to these presents have set their hand and seal, the day and year first above written. STATE OF NEW YORK, COUNTY OF, ONONDAGA SS: On the 28th Day of August, Nineteen hundred and Ninety-Five before me personally came JAMES D. LUCKETT to me known, who being by me duly sworn, did depose and say that he/she resides at: Liverpool, New York that he/she is the Vice President of NYSERNet, Inc. 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/ Patricia J. Foster ---------------------- NOTARY PUBLIC (affix stamp) PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1996 Accepted by: State of New York Department of Labor /s/ James D. Luckett - -------------------------------- -------------------------------- Authorized Signature Authorized Signature James D. Luckett - -------------------------------- -------------------------------- Printed Name Printed Name Vice President - ------------------------------- -------------------------------- Title Title 8/28/95 - -------------------------------- -------------------------------- Date Date State Attorney General's Signature Office of State Comptroller's Signature - -------------------------------- ------------------------------- DATE DATE 7 AMENDMENT #3 TO C000525 This Amendment made this 25th day of October in the year one thousand nine hundred and ninety-six by and between NYSERNET, Inc., party of the first part and the New York State Department of Labor, party of the second part serves to increase the contract amount to two million, eight hundred seventy thousand nine hundred sixty-two dollars and twelve cents ($2,870,962.12) as per the attached scope of work, which is hereby, incorporated and made part of this agreement. All other terms and conditions remain the same. 8 Page 2 of 2 C000525 IN WITNESS WHEREOF, the parties hereto, have set their hands and seals, the day and year first written above. STATE OF NEW YORK, COUNTY OF Onondaga , SS: On the 30th day Of October, nineteen hundred and ninety- 96 before me personally came James D. Luckett to me known, who being by me duly sworn, did depose and say that he/she resides at No. Liverpool and that he/she is the President of NYSERNet, Inc. of the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by like order of the Board of Directors of said corporation. /s/ Patricia J. Foster -------------------------- NOTARY PUBLIC (affix stamp) PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1998 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." Contractor's Signature NYS Department of Labor /s/ James D. Luckett /s/ Laurel Dawson - -------------------- -------------------- Authorized Signature Authorized Signature James D. Luckett LAUREL DAWSON - -------------------- -------------------- Printed Name Printed Name President PURCHASING AGENT - -------------------- -------------------- Title Title 10/21/96 October 31, 1996 - -------------------- -------------------- Date Date State Attorney General State Comptroller - -------------------- /s/ Illegible -------------------- - -------------------- -------------------- Date ---------------- -------------------- APPROVED AS TO FORM Date Jan 7, 1997 NYS ATTORNEY GENERAL ----------------- NOV 20 1996 /s/ Peter Favretto ------------------ PETER FAVRETTO ASSOCIATE ATTORNEY 9 Amendment No. 4 to C000525 This Amendment made this Thirty-first day of October in the year one thousand nine hundred and ninety-seven by and between NYSERNET, Inc., party of the first part, and the New York State Department of Labor, party of the second part, serves to increase the contract amount to Five million, six hundred thirty-seven thousand, two hundred thirty-seven dollars and twelve cents $5,637,237.12 as per the attached Scope of Work, which is hereby incorporated and made a part of this agreement. All other terms and conditions remain the same. IN WITNESS WHEREOF, the parties hereto, have set their hands and seals, the day and year first written above. STATE OF NEW YORK, COUNTY OF ONONDAGA, SS: On the 14th day of November, nineteen hundred and ninety-seven before me personally came David A. Buckel to me known, who being by me duly sworn, did depose and say that resides at Syracuse, NY and that he/she is the Asst. Secretary/Treasurer of NYSERNet. Inc. the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by like order of the Board of Directors of said corporation. /s/ Patricia J. Foster ---------------------- Notary Public (affix stamp) PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1996 Agency Certification "In addition to the acceptance of this contract, I also certify that the original copies of this signature page will be attached to all other exact copies of this contract." NYSERNET, INC. NYS DEPARTMENT OF LABOR /s/ David A. Buckel /s/ Laurel Dawson - ------------------------- ------------------------- Authorized Signature Authorized Signature David A. Buckel - ------------------------- LAUREL DAWSON Printed Name ------------------------- Asst. Secretary/Treasurer Printed Name - ------------------------- PURCHASING AGENT Title ------------------------- Date November 14 ,1997 Title -------------------- Date Nov 17, 1997 --------------- APPROVED AS TO FORM NYS ATTORNEY GENERAL NOV 21 1997 /s/ Peter Favretto - ------------------ PETER FAVRETTO ASSOCIATE ATTORNEY 10 Page 2 of 2 STATE ATTORNEY GENERAL OFFICE OF THE STATE COMPTROLLER APPROVED AS TO FORM /s/ Illegible signature NYS ATTORNEY GENERAL ------------------ NOV 21 1997 /s/ Peter Favretto FEB 26 1998 - ------------------ ------------------ PETER FAVRETTO Date ASSOCIATE ATTORNEY 11 AMENDMENT NO. 5 TO CONTRACT C000525 THIS AMENDMENT, made this Twenty-first day of May in the year one thousand nine hundred and ninety-eight by and between NYSERNET and the State of New York, Department of Labor, increases the Contract amount to $8,387,237.12. WITNESSETH, that NYSERNET 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, Help Desk Services and Training as per the April 1998 Scope of Work and the Software Licensing Agreement for AJB V 3.0 attached, which together with all appendices is hereby made a part of this agreement. ARTICLE II. Year 2000 Date Change Warranty 1. Definitions For the purpose of this section, the term "Product" shall include without limitation: any piece or component of equipment, hardware, firmware, middleware, custom or commercial software, or internal components or subroutines therein which perform any date/time data recognition function, calculation, comparing or sequencing. Where services are being furnished, e.g. consulting, systems integration, code or data conversion or data entry, the term "product" shall include resulting deliverables. The term "Vendor's Product" shall include all product delivered under this Agreement by Vendor other than Third party Product. The term "Third Party Product" shall include product manufactured or developed by a corporate entity independent from Vendor and provided by Vendor on a non-exclusive licensing or other distribution Agreement with the third party manufacturer. "Third Party Product" does not include product where Vendor is: a) a corporate subsidiary or affiliate of the third party manufacturer/developer; and/or b) the exclusive re-seller or distributor of product manufactured or developed by said corporate entity. 2. Warranty Disclosure At the time of Product quote, the Vendor is required to disclose the following information in writing to Authorized User: A. FOR VENDOR PRODUCT AND FOR PRODUCTS WHICH HAVE BEEN SPECIFIED TO PERFORM AS A SYSTEM (INCLUDING, BUT NOT LIMITED TO, SYSTEMS INVOLVING 12 C000525 PAGE 2 OF 4 VENDOR AND/OR THIRD PARTY PRODUCTS AND/OR AUTHORIZED USER'S OTHER INSTALLED PRODUCT): Compliance or non-compliance of the Products individually or as a system with the Warranty Statement set forth below; and B. FOR THIRD PARTY PRODUCTS ONLY: Third Party manufacturer's statement of compliance or non-compliance of any Third Party Product being delivered with Third Party Manufacturer/Developer's Year 2000 Warranty. If such Third Party Product is represented by Third Party Manufacturer/Developer as compliant with Third Party Manufacturer/Developer's Year 2000 Warranty, Vendor shall pass through said Third Party Warranty from the Third Party Manufacturer to the Authorized User but shall not be liable for the testing or verification of Third Party's compliance statement. 3. Warranty Statement Year 2000 warranty 'compliance' shall be defined in accordance with the following warranty statement: Vendor warrants that Product(s) furnished pursuant to this Agreement shall, when used in accordance with the Product documentation, be able to accurately process date/time data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty- first centuries, and the years 1999 and 2000, including leap year calculations. Where a purchase requires that specific Products must perform as a package or system, this warranty shall apply to the Products as a system. In the event of any breach of this warranty, Vendor shall restore the Product to the same level as warranted herein, or repair or replace the Product with conforming Product so as to minimize interruption to Authorized User's ongoing business processes, time being of the essence, at Vendor's sole cost and expense. This warranty does not extend to correction of Authorized User's errors in data entry or data conversion. This warranty shall survive beyond termination or expiration of the Agreement. Nothing in this warranty shall be construed to limit any rights or remedies otherwise available under this agreement. 13 C000525 PAGE 3 OF 4 ARTICLE III. 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 $2,750,000.00. 