<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TRANSACTION NETWORK SERVICES, INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the
appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):.
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/x/ Fee paid previously with preliminary materials
/x/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date of its
filing.
(1) Amount Previously Paid: $70,981 reduced to $64,005
(2) Form, Schedule or Registration Statement No.: Form S-4
(No. 333-88325)
(3) Filing Party: PSINet Inc.
(4) Date Filed: October 1, 1999
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[LOGO OF TNS](R)
TRANSACTION NETWORK SERVICES, INC.
October 22, 1999
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Transaction Network Services, Inc. (TNI) on Tuesday November 23, 1999, at 9:00
a.m., local time, at 1939 Roland Clarke Place, Reston, Virginia.
At the special meeting, you will be asked to vote on the merger of TNI and
PSINet Inc. If the merger is approved, in exchange for each share of TNI common
stock, you will have the option to receive $45.00 in cash or a share of PSINet
common stock, or a combination of cash and PSINet common stock, subject to the
restriction that half of all TNI shares must be converted into cash and half
into PSINet common stock. You can choose to convert some of your TNI shares
into cash and others into PSINet shares.
If TNI stockholders owning more than half of all TNI shares elect to receive
cash, the number of TNI shares that will be converted into cash in the merger
will be less than the number elected. Similarly, if TNI stockholders owning
more than half of the TNI shares elect to receive PSINet shares, the number of
TNI shares that will be converted into PSINet shares will be less than the
number elected. In either case, the reduction will be prorated among all
stockholders making the excess election based upon the number of shares as to
which the excess election was made.
This prospectus/proxy statement contains answers to frequently asked
questions and a summary description of the merger (beginning on page 1),
followed by a more detailed discussion of the merger and other related matters.
You should also consider the matters discussed under "Risk Factors Relating to
the Merger" commencing on page 15 of the enclosed prospectus/proxy statement.
We urge you to review carefully the entire prospectus/proxy statement.
Sincerely,
John J. McDonnell, Jr
President and Chief Executive
Officer
Your vote is important.
Please cast your vote by telephone, over the Internet or by completing,
signing, dating and returning your proxy in the enclosed envelope.
----------------
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the merger described in the
prospectus/proxy statement or the PSINet common stock to be issued in
connection with the merger, or determined if the prospectus/proxy statement is
accurate or adequate. Any representation to the contrary is a criminal offense.
This prospectus/proxy statement is dated October 22, 1999, and is first being
mailed to stockholders on or about October 22, 1999.
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This prospectus/proxy statement incorporates important business and
financial information about PSINet and TNI from documents that are not included
in or delivered with this prospectus/proxy statement. This information is
available to you without charge upon your written or oral request. You can
obtain documents incorporated by reference in this prospectus/proxy statement
by requesting them in writing or by telephone from the appropriate company at
the following addresses and telephone numbers:
<TABLE>
<S> <C>
PSINet Inc. Transaction Network Services, Inc.
510 Huntmar Park Drive 1939 Roland Clarke Place
Herndon, Virginia 20170 Reston, Virginia 20191
Attention: Corporate Secretary Attention: Karen Kazmark
Telephone: (703) 904-4100 Telephone: (703) 453-8406
</TABLE>
See also "Where You Can Find More Information" beginning on page 99. If you
would like to request documents, please do so by November 16, 1999 in order to
receive them before the TNI special meeting.
<PAGE>
TRANSACTION NETWORK SERVICES, INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 23, 1999
----------------
To the Stockholders of Transaction Network Services, Inc:
We will hold a special meeting of the stockholders of Transaction Network
Services, Inc., also referred to as TNI, on Tuesday, November 23, 1999, at 9:00
a.m., local time, at 1939 Roland Clarke Place, Reston, Virginia, for the
following purpose:
To consider and vote upon a proposal to adopt the agreement and plan of
merger, as amended, among PSINet Inc., PSINet Shelf I Inc. (a wholly-owned
subsidiary of PSINet Inc.) and Transaction Network Services, Inc., and to
approve the transactions contemplated in that agreement.
We will transact no other business at the special meeting, except such
business as may properly be brought before the special meeting or any
adjournment of it by the TNI board of directors.
Only holders of record of shares of TNI common stock at the close of
business on October 22, 1999, the record date for the special meeting, are
entitled to notice of, and to vote at, the special meeting and any adjournments
or postponements of it. TNI and PSINet cannot complete the merger unless the
holders of a majority of the outstanding shares of TNI common stock vote to
adopt the merger agreement.
For more information about the merger, please review the accompanying
prospectus/proxy statement and the copy of the merger agreement attached as
Annex 1.
Please do not send any stock certificates at this time.
After careful consideration, TNI's board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests and unanimously recommends that you vote for the
adoption of the merger agreement.
By Order of the Board of
Directors,
John J. McDonnell, III
Secretary
Reston, Virginia
October 22, 1999
Whether or not you plan to attend the special meeting, please cast your
vote by telephone, over the Internet or by completing, signing and dating
the enclosed proxy and returning it promptly in the enclosed postage-paid
envelope.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER ................................... 1
SUMMARY .................................................................. 3
Summary Unaudited Pro Forma Consolidated Financial Information ......... 11
PSINet Summary Consolidated Financial and Operating Data ............... 12
TNI Summary Consolidated Financial and Operating Data .................. 14
RISK FACTORS ............................................................. 15
THE COMPANIES............................................................. 37
Transaction Network Services, Inc....................................... 37
PSINet Inc. ............................................................ 38
PSINet Shelf I Inc. .................................................... 39
THE SPECIAL MEETING....................................................... 40
Date, Time and Place.................................................... 40
Purpose of Special Meeting.............................................. 40
Record Date; Stock Entitled to Vote; Quorum............................. 40
Votes Required.......................................................... 40
Voting by TNI Directors and Executive Officers.......................... 40
Voting of Proxies....................................................... 41
Revocability of Proxies................................................. 41
Solicitation of Proxies................................................. 41
THE MERGER................................................................ 42
Background to the Merger................................................ 42
TNI's Reasons for the Merger and Board of Directors' Recommendation..... 44
PSINet's Reasons for the Merger......................................... 46
Opinion of Morgan Stanley & Co. Incorporated............................ 48
Interests of TNI Directors and Management in the Merger................. 55
Tax Treatment........................................................... 59
Form of the Merger...................................................... 59
Merger Consideration.................................................... 59
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares...................................................... 60
Effective Time of the Merger............................................ 61
Listing of PSINet Common Stock on The Nasdaq Stock Market............... 61
Delisting and Deregistration of TNI Common Stock........................ 61
Material United States Federal Income Tax Consequences of the Merger.... 61
Accounting Treatment.................................................... 65
Regulatory Matters...................................................... 66
Appraisal Rights........................................................ 66
Continuation of TNI Employee Benefits................................... 67
Effect on Options Awards Outstanding under TNI Stock Plans.............. 67
Resale of PSINet Common Stock........................................... 67
THE MERGER AGREEMENT...................................................... 68
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................... 74
PRO FORMA CAPITALIZATION OF PSINET........................................ 86
DESCRIPTION OF PSINET CAPITAL STOCK....................................... 87
COMPARISON OF RIGHTS OF HOLDERS OF COMMON STOCK OF PSINET AND TNI......... 94
LEGAL MATTERS............................................................. 98
EXPERTS................................................................... 98
</TABLE>
i
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<TABLE>
<CAPTION>
Page
----
<S> <C>
STOCKHOLDER PROPOSALS...................................................... 98
OTHER MATTERS.............................................................. 98
WHERE YOU CAN FIND MORE INFORMATION........................................ 99
DOCUMENTS INCORPORATED BY REFERENCE........................................ 101
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................... 102
</TABLE>
Annexes
<TABLE>
<C> <S>
Annex 1 Agreement and Plan of Merger and Amendment No. 1 to Agreement and Plan
of Merger.
Annex 2 Opinion of Morgan Stanley & Co. Incorporated.
Annex 3 Section 262 of the Delaware General Corporation Law.
</TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are PSINet and TNI proposing to merge?
A: PSINet is the leading independent global provider of Internet solutions to
businesses, providing Internet connectivity and Web hosting services in 90
of the 100 largest U.S. metropolitan areas and 17 of the 20 largest global
telecommunications markets and is currently operating in 22 countries.
PSINet also offers a suite of value-added products and services that are
designed to enable its customers to maximize utilization of the Internet
to communicate more efficiently with its customers, suppliers, business
partners and remote office locations. TNI is the leading worldwide
provider of eCommerce data communications and transports more than 19
million point-of-sale/point-of-service transactions daily. We anticipate
that the merger will create the leading provider of global eCommerce and
Internet solutions to businesses.
Q: What will happen in the merger?
A: TNI will become a direct subsidiary of PSINet by merging into PSINet Shelf
I Inc., a wholly-owned subsidiary of PSINet.
Q: What will TNI stockholders receive?
A: In exchange for each of their TNI shares TNI stockholders may elect to
receive (i) $45.00 in cash, (ii) a share of PSINet common stock, or (iii)
a combination of cash and PSINet common stock, subject to limitations
described in the next answer.
Please read the more detailed description of the consideration to be
issued in the merger on page 59.
Q: Will I receive the specific amounts of cash and stock that I elect?
A: Due to a requirement contained in the merger agreement that half of the
TNI shares must be converted into cash and half must be converted into
PSINet common stock, the amounts of cash and stock you receive may be
different from the amounts you elect. For example, if TNI stockholders
owning more than half of TNI shares elect to receive cash, the number of
TNI shares converted into cash will be less than the number elected.
Similarly, if TNI stockholders owning more than half of TNI shares elect
to receive PSINet common stock, the number of TNI shares converted into
PSINet common stock will be less than the number elected.
PSINet will not issue any fractional shares in the merger. Instead, you
will receive cash for any fractional shares that you would otherwise
receive.
If you hold outstanding and unexercised TNI stock options, these options
are fully vested. They will be assumed by PSINet and become exercisable for
shares of PSINet common stock.
Please read the more detailed description of the allocation procedures on
pages 59 and 60.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
prospectus/proxy statement, please cast your vote. You may vote by
telephone, over the Internet or by completing and signing your proxy and
returning it in the enclosed return envelope as soon as possible, so that
your shares may be represented at the special meeting. If you sign and
send in your proxy and do not indicate how you want to vote, we will count
your proxy as a vote in favor of adoption of the merger agreement.
The special meeting will take place on November 23, 1999. You may attend
the special meeting and vote your shares in person, rather than providing
your proxy.
Q: Can I change my vote after I have provided my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your
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proxy. Second, you can complete and submit a new proxy. If you choose
either of these two methods, you must submit your notice of revocation to
the Secretary of TNI at the address set forth below or submit your new
proxy in the same way you submitted your prior proxy. Third, you can attend
the special meeting and vote in person.
Q: If my TNI shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your TNI shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without
instructions, your shares will not be voted and will therefore have the
effect of a no vote.
Q: Should I send in my stock certificates now?
A: No. You should continue to hold your stock certificates until we send you
a form of election that you can use to indicate your preference as to the
type of payment you would like to receive in the merger. You will receive
this form, along with written instructions on how to exchange your
shares, within 30 days prior to, but no later than seven business days
prior to, the effective time of the merger. Please read the more detailed
description of the election procedure on pages 59 through 61.
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as quickly as possible. We expect
to complete the merger during the fourth quarter of 1999.
Q: Assuming I receive PSINet shares in the merger, will my rights as a TNI
stockholder change as a result of the merger?
A: Yes. For a summary of material differences between the rights of TNI
stockholders and the rights of PSINet shareholders, see pages 94 through
97.
Q: Are TNI stockholders entitled to appraisal rights?
A: Yes. Holders of TNI common stock are entitled to appraisal rights in
connection with the merger. We describe the procedures for exercising
appraisal rights on pages 66 and 67 and are attaching the provision of
Delaware law that governs appraisal rights as Annex 3.
Q: What are my tax consequences as a result of the merger?
A: With respect to any inherent gain in your TNI stock, you will not be
taxed at all, will be fully taxed, or will be partially taxed, depending
upon whether you receive PSINet common stock, cash or a combination of
both in the merger. We describe the material U.S. federal income tax
consequences of the merger in more detail beginning on page 61, although
your tax consequences will depend upon the facts of your own situation.
You should consult your own tax advisor for a full understanding of the
consequences of the merger on your tax position.
Q: Who can help answer my questions?
A: If you have any questions about the merger or if you need additional
copies of this prospectus/proxy statement or the enclosed proxy, you
should contact:
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, Virginia 20191
Attention: Karen Kazmark
Telephone: (703) 453-8406
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SUMMARY
This summary highlights selected information from this prospectus/proxy
statement and does not contain all of the information that is important to you.
To understand the merger fully and for a more complete description of the terms
of the merger, you should carefully read this entire prospectus/proxy statement
and the other documents to which we have referred you. See "Where You Can Find
More Information" on page 99. We have included page references parenthetically
to direct you to a more complete description of the topics presented in this
summary. (As used in this prospectus/proxy statement, "we" and "our" refers to
TNI).
The Companies
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, Virginia 20191
Attention: Karen Kazmark
Telephone: (703) 453-8406
TNI was incorporated in August 1990 to build and operate a communications
network focused on the network services needs of the POS (point-of-sale/point-
of-service) transaction processing industry through its POS division. TNI
currently operates four divisions: (1) the POS Division which includes TNI's
TransXpress(R) network services for the POS transaction processing industry,
(2) the Telecom Services Division which includes TNI's CARD*TEL(R) telephone
call billing validation and fraud control services and other services targeting
primarily the telecommunications industry, (3) the Financial Services Division
which provides integrated data and voice services including the TNI FastLink(R)
Data Service in support of the Financial Information eXchange messaging
protocol and other transaction oriented trading applications primarily to the
financial services industry, and (4) the International Systems Division which
markets TNI's products and services internationally.
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 22070
Attention: Corporate Secretary
Telephone: (703) 904-4100
PSINet is the leading independent global provider of Internet solutions to
businesses. PSINet provides Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 17 of the 20 largest global telecommunications markets and is currently
operating in 22 countries. In addition to these services, the Company also
offers a suite of value-added products and services that are designed to enable
its customers to maximize utilization of the Internet to communicate more
efficiently with its customers, suppliers, business partners and remote office
locations. PSINet conducts its business through operations organized into four
geographic operating segments--North America, Latin America, Europe and
Asia/Pacific. The Company's services and products include access services that
offer dedicated, dial-up, wireless and digital subscriber line or xDSL
connections, Web hosting services, intranets, virtual private networks or VPNs,
electronic commerce or e-commerce, voice-over-IP, e-mail and managed security
services. PSINet also provides wholesale and private label network connectivity
and related services to other Internet service providers, known as ISPs, and
telecommunications carriers to further utilize its network capacity.
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PSINet Shelf I Inc.
c/o PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 22070
PSINet Shelf I Inc. is a wholly-owned subsidiary of PSINet Inc., formed
under the laws of the State of Delaware. TNI will merge with and into PSINet
Shelf I Inc. which will be the surviving corporation. It will change its name
to "Transaction Network Services, Inc." upon the merger.
The Special Meeting (page 40)
The special meeting of TNI stockholders will be held on Tuesday, November
23, 1999 at 9:00 a.m., local time, at 1939 Roland Clarke Place, Reston,
Virginia. At the special meeting, we will ask you to vote upon a proposal to
adopt the merger agreement.
Record Date; Voting Power
TNI stockholders are entitled to vote at the special meeting if they owned
TNI shares as of the close of business on October 22, 1999, which is known as
the record date.
On the record date, there were 14,190,581 shares of TNI common stock
entitled to vote at the special meeting. Stockholders will have one vote at the
special meeting for each share of TNI common stock that they owned on the
record date.
Vote Required
The affirmative vote of a majority of the shares of TNI common stock
outstanding on the record date is required to adopt the merger agreement.
Voting by TNI Directors and Executive Officers
On the record date, TNI directors and executive officers and their
affiliates owned and were entitled to vote 2,192,934 shares of TNI common
stock, or approximately 15.5% of the shares of TNI common stock outstanding on
the record date. TNI directors and executive officers owning or controlling
approximately 14.1% of TNI's outstanding common stock have agreed to vote "for"
adoption of the merger agreement.
The Merger (page 42)
The merger agreement is attached as Annex 1 to this prospectus/proxy
statement. We encourage you to read the merger agreement. It is the principal
document governing the merger.
Structure of the Merger
Subject to the terms and conditions of the merger agreement, TNI will merge
with and into PSINet Shelf I Inc., a wholly-owned subsidiary of PSINet. At the
effective time of the merger, the separate corporate existence of TNI will end.
PSINet's subsidiary will be the surviving corporation in the merger and will
continue its corporate existence as a wholly-owned subsidiary of PSINet under
the name "Transaction Network Services, Inc."
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What TNI Stockholders Will Receive in the Merger (page 59)
The merger agreement provides that, at the effective time of the merger,
each issued and outstanding share of TNI common stock will, at the election of
each holder, but subject to proration as described on pages 59 through 61 be
converted into the right to receive:
. 1 share of PSINet common stock; or
. $45.00 in cash; or
. a combination of PSINet common stock and cash.
Ownership of PSINet Following the Merger
Based on the number of outstanding TNI shares and options to acquire TNI
shares on the record date and assuming the exercise of all outstanding options,
we anticipate that TNI stockholders will receive approximately 7,804,546 shares
of PSINet common stock in the merger. Based on that number and on the number of
outstanding shares of PSINet common stock on the record date, following the
merger former TNI stockholders will own approximately 12% of the outstanding
shares of PSINet common stock.
Appraisal Rights (page 66)
TNI stockholders will have appraisal rights in connection with the merger.
Material United States Federal Income Tax Consequences of the Merger (page 61)
The merger is intended to qualify as a reorganization within the meaning of
the Internal Revenue Code of 1986. It is a condition to the completion of the
merger that TNI receive an opinion from Arent Fox Kintner Plotkin & Kahn, PLLC
and PSINet receive an opinion from Nixon Peabody LLP, in each case stating that
the merger will qualify for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code. Assuming the merger qualifies as a reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code, holders of TNI
common stock will not recognize gain or loss for United States federal income
tax purposes as a result of the exchange of their TNI common stock for PSINet
common stock in the merger, except for cash received instead of fractional
shares of PSINet common stock. In general, however, TNI stockholders will
recognize any taxable gain (but not taxable loss) to the extent they receive
cash in the merger.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.
Regulatory Matters (page 66)
United States antitrust laws prohibit PSINet and TNI from completing the
merger until after they have furnished specified information and materials to
the Antitrust Division of the Department of Justice and the Federal Trade
Commission and a required waiting period has ended. PSINet and TNI each filed
the required notification and report forms with the Antitrust Division and the
Federal Trade Commission on August 30, 1999, and the Federal Trade Commission
has granted early termination of the waiting period.
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Board of Directors Recommendation to Stockholders (page 44)
The TNI board of directors believes that the terms of the merger and the
merger agreement are fair to and in the best interests of TNI and its
stockholders and unanimously recommends that the stockholders vote "for" the
adoption of the merger agreement.
To review the background and reasons for the merger in greater detail, as
well as certain risks related to the merger, see pages 42, 44 and 15,
respectively.
Fairness Opinion of TNI's Financial Advisor (page 48)
In deciding to approve the merger, the TNI board of directors considered,
among other things, the opinion of its financial advisor, Morgan Stanley & Co.
Incorporated, as to the fairness from a financial point of view of the
consideration to be paid in the merger to TNI stockholders. This opinion is
attached as Annex 2 to this prospectus/proxy statement. We encourage you to
read this opinion carefully.
Interests of TNI Directors and Management in the Merger (page 55)
TNI stockholders should note that a number of directors and officers of TNI
have interests in the merger as directors or officers that are different from,
or in addition to, those of a stockholder. For a description of these
differences see pages 55 through 59.
The Merger Agreement
Conditions to the Merger (page 68)
PSINet and TNI will complete the merger only if they satisfy or, in some
cases, waive several conditions, including the following:
. holders of a majority of the outstanding shares of TNI common stock must
adopt the merger agreement
. the waiting period required under the Hart-Scott-Rodino Act must expire
or be terminated (which was terminated on September 9, 1999) and any
other required material consents from governmental entities and other
third parties must be received
. no legal restraints, injunctions or prohibitions may exist which prevent
the completion of the merger
. the registration statement must have been declared effective by the SEC
and must remain effective
. TNI's $75 million revolving credit facility ($62.0 million of which was
outstanding at September 30, 1999) must be paid prior to the
effectiveness of the merger
. PSINet common stock issuable to TNI stockholders in the merger must have
been approved for listing on the Nasdaq National Market
. Arent Fox Kintner Plotkin & Kahn, PLLC must deliver an opinion to TNI,
and Nixon Peabody LLP must deliver an opinion to PSINet, in each case
stating that the merger will qualify as a reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code
. PSINet, PSINet Shelf I Inc. and TNI must satisfy the representations,
warranties and covenants contained in the merger agreement in all
material respects.
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Termination of the Merger Agreement
The merger agreement may be terminated for the following reasons:
1. PSINet and TNI can agree by mutual written consent to terminate the
merger agreement at any time without completing the merger.
2. PSINet or TNI can terminate the merger agreement if:
. the merger is not consummated on or before February 29, 2000 (provided
that the terminating party is not otherwise in material breach under the
merger agreement)
. the holders of a majority of the outstanding shares of TNI common stock
do not adopt the merger agreement at the special meeting
. any court issues any order or takes other legal action which permanently
enjoins or prohibits the completion of the merger and, after reasonable
efforts by PSINet and TNI, the court's action is final and nonappealable
. the other party breached in any material respect any of its
representations, warranties or obligations under the merger agreement
which is incapable of being satisfied by February 29, 2000
3. Before the special meeting, TNI can terminate the merger agreement if the
TNI board of directors receives an unsolicited proposal by a third party to
acquire TNI on terms determined by the TNI board of directors to be more
favorable to TNI stockholders than the terms of the merger with PSINet provided
that PSINet has been afforded the opportunity to negotiate and make such
adjustments to the terms of the merger agreement to enable PSINet to proceed
with the merger.
4. PSINet can also terminate the merger agreement if TNI's board of
directors withdraws or adversely modifies its approval or approves or
recommends an unsolicited third party proposal.
Termination Fees (page 70)
TNI must pay PSINet a termination fee of $15 million if:
1. a third party makes an acquisition proposal for TNI and
. the holders of a majority of the outstanding shares of TNI common stock
do not adopt the merger agreement at the special meeting, TNI or PSINet
terminates the merger agreement, and within 12 months of that
termination TNI enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
consummated.
. any court issues an order or takes other legal action described in the
third bullet under paragraph 2 above, TNI intentionally and materially
breaches any material obligation in the merger agreement and does not
cure that breach, TNI or PSINet terminates the merger agreement, and
within 12 months of that termination TNI enters into a definitive
agreement with any third party with respect to an acquisition proposal
or an acquisition proposal is consummated.
. TNI intentionally and materially breaches any material obligation in
the merger agreement and does not cure that breach, the breach would
prevent the consummation of the merger by February 29, 2000, PSINet
terminates the merger agreement, and within 12 months of that
termination TNI enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
consummated.
. the merger is not consummated by February 29, 2000, TNI intentionally
and materially breaches any material obligation in the merger agreement
and does not cure that breach, PSINet terminates the
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merger agreement but is not otherwise in material breach, and within 12
months of that termination TNI enters into a definitive agreement with
any third party with respect to an acquisition proposal or an
acquisition proposal is consummated.
. the TNI board of directors withdraws or adversely modifies its approval
of the merger or approves or recommends an unsolicited third party
proposal, TNI intentionally and materially breaches any material
obligation in the merger agreement and does not cure that breach,
PSINet terminates the merger agreement, and within 12 months of that
termination TNI enters into a definitive agreement with any third party
with respect to an acquisition proposal or an acquisition proposal is
consummated.
2. TNI terminates the merger agreement in order to accept a more favorable
proposal as described in paragraph 3 above.
3. PSINet terminates the merger agreement because the TNI board of directors
approves or recommends an unsolicited third party proposal.
Comparative Per Share Market Price and Dividend Information
PSINet common stock is listed for trading on the Nasdaq National Market
under the trading symbol "PSIX" and TNI common stock is listed on the New York
Stock Exchange under the trading symbol "TNI." Prior to June 7, 1999, TNI's
common stock was listed on the Nasdaq National Market under the symbol "TNSI."
The following table shows the closing prices for PSINet and TNI shares on
August 20, 1999, the last full trading day before the public announcement of
the proposed merger and on October 20, the most recent date for which
quotations were available prior to the printing of this prospectus/proxy
statement.
<TABLE>
<CAPTION>
Equivalent price
PSINet TNI per share of TNI
Date common stock common stock common stock
---- ------------ ------------ ----------------
<S> <C> <C> <C>
August 20, 1999................ $45.56 $34.25 $45.56
October 20, 1999............... $35.00 $39.13 $35.00
</TABLE>
Neither TNI nor PSINet has ever declared or paid any cash dividends on its
common stock. Except as required with respect to PSINet's preferred stock,
PSINet currently intends to retain all of its earnings, if any, for use in its
business and does not anticipate paying any cash dividends on its common stock
in the foreseeable future. In addition, under the terms of PSINet's existing
credit facility, the payment of cash dividends is prohibited without the
lender's consent, and under the terms of PSINet's debt securities, the payment
of cash dividends is subject to limitations.
8
<PAGE>
The following table sets forth, for the periods indicated, the high and low
bid prices per share of PSINet common stock on the Nasdaq National Market and
the high and low sales prices of TNI common stock on the New York Stock
Exchange and the Nasdaq National Market. For current price information,
stockholders are urged to consult publicly available sources.
<TABLE>
<CAPTION>
PSINet TNI
Common Stock Common Stock
------------- -------------
Calendar Period High Low High Low
- --------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
First Quarter..................................... $13.38 $ 6.75 $14.63 $ 9.63
Second Quarter.................................... 9.25 5.50 16.50 9.88
Third Quarter..................................... 9.75 7.38 18.38 13.00
Fourth Quarter.................................... 9.50 4.25 22.50 15.13
Year Ended December 31, 1998:
First Quarter..................................... $17.31 $ 4.94 $21.75 $16.00
Second Quarter.................................... 15.19 10.00 24.00 15.06
Third Quarter..................................... 21.81 10.13 33.75 14.00
Fourth Quarter.................................... 24.94 8.38 32.25 12.00
Year Ending December 31, 1999:
First Quarter..................................... $45.94 $21.00 $20.68 $15.25
Second Quarter.................................... 73.00 41.38 29.25 12.81
Third Quarter..................................... 65.38 33.50 46.56 26.75
Fourth Quarter (through October 20, 1999)......... 40.38 31.06 42.25 37.50
</TABLE>
Unaudited Pro Forma Comparative Per Share Information
We have summarized below information concerning earnings, cash dividends and
book value per share for:
. PSINet on a historical basis
. TNI on a historical basis
. the combination of PSINet and TNI on a pro forma basis
. the equivalent of one TNI share
The pro forma data are based on the assumed conversion of 50% of the shares
of TNI common stock into an equivalent number of PSINet common shares and 50%
of the shares of TNI common stock into cash at $45.00 per TNI share. The
equivalent information is based on the exchange ratio of one share of PSINet
common stock for each share of TNI common stock.
9
<PAGE>
You should read the information set forth below in conjunction with the
respective audited and unaudited financial statements of TNI and PSINet
incorporated by reference in this prospectus/proxy statement and the unaudited
pro forma consolidated financial information and related notes presented
elsewhere in this prospectus/proxy statement. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
PSINet TNI Equivalent of
Historical Historical Pro Forma One TNI Share
---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31,
1998:
Basic earnings per share....... $(5.32) $0.54 $(8.06) $(8.06)
Diluted earnings per share..... (5.32) 0.52 (8.06) (8.06)
Cash dividends declared per
share.........................
Book value per share........... (2.31) 6.57 3.47 3.47
Six months ended June 30, 1999:
Basic earnings per share....... (2.10) 0.32 (3.18) (3.18)
Diluted earnings per share..... (2.10) 0.30 (3.18) (3.18)
Cash dividends declared per
share......................... -- -- -- --
Book value per share........... 8.19 7.07 11.84 11.84
</TABLE>
10
<PAGE>
Summary Unaudited Pro Forma Consolidated Financial Information
(In thousands of U.S. dollars, except per share amounts)
The following Summary Unaudited Pro Forma Consolidated Financial Information
gives pro forma effect to the merger as well as to other acquisitions and
transactions, as more fully discussed under "Unaudited Pro Forma Consolidated
Financial Information," as if they had occurred on the dates indicated.
If PSINet had actually completed the merger in prior periods, TNI might have
performed differently. You should not rely on the pro forma financial
information as an indication of the results that PSINet would have achieved if
the merger had taken place earlier or of the future results that the companies
will achieve after completion of the merger. For further information concerning
the following summary pro forma financial information, including the
adjustments made in preparing it, please refer to "Unaudited Pro Forma
Consolidated Financial Information."
<TABLE>
<CAPTION>
Pro Forma
-------------------------------------
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
----------------- -------------------
<S> <C> <C>
Statement of Operations Data:
Revenue................................. $ 513,077 $ 329,186
Operating costs and expenses:
Data communications and operations.... 359,644 225,012
Sales and marketing................... 72,681 45,908
General and administrative............ 82,743 44,723
Depreciation and amortization......... 159,436 98,969
Charge for acquired in-process R&D.... 70,800 --
--------- ----------
Total operating costs and expenses.. 745,304 414,612
--------- ----------
Loss from operations.................... (232,227) (85,426)
Interest expense........................ (207,371) (130,583)
Interest income......................... 21,442 13,782
Other income (expense), net............. 6,333 (468)
Non-recurring arbitration charge........ (49,000) --
--------- ----------
Loss before income taxes, equity in
earnings of affiliate
and minority interest.................. (460,823) (202,695)
Income tax expense...................... (832) (353)
Equity in earnings of unconsolidated
affiliate.............................. 356 93
Minority interest in net loss (income)
of consolidated subsidiary............. 319 (128)
--------- ----------
Net loss................................ (460,980) (203,083)
Return to preferred shareholders........ (3,079) (4,797)
--------- ----------
Net loss available to common
shareholders........................... $(464,059) $(207,880)
========= ==========
Basic and diluted loss per share........ $(8.06) $(3.18)
========= ==========
Shares used in computing basic and
diluted loss per share................. 57,606 65,457
========= ==========
<CAPTION>
Pro Forma
As of June 30, 1999
-------------------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, short-term investments and
marketable securities.................................... $1,466,959
Restricted cash and short-term investments................ 144,504
Total assets.............................................. 3,673,656
Current portion of debt................................... 78,559
Long-term debt, less current portion...................... 2,350,275
Shareholders' equity...................................... 858,063
</TABLE>
11
<PAGE>
PSINet Summary Consolidated Financial and Operating Data
(In thousands of U.S. dollars, except per share, ratio and operating data)
The following table sets forth for the periods indicated summary
consolidated financial and operating data for PSINet. The consolidated balance
sheet data and consolidated statement of operations data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
PSINet's audited consolidated financial statements and as of and for the six
months ended June 30, 1998 and 1999 have been derived from PSINet's unaudited
consolidated financial statements. The following summary consolidated financial
and operating data should be read in conjunction with PSINet's more detailed
consolidated financial statements and related notes incorporated by reference
to this prospectus/proxy statement.
EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with generally accepted accounting principles,
is not indicative of cash used by operating activities and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles. PSINet defines EBITDA as earnings (losses) before
interest expense and interest income, taxes, depreciation and amortization,
other non-operating income and expense, and charges for intangible asset write-
down and acquired in-process research and development. PSINet's definition of
EBITDA may not be comparable to similarly titled measures used by other
companies.
In July 1999, PSINet issued $1.2 billion aggregate principal amount of its
11% senior notes due 2009, consisting of $1.05 billion aggregate principal
amount of 11% senior notes due 2009 and Euro 150 million aggregate principal
amount of 11% senior notes due 2009, pursuant to Securities and Exchange
Commission Rule 144A and Regulation S. The aggregate net proceeds of the
offering of the 11% senior notes, after giving effect to discounts and
commissions and other offering expenses, was approximately $1.17 billion.