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 2nd Day of June, Nineteen Hundred and Ninety-eight before me personally came Angelo A. Gencarelli III to me known, who being by me duty sworn, did depose and say that he/she resides at: Liverpool, NY and that he/she is the Controller of NYSERNet, Inc. the corporation described in and which executed the foregoing instrument, and that he/she signed his/her name thereto by order of the Board of Directors of said corporation. /s/ Patricia J. Foster ------------------------------------- NOTARY PUBLIC (affix stamp) PATRICIA J. FOSTER Notary Public, State of New York Qualified in Onon. Co. No. 4755760 My Commission Expires Sept. 30, 1998 14 C000525 PAGE 4 OF 4 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 Controller PURCHASING AGENT - ----------------------------- ----------------------------- Title Title 6/2/98 June 4, 1998 - ----------------------------- ----------------------------- Date STATE ATTORNEY GENERAL STATE COMPTROLLER /s/ Peter Favretto /s/ illegible - ----------------------------- ----------------------------- JUN 05, 1998 JUL 16 1998 - ----------------------------- ----------------------------- Date Date EX-10.20 18 REVOLVING NOTE AGREEMENT 1 Exhibit 10.21 REVOLVING NOTE AGREEMENT $7,500,000 Dated as of January 20, 1998 At Syracuse, New York (1) Subject to the terms of this Revolving Note Agreement ("Note"), commencing on January 20, 1998 and continuing through January 19, 2001, (the "Advance Period"), FLEET NATIONAL BANK, its successors and assigns with banking offices at One Clinton Square, Syracuse, New York 13202 ("Bank") agrees to loan to APPLIEDTHEORY COMMUNICATIONS, INC., a New York corporation with its offices at 125 Elwood Davis Road, North Syracuse, New York 13212 ("Borrower") on a revolving credit basis an amount not to exceed Seven Million Five Hundred Thousand Dollars ($7,500,000) (the "Loan") in the aggregate at any one time outstanding. So long as no Event of Default has occurred and is then continuing, the Borrower may obtain Loan advances(an "Advance" or the "Advances") from the Bank during the Advance Period in accordance with the provisions of this Note. Borrower unconditionally agrees that Loan amounts advanced by the Bank to the Borrower hereunder shall be repaid by the Borrower as follows under the provisions of this Note. (2) Payment. Commencing on the first day of the first calendar month following the date of the first Advance made by the Bank to the Borrower hereunder and continuing on the first day of each succeeding calendar month through and including January 1, 2001 (each a "Monthly Payment Date"), Borrower shall pay to the order of the Bank interest on the then outstanding unpaid balance of the amount of each Advance made under this Note at a rate of interest equal to the "Applicable Interest Rate" (defined below), and on January 19, 2001 (the "Maturity Date"), Borrower shall pay to the Bank the then unpaid principal balance of all amounts advanced under this Note plus all accrued and unpaid interest. (3) Advance Term and Interest Rates. At the time Borrower requests an Advance, Borrower shall include in the Advance request the term of the requested Advance and which of the following interest rate options Borrower elects with respect to the Advance (the Applicable Interest Rate"). Under no circumstances may the requested Advance term extend beyond the Maturity Date. If no term or interest rate option is specified by the Borrower, or if the amount of the requested Advance is less than $100,000, the Advance involved shall bear interest at the Bank's Prime Rate of interest minus two hundred (200) basis points. (a) LIBOR Advance. The Borrower may obtain Advances by submitting an Advance request, in the form attached hereto as Exhibit "A" two (2) Business Days prior to date on which Advance is to be made during the Advance Period at the "LIBOR Rate" (defined below) for the "Applicable Interest Period" (defined below) plus fifty (50) basis points. Each Advance requested under this Section 3(a) shall be in the minimum amount of $100,000. The term "LIBOR" or "LIBOR Rate" shall mean, as applicable to any Advance under this Section 3(a) (a "LIBOR Advance"), the rate per annum (rounded upward, if necessary, 2 to the nearest 1/32 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for an Advance term as specified by Borrower of either thirty (30) days, sixty (60) days, ninety (90) days, one hundred twenty (120) days, one hundred eighty (180) days or three hundred sixty (360) days (the "Applicable Interest Period") which appears on the Telerate page 3750 as of 11:00 a.m. London time on the day that is two London Banking Days preceding the first day of such LIBOR Advance; provided, however, if the rate described above does not appear on the Telerate System on the interest determination date, the LIBOR Rate shall be the rate (rounded upwards as described above, if necessary) for deposits in dollars for a period substantially equal to the Applicable Interest Period on the Reuters Page "LIBOR" (or such other page as may replace the LIBOR Page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London Time), on the day that is two (2) London Banking Days prior to the beginning of such Interest Period. "Banking Day" shall mean, in respect of any city, any date on which commercial banks are open for business in that city. If both the Telerate and Reuters system are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for the number of days in the Applicable Interest Period which are offered by four major banks in the London interbank market at approximately 11: 00 a.m. London time, on the date that is two (2) London Banking Days preceding the first day of such LIBOR Advance as selected by the Calculation Agent. The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for the number of days in the Applicable Interest Period offered by major banks in New York City at approximately 11:00 a.m. New York City time, on the date that is two London Banking Days preceding the first day of such LIBOR Advance. In the event that Bank is unable to obtain any such quotation as provided above, it will be deemed that LIBOR pursuant to a LIBOR Advance cannot be determined and the Advance will be made at the rate provided for in Section 3(c) below. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage with respect to LIBOR deposits of Bank then for any period during which such Reserve Percentage shall apply, LIBOR shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage. 2 3 (b) Cost of Funds Advance. If the term of a requested Advance is to be for more than one (1) year, Borrower, by submitting an Advance request two (2) Business Days prior to the date on which the Advance is to be made, may obtain Advances during Advance Period at a rate equal to the Bank's "Cost of Funds" (defined below) for the term of the requested Advance, plus fifty (50) basis points. Each Advance requested under this Section 3(b) shall be in the minimum amount of $100,000. For the purposes of this Note, the term "Cost of Funds" means the per annum rate of interest which the Bank is required to pay, or is offering to pay, for wholesale liabilities, adjusted for reserve requirements and such other requirements as may be imposed by federal, state or local government and regulatory agencies, as determined by the Bank's treasury funding group or treasury funding management. (c) Prime Rate Advance. The Borrower, by submitting an Advance request, may obtain Advances at any time during the Advance Period at the Bank's "Prime Rate" of interest (defined below) minus 200 basis points. Advances made by Bank to Borrower under the Target Balance Service Agreement between Borrower and Bank dated January 20, 1998 shall be deemed to be Advances made under this Section 3(c). The term "Prime Rate" means the variable rate per annum of interest so designated from time to time by the Bank as its Prime Rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. (d) With respect to any Advance made under Section 3(a) or 3(b) above, Borrower must either repay such Advance at the end of the Applicable Interest Period or Cost of Funds Period, as the case may be or notify the Bank two banking days prior to the expiration of the period involved that Borrower intends to continue such borrowing in which event Borrower must at such time notify the Bank as to whether the borrowing will be continued as an Advance under Section 3(a) or 3(b) or 3(c) of this Note. If at the end of an Applicable Interest Period or a Cost of Funds Period, the Borrower has not given such two banking day notice and does not repay the Advance in question, then, so long as no Event of Default has occurred and is then continuing, the Advance involved shall be repaid by making an Advance under Section 3(c) for a period of 30 days. (e) The term "Business Day" means a day on which commercial banks are regularly open for business in the State of New York. (4) Interest Computations. All computations of interest shall be made by Bank on the basis of a 360-day year and the actual number of days elapsed. 3 4 (5) Prepayment. In the event Borrower obtains an Advance under Section 3(a) or 3(b) above, the last day of the Advance term selected by the Borrower shall be deemed to be and is referred to herein as the "Advance Maturity Date". Borrower shall have the right at any time and from time to time to prepay in whole or in part any Advance made under Section 3(c) above without penalty, premium or yield maintenance fee. Borrower shall have the right at any time and from time to time to prepay in whole or in part in advance made under Section 3(a) or 3(b) prior to the Advance Maturity Date with respect to the prepaid Advance, and Borrower shall pay to the Bank a yield maintenance fee computed as follows: The current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the Advance Maturity Date for the Advance being prepaid following the day the prepayment is made, shall be subtracted from the "Cost of Funds" component of the rate in effect at the time of prepayment. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining until the Advance Maturity Date for the Advance being prepaid. Said amount shall be reduced to present value calculated by using the above-referenced United States Treasury security rate and the number of days remaining until the Advance Maturity Date for the Advance being prepaid. The resulting amount shall be the yield maintenance fee due to Bank upon the prepayment. If by reason of an event of default Bank elects to declare the Loan to be immediately due and payable, then any yield maintenance fee with respect to the loan shall become due and payable in the same manner as though Borrower had exercised such right of prepayment with respect to all then unpaid Advances. (6) U.S. Dollars. All payments shall be in lawful money of