12
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
U.S. .................. $15,159 $ 36,252 $ 77,571 $103,952 $ 156,048 $ 68,888 $ 111,547
International.......... 55 2,470 6,780 17,950 103,588 29,294 117,121
------- -------- -------- -------- --------- -------- ---------
15,214 38,722 84,351 121,902 259,636 98,182 228,668
Other income, net...... -- -- 5,417 -- -- -- --
------- -------- -------- -------- --------- -------- ---------
15,214 38,722 89,768 121,902 259,636 98,182 228,668
------- -------- -------- -------- --------- -------- ---------
Operating costs and
expenses:
Data communications and
operations............ 9,489 32,124 70,102 94,363 199,372 78,609 162,341
Sales and marketing.... 3,599 23,930 27,064 25,831 57,026 23,219 40,505
General and
administrative........ 3,605 10,569 20,648 22,947 45,288 17,872 32,469
Depreciation and
amortization.......... 3,183 14,778 28,035 28,347 63,424 22,354 61,210
Charge for acquired in-
process research and
development........... -- -- -- -- 70,800 27,000 --
Intangible asset write-
down.................. -- 9,938 -- -- -- -- --
------- -------- -------- -------- --------- -------- ---------
Total operating costs
and expenses.......... 19,876 91,339 145,849 171,488 435,910 169,054 296,525
------- -------- -------- -------- --------- -------- ---------
Loss from operations.... (4,662) (52,617) (56,081) (49,586) (176,274) (70,872) (67,857)
Interest expense........ (731) (1,964) (5,025) (5,362) (63,914) (19,471) (61,486)
Non-recurring
arbitration charge..... -- -- -- -- (49,000) -- --
Loss before income
taxes.................. (5,342) (53,160) (55,256) (46,078) (262,717) (82,695) (116,903)
Net loss................ (5,342) (53,160) (55,097) (45,602) (261,869) (82,724) (116,453)
Return to preferred
shareholders........... -- -- -- (411) (3,079) (1,545) (4,797)
Net loss available to
common shareholders.... $(5,342) $(53,160) $(55,097) $(46,013) $(264,948) $(84,269) (121,250)
======= ======== ======== ======== ========= ======== =========
Basic and diluted loss
per share.............. $ (0.42) $ (2.01) $ (1.40) $ (1.14) $ (5.32) $ (1.76) $ (2.10)
======= ======== ======== ======== ========= ======== =========
Shares used in computing
basic and diluted loss
per share (in
thousands)............. 12,805 26,485 39,378 40,306 49,806 47,854 57,657
======= ======== ======== ======== ========= ======== =========
Other Financial Data:
EBITDA:
U.S. .................. $ (772) $(26,930) $(20,563) $(13,071) $ (26,170) $(12,139) $ (12,735)
International.......... (707) (971) (7,483) (8,168) (15,880) (9,379) 6,088
------- -------- -------- -------- --------- -------- ---------
$(1,479) $(27,901) $(28,046) $(21,239) $ (42,050) $(21,518) $ (6,647)
======= ======== ======== ======== ========= ======== =========
Capital expenditures.... $ 5,009 $ 45,166 $ 38,390 $ 50,074 $ 303,550 $ 79,024 $ 215,400
Cash Flow Data:
Cash flows used in
operating activities... $(1,097) $(30,093) $(32,543) $(15,568) $ (87,586) $(20,730) $(139,325)
Cash flows used in
investing activities... (1,937) (21,958) (7,897) (15,560) (783,877) (451,312) (27,770)
Cash flows provided by
(used in) financing
activities............. 4,527 151,403 (10,529) 12,598 874,246 563,317 721,683
Operating Data:
Number of POPs.......... 82 241 350 350 500 400 600
Number of business
accounts............... 4,220 8,200 17,800 26,400 54,700 38,700 73,400
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
short-term investments
and marketable
securities............. $ 3,358 $102,710 $ 56,390 $ 33,322 $ 322,508 $370,553 $ 716,356
Restricted cash and
short-term
investments............ -- -- 954 20,690 162,469 143,154 144,504
Total assets............ 17,055 201,830 177,112 186,181 1,284,231 794,774 2,013,459
Current portion of
debt................... 3,369 16,643 26,915 39,633 59,968 46,667 78,455
Long-term debt, less
current portion........ 4,397 24,130 26,938 33,820 1,064,633 659,559 1,141,730
Shareholders' equity
(deficit).............. (8,283) 143,230 89,783 73,429 (120,174) (1,108) 529,927
</TABLE>
13
<PAGE>
TNI Summary Consolidated Financial and Operating Data
(in thousands, except per share data and transaction data)
The following table sets forth for the periods indicated selected
consolidated financial and operating data for TNI. The consolidated balance
sheet data and consolidated statement of operations data as of and for the
years ended December 31, 1994, 1995, 1996, 1997, and 1998 have been derived
from TNI's audited consolidated financial statements and as of and for the six
months ended June 30, 1998 and 1999 have been derived from TNI's unaudited
consolidated financial statements. The following summary consolidated financial
and operating data should be read in conjunction with TNI's more detailed
consolidated financial statements and related notes incorporated by reference
in this prospectus/proxy statement.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- ---------------
1994(1) 1995 1996 1997 1998(2) 1998 1999
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $26,526 $41,365 $52,291 $63,344 $101,906 $38,510 $80,827
Cost of network
services............... 14,200 21,819 28,771 35,322 62,796 21,874 50,900
------- ------- ------- ------- -------- ------- -------
Gross profit............ 12,326 19,546 23,520 28,022 39,110 16,636 29,927
------- ------- ------- ------- -------- ------- -------
Other operating
expenses:
Engineering &
development........... 1,575 2,241 2,692 3,431 5,565 2,168 2,927
Selling, general &
administrative........ 3,842 5,697 7,491 7,941 12,474 5,185 9,020
Depreciation........... 1,830 3,081 4,068 4,793 6,693 2,987 5,080
Amortization of
intangibles........... 566 1,138 1,485 1,570 4,090 1,092 4,186
Reserve for AMNEX
assets................ -- -- -- -- -- -- 919
------- ------- ------- ------- -------- ------- -------
Total other operating
expenses.............. 7,813 12,157 15,736 17,735 28,822 11,432 22,132
------- ------- ------- ------- -------- ------- -------
Income from operations.. 4,513 7,389 7,784 10,287 10,288 5,204 7,795
Interest
income/(expense) net... 220 918 1,670 1,939 327 856 (1,051)
------- ------- ------- ------- -------- ------- -------
Income before income
taxes.................. 4,733 8,307 9,454 12,226 10,615 6060 6,744
Provision for income
taxes.................. 1,491 3,157 3,640 4,840 4,425 2,395 2,552
Equity in earnings of
unconsolidated
affiliate.............. -- -- -- -- 356 81 93
Minority interest in net
(income)/loss of
consolidated
subsidiary............. -- -- -- -- 319 -- (128)
------- ------- ------- ------- -------- ------- -------
Net income.............. $ 3,242 $ 5,150 $ 5,814 $ 7,386 $ 6,865 $ 3,746 $ 4,157
======= ======= ======= ======= ======== ======= =======
Diluted earnings per
common share........... $ 0.33 $ 0.45 $ 0.46 $ 0.59 $ 0.52 $ 0.29 $ 0.30
======= ======= ======= ======= ======== ======= =======
Weighted average shares-
diluted................ 9,947 11,534 12,591 12,619 13,279 13,123 13,692
======= ======= ======= ======= ======== ======= =======
POS Transaction Volume
(in millions).......... 824 1,218 1,900 2,386 3,696 1,280 2,965
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------- ----------------
1994(1) 1995 1996 1997 1998(2) 1998 1999
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 7,313 $18,681 $14,735 $18,516 $ 12,339 $ 6,579 $ 13,940
Working capital......... 7,749 25,779 34,851 33,230 21,212 18,993 27,209
Total assets............ 30,835 61,348 68,551 76,109 174,859 88,643 183,135
Long term debt.......... 18 -- -- -- 59,325 -- 62,946
Total stockholders'
equity................. 24,733 54,593 62,191 68,475 84,177 78,408 92,805
</TABLE>
- --------
(1) Includes the results of Fortune Telecommunications, Inc. from June 6,
1994, the closing date of its acquisition by TNI, through December 31,
1994.
(2) Includes the results of TNI's SunTech, OmniLink and TAS acquisitions from
the closing dates of February 27, 1998, July 1, 1998 and September 10,
1998.
14
<PAGE>
RISK FACTORS
In addition to the other information included and incorporated by reference
in this prospectus/proxy statement, TNI stockholders should consider carefully
the matters described below in determining whether to adopt the merger
agreement.
Risk Factors Relating to the Merger
The exchange ratio for TNI common stock to be acquired in the merger is fixed
and will not be adjusted if there is any change in stock price
Under the merger agreement, each share of TNI common stock will be converted
into the right to receive one share of PSINet common stock or $45.00 in cash or
a combination of stock and cash. This exchange ratio is a fixed number and will
not be adjusted if there is any increase or decrease in the price of PSINet
common stock or TNI common stock. The prices of PSINet common stock and TNI
common stock at the closing of the merger may vary from their respective prices
on the date of this prospectus/proxy statement and on the date of the special
meeting. These prices may vary because of changes in the business, operations
or prospects of PSINet or TNI, market assessments of the likelihood that the
merger will be completed, the timing of the completion of the merger, the
prospects of post-merger operations, regulatory considerations, general market
and economic conditions and other factors. Because the date that the merger is
completed may be later than the date of the special meeting, the prices of
PSINet common stock and TNI common stock on the date of the special meeting may
not be indicative of their respective prices on the date the merger is
completed. We urge TNI stockholders to obtain current market quotations for
PSINet common stock and TNI common stock in connection with their determination
as to which election of merger consideration they desire to make.
PSINet may face difficulties in integrating TNI's business into PSINet's
business
PSINet and TNI entered into the merger agreement with the expectation that
integrating TNI's eCommerce business with PSINet's technology with Internet
connectivity, Web hosting and a suite of value-added products and services
designed to maximize utilization of the Internet will present a significant
opportunity to create a combined organization that will be a leader in
providing global eCommerce and Internet solutions to businesses. PSINet's
ability to create such a combined organization will be subject to risks
associated with acquisitions relating to difficulties in integrating combined
operations, the potential disruption of operations and the related negative
impact on earnings and the incurrence of substantial expenses that could
adversely affect its financial condition. PSINet intends to integrate TNI's
business into PSINet. Achieving the anticipated benefits of the merger will
depend in large part upon whether the integration of TNI's business into PSINet
is accomplished in an efficient and effective manner. The integration of TNI's
business into PSINet will require, among other things, integration of the
products and services, technologies, distribution channels, management
information systems and key personnel of TNI's business into PSINet. There can
be no assurance that the integration of TNI's business will be accomplished in
an efficient and effective manner, if at all. If significant difficulties are
encountered in the integration, it could have a material adverse effect on the
business, results of operations and financial condition of PSINet.
The integration of operations and technologies following the merger will
require the dedication of management and other personnel which may distract
their attention from the day-to-day business of PSINet, development or
acquisition of new products, services and technologies, and the pursuit of
other business acquisition opportunities. The difficulties of integrating
PSINet and TNI may be increased by the necessity of coordinating organizations
with distinct cultures and widely disbursed operations. Successful integration
of the two companies' sales and marketing organizations will require the sales
and marketing personnel of each company to learn about the often technically-
complex products, services and technologies of the other company.
15
<PAGE>
In addition, successful combination of the PSINet and TNI businesses will
be dependent at least in part on the retention and integration of the key
management, sales, marketing and engineering and other technical employees of
TNI's business into PSINet. Competition for qualified personnel in the
eCommerce industry is intense and competitors often use aggressive tactics to
recruit key employees during the period leading up to a merger and during the
integration phase following a merger. While each of PSINet and TNI is engaged
in ongoing efforts to retain key employees, it may be more difficult for
PSINet to retain such employees after the merger. In particular, in connection
with the signing of the merger agreement, unvested stock options held by
employees of TNI immediately vested. The acceleration of these options could
potentially reduce the retention incentive provided by the options. Neither
PSINet nor TNI can assure you that TNI employees will remain with PSINet. The
loss of services of any key employees of TNI could have a material adverse
effect on the business, results of operations and financial condition of
PSINet.
The price of PSINet common stock may be affected by factors different from
those affecting the price of TNI common stock
Upon completion of the merger, many holders of TNI common stock will become
holders of PSINet common stock. PSINet's business differs from that of TNI,
and PSINet's results of operations, as well as the price of PSINet common
stock, may be affected by factors different from those affecting the price of
TNI common stock. For a discussion of PSINet's and TNI's businesses and other
factors to consider in connection with the businesses, see PSINet's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, and TNI's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, which
are incorporated by reference in this prospectus/proxy statement.
It is possible that the merger will not be consummated because of a failure
to qualify as a reorganization for tax purposes
The consummation of the merger is contingent upon the receipt by each of
PSINet and TNI of an opinion from their attorneys that the merger will be
treated as a reorganization within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code (the "Code"). It is intended that the merger qualify as
a reorganization under Section 368(a)(2)(D) of the Code. To qualify as a
reorganization, among other requirements, the merger must satisfy a
"continuity of interest" test, under which the TNI stockholders must receive a
meaningful ownership interest in PSINet after the merger. Generally, this test
will be considered satisfied if TNI stockholders in the aggregate exchange a
substantial part of their TNI common stock for PSINet common stock in the
merger. The merger has been structured with the intent that 50% of the
consideration provided in the merger will consist of PSINet common stock. It
is possible, however, that the value of the PSINet common stock issued at the
time of the merger could fall below this 50% threshold. Arent Fox Kinter
Plotkin & Kahn, PLLC, counsel to TNI, and Nixon Peabody LLP, counsel to
PSINet, will issue opinions that the "continuity of interest" requirement as
specified in Treas. Reg. Sec. 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions will be
satisfied if the amount of stock received by TNI stockholders is at least 40%
(and the amount of cash received is no more than 60%) of the aggregate merger
consideration (including payments to dissenters and payments in lieu of
fractional shares). Arent Fox Kinter Plotkin & Kahn, PLLC and Nixon Peabody
LLP will not issue opinions that the continuity of interest requirement will
be met if the amount of stock received by TNI stockholders is less than 40%
(and the amount of cash received is more than 60%) of the aggregate merger
consideration (including payments to dissenters and payments in lieu of
fractional shares). The last reported sales price of PSINet common stock on
October 20, 1999 was $35.00. In order for the stock received by TNI
stockholders to be less than 40% of the aggregate merger consideration
(including payments to dissenters and payments in lieu of fractional shares),
the trading price per share of PSINet common stock would generally have to
decline to below $30.00.
Even if Arent Fox and Nixon Peabody opine that the "continuity of interest"
requirement is met, those opinions are not binding and neither PSINet nor TNI
can assure you that the Service or a court would
16
<PAGE>
ultimately determine that the continuity of interest requirement has been met
(and that the merger qualifies as a reorganization) if the amount of stock
consideration received by TNI stockholders is less than 50% of the aggregate
merger consideration (including payments to dissenters and payments in lieu of
fractional shares).
If the merger of TNI into PSINet Shelf I Inc. is not treated as a
reorganization for federal income tax purposes, the merger would be deemed a
sale of assets by TNI, and TNI would recognize gain in an amount equal to the
excess of the fair market value of the merger consideration over the adjusted
basis of the assets transferred to PSINet Shelf I Inc. Any such tax liability
could have a material adverse effect on either or both of the consolidated
financial position or the results of operations of PSINet. A merger of PSINet
Shelf I Inc. into TNI would not qualify as a reorganization and would be
considered a taxable sale of stock by the TNI stockholders to PSINet. If the
merger is not treated as a tax-free reorganization, each stockholder of TNI
would generally be required to recognize gain on the exchange of the
stockholder's TNI common stock for the stockholder's share of the merger
consideration in the amount of the excess of any cash received plus the value
at the time of the merger of the PSINet common stock received over his or her
basis in the TNI common stock.
Risk Factors Relating to PSINet
PSINet has significant indebtedness and may not be able to meet its
obligations
PSINet is highly leveraged and has significant debt service requirements. As
of June 30, 1999, after giving pro forma effect to the issuance in July 1999 of
$1.2 billion aggregate principal amount of 11% senior notes, PSINet's total
indebtedness would have been $2.4 billion, representing 82% of total
capitalization. For the three and six months ended June 30, 1999, PSINet's
interest expense was $31.9 million and $61.5 million, respectively. After
giving pro forma effect to the 11% senior notes offering, PSINet's interest
expense, including amortization of deferred financing costs for the three and
six months ended June 30, 1999 would have been $66.2 million and $130.1
million, respectively. As a result of the completion of the 11% senior notes
offering, PSINet's annual interest expense on its outstanding 11% senior notes,
10% senior notes and 11 1/2% senior notes will be $241.5 million, assuming an
exchange rate of Euro 0.92 to U.S $1.00, which was the average exchange rate
for the period from January 1 to June 30, 1999. PSINet will have additional
interest expense attributable to its revolving credit facility and equipment
lease arrangements.
PSINet's high level of indebtedness could have several important effects on
its future operations, which, in turn, could have important consequences for
the holders of its securities, including the following:
. a substantial portion of PSINet's cash flow from operations must be used
to pay interest on its indebtedness and, therefore, will not be
available for other business purposes;
. covenants contained in the agreements evidencing PSINet's debt
obligations require PSINet to meet many financial tests, and other
restrictions limit its ability to borrow additional funds or to dispose
of assets and may affect its flexibility in planning for, and reacting
to, changes in its business, including possible acquisition activities
and capital expenditures; and
. PSINet's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired.
PSINet's ability to meet its debt service obligations and to reduce its
total indebtedness depends on its future operating performance and on economic,
financial, competitive, regulatory and other factors affecting its operations.
Many of these factors are beyond PSINet's control and PSINet's future operating
performance could be adversely affected by some or all of these factors. PSINet
historically has been unable to generate sufficient cash flow from operations
to meet its operating needs and has relied on equity, debt and capital lease
financings to fund its operations. However, based on PSINet's current level of
operations, management believes that existing working capital, existing credit
facilities, capital lease financings and proceeds of future equity or debt
financings will be adequate to meet its presently anticipated future
requirements for working capital, capital expenditures and scheduled payments
of interest on its debt. PSINet cannot assure you, however, that its
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business will generate sufficient cash flow from operations or that future
working capital borrowings will be available in an amount sufficient to enable
PSINet to service its debt, or to make necessary capital expenditures. In
addition, PSINet cannot assure you that it will be able to raise additional
capital for any refinancing of its debt in the future.
PSINet has experienced continuing losses, negative cash flow and fluctuations
in operating results
PSINet's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, PSINet must, among other things, respond to
competitive developments, continue to attract and retain qualified persons,
continue to upgrade its management and financial systems, and continue to
upgrade its technologies and commercialize its network services incorporating
its technologies. PSINet cannot assure you that it will be successful in
addressing these risks, and the failure to do so could have a material adverse
effect on its business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts due on its debt.
Although PSINet has experienced revenue growth on an annual basis with revenue
increasing from $84.4 million in 1996 to $121.9 million in 1997 to $259.6
million in 1998 and $228.7 million for the first six months of 1999, it has
incurred losses and experienced negative EBITDA during those periods. PSINet
may continue to operate at a net loss and may experience negative EBITDA as
PSINet continues its acquisition program and the expansion of its global
network operations. PSINet has incurred net losses available to common
shareholders of $55.1 million in 1996, $46.0 million in 1997, $264.9 million
in 1998 and $121.3 million for the first six months of 1999. PSINet has
incurred negative EBITDA of $28.0 million, $21.2 million and $42.1 million and
$6.8 million for each of the years ended December 31, 1996, 1997 and 1998 and
the three months ended March 31, 1999, respectively, and had positive EBITDA
of $0.2 million for the three months ended June 30, 1999. At June 30, 1999,
PSINet had an accumulated deficit of $548.8 million. PSINet cannot assure you
that it will be able to achieve or sustain profitability or sustain positive
EBITDA. PSINet's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside PSINet's control. These factors, include, among
others:
. general economic conditions and specific economic conditions in the
Internet access industry;
. user demand for Internet services;
. capital expenditures and other costs relating to the expansion of
operations of its network;
. the introduction of new services by PSINet or its competitors;
. the mix of services sold and the mix of channels through which those
services are sold;
. pricing changes and new product introductions by PSINet and its
competitors;
. delays in obtaining sufficient supplies of sole or limited source
equipment and telecom facilities; and
. potential adverse regulatory developments.
As a strategic response to a changing competitive environment, PSINet may
elect from time to time to make pricing, service or marketing decisions that
could have a material adverse effect on its business, results of operations
and cash flow.
PSINet will depend on the cash flows of its subsidiaries in order to satisfy
its debt obligations
PSINet is an operating entity which also conducts a significant portion of
its business through its subsidiaries. PSINet's operating cash flow and
consequently its ability to service its debt is therefore partially dependent
upon its subsidiaries' earnings and their distributions of those earnings to
PSINet. It may also be dependent upon loans, advances or other payments of
funds to PSINet by those subsidiaries. PSINet's subsidiaries are separate
legal entities and have no obligation, contingent or otherwise, to pay any
amount due under to PSINet's senior notes or to make any funds available for
that purpose. PSINet's subsidiaries' ability to
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make payments may be subject to the availability of sufficient surplus funds,
the terms of the subsidiaries' indebtedness, applicable laws and other
factors.
PSINet may not be able to fund the expansion it will need to remain
competitive
In order to maintain its competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing,
PSINet expects to make significant capital expenditures. At September 30,
1999, PSINet was obligated to make future cash payments that total $200.7
million for acquisitions of global fiber-based telecommunications bandwidth,
including indefeasible rights of use or other rights. PSINet also expects that
there will be additional costs, such as connectivity and equipment charges, in
connection with taking full advantage of the acquired bandwidth and
indefeasible rights of use. PSINet currently believes that its capital
expenditures in 1999 will be greater than those in 1998 and that as a result
of its completion of the recent debt and equity offerings, its capital
expenditures will be accelerated. This may occur as PSINet continues to
execute its expansion strategy in the 20 largest global telecommunications
markets and beyond.
PSINet historically has been unable to generate sufficient cash flow from
operations to meet its operating needs and has relied on equity, debt and
capital lease financings to fund its operations. However, PSINet believes that
it will have a reasonable degree of flexibility to adjust the amount and
timing of capital expenditures in response to market conditions, competition,
its then existing financing capabilities and other factors. PSINet also
believes that working capital generated from the use of acquired bandwidth,
together with other existing working capital from existing credit facilities,
from capital lease financings, from the proceeds of its recent debt and equity
offerings and from proceeds of future equity or debt financings will be
sufficient to meet the presently anticipated working capital and capital
expenditure requirements of its operations. PSINet cannot assure you, however,
that it will have sufficient additional capital or obtain financing on
satisfactory terms to enable it to meet its capital expenditures and working
capital requirements.
PSINet may need to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or
acquisitions of complementary businesses. In addition, PSINet may need to
raise additional funds to develop new products or otherwise respond to
changing business conditions or unanticipated competitive pressures. PSINet
cannot assure you that it will be able to raise additional funds on favorable
terms. If it is unable to obtain additional funds on acceptable terms, PSINet
may determine not to enter into various expansion opportunities.
PSINet faces risks associated with acquisitions and strategic alliances and
investments relating to difficulties in integrating combined operations,
incurrence of additional debt to finance acquisitions and operations of
acquired businesses, potential disruption of operations and related negative
impact on earnings, and incurrence of substantial expenses that could
adversely affect its financial condition
Growth through acquisitions represents a principal component of PSINet's
business strategy. Over the 24 months ended September 30, 1999, PSINet
acquired 47 ISPs primarily in 16 of the 20 largest global telecommunications
markets. PSINet expects to continue to acquire assets and businesses
principally relating to or complementary to its current operations. PSINet may
also seek to develop strategic alliances and investments (including venture
capital investments) both domestically and internationally. Any such future
acquisitions or strategic alliances and investments would be accompanied by
the risks commonly encountered in acquisitions, strategic alliances or
investments. Those risks include, among other things:
. the difficulty of integrating the operations and personnel of the
companies, particularly in non-U.S. markets;
. the potential disruption of its ongoing business;
. the inability of management to maximize its financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into its service offerings; and
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. the inability to maintain uniform standards, controls, procedures and
policies and the impairment of relationships with employees and
customers as a result of changes in management.
PSINet cannot assure you that it will be successful in overcoming these
risks or any other problems encountered in connection with such acquisitions,
strategic alliances or investments. PSINet believes that after eliminating
redundant network architecture and administrative functions and taking other
actions to integrate the operations of acquired companies it will be able to
realize cost savings. However, it cannot assure you that its integration of
acquired companies' operations will be successfully accomplished. PSINet's
inability to improve the operating performance of acquired companies'
businesses or to integrate successfully the operations of acquired companies
could have a material adverse effect on its business, financial condition and
results of operations. In addition, as PSINet proceeds with acquisitions in
which the consideration consists of cash, a substantial portion of its
available cash will be used to consummate such acquisitions.
As with each of PSINet's recent acquisitions, the purchase price of many of
the businesses that might become attractive acquisition candidates for PSINet
likely will significantly exceed the fair values of the tangible net assets of
the acquired businesses. As a result, material goodwill and other intangible
assets would be required to be recorded which would result in significant
amortization charges in future periods. In addition, an intangible asset that
frequently arises in connection with the acquisition of a technology company is
"acquired in-process research and development," which under U.S. generally
accepted accounting principles, as presently in effect, must be expensed
immediately upon acquisition. Those expenses, in addition to the financial
impact of the acquisitions, could have a material adverse effect on PSINet's
business, financial condition and results of operations and could cause
substantial fluctuations in its quarterly and yearly operating results.
Furthermore, in connection with acquisitions or strategic alliances, PSINet
could incur substantial expenses, including the expenses of integrating the
business of the acquired company or the strategic alliance with its existing
business.
PSINet expects that competition for appropriate acquisition candidates may
be significant. PSINet may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
financial and other resources than PSINet has. Competition for Internet
companies is based on a number of factors including price, terms and
conditions, size and access to capital, ability to offer cash, stock or other
forms of consideration and other matters. PSINet cannot assure you that it will
be able to successfully identify and acquire suitable companies on acceptable
terms and conditions.
PSINet's growth and expansion may strain its ability to manage its operations
and its financial resources
PSINet's rapid growth has placed a strain on its administrative, operational
and financial resources and has increased demands on its systems and controls.
PSINet has approximately 600 points-of-presence and plans to continue to expand
the capacity of existing points-of-presence as customer-driven demand dictates.
In addition, PSINet has completed a number of acquisitions of companies and
telecommunications bandwidth during 1998 and the first half of 1999 and plans
to continue to do so. PSINet anticipates that it may be required to make
continued enhancements to and expansion of its network. The process of
consolidating the businesses and implementing the strategic integration of
these acquired businesses with its existing business may take a significant
amount of time. It may also place additional strain on PSINet's resources and
could subject the company to additional expenses. PSINet cannot assure you that
it will be able to integrate these companies successfully or in a timely
manner. In addition, PSINet cannot assure you that its existing operating and
financial control systems and infrastructure will be adequate to maintain and
effectively monitor future growth.
PSINet's continued growth may also increase its need for qualified
personnel. PSINet cannot assure you that it will be successful in attracting,
integrating and retaining qualified personnel. PSINet's inability to accomplish
the following factors associated with its growth could have a material adverse
effect on its business, results of operations and financial condition:
. to continue to upgrade its networking systems or operating and financial
control systems;
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. to recruit and hire necessary personnel or to successfully integrate new
personnel into its operations;
. to successfully integrate the operations of acquired companies or to
manage its growth effectively; or
. to adequately respond to the emergence of unexpected expansion
difficulties.
PSINet faces risks associated with its acquisitions of bandwidth from network
suppliers, including its strategic alliance with IXC Communications Inc.,
relating to its dependence on their ability to satisfy their obligations to
PSINet, the possibility that PSINet may need to incur significant expenses to
utilize bandwidth and their ability to buildout their networks under
construction that could adversely affect PSINet's ability to utilize acquired
bandwidth
PSINet is subject to a variety of risks relating to its recent acquisitions
of fiber-based telecommunications bandwidth from its various global network
suppliers, including its strategic alliance with IXC Communications Inc., and
the delivery, operation and maintenance of that bandwidth. Those risks
include, among other things, the following:
. the risk that financial, legal, technical or other matters may adversely
affect suppliers' ability to perform their respective operation,
maintenance and other services relating to the bandwidth, which may
adversely affect PSINet's use of the bandwidth;
. the risk that PSINet will not have access to sufficient additional
capital or financing on satisfactory terms to enable it to make the
necessary capital expenditures to take full advantage of the bandwidth;
. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise elect
not to complete, their contemplated buildout of the respective fiber
optic telecommunications systems; and
. the risk that the buildout may be delayed or otherwise adversely
affected by presently unforeseeable legal, technical or other factors.
In addition, IXC Communications Inc. has recently entered into an agreement
to be acquired by Cincinnati Bell. If the conditions to completion of the
transaction are satisfied and IXC is acquired, PSINet may face risks
associated in conducting business with a company which is undergoing a
business combination. These risks include, but are not limited to, the need
for PSINet to establish a good working relationship with the senior management
and other personnel of Cincinnati Bell and the potential disruption of IXC's
ongoing business. Although PSINet believes that it will be able to maintain a
good working relationship with IXC and that the business combination will not
be unduly disruptive, PSINet cannot assure you that it will be successful in
overcoming these risks or any other problems encountered in connection with
its acquisitions of bandwidth.
Continued international expansion is a key component of PSINet's business
strategy and, if PSINet is unable to complete this expansion, its financial
condition may be adversely affected
A key component of PSINet's business strategy is its continued expansion
into international markets. Revenue from PSINet's non-U.S. operations
continues to increase as a percentage of consolidated results, comprising 51%
of revenue in the second quarter of 1999. By comparison, PSINet's non-U.S.
operations comprised 31% of revenue in the second quarter of 1998 and 40% for
all of 1998. PSINet may need to enter into joint ventures or other strategic
relationships with one or more third parties in order to conduct its foreign
operations successfully. However, PSINet cannot assure you that it will be
able to obtain the permits and operating licenses required for it to operate,
to hire and train employees or to market, sell and deliver high quality
services in these markets. In addition to the uncertainty as to PSINet's
ability to continue to expand its international presence, there are risks
inherent in doing business on an international level. Those risks include:
. unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;
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. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts receivable;
. fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;
. technology export and import restrictions or prohibitions;
. delays from customs brokers or government agencies;
. the introduction of free ISP services for consumer customers;
. seasonal reductions in business activity during the summer months in
Europe and other parts of the world; and
. potentially adverse tax consequences, which could adversely impact the
success of PSINet's international operations.
PSINet cannot assure you that these factors will not have an adverse effect
on its future international operations and, consequently, on its business,
financial condition and results of operations. In addition, PSINet cannot
assure you that laws or administrative practice relating to taxation, foreign
exchange, foreign ownership or other matters of countries within which it
operates will not change. Any of these changes could have a material adverse
effect on its business, financial condition and results of operations.
Countries in which PSINet operates may also experience economic
difficulties and uncertainties. These economic difficulties and uncertainties
could have a material adverse effect on PSINet's business, financial condition
and results of operations.
PSINet's financial results and its financial position may be adversely
affected by currency and exchange risks
During the year ended December 31, 1998 and the six months ended June 30,
1999, 40% and 51%, respectively, of PSINet's revenue was derived from
operations outside the United States and at June 30, 1999, 30% of its assets
were in operations outside of the United States. PSINet anticipates that a
significant percentage of its future revenue and operating expenses will
continue to be generated from operations outside the United States and expects
to continue to invest in non-U.S. businesses. Consequently, a substantial
portion of PSINet's revenue, operating expenses, assets and liabilities will
be subject to significant foreign currency and exchange risks. Obligations of
customers and of PSINet in foreign currencies will be subject to unpredictable
and indeterminate fluctuations if those currencies change in value relative to
U.S. dollars. Furthermore, those customers and PSINet may be subject to
exchange control regulations which might restrict or prohibit the conversion
of the currencies into U.S. dollars. Although PSINet has not entered into
hedging transactions to limit its foreign currency risks, as a result of the
increase in its foreign operations, PSINet may implement those practices in
the future. PSINet cannot assure you that the occurrence of any of these
factors will not have a material adverse effect on its business, financial
position or results of operations.
PSINet depends on key personnel and could be affected by the loss of their
services
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge
of and experience in the Internet service industry. The process of locating
qualified personnel with the combination of skills and attributes required to
carry out PSINet's strategies is often lengthy. PSINet's success depends to a
significant degree upon its ability to attract and retain qualified
management, technical, marketing and sales personnel and upon their continued
contributions. In particular, PSINet's success is highly dependent upon the
personal abilities of its senior executive management, including William L.
Schrader, its Chairman of the Board and Chief Executive Officer and the
founder of
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PSINet, Harold S. Wills, its President and Chief Operating Officer, and Edward
D. Postal, its Executive Vice President and Chief Financial Officer. PSINet has
employment agreements with Messrs. Wills and Postal. The loss of the services
of any one of them could have a material adverse effect on PSINet's business,
financial condition or results of operations.
PSINet depends on suppliers and could be affected by changes in suppliers or
delays in delivery of their products and services
PSINet has few long-term contracts with its suppliers. PSINet is dependent
on third party suppliers for its leased-line connections or bandwidth. Some of
these suppliers are or may become competitors of PSINet, and these suppliers
are not subject to any contractual restrictions upon their ability to compete
with PSINet. If these suppliers change their pricing structures, PSINet may be
adversely affected. Moreover, any failure or delay on the part of PSINet's
network providers to deliver bandwidth to PSINet or to provide operations,
maintenance and other services with respect to bandwidth in a timely or
adequate fashion could adversely affect PSINet.
PSINet is also dependent on third party suppliers of hardware components.
Although PSINet attempts to maintain a minimum of two vendors for each required
product, some components used by PSINet in providing its networking services
are currently acquired or available from only one source. PSINet has from time
to time experienced delays in the receipt of hardware components and
telecommunications facilities, including delays in delivery of PRI
telecommunications facilities, which connect dial-up customers to its network.
A failure by a supplier to deliver quality products on a timely basis, or
PSINet's inability to develop alternative sources if and as required, could
result in delays which could have a material adverse effect on PSINet. PSINet's
remedies against suppliers who fail to deliver products on a timely basis are
limited by contractual liability limitations contained in supply agreements and
purchase orders and, in many cases, by practical considerations relating to
PSINet's desire to maintain good relationships with the suppliers. As PSINet's
suppliers revise and upgrade their equipment technology, PSINet may encounter
difficulties in integrating the new technology into its network.