the United States in immediately available funds. (7) Participations. Bank shall have the unrestricted right at any time and from time to time, and without the consent of or notice to Borrower, to grant to one or more banks or other financial institutions (each, a "Participant") participating interests in Bank's obligation to lend hereunder and/or any or all of the Loan. In the event of any such grant by Bank of a participating interest to a Participant, whether or not upon notice to Borrower, Bank shall remain responsible for the performance of its obligations hereunder and Borrower shall continue to deal solely and directly with Bank in connection with Bank's rights and obligations hereunder. Bank may furnish any information concerning Borrower in its possession from time to time to prospective Participants, provided that Bank shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information. (8) Certain Bank Rights. To secure all amounts due under this Note, Borrower hereby grants to Bank, a lien, security interest and right of setoff as security for all liabilities and obligations to Bank when due, whether now existing or hereafter arising, upon and against all deposits and credits now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank, or in transit to any of them. At any 4 5 time, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower to the Bank regardless of the adequacy of any other collateral securing the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURED THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. (9) Lost or Destroyed Documents. Upon receipt of an affidavit of an officer of Bank as to the loss, theft, destruction or mutilation of the Note or any other security or loan document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Note or other security or loan document, Borrower will issue, in lieu thereof, a replacement Note or other security or loan document in the same principal amount thereof and otherwise of like tenor. The Bank agrees to indemnify Borrower from liability in the event Borrower is required to make any payment on account of any Note or other Loan Document replaced by the Borrower at the Bank's request under this Section 9. (10) Bank Pledge. Bank may at any time pledge all or any portion of its rights under the loan documents including any portion of this Note to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or enforcement thereof shall release Bank from its obligations under any of the loan documents. (11) Defaults. The occurrence of any of the following shall constitute an "Event of Default" under this Note: (a) Failure by Borrower to make any payment within ten (10) days of the date when due under this Note; (b) The occurrence and continuation beyond the applicable space period, if any, of an event of default with respect to any other indebtedness of Borrower to Bank; (c) Any representation or warranty contained in this Note any other loan document or in any certificate delivered to Bank by Borrower shall have been incorrect or false in any material respect as of the date as to which the facts set forth were asserted; (d) If Borrower or NYSERNet.net, Inc. ("NYSERNET") shall file a voluntary petition in bankruptcy or a voluntary petition seeking reorganization or to effect a plan, composition or other arrangement with creditors under any federal or state law relating to bankruptcy, insolvency. or relief of debtors; (e) If Borrower or NYSERNet shall have filed against either of them an involuntary petition in bankruptcy or an involuntary petition seeking reorganization or to effect a plan, composition or other arrangement with creditors under any federal or state law relating to bankruptcy, insolvency or 5 6 relief of debtors and such petition is not dismissed within thirty (30) days of the date of filing; (f) The entry of a judgment against Borrower not fully covered by insurance less normal deductibles, and the failure to either satisfy or stay the enforcement of such judgment, within fifteen (15) days of the date of such entry; (g) The acceleration before stated maturity of any indebtedness for borrowed money owed by Borrower where the amount involved exceeds $10,000; (h) Failure by NYSERNet to maintain the "Required Value" of the "Collateral" [as those quoted terms are defined in the Pledge Security Agreement between NYSERNet and the Bank dated January 20, 1998] as required by the terms of such Pledge Security Agreement; (i) Failure by Borrower to perform any of Borrower's other obligations under this Note or the documents securing amounts due under this Note within fifteen (15) days after notice from the Bank. (12) Acceleration. Upon the occurrence of an Event of Default the then unpaid amount of this Note, together with all accrued and unpaid interest, shall be and become due and payable. (13) Late Fee. Further, and not in lieu of any other remedy, Borrower shall pay to Bank a late charge equal to five percent (5%) of the amount of any payment due under this Note which is not made within ten (10) days of the date when due. (14) Default Rate. Upon default or after maturity or after