Many of the vendors from whom PSINet purchases telecommunications bandwidth,
including the regional Bell operating companies, competitive local exchange
carriers and other local exchange carriers, currently are subject to tariff
controls and other price constraints which in the future may be changed. In
addition, recently enacted legislation will produce changes in the market for
telecommunications services. These changes may affect the prices which PSINet
is charged by the regional Bell operating companies and other carriers, which
could have a material adverse effect on PSINet's business, financial condition
and results of operations. Moreover, PSINet is subject to the effects of other
potential regulatory actions which, if taken, could increase the cost of
PSINet's telecommunications bandwidth through, for example, the imposition of
access charges.
The terms of PSINet's financing arrangements may restrict its operations
PSINet's financing arrangements are secured by substantially all of its
assets and stock of some of its subsidiaries. These financing arrangements
require that PSINet satisfy many financial covenants. PSINet's ability to
satisfy these financial covenants may be affected by events beyond its control
and, as a result, PSINet cannot assure you that it will be able to continue to
satisfy such covenants. These financing arrangements also currently prohibit
PSINet from paying dividends and repurchasing its capital stock without the
lender's consent. PSINet's failure to comply with the covenants and
restrictions in these financing arrangements could lead to a default under the
terms of these agreements. If PSINet defaults under the financing arrangements,
PSINet's lenders would be entitled to accelerate the outstanding indebtedness
and foreclose upon the assets securing the indebtedness. They would also be
entitled to be repaid from the proceeds of the liquidation of those assets
before the assets would be available for distribution to the holders of
PSINet's securities. In addition, the collateral security arrangements under
PSINet's existing financing arrangements may adversely affect its ability to
obtain additional borrowings.
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PSINet's financial condition may be adversely affected if its systems and
those of its suppliers fail because of Year 2000 problems
The commonly referred to Year 2000 or Y2K problem results from the fact
that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and
developed without considering the impact of a change in the century
designation. If not corrected, computer applications that use a two-digit
format could fail or create erroneous results in any computer calculation or
other processing involving the Year 2000 or a later date. PSINet has
identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in PSINet's
operations; and
2. Computer systems or embedded chips of third parties including,
without limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or decrease in
PSINet's ability to continue its operations.
PSINet has developed detailed plans for implementing, testing and
completing any necessary modifications to its key computer systems and
equipment with embedded chips to ensure that they are Y2K compliant. PSINet
engaged a third party consultant to perform an assessment of its U.S. internal
systems (e.g., accounting, billing, customer support and network operations)
to determine the status of its Y2K compliance. The assessment of these systems
has been completed and, while some minor changes were necessary, PSINet
believes that no material changes or modifications to its internal systems are
required to achieve Y2K compliance. PSINet's U.S. chief information officer
has developed a test bed of its U.S. internal systems to implement and
complete testing of the requisite minor changes. PSINet believes that its U.S.
internal systems are presently Y2K ready. PSINet has completed an inventory of
its internal systems that it uses outside of the United States to determine
the status of their Y2K compliance. Each international office has plans in
place to test, upgrade or, if necessary, replace components of its internal
systems to ensure they are Y2K compliant. PSINet anticipates that its
international operations will be Y2K compliant during the fourth quarter of
1999. To help ensure that its network operations and services to its customers
are not interrupted due to the Y2K problem, PSINet has established a network
operations team that meets weekly to examine its network on a worldwide basis.
This team of operational staff have conducted inventories of PSINet's network
equipment (software and hardware) and have found no material Y2K compliance
issues. PSINet believes that all equipment currently being purchased for use
in the PSINet network is Y2K compliant. Any existing equipment that is not Y2K
compliant is in the process of being made Y2K compliant through minor changes
to the software or hardware or, in limited instances, replacement of the
equipment. PSINet believes that its network is presently Y2K compliant. In
addition to administering the implementation of necessary upgrades for Y2K
compliance, its network team has developed a contingency plan to address any
potential problems that may occur with its network as it enters the year 2000.
PSINet believes that, as a result of its detailed assessment and completed
modifications, the Y2K issue will not pose significant operational problems
for the company. However, if the requisite modifications and conversions are
not made, or not completed in a timely fashion, it is possible that the Y2K
problem could have a material impact on PSINet's operations.
PSINet's cost of addressing Y2K issues has been minor to date, less than 5%
of its information technology and network operations budgets, but this amount
may increase if additional outside consultants or personnel resources are
required or if important operational equipment must be remediated or replaced.
PSINet's estimated total costs related to Y2K issues for 1999 is not expected
to exceed $2.0 million. These costs include equipment, consulting fees,
software and hardware upgrades, testing, remediation and, in limited
instances, replacement of equipment. The risk that Y2K issues could present to
PSINet include, without limitation, disruption, delay or cessation of
operations, including operations that are subject to regulatory compliance. In
each case, the correction of the problem could result in substantial expense
and disruption or delay of PSINet's operations. The total cost of Y2K
assessments and remediation is funded through cash on hand and available
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from other sources. PSINet is expensing these costs, as appropriate. The
financial impact of making all required systems changes or other remediation
efforts cannot be known precisely, but PSINet does not expect the impact to be
material to PSINet's financial position, results of operations, or cash flows.
PSINet has not canceled any principal information technology projects as a
result of its Y2K effort, although PSINet has rescheduled some internal tasks
to accommodate this effort.
In addition, PSINet has identified, prioritized and is communicating with
its suppliers, vendors, customers, lenders and other material third parties to
determine their Y2K status and any probable impact on the company. To date,
PSINet's inquiries have not revealed any significant Y2K noncompliance issue
affecting its material third parties. PSINet will continue to monitor and
evaluate its long-term relationships with its material third parties based on
their responses to its inquiries and on information learned from other sources.
If any of PSINet's material third parties are not Y2K ready and their non-
compliance causes a material disruption to any of their respective businesses,
PSINet's business could be materially adversely affected. Disruptions could
include, among other things:
. the failure of a material third party's business;
. a financial institution's inability to receive and transfer funds;
. an interruption in delivery of supplies from vendors;
. a loss of voice and data connections;
. a loss of power to PSINet's facilities; and
. other interruptions in the normal course of PSINet's operations, the
nature and extent of which PSINet cannot foresee.
PSINet will continue to evaluate the nature of these risks, but at this time
PSINet is unable to determine the probability that any of the risks will occur,
or if any does occur, what the nature, length or other effects, if any, such
risks may have on the company. If any of PSINet's material third parties
experience significant failures in their computer systems or operations due to
Y2K non-compliance, it could affect PSINet's ability to process transactions or
otherwise engage in similar normal business activities. For example, while
PSINet expects its internal systems, U.S. and non-U.S., to be Y2K ready in
stages during 1999, PSINet and its customers who communicate internationally
will be dependent upon the Y2K-readiness of many non-U.S. providers of
telecommunication services and their vendors and suppliers. If these providers
and others are not Y2K ready, PSINet and its customers may not be able to send
and receive data and other electronic transmissions, which would have a
material adverse effect on its revenues and business and that of its customers.
While many of these risks are outside its control, PSINet has identified and
contacted its critical third party vendors and suppliers and is establishing
contingency plans to remedy any potential interruption to its operations.
While PSINet believes that it is adequately addressing the Y2K issue, PSINet
cannot assure you that its Y2K compliance effort will prevent every potential
interruption or that the cost and liabilities associated with the Y2K issue
will not materially adversely impact its business, prospects, revenues or
financial position. PSINet is uncertain as to its most reasonably likely worst
case Y2K scenario and, although PSINet has completed a contingency plan to
handle reasonably forseeable interruptions resulting from the Y2K problem,
PSINet cannot assure you that its contingency plan will be capable of
adequately addressing every potential interruption that may occur.
PSINet faces a high level of competition in the Internet services industry
The market for Internet connectivity and related services is extremely
competitive. PSINet anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
established businesses from different industries.
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PSINet's current and prospective competitors include other national,
regional and local ISPs, long distance and local exchange telecommunications
companies, cable television, direct broadcast satellite, wireless
communications providers and on-line service providers. PSINet believes that
its network, products and customer service distinguish it from these
competitors. However, some of these competitors have significantly greater
market presence, brand recognition and financial, technical and personnel
resources than PSINet does. PSINet competes with all of the major long distance
companies, also known as interexchange carriers, including AT&T, MCI WorldCom,
Sprint and Cable & Wireless/IMCI, which also offer Internet access services.
The recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for local exchange carriers,
including the regional Bell operating companies, to enter the Internet
connectivity market. PSINet believes that there is a move toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from ISPs to address the Internet connectivity
requirements of the current business customers of long distance and local
carriers. The WorldCom/MFS/UUNet consolidation, the WorldCom/MCI merger, the
ICG/NETCOM merger, Cable & Wireless' purchase of the internetMCI assets, the
Intermedia/DIGEX merger, GTE's acquisition of BBN, Global Crossing's recently
announced plans to acquire Frontier Corp and Frontier's prior acquisition of
Global Center, Qwest Communication's recently announced plans to acquire US
West, AT&T's purchase of IBM's global communications network and MCI WorldCom's
recently announced plans to merge with Sprint are indicative of this trend.
Accordingly, PSINet expects to experience increased competition from the
traditional telecommunications carriers. Many of these telecommunications
carriers may have the ability to bundle Internet access with basic local and
long distance telecommunications services. This bundling of services may have
an adverse effect on PSINet's ability to compete effectively with the
telecommunications providers and may result in pricing pressure on PSINet that
could have a material adverse effect on its business, financial condition and
results of operations.
Many of the major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. Several announcements
also have recently been made by other alternative service companies approaching
the Internet connectivity market with various wireless terrestrial and
satellite-based service technologies.
The predominant on-line service providers, including America Online and
Microsoft Network, have all entered the Internet access business by engineering
their current proprietary networks to include Internet access capabilities.
PSINet competes to a lesser extent with these on-line service providers.
However, America Online's acquisition of Netscape Communications Corporation
and related strategic alliance with Sun Microsystems will enable it to offer a
broader array of Internet protocol-based services and products that could
significantly enhance its ability to appeal to the business marketplace and, as
a result, compete more directly with PSINet.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services would include new technologies such as
cable modems and xDSL. These providers have initially targeted the residential
consumer. However, it is likely that their target markets will expand to
encompass business customers, which is PSINet's target market. This expansion
could adversely affect the pricing of PSINet's service offerings. Moreover,
there has recently been introduced a number of free ISP services, particularly
in non-U.S. markets, and some ISPs are offering free personal computers to
their subscribers. While these services have been offered primarily to dial-up
consumer customers, they could be extended to dial-up business customers as
well. These trends could have a material adverse effect on PSINet's business,
financial condition and results of operations.
As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, PSINet currently encounters and
expects to continue to encounter significant pricing pressure and other
competition. Advances in technology as well as changes in the marketplace and
the regulatory environment are constantly occurring, and PSINet cannot predict
the effect that ongoing or future developments may have on it or on the pricing
of its products and services. Increased price or other competition could result
in erosion of PSINet's market share and could have a material adverse effect on
PSINet's business, financial
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condition and results of operations. PSINet cannot assure you that it will have
the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
As PSINet continues to expand its operations outside the United States, it
will encounter new competitors and competitive environments. In some cases,
PSINet will be forced to compete with and buy services from government-owned or
subsidized telecommunications providers. Some of these providers may enjoy a
monopoly on telecommunications services essential to PSINet's business. PSINet
cannot assure you that it will be able to purchase such services at a
reasonable price or at all. In addition to the risks associated with PSINet's
previously described competitors, foreign competitors may pose an even greater
risk, as they may possess a better understanding of their local markets and
better working relationships with local infrastructure providers and others.
PSINet cannot assure you that it can obtain similar levels of local knowledge.
Failure to obtain that knowledge could place PSINet at a significant
competitive disadvantage.
Technology trends and evolving industry standards could result in PSINet's
competitors developing or obtaining access to bandwidth and technologies that
carry more information faster than PSINet's bandwidth and technology and,
consequently, render PSINet's bandwidth or technology obsolete
PSINet's products and services are targeted toward users of the Internet,
which has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. PSINet's future success will depend, in part, on its ability to
effectively use and develop leading technologies.
PSINet cannot assure you that it will be successful in responding to
changing technology or market trends. In addition, services or technologies
developed by others may render PSINet's services or technologies uncompetitive
or obsolete. Furthermore, changes to PSINet's services in response to market
demand may require the adoption of new technologies that could likewise render
many of PSINet's assets technologically uncompetitive or obsolete. As PSINet
accepts bandwidth from IXC and its other existing global network suppliers or
acquires bandwidth or equipment from other suppliers that may better meet its
needs than existing bandwidth or equipment, many of its assets could be
determined to be obsolete or excess. The disposition of obsolete or excess
assets could have a material adverse effect on its business, financial
condition and results of operations.
Even if PSINet does respond successfully to technological advances and
emerging industry standards, the integration of new technology may require
substantial time and expense, and PSINet cannot assure you that it will succeed
in adapting its network infrastructure in a timely and cost-effective manner.
PSINet may be liable for information disseminated through its network
The law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. A number of
lawsuits have sought to impose liability for defamatory speech and infringement
of copyrighted materials. The U.S. Supreme Court has let stand a lower court
ruling which held that an ISP was protected by a provision of the
Communications Decency Act from liability for material posted on its system.
However, the findings in that particular case may not be applicable in other
circumstances with differing facts. Other courts have held that online service
providers and ISPs may, under some circumstances, be subject to damages for
copying or distributing copyrighted materials. However, in an effort to protect
qualified ISPs, the Digital Millennium Copyright Act was signed into law in
October 1998. Under some circumstances, this Act may provide qualified ISPs
with a "safe harbor" from liability for copyright infringement if the ISP does
not have knowledge of any transfer of potentially infringing material. PSINet
cannot assure you that it would be protected by the terms, provisions and
interpretations of this Act. Provisions of the Communications Decency Act which
imposed criminal penalties for using an interactive computer service for
transmitting obscene or indecent communications have been found
unconstitutional by the U.S. Supreme Court. However, on October 21, 1998, new
federal legislation was enacted that requires limitations on
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access to pornography and other material deemed "harmful to minors." This
legislation has been attacked in court as a violation of the First Amendment.
PSINet is unable to predict the outcome of this case at this time. The
imposition upon ISPs or web server hosts of potential liability for materials
carried on or disseminated through their systems could require PSINet to
implement measures to reduce its exposure to that liability. Those measures may
require that PSINet spend substantial resources or discontinue some product or
service offerings. Any of these actions could have a material adverse effect on
PSINet's business, operating results and financial condition.
PSINet carries errors and omissions insurance with a policy limit of $5.0
million, subject to deductibles and exclusions. Such coverage may not be
adequate or available to compensate PSINet for all liability that may be
imposed. The imposition of liability in excess of, or the unavailability of,
such coverage could have a material adverse effect on PSINet's business,
financial condition and results of operations.
The law relating to the regulation and liability of ISPs in relation to
information carried or disseminated also is undergoing a process of development
in other countries. For example a recent court decision in England held an ISP
liable for certain allegedly defamatory content carried through its network
under factual circumstances in which the ISP had been notified by the
complainant about the offending message which the ISP had failed to delete when
asked to do so by the complainant. Decisions, laws, regulations and other
activities regarding regulation and content liability may significantly affect
the development and profitability of companies offering on-line and Internet
access services, including PSINet.
One particular area of uncertainty in this regard results from the entry
into effect of European Union Directive 95/46/EC on the protection of
individuals with regard to the processing of personal data and on the free
movement of such data. That Directive imposes obligations in connection with
the protection of personal data collected or processed by third parties. Under
some circumstances, PSINet may be regarded as subject to the Directive's
requirements. The United States and the European Union currently are
negotiating the application of the Directive to U.S. companies.
FCC regulations may limit the services PSINet can offer
Consistent with PSINet's growth and acquisition strategy, PSINet is now
engaged in, or will soon be engaged in, activities that subject it to varying
degrees of federal, state and local regulation. The FCC exercises jurisdiction
over all facilities of, and services offered by, telecommunications carriers to
the extent that they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The state
regulatory commissions retain jurisdiction over the same facilities and
services to the extent they involve origination or termination of
jurisdictionally intrastate communications.
PSINet's Internet operations are not currently subject to direct regulation
by the FCC or any other governmental agency, other than regulations applicable
to businesses generally. However, the FCC has recently indicated that some
services offered over the Internet, such as phone-to-phone Internet protocol
telephony, may be functionally indistinguishable from traditional
telecommunications service offerings and their non-regulated status may have to
be re-examined. PSINet is unable to predict what regulations may be adopted in
the future, or to what extent existing laws and regulations may be found
applicable, or the impact such new or existing laws may have on its business.
PSINet cannot assure you that new laws or regulations relating to Internet
services, or existing laws found to apply to them, will not have a material
adverse effect on it. Although the FCC has recently decided not to allow local
telephone companies to impose per-minute access charges on Internet service
providers, and that decision has been upheld by the reviewing court, further
regulatory and legislative consideration of this issue is likely. In addition,
some telephone companies are seeking relief through state regulatory agencies.
Such rules, if adopted, would affect PSINet's costs of serving dial-up
customers and could have a material adverse effect on its business, financial
condition and results of operations.
In addition to PSINet's Internet activities, PSINet has recently focused
attention on acquiring telecommunications assets and facilities, which is a
regulated activity. PSINet's wholly-owned subsidiary,
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PSINetworks Company, has received an international Section 214 authorization
from the FCC to provide global facilities-based and global resale
telecommunications services. PSINet's wholly-owned subsidiary, PSINet Telecom
UK Limited, has received an international facilities license from DTI and
OFTEL, the responsible telecommunications regulatory bodies in the United
Kingdom. Currently, the FCC and OFTEL do not closely regulate the charges or
practices of non-dominant carriers, such as PSINet's subsidiaries.
Nevertheless, these regulatory agencies have the power to impose more stringent
regulatory requirements on PSINet and to change its regulatory classification,
which may adversely affect its business.
PSINet's subsidiaries have also received competitive local exchange carrier,
or CLEC, certification in New York, Virginia, Colorado and Texas, and have
applied for CLEC certification in Maryland and California. PSINet is
considering the financial, regulatory and operational implications of becoming
a competitive local exchange carrier in other states. As a provider of domestic
basic telecommunications services, particularly competitive local exchange
services, PSINet could become subject to further regulation by the FCC and/or
another regulatory agency, including state and local entities.
An important issue for CLECs is the right to receive reciprocal compensation
for the transport and termination of Internet traffic. Most states have
required incumbent local exchange carriers to pay competitive local exchange
carriers reciprocal compensation. In October 1998, the FCC determined that
dedicated Digital Subscriber Line service is an interstate service and properly
tariffed at the interstate level. In February 1999, the FCC concluded that at
least a substantial portion of dial-up ISP traffic is jurisdictionally
interstate. The FCC also concluded that its jurisdictional decision does not
alter the exemption from access charges currently enjoyed by ISPs. The FCC
established a proceeding to consider an appropriate compensation mechanism for
interstate Internet traffic. Pending the adoption of that mechanism, the FCC
saw no reason to interfere with existing interconnection agreements and
reciprocal compensation arrangements. The FCC order has been appealed and
briefing is expected to be completed in September 1999.
In light of the FCC's order, state commissions that previously addressed
this issue and required reciprocal compensation to be paid for ISP traffic, may
reconsider and may modify their prior rulings. Several incumbent local exchange
carriers are seeking to overturn prior orders, or seek refunds of, or authority
to escrow, payments that they claim are inconsistent with the FCCs' February
1999 order. In response to these and other challenges, some state commissions
have opened inquiries as to the appropriate compensation mechanisms in the
context of ISP traffic. Of the state commissions that have considered the issue
since the FCC's February 1999 order, the majority of these states have upheld
the requirement to pay reciprocal compensation for ISP traffic. PSINet cannot
assure you that any future court, state regulatory or FCC decision on this
matter will favor PSINet's position. An unfavorable result may have an adverse
impact on PSINet's potential future revenues as a CLEC, as well as increasing
its costs for PRIs generally.
If PSINet experiences system failure or shutdown, it may not be able to
deliver services
PSINet's success depends upon its ability to deliver reliable, high-speed
access to the Internet and upon the ability and willingness of its
telecommunications providers to deliver reliable, high-speed telecommunications
service through their networks. PSINet's network, and other networks providing
services to PSINet, are vulnerable to damage or cessation of operations from
fire, earthquakes, severe storms, power loss, telecommunications failures and
similar events, particularly if such events occur within a high traffic
location of the network. PSINet has designed its network to minimize the risk
of such system failure, for instance, with redundant circuits among POPs to
allow traffic rerouting. In addition, PSINet performs lab and field testing
before integrating new and emerging technology into the network, and engages in
capacity planning. Nonetheless, PSINet cannot assure you that it will not
experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network.
PSINet carries business personal property insurance at both scheduled
locations and unscheduled locations to protect the company against losses due
to property damage and business interruption. That coverage,
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however, may not be adequate or available to compensate PSINet for all losses
that may occur. In addition, PSINet generally attempts to limit its liability
to customers arising out of network failures by contractually disclaiming all
such liability. With respect to many services, PSINet has also contractually
limited liability to a usage credit based upon the amount of time that the
system was not operational. PSINet cannot assure you, however, that those
contracted limitations will be enforceable. In any event, significant or
prolonged system failures or shutdowns could damage PSINet's reputation and
result in the loss of customers.
Although PSINet has implemented network security measures, its network may be
susceptible to viruses, break-ins or disruptions
PSINet has implemented many network security measures, such as limiting
physical and network access to its routers. Nonetheless, PSINet's network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to its customers.
Furthermore, inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of PSINet's customers. This could, in turn, deter potential
customers and adversely affect PSINet's existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center
at Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on PSINet.
The security services that PSINet offers in connection with its customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although PSINet attempts to limit contractually its
liability in those instances, the occurrence of problems may result in claims
against PSINet or liability on PSINet's part. These kinds of claims, regardless
of their ultimate outcome, could result in costly litigation and could have a
material adverse effect on PSINet's business or reputation or on its ability to
attract and retain customers for its products. Moreover, until more consumer
reliance is placed on security technologies available, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry and PSINet's customer base and revenues.
PSINet depends on its technology and proprietary rights
PSINet's success and ability to compete is dependent in part upon its
technology and technical expertise and, to a lesser degree, on its proprietary
rights. In order to establish and protect its technology, PSINet relies on a
combination of copyright, trademark and trade secret laws and contractual
restrictions. Nevertheless, PSINet cannot assure you that these laws and
restrictions are adequate to protect PSINet's proprietary technology. It may be
possible for a third party to copy or otherwise obtain and use PSINet's
products or technology without authorization or to develop similar technology
independently. In addition, PSINet's products may be licensed or otherwise
utilized in foreign countries where laws may not protect PSINet's proprietary
rights to the same extent as do laws in the United States. It is PSINet's
policy to require employees and consultants and, when obtainable, suppliers to
execute confidentiality agreements upon the commencement of their relationships
with PSINet. Nonetheless, PSINet cannot assure you that these precautions will
be adequate to prevent misappropriation of its technology or that its
competitors will not independently develop technologies that are substantially
equivalent or superior to PSINet's technology.
In addition, PSINet is also subject to the risk of adverse claims and
litigation alleging infringement by PSINet of the intellectual property rights
of others. From time to time, PSINet has received claims that it has infringed
other parties' proprietary rights. While PSINet does not believe that its has
infringed the proprietary rights of other parties, PSINet cannot assure you
that third parties will not assert infringement claims in the future with
respect to its current or future products. Those claims may require that PSINet
enter into license
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arrangements or may result in protracted and costly litigation, regardless of
the merits of the claims. PSINet cannot assure you that any necessary licenses
will be available or that, if available, the licenses can be obtained on
commercially reasonable terms.
PSINet has recently introduced new enterprise service offerings, including
value-added, Internet protocol-based enterprise communication services and
xDSL-based Internet access services in limited areas. The failure of these
services to gain market acceptance in a timely manner or at all, or the failure
of xDSL-based services, in particular, to achieve significant market coverage
could have a material adverse effect on PSINet's business, financial condition
and results of operations. If PSINet introduces new or enhanced services with
reliability, quality or compatibility problems, it could significantly delay or
hinder market acceptance of those services, which could adversely affect
PSINet's ability to attract new customers and subscribers. PSINet's services
may contain undetected errors or defects when first introduced or as
enhancements are introduced. Despite testing by PSINet or its customers, PSINet
cannot assure you that errors will not be found in new services after
commencement of commercial deployment. These errors could result in additional
development costs, loss of or delays in market acceptance, diversion of
technical and other resources from PSINet's other development efforts and the
loss of credibility with PSINet's customers and subscribers, any of which could
have a material adverse effect on PSINet's business, financial condition and
results of operations.
Additionally, if PSINet is unable to match its network capacity to customer
demand for its services, its network could become congested during periods of
peak customer demand. That congestion could adversely affect the quality of
service PSINet is able to provide. Conversely, due to the high fixed cost
nature of PSINet's infrastructure, if PSINet's network is under-utilized, it
could adversely affect PSINet's ability to provide cost-efficient services.
PSINet's failure to match network capacity to demand could have a material
adverse effect on its business, financial condition or results of operations.
The market price and trading volume of PSINet's stock may be volatile
The market price and trading volume of PSINet's common stock and convertible
preferred stock has been and may continue to be highly volatile. Factors such
as variations in PSINet's revenue, earnings and cash flow and announcements of
new service offerings, technological innovations, strategic alliances or
acquisitions involving PSINet's competitors or price reductions by PSINet,
PSINet's competitors or providers of alternative services could cause the
market price of PSINet's common stock and convertible preferred stock to
fluctuate substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that particularly have
affected technology-based companies and resulted in changes in the market
prices of the stocks of many companies that have not been directly related to
the operating performance of those companies. The broad market fluctuations
have adversely affected and may continue to adversely affect the market price
of PSINet's common stock and convertible preferred stock.
PSINet does not anticipate that it will pay cash dividends on its common stock
PSINet has never declared or paid any cash dividends on its common stock and
does not anticipate paying cash dividends on its common stock in the
foreseeable future. In addition, PSINet's debt securities and credit facility
contain limitations on its ability to declare and pay cash dividends.
Risk Factors Relating to TNI
TNI's expansion of its "800" backbone and access capacity involves higher
network costs that could adversely affect its business and operating results
TNI has expanded, and continues to expand, its "800" backbone and access
network capacity to ensure adequate capacity and appropriate network
architecture for the significant increases in network traffic primarily related
to TNI's acquisition from AT&T Corp. of the right to provide services under
customer service contracts relating to AT&T's Transaction Access Service
business, but also to accommodate increasing volumes from its
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base business. The costs of establishing an "800" access service are expected
to negatively impact gross margins until the installation costs are offset by
an increase in transaction volumes transported using TNI's own "800" access
service. After a particular transaction volume level, TNI believes, but neither
TNI nor PSINet can assure you, that gross margins will increase due to a
significant lower variable cost per transaction from TNI's own "800" access
service versus the variable cost charged by third party service providers
including AT&T. TNI's own "800" access service also reduces TNI's reliance upon
these third party service providers. The ultimate impact on TNI's gross margin
percentage will primarily depend upon the timing and success of the roll-out of
TNI's own "800" access service and the transition of customers from "800"
services purchased from third parties to TNI's "800" access service. The
increased costs of network services relating to the expansion of TNI's "800"
access service could have a material adverse effect on TNI's business, results
of operations and financial condition.
TNI derives a substantial portion of its revenue from a small number of
customers
For the year ended December 31, 1998, approximately 44% of TNI's total
revenues were derived from its five largest customers, and for the six months
ended June 30, 1999, approximately 47% of TNI's total revenues were derived
from these customers. The loss of any one or more of these customers would have
a material adverse effect on TNI's business, operating results and financial
condition. TNI has multi-year contracts with these customers. These contracts
expire between June 2000 and May 2002. Neither TNI nor PSINet can assure you
that these contracts will be renewed.
TNI depends on market expansion and on its expansion into new markets
Although TNI has grown rapidly since it became operational in June 1991,
TNI's future growth and profitability will depend in part on:
. the further expansion of:
. the point of sale/point of service transaction network services
market;
. the telecommunications services market;
. the financial services market;
. the emergence of other markets for:
. electronic transaction network services;
. services for automated teller machine processing;
. services for healthcare claims processing;
. services for electronic benefits transfer; and
. TNI's ability to penetrate these markets both domestically and
internationally.
Further market expansion depends on the continued growth in the number of
transactions and the continued automation of traditional paper-based processing
systems. Neither TNI nor PSINet can assure you that markets for the TNI network
and telecommunications services will continue to expand and develop or that TNI
will succeed in penetrating new markets.
TNI faces significant competition
The point of sale/point of service transaction network services market and
the telecommunications services market are highly competitive, and TNI expects
competition in each of these businesses to increase. TNI may be unable to
compete successfully for the following reasons.
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TNI's competitors include public data networks, major interexchange carriers
such as MCI WorldCom, Sprint and AT&T, and customers who may decide to perform
network services in-house. Several of TNI's competitors have recently
introduced new products that compete with TNI's products. Increased competition
has resulted in price reductions and reduced margins. Increased competition
could result in additional price reductions, reduced margins and loss of market
share, all of which could materially and adversely affect TNI's business,
operating results and financial condition. Many of TNI's current and potential
competitors have significantly greater financial, technical, marketing and
other resources than TNI has. As the point of sale/point of service transaction
network services market and the telecommunications services market continue to
grow, TNI's competitors may devote greater resources to the development and
marketing of new competitive services and the marketing of existing competitive
services. Recent federal legislation relaxes current regulations that restrict
the regional Bell operating companies from competing in this industry. Neither
TNI nor PSINet can assure you that TNI will be able to compete successfully
with existing or new competitors or that competitive pressure that TNI faces
will not materially and adversely affect TNI's business, operating results and
financial condition.
If TNI does not successfully respond to technological change, TNI's business
could be adversely affected
The markets for TNI's services are characterized by rapidly changing
technology and frequent new service offerings that can render existing services
obsolete or unmarketable. TNI's future success will depend on TNI's ability to
enhance existing services and to develop and introduce, on a timely and cost
effective basis, new services that keep pace with technological developments
and that address increasingly sophisticated customer requirements. Neither TNI
nor PSINet can assure you that TNI will successfully identify, develop and
market service enhancements or new services that respond to technological
change or that TNI's service enhancements and new services will adequately meet
marketplace requirements and achieve market acceptance. Also, TNI may
experience difficulties that could delay or prevent TNI's successful
development, introduction and marketing of service enhancements or new
services. TNI's business, operating results and financial condition could be
materially and adversely affected if TNI were to fail to develop and market in
a timely and cost effective manner service enhancements or new services.
TNI depends on key personnel; TNI may not be able to attract and retain
highly-skilled personnel
TNI's success depends largely on a number of key employees including John J.
McDonnell, Jr., its president and chief executive officer. Several of TNI's
senior management employees have recently joined TNI. If TNI loses the services
of any of its key employees, TNI's business may be adversely affected.
TNI's success also depends largely on its ability to attract and retain
highly-skilled technical, managerial, sales and marketing personnel. TNI
believes that it needs to hire additional technical personnel to enhance its
existing services and to develop new services. Competition for highly skilled
personnel is intense in TNI's industry. This competition means that there are
fewer qualified people available to hire and the costs of hiring and retaining
them are high. While TNI employees enter into confidentiality agreements, they
generally do not enter into non-competition agreements. In addition, in
connection with the signing of the merger agreement, unvested stock options
held by employees of TNI immediately vested. The acceleration of these options
could potentially reduce the retention incentive provided by the options. If
TNI is unable to hire and retain the necessary personnel, TNI's development of
service enhancements and new services likely would be adversely affected.
Neither TNI nor PSINet can assure you that TNI will succeed in retaining its
key personnel and in attracting and retaining the personnel it requires to
continue its growth strategy.
TNI may be unable to protect its proprietary technology and others could
independently develop equal or superior technologies
TNI may not be able to protect sufficiently its proprietary technology on
which its success heavily depends. TNI relies principally on copyright and
trade secret laws and contractual provisions to protect its proprietary
technology. TNI enters into confidentiality or license agreements with its
employees, distributors,
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customers and potential customers, and TNI limits access to and distribution of
its software, documentation and other proprietary information. These measures
may not be adequate to prevent misappropriation of TNI's technology. In
addition, the laws of some foreign countries provide less protection of
intellectual property rights than the laws of the United States. Further,
neither TNI nor PSINet can assure you that TNI's competitors will not
independently develop technologies that are substantially equivalent or
superior to TNI's technology.
TNI may face claims of infringement of proprietary rights
There is a risk that third parties may assert claims that TNI is infringing
their proprietary rights. If infringement claims are asserted against TNI, it
could incur significant costs in defending those claims. TNI may be required to
discontinue using and selling any infringing technology and services. TNI may
also be required to expend resources to develop non-infringing technology or to
purchase licenses or pay royalties for other technology. TNI may not be able to
acquire licenses for the other technology on reasonable commercial terms or at
all.
TNI may not be able to acquire licenses that it may need
TNI believes that it has all licenses that it needs to conduct its business.