judgment has been rendered on this Note, or in the Event of Default as defined above, the unpaid principal of all advances shall, at the option of the Bank, bear interest at a rate which is four (4) percentage points per annum greater than the rate in effect when the Banks exercise this option. (15) Financial Statements. Borrower shall furnish to Bank within one hundred fifty (150) days of Borrower's fiscal year end, annual audited year-end financial statements of Borrower, prepared in accordance with generally accepted accounting principles consistently applied and certified by an independent certified public accounting firm acceptable to Bank. (16) No Usury. All agreements between Borrower and Bank are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Bank for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of Borrower and in the execution, delivery and acceptance of this Note to contract in strict compliance with the laws of the State of New York from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the loan documents at the time of 6 7 performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever Bank should ever receive as interest and amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between Borrower and Bank. (17) Certain Waivers. Borrower expressly waives any presentment, demand, protest or notice in connection with this Note, now or hereafter required by applicable law. (18) Costs of Collection. Borrower promises and agrees to pay the costs of collection and any reasonable attorneys fees incurred by Bank after the occurrence of an Event of Default under this Note. (19) New York Law. This Note shall be governed by and construed and enforced in accordance with the laws of the State of New York, exclusive of New York's conflicts of laws rules and public policies. (20) Business Purpose. Borrower represents that the proceeds of this Note will be used for business or commercial purposes. (21) Merger Clause. This Note constitutes the complete understanding between the parties and supersedes all prior or contemporaneous understandings, agreements, commitment letters and negotiations, all of which are merged into this Note. This Note may not be changed, altered or amended absent the execution and delivery by Borrower and Bank of a writing intended for such purpose. (22) Jury Waiver. BORROWER AND BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS 7 8 (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR BANK TO ACCEPT THIS NOTE AND MAKE THE LOAN. APPLIEDTHEORY COMMUNICATIONS, INC. By: /s/ David A. Buckel DAVID A. BUCKEL VP & Chief Financial Officer FLEET NATIONAL BANK By: /s/ Christopher P. Papayanakos, SVP CHRISTOPHER P. PAPAYANAKOS Sr. Vice President 8 EX-23.1 19 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated January 29, 1999 accompanying the financial statements and schedule of AppliedTheory Corporation and Predecessor contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned reports in the Registration Statement and Prospectus, and to the use of our name as it appears under the captions "Selected Financial Data" and "Experts." GRANT THORNTON LLP New York, New York February 10, 1999 EX-27.1 20 FINANCIAL DATA SCHEDULE FOR PERIOD END 01/01/1996
5 1 U.S. DOLLARS 9-MOS SEP-30-1996 JAN-01-1996 SEP-30-1996 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,226,306 6,226,306 5,741,604 5,741,604 4,404,424 30,000 4,870 (3,924,592) 0 (3,924,592) 0 0 0 (3,924,592) 0 0 The operating activities prior to October 1, 1996 were conducted as a Non Incorporated "Division" of NYSERNet.org Inc. and are considered to constitute a predecessor business. The financial statements presented for the nine months ended September 30, 1996 reflect these activities on a "carved-out" basis from the Historical Financial Statements of NYSERNet.org as if the predecessor had been organized as of January 1, 1996.
EX-27.2 21 FINANCIAL DATA SCHEDULE FOR PERIOD END 12/31/1998
5 1 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 1,785,682 0 3,741,391 157,000 0 5,625,131 6,812,335 2,609,164 10,517,635 8,873,697 8,936,476 1,500,000 0 100,629 (9,107,666) 10,517,635 22,562,990 22,562,990 13,315,568 13,315,568 14,448,393 60,000 608,068 (5,766,571) 0 (5,766,571) 0 0 0 (5,766,571) (0.71) (0.71)
EX-27.3 22 FINANCIAL DATA SCHEDULE FOR PERIOD END 12/31/1997
5 1 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 135,179 0 1,333,323 122,000 0 1,533,684 5,043,048 1,132,642 5,444,090 5,113,247 6,805,165 1,500,000 0 13,080 (8,638,863) 5,444,090 15,171,714 15,171,714 10,796,095 10,796,095 9,876,273 120,000 346,713 (5,847,367) 0 (5,847,367) 0 0 0 (5,847,367) (0.93) (0.93)
EX-27.4 23 FINANCIAL DATA SCHEDULE FOR PERIOD END 12/31/1996
5 1 U.S. DOLLARS 3-MOS DEC-31-1996 OCT-01-1996 DEC-31-1996 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,076,311 3,076,311 2,331,050 2,331,050 2,507,698 25,000 0 (1,762,437) 0 (1,762,437) 0 0 0 (1,762,437) (0.27) (0.27) APPLIED THEORY CORPORATION IS A SUCCESSOR TO APPLIED THEORY COMMUNICATIONS, INC., WHICH WAS INCORPORATED IN THE STATE OF NEW YORK AND COMMENCED OPERATIONS ON OCTOBER 1, 1996.
-----END PRIVACY-ENHANCED MESSAGE-----