But TNI may need to acquire additional licenses in the future. If additional
licenses are required, TNI may not be able to acquire them on reasonable
commercial terms or at all.
TNI depends on a limited number of suppliers and does not have supply
contracts
Some key components used in the TNI network are currently available only
from a limited number of suppliers. TNI does not have long-term supply
contracts with these or any other limited source vendors, and TNI purchases
network equipment on a purchase order basis. If TNI is unable to obtain
sufficient quantities of limited source equipment that it may require or to
develop alternate sources as required in the future, its development and
deployment of network equipment could be delayed or reduced. If TNI experiences
those delays or reductions, its business could be adversely affected.
Telecommunications legislation and FCC rules may result in increased network
costs and additional competition, and TNI may face burdensome government
regulation
Federal and state regulations can affect the costs of business for TNI and
its competitors by changing the rate structure for access services purchased
from local exchange carriers to originate and terminate calls. Under the
Telecommunications Act of 1996, the Federal Communications Commission
implemented rules and regulations known as Access Charge Reform to reform the
system of interstate access charges. While the first, second and third phases
of Access Charge Reform resulted in decreases in some components of TNI's
variable cost per transaction, the second and third phases, which were
implemented in January and July 1998, increased TNI's fixed charges that more
than offset the reduction in variable costs per transaction. Future phases of
Access Charge Reform, scheduled to be implemented in 1999 and 2000, may result
in TNI incurring increased network costs.
The 1996 Telecommunications Act also removed some restrictions on the
ability of the regional Bell operating companies to provide enhanced services,
specifically including credit card verification services, between local access
transport areas. Under the legislation, the regional Bell operating companies
ultimately will be permitted to provide long distance telecommunications
between local access transport areas, out-of-region immediately and in-region
after satisfaction of network unbundling and related requirements. As a result,
TNI and its telecommunications services customers likely will face additional
competition.
In addition, TNI is considering expanding its services into markets that may
involve providing voice-grade or data common carrier telecommunications
services. If TNI provides those services, TNI will be required to comply with
applicable FCC and state authorization and tariffing regulations, which could
be burdensome.
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TNI's business is seasonal and TNI experiences fluctuations in quarterly
results
Merchant credit card transactions account for a major percentage of the
transaction volume processed by TNI's customers. TNI expects the volume of
those transactions on its network to be greater in the fourth quarter holiday
season than during the rest of the year. Consequently, revenues and earnings
from merchant credit card transactions in the first quarter generally are
expected to be lower than revenues and earnings from merchant credit card
transactions in the fourth quarter of the immediately preceding year. Although
the financial services, healthcare claims processing and electronic benefits
transfer markets, as well as other potential markets that TNI has targeted for
future expansion, are anticipated to be less seasonal, TNI expects that its
operating results in the foreseeable future will be significantly affected by
seasonal trends in the merchant credit card transaction market. Quarterly
results also can be affected by a number of other factors, including costs
incurred for network expansion, the impact of Access Charge Reform on network
costs, general economic conditions, acquisitions, weather and changes in
pricing policy by TNI and its competitors.
TNI may not succeed in effectively managing its growth
TNI has been experiencing a period of rapid growth and expansion. In 1996
through 1999, TNI formed or acquired interests of 50% or more in businesses in
Ireland, Sweden, the United Kingdom, France, Japan and Australia. In 1998 TNI
acquired AT&T's Transaction Access Service business and selected assets and
selected technology of SunTech Processing Systems, LLC and OmniLink
Communications Corporation. In January 1999 TNI acquired TransLine
Communications, Inc. TNI's growth and profitability depend on its ability to
successfully integrate acquired businesses and assets into its existing
operations and to successfully expand internationally, which TNI may not
accomplish. Some of TNI's key employees have not had experience in managing
companies of TNI's size or larger. In addition, some of TNI's senior management
personnel have recently joined TNI. TNI's ability to manage growth successfully
will require it to continue to improve its operational, management and
financial systems and controls. If TNI's management is unable to manage growth
effectively, TNI's business, results of operations and financial condition
could be materially and adversely affected.
Problems relating to the year 2000 issue could materially affect TNI's
business
TNI believes that its networks and computer systems that execute its primary
business processes are year 2000 compatible, which means that the products or
services will accurately receive, process and provide date data between the
years 1999 and 2000 and make leap year calculations if all other products used
in or in combination with the product or service properly exchange data with
it. But TNI may not have identified every factor or component that may render
its products or services not year 2000 compatible. The technology TNI uses in
its information technology systems and in its non-information technology
systems may contain undetected errors or defects associated with year 2000 date
functions. Errors or defects in TNI's products or service offerings could
result in delay or loss of revenue, diversion of development resources, damage
to its reputation, or increased service and warranty costs, any of which could
impair TNI's business, operating results and financial condition.
Disruptions involving the computer systems of vendors or customers, which
are outside TNI's control, could impair TNI's ability to obtain services or
conduct business. TNI's revenues and financial condition could be materially
adversely affected if any of its significant vendors or customers are not year
2000 compatible or TNI fails to identify or replace non-compatible equipment or
software and the non-compatibility causes a material disruption to TNI's
business.
TNI's goal was to have the mission-critical networks, applications and
systems within its control year 2000 compatible by August 31, 1999. TNI has
largely completed the deployment of necessary software to its networks,
applications and systems, though some testing continues. TNI expects to receive
a corrective software patch from one vendor in October and will deploy that
patch promptly following receipt. Based upon the deployment and testing
performed to date, TNI believes that the portions of its mission-critical
networks,
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applications and systems within its control will be year 2000 compatible by
October 31, 1999. TNI cannot assure you, however, that the actions it takes
with respect to its network, computer systems, products, services or embedded
systems will eliminate the numerous and varied risks associated with the year
2000 date change. Further, TNI cannot assure you that TNI will not be adversely
affected by any year 2000-related difficulties encountered by vendors or
customers or any downturn or disruption in the economy in general resulting
from year 2000-related problems. The extent of the potential impact of the year
2000 issue generally is not known and neither TNI nor PSINet can assure you
that the year 2000 issue will not have a material adverse effect on its
business, operating results and financial condition. TNI has not yet fully
developed a comprehensive contingency plan to address situations that may
result if it is unable to achieve year 2000 readiness of its mission-critical
networks, applications and systems, but it expects to complete a comprehensive
year 2000 contingency plan by October 31, 1999.
Forward-looking statements
Some of the information contained in this prospectus/proxy statement may
contain forward-looking statements. The statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or similar words, or by discussions of strategy that
involve risks and uncertainties. These statements may discuss PSINet's or TNI's
future expectations or contain projections of PSINet's or TNI's results of
operations or financial condition or expected benefits to PSINet or TNI
resulting from acquisitions or transactions. Neither PSINet nor TNI can assure
you that the future results indicated, whether expressed or implied, will be
achieved. The risk factors noted in this section and other factors noted
throughout, including risks and uncertainties, could cause PSINet's or TNI's
actual results to differ materially from those contained in any forward-looking
statement.
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THE COMPANIES
Transaction Network Services, Inc.
TNI was incorporated in August 1990 to build and operate a communications
network focused on the network services needs of the POS (point-of-sale/point-
of-service) transaction processing industry through its POS division. TNI
currently operates four divisions: (1) the POS Division which includes TNI's
TransXpress(R) network services for the point-of-sale/point-of-service
transaction processing industry, (2) the Telecom Services Division which
includes TNI's CARD*TEL(R) telephone call billing validation and fraud control
services and other services targeting primarily the telecommunications
industry, (3) the Financial Services Division which provides integrated data
and voice services including the TNI FastLink(R) Data Service in support of the
Financial Information eXchange messaging protocol and other transaction
oriented trading applications primarily to the financial services industry, and
(4) the International Systems Division which markets TNI's products and
services internationally.
In September 1998, TNI significantly expanded its POS Division through a
$64.3 million acquisition of the rights to provide services under certain
customer service contracts relating to AT&T Corp.'s Transaction Access Service.
AT&T's Transaction Access Service provided services similar to TNI's point-of-
sale/point-of-service network services. Additionally, in 1998, TNI expanded the
service offerings of its POS Division through the acquisitions of certain
assets of SunTech Processing Systems, LLC and of OmniLink Communications
Corporation. SunTech's proprietary host-interface processing technology allows
for leased line automated teller machines to be converted into dial-up
automated teller machines. OmniLink develops, manufactures and markets modems
and ISDN terminal adaptors for electronic commerce, Internet access,
telecommuting and advance office communications. TNI has transferred its dial-
up modem technology acquired from SunTech to OmniLink.
In June 1994, TNI acquired Fortune Telecommunications, Inc. of Ft.
Lauderdale, Florida and formed TNI's Telecom Services Division. The Telecom
Services Division provides customers in the telecommunications industry with
telephone call fraud control, billing validation, Signaling System No. 7
services and other services.
In March 1997, the Financial Services Division was created to serve the data
communications needs of the financial services industry. TNI's financial
services network provides a secure, independent, Internet Protocol Extranet for
transacting securities trading orders and associated data electronically
between brokerage firms and financial institutions. In January 1999, TNI
acquired TransLine Communications, Inc. TransLine's core business is comprised
of managed private, secure voice and data services provided to financial
institutions for futures, options and commodities trading.
In June 1996, TNI formed Transaction Network Services Limited, a majority-
owned subsidiary. TNSL provides point-of-sale/point-of-service network services
in Ireland and serves as TNI's European technology and marketing center to
support current and future European operations. In October 1997, through TNSL,
TNI acquired a majority interest in Pronoma Systems AB which has been renamed
Transaction Network Services TNS AB and operates as a TNSL subsidiary located
in Stockholm, Sweden. In April 1998, the Company, through TNSL, acquired a 50%
interest in ATOS Ireland Limited. Atos has been renamed Switchtran Limited and
provides processing services, primarily for cash withdrawals, for a network of
automated teller machines located throughout Ireland. In September 1998, TNI
entered into a 60% owned joint venture in the United Kingdom. The joint venture
is named Transaction Network Services UK Limited and operates as a TNI
subsidiary located in Sheffield, England. In November 1998, TNI, through TNSL,
formed Transaction Network Services, Societe Anonyme. TNSSA operates as a TNI
subsidiary located in Paris, France. In April 1999, TNI acquired the other 50%
interest in Switchtran and also acquired a 50.001% interest in Transaction
Network Services (Australia) Pty Limited. In July 1999, TNI acquired a 60%
interest in Transaction Network Services (Japan) KK, and, in August 1999,
acquired the minority interest in Transaction Network Services (UK). TNSL,
TNSAB, TNSUK, Switchtran and TNSSA utilize TNI's network technology to provide
point-of-sale/point-of-
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service and other transaction services in their respective countries.
The majority of TNI's revenues are derived from the transmission of point-
of-sale/point-of-service transactions (predominantly credit and debit card
transactions) which are processed electronically by a small number of third
party point-of-sale/point-of-service transaction processors. TNI's TransXpress
network services utilize proprietary technology that provides a fast
communications link between the merchant site and the transaction processor at
a cost generally lower than current alternatives. TNI was the first provider of
"950" service to third party point-of-sale/point-of-service transaction
processors and currently provides "950" service in 170 local access transport
areas, which cover approximately 98% of the United States population. In June
1991, TNI transmitted its first point-of-sale/point-of-service transaction, and
since then has increased its average daily transaction volume from
approximately 17,000 in the third quarter of 1991 to more than 17.4 million in
the third quarter of 1999. TNI markets its TransXpress network services
directly to third party point-of-sale/point-of-service transaction processors,
who in turn resell TNI's network services as a part of the processors' own
services. Of the ten leading third party point-of-sale/point-of-service
transaction processors in the nation, eight (First Data Corporation, Electronic
Payment Services, Inc., Alliance Data Systems, Paymentech Inc., National Data
Corporation, American Express, NOVUS Services, Inc. and Vital Processing
Services) purchase TNI's network services.
PSINet Inc.
PSINet is the leading independent global provider of Internet solutions to
businesses. PSINet provides Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 17 of the 20 largest global telecommunications markets and is currently
operating in 22 countries. In addition to these services, PSINet also offers a
suite of value-added products and services that are designed to enable its
customers to maximize utilization of the Internet to communicate more
efficiently with its customers, suppliers, business partners and remote office
locations. PSINet conducts its business through operations organized into four
geographic operating segments--North America, Latin America, Europe and
Asia/Pacific. PSINet's services and products include:
. Access services that offer dedicated, dial-up, wireless and digital
subscriber line, or xDSL, connections that link its customers' networks
to the Internet;
. Web hosting services that provide cost-effective solutions for the
management and maintenance of its customers' Web sites and Web-based
applications;
. Intranets and virtual private networks, or VPNs, that allow its
customers to provide secure and seamless wide area networks, or WANs,
connecting their remote offices and employees, customers and suppliers;
. E-commerce services designed to enable its customers to securely
transact business over the Internet;
. Voice-over-Internet protocol services that enable companies with
multiple business locations to transmit voice conversations over the
PSINet network at a significant savings to traditional long-distance
calling;
. E-mail services that allow its customers to outsource to PSINet the day-
to-day management and maintenance of their internal message systems; and
. Managed security services designed to protect, monitor and maintain the
integrity of its customers' networks.
PSINet also provides wholesale and private label network connectivity and
related services to other Internet service providers, known as ISPs, and
telecommunications carriers to further utilize its network capacity.
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PSINet operates one of the largest global commercial data communications
networks. Its Internet-optimized network has a footprint that extends around
the globe and is connected to approximately 600 sites, called points of
presence or POPs, situated throughout North America, Latin America, Europe and
Asia that enable our customers to connect to the Internet. PSINet's network
reach allows its customers' employees to access their corporate network and
systems resources through local calls in over 150 countries. PSINet's network
architecture consists of high capacity frame relay switches and routers
designed to deliver superior Internet connections, reliable packet control and
intelligent data traffic routing and is compatible with all of the most widely
deployed transmission technologies. PSINet further expands the reach of its
network by connecting with other large ISPs at 137 points through 67
contractual arrangements, called peering agreements, that permit the exchange
of information between its network and the networks of its peering partners.
PSINet has recently opened four global Internet hosting facilities in the U.S.,
Switzerland, Canada and London containing a total of approximately 125,000
square feet. PSINet also opened an Internet hosting facility in New York on
October 19, 1999 and anticipates opening an additional facility in Los Angeles
in November 1999, containing a total of approximately 55,000 square feet.
PSINet also has two network operating centers that monitor and manage network
traffic 24-hours per day, seven-days per week.
PSINet's mission is to build a premier Internet protocol-based
communications company. PSINet has grown by using multiple sales channels,
including direct sales and resellers, and by acquiring other ISPs and related
businesses in key markets. It has increased revenues by providing services and
products that enhance its customers' business processes by helping them to
effectively use the Internet and related tools. As of June 30, 1999, PSINet
served approximately 73,400 business accounts, including 364 ISPs.
PSINet was incorporated in New York in 1988. Additional information
regarding PSINet is contained in PSINet's filings with the Securities and
Exchange Commission. See "Where You Can Find More Information" on page 99.
PSINet Shelf I Inc.
PSINet Shelf Inc. I is a Delaware corporation and a wholly-owned subsidiary
of PSINet, formed by PSINet in June 1999, will act solely for the purpose of
completing the merger with TNI.
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THE SPECIAL MEETING
We are furnishing this prospectus/proxy statement to stockholders of TNI as
part of the solicitation of proxies by the TNI board of directors for use at
the special meeting.
Date, Time and Place
The TNI board of directors is soliciting proxies in the form accompanying
this prospectus/proxy statement for use at the special meeting of TNI
stockholders. The special meeting will be held at 1939 Roland Clarke Place,
Reston, Virginia at 9:00 a.m., local time, on Tuesday, November 23, 1999.
Purpose of Special Meeting
At the special meeting, we are asking holders of TNI common stock to adopt
the merger agreement. The TNI board of directors has determined that the merger
is fair to, and in the best interests of, TNI stockholders. The Board has
unanimously approved the merger agreement and the merger and unanimously
recommends that TNI stockholders vote "for" adoption of the merger agreement.
Record Date; Stock Entitled to Vote; Quorum
The TNI board of directors has fixed the close of business (5:00 p.m. local
time) on October 22, 1999 as the record date. Only holders of record of TNI
common stock at the close of business on the record date, are entitled to
notice of and to vote at the special meeting. On the record date, 14,190,581
shares of TNI common stock were issued and outstanding and held by
approximately 115 holders of record.
A quorum is present at the special meeting if 50% of the shares of TNI
common stock issued and outstanding and entitled to vote on the record date are
represented in person or by proxy. In the event that a quorum is not present at
the special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of TNI common stock
on the record date are entitled to one vote per share at the special meeting on
the proposal to adopt the merger agreement.
Votes Required
The adoption of the merger agreement requires the affirmative vote of a
majority of the shares of TNI common stock outstanding on the record date.
Voting by TNI Directors and Executive Officers
At the close of business on the record date, TNI directors and executive
officers and their affiliates owned and were entitled to vote 2,192,934 shares
of TNI common stock, which represented approximately 15.5% of the shares of TNI
common stock outstanding on that date. Each TNI director and executive officer
has indicated his present intention to vote, or cause to be voted, the TNI
common stock owned by him "for" adoption of the merger agreement. In addition,
Jurgen Manchot, William N. Melton, John J. McDonnell, Jr., McDonnell &
Associates, L.P. and The John J. McDonnell, Jr. and Marion J. McDonnell
Charitable Foundations have entered into a stockholders' voting and proxy
agreement with PSINet, PSINet Shelf I Inc. and certain officers of PSINet.
These TNI stockholders have agreed to vote their shares of TNI common stock in
favor of the merger and against alternate proposals and have granted PSINet and
the named officers a proxy to vote the TNI shares at the special stockholders
meeting. Approximately 14.1% of the outstanding TNI shares are covered by the
voting agreement.
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Voting of Proxies
All TNI shares represented by properly executed proxies received in time for
the special meeting will be voted at the special meeting in the manner
specified by the proxies. Properly executed proxies that do not contain voting
instructions will be voted "for" adoption of the merger agreement. Shares of
TNI common stock represented at the special meeting but not voting, including
shares of TNI common stock for which proxies have been received but for which
holders of shares have abstained, will be treated as present at the special
meeting for purposes of determining the presence or absence of a quorum for the
transaction of all business.
Only shares affirmatively voted for adoption of the merger agreement,
including properly executed proxies that do not contain voting instructions,
will be counted as favorable votes for that proposal. Brokers who hold shares
of TNI common stock in street name for customers who are the beneficial owners
of such shares may not give a proxy to vote those customers' shares in the
absence of specific instructions from those customers. These unvoted shares are
referred to as broker non-votes and have the effect of votes against adoption
of the merger agreement. The persons named as proxies by a stockholder may
propose and vote for one or more adjournments of the special meeting, including
adjournments to permit further solicitations of proxies. No proxy voted against
the proposal to adopt the merger agreement will be voted in favor of any
adjournment or postponement.
TNI does not expect that any matter other than the proposal to adopt the
merger agreement will be brought before the special meeting. If, however, the
TNI board of directors properly presents other matters, the persons named as
proxies will vote in accordance with their judgment.
Revocability of Proxies
The grant of a proxy by telephone, over the Internet or on the enclosed form
of proxy does not preclude a stockholder from voting in person at the special
meeting. A stockholder may revoke a proxy at any time prior to its exercise by
filing with the Secretary of TNI a duly executed revocation of proxy, by
submitting in the same manner as the prior proxy a duly executed proxy bearing
a later date or by appearing at the special meeting and voting in person.
Attendance at the special meeting will not itself constitute revocation of a
proxy.
Solicitation of Proxies
TNI will bear the cost of the solicitation of proxies from its stockholders.
In addition to solicitation by mail, the directors, officers and employees of
TNI and its subsidiaries may solicit proxies from stockholders by telephone or
other electronic means or in person. TNI will cause brokerage houses and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of stock held of record by such persons. TNI will reimburse
such custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses in doing so.
MacKenzie Partners, Inc. will assist in the solicitation of proxies by TNI.
TNI will pay MacKenzie Partners, Inc. a fee, not to exceed $5,000 plus
reimbursement of certain out-of-pocket expenses, and will indemnify them
against any losses arising out of their proxy solicitation services on behalf
of TNI.
You should NOT send stock certificates with your proxy cards. A form of
election with instructions for the surrender of TNI common stock certificates
will be mailed to you within 30 days prior to, but no later than seven business
days prior to, the effective time of the merger.
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THE MERGER
The following discussion summarizes the material terms of the merger and the
merger agreement. Stockholders should read carefully the merger agreement,
which is attached as Annex 1 to this prospectus/proxy statement.
Background to the Merger
PSINet has actively pursued expanding its role as a leading global Internet
Service Provider (ISP) to businesses through acquisitions of Internet capacity
as well as customers. In October, 1998, John Walpuck, PSINet's Vice President
of Corporate Development, initiated telephone calls to TNI's then Chief
Financial Officer, Thaddeus Weed, with a goal of meeting to discuss views on
the eCommerce and Internet industry and to explore joint business
opportunities. They generally discussed potential business relationships
between the two companies, including a possible business combination. No
meeting was held following those telephone calls, and PSINet focused on other
opportunities. TNI had been approached by another company and announced on
October 20, 1998 that it was in negotiations with a prospective acquiror.
On May 24, 1999, at a meeting initiated by PSINet, representatives of
PSINet, including Mr. Walpuck, William Opet, President, Corporate Network
Services, Kathleen Horne, then Vice President and Deputy General Counsel,
Lawrence Winker, Vice President and Treasurer, and James Davin, Vice President
and Chief Technical Officer, met with representatives of TNI, including John
McDonnell, Jr., President and Chief Executive Officer, Henry Graham, Chief
Financial Officer, Mr. Weed, Brian Bates, Senior Vice President and General
Manager, POS Services Division, John Shanz, Senior Vice President and General
Manager, Financial Services Division, Peter Gorog, Vice President and John
McDonnell, III, Senior Vice President and General Counsel. The parties
exchanged a mutual nondisclosure agreement and discussed a variety of business
opportunities between the two companies. The four-hour meeting covered a number
of topics including possibilities for a commercial relationship, joint
marketing opportunities, and a business combination.
At a meeting of PSINet's board of directors held on the morning of May 27,
1999, PSINet's board was apprised of the status of discussions between PSINet
and TNI and the proposed timing of future meetings between the parties. At the
conclusion of this discussion, PSINet's board of directors authorized its
officers to continue discussions with TNI.
On May 27, 1999, Mr. Walpuck and Mr. Winkler met again with Mr. Graham, Mr.
Weed and Mr. McDonnell, III and expressed PSINet's desire to pursue a potential
business combination between the companies, subject to the satisfactory
completion of due diligence, negotiations between the companies, and other
matters. The representatives proposed a meeting between the chief executive
officers of the two companies which occurred on the next day. On May 28, 1999,
Mr. Walpuck, Mr. Winkler and Harold Wills, President and Chief Operating
Officer of PSINet, met with Mr. McDonnell, Jr., Mr. Graham, Mr. Weed and
Mr. McDonnell III to discuss their views of the industry and possible business
relationships including possible business combinations. On the same day,
William Schrader, Chairman and Chief Executive Officer of PSINet, and John
McDonnell, Jr. met and agreed on an intensive review and analysis of TNI and
its business, technology, financial condition and prospects by PSINet and its
representatives.
Commencing June 1, 1999, TNI provided PSINet and its representatives with
access to corporate records, documents and other information regarding TNI and
its subsidiaries for PSINet's legal, financial and business review. PSINet also
provided representatives of TNI with access to similar materials for their
diligence review.
On June 4, 1999, the board of directors of PSINet held a telephonic meeting
to discuss the results of the diligence review and various structure and
pricing information. The board unanimously approved management's proceeding
with an offer for the acquisition of TNI.
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On June 6, 1999, Mr. Wills, Mr. Walpuck, Mr. Schrader, Mr. Winkler and Alex
Diaz-Asper, Director of Mergers and Acquisitions of PSINet, met with Mr.
McDonnell, Jr., Mr. Graham, Mr. Weed and Mr. McDonnell, III. Later that day,
Mr. Wills met separately with Mr. McDonnell, Jr. Mr. Wills and Mr. McDonnell,
Jr. discussed price and valuations, and Mr. Wills extended an oral offer of $40
per share for TNI common stock, with a fixed exchange ratio of PSINet common
stock for TNI common stock.
During the week of June 7, 1999, the parties engaged in negotiations
regarding price and structure of the proposed transaction and continued their
diligence review. PSINet proposed a merger agreement that contemplated a stock
for stock exchange with a fixed exchange ratio and a price of $40 to $41 per
share of TNI common stock, subject to completing due diligence. TNI management,
TNI's in-house and outside legal counsel and TNI's financial advisors, Morgan
Stanley & Co. Incorporated, reviewed and discussed the draft of the merger
agreement distributed by PSINet, including price and other terms of the
proposed merger.
On June 10, 1999, TNI held a special meeting of its board of directors. A
representative of Morgan Stanley discussed the major terms of PSINet's
proposal. The board discussed the PSINet proposal and synergies between the two
companies. A representative of Arent Fox Kintner Plotkin & Kahn, PLLC, TNI's
outside legal counsel, discussed the board's fiduciary duties and the
significant terms of the merger agreement proposed by PSINet. The board
identified and discussed aspects of the proposal that directors considered
unacceptable. The board authorized TNI's management to continue negotiations
with PSINet consistent with the board's guidelines. On June 11, TNI submitted
to PSINet a revised draft of a merger agreement.
On June 12, 1999, Mr. Walpuck, Mr. Winkler, Mr. Diaz-Asper, Ms. Horne and
representatives of PSINet's legal counsel, Nixon Peabody LLP, and its financial
advisors, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Wasserstein Parella & Co., Inc., met with Mr. Graham, Mr. Weed, and TNI's legal
counsel, Arent Fox, and financial advisors, Morgan Stanley, to discuss the
terms of the merger agreement and the proposed structure and price. At the
conclusion of that meeting, the parties determined that they did not have an
agreement on price and structure and terminated discussions.
During the week of July 26, 1999, PSINet indicated a renewed interest in a
business combination and then directed DLJ to contact Morgan Stanley regarding
a transaction with TNI. On August 6, 1999, Morgan Stanley responded that they
had discussed the matter with members of TNI management and that TNI had
indicated interest in resuming discussions with respect to a transaction.
Representatives from DLJ then spoke with Mr. Schrader and Mr. Wills, conveying
information from the conversation with Morgan Stanley. On August 7, 1999, at
the direction of PSINet, DLJ spoke again with Morgan Stanley about various
price alternatives, and on August 15, PSINet's legal counsel delivered to TNI
and TNI's legal counsel draft copies of a merger agreement.
The parties, through their financial advisors, continued to discuss possible
purchase price alternatives throughout the week of August 16, 1999. On
Thursday, August 19, 1999, Mr. Schrader sent an offer letter to TNI's board of
directors outlining the terms of the proposed merger in which TNI stockholders
could elect to exchange each share of TNI common stock for $45 in cash or one
share of PSINet common stock, or a combination of both, subject to the
requirement that the total be one half cash and one half stock.
On Friday, August 20, 1999, TNI held a special meeting of its board of
directors to consider the merger proposal. The board reviewed and discussed the
PSINet proposal of August 19th. The board discussed alternative approaches that
might be available to enhance TNI stockholder value and the inherent market
risks of remaining independent and the uncertainties of market valuations and
prices. The board also discussed the financial performance of PSINet, financial
projections for the combined entity and the differences in the relative
valuations of the two companies. After further discussion, the board authorized
management to proceed with negotiations on the terms outlined in the August
19th proposal.
Throughout the weekend of August 21 and 22, 1999, various working groups of
TNI and PSINet and their respective legal counsel, financial advisors and
accountants continued a review of the business and financial aspects of the
merger and negotiated the terms of the merger agreement, including pricing
terms.
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<PAGE>
At 5:15 p.m. on Sunday, August 22, 1999, TNI convened a special meeting of
its board of directors. A representative of Morgan Stanley described the
proposed consideration and reviewed the valuation analysis prepared by Morgan
Stanley and distributed to the board. The board discussed price and other terms
of the proposed merger and Morgan Stanley's valuation analysis. After answering
questions from various directors, the representative of Morgan Stanley
presented Morgan Stanley's opinion that the consideration offered by PSINet in
the proposed merger was fair from a financial point of view to TNI's
shareholders. A representative of Arent Fox, TNI's legal counsel, reviewed the
terms of the merger agreement and the fiduciary duties of the board of
directors in determining whether to approve the merger consideration and the
other terms of the merger agreement. The TNI board of directors determined that
the terms of the merger agreement were fair and in the best interests of TNI
stockholders and voted unanimously to approve the merger agreement and to
recommend to TNI stockholders that they vote to approve the merger agreement.
On the evening of August 22, 1999, PSINet's board of directors convened and
approved the merger agreement and the transactions contemplated by the
agreement and authorized the execution, delivery and performance of the merger
agreement and related documents on behalf of PSINet.
The chief executive officers of the two companies executed and delivered the
merger agreement on the evening of August 22, 1999. On August 23, 1999, PSINet
and TNI issued a joint press release announcing the transaction.
On October 14, 1999, the two companies amended the merger agreement to
provide for an additional 16,646 shares of outstanding TNI common stock that
had not been reported as outstanding as of the date of execution of the merger
agreement.
TNI's Reasons for the Merger and Board of Directors' Recommendation
Reasons for the Merger. In reaching its decision to approve the merger
agreement and the merger and to recommend adoption of the merger agreement by
TNI stockholders, the TNI board of directors consulted with its management team
and advisors and independently considered the proposed merger agreement and the
transactions contemplated by the merger agreement. The following discussion of
the factors considered by the TNI board of directors in making its decision is
not intended to be exhaustive, but TNI believes that it includes all material
factors considered by the TNI board of directors.
The TNI board of directors considered the following factors as reasons that
the merger will be beneficial to TNI and its stockholders:
. Stockholder value. The TNI board believes that the consideration to be
received in the merger by the TNI stockholders is fair to the TNI
stockholders and that the PSINet common stock has prospects for positive
long-term performance.
. Strategic combination. TNI believes that the combination of TNI's
eCommerce business and technology with PSINet's Internet connectivity,
Web hosting and suite of value-added products and services will provide
a significant opportunity for the combined company to be a leader in
providing global eCommerce and Internet solutions to businesses. TNI
believes that TNI's relationship with leading transaction processing
companies and TNI's proprietary eCommerce software will enable PSINet to
utilize its telecommunications network assets to position the combined
company as a leader in enabling eCommerce solutions to businesses. TNI
has relationships with transaction processing companies that have an
aggregate customer base of approximately two million merchants. TNI
believes that these relationships will offer the combined company an
opportunity to market bundled data and Internet service offerings,
including turnkey eCommerce solutions. The TNI board also considered the
possible revenue enhancements and cost savings that could be associated
with an acquisition of TNI by PSINet and the impact of the business
combination on PSINet's financial condition, results of operations and
cashflow.
44
<PAGE>
. International opportunities. TNI believes that PSINet's presence in 17
of the 20 largest global communications markets will provide a
significant opportunity to more quickly expand and develop TNI's
international operations. TNI also believes that the combination will
create additional opportunities to expand TNI's service offerings as
well as to further utilize PSINet's international backbone network.
The TNI board considered that the merger agreement provides that TNI may not
solicit any alternate transaction. The TNI board discussed other acquisition
alternatives and expressed the view that other acquisition proposals were
unlikely. The TNI board noted that the merger agreement provides that TNI may
furnish information to, and enter into discussions or negotiations with, any
party that makes an unsolicited bona fide written proposal to acquire TNI or
substantially all of its assets on terms which, in an exercise of the TNI
board's fiduciary duty after the consideration of advice from TNI's legal
counsel, a majority of TNI's directors determines is likely to be materially
more beneficial to TNI's stockholders than the merger. The TNI board also noted
that the merger agreement provides for the payment of termination fees of $15
million if TNI enters into an alternate transaction with another party and was
aware that PSINet would not have agreed to enter into the merger agreement
without this provision. The TNI board concluded that, while the existence of
the termination fee provision might reduce the likelihood that a third party
would propose an alternate transaction, the increased cost to a third party
would not be material and the benefits of the merger to TNI outweighed the
risks. The TNI board also considered the prospects for TNI completing other
strategic transactions and determined that the completion of such transactions
was speculative.
As part of its review, the TNI board considered, among other things, the
following factors:
. the terms of the merger;
. information concerning PSINet's and TNI's respective businesses,
prospects, financial positions, results of operations, operations,
services, service development and technologies, based in the case of
PSINet on information provided by PSINet and on TNI's management's due
diligence investigation;
. information regarding comparable business-focused Internet service
providers, including market prices of the companies' stock, market
capitalizations, revenues, ratios of revenues to market price and other
results of operations, based on reported historical information and
analysts' reports;
. information regarding reported acquisitions of other companies in the
eCommerce industry and other comparable acquisitions;
. an analysis of the relative value that PSINet and TNI might contribute
to the future business and prospects of the combined company;
. current financial market conditions, historical market prices,
volatility and trading information with respect to PSINet common stock
and historical market prices, volatility and trading information with
respect to TNI common stock;
. advice and detailed analysis of Morgan Stanley, including its written
opinion on August 22, 1999, that the merger consideration was fair from
a financial point of view to the TNI stockholders, as of the date of
that opinion;
. the compatibility of the businesses, services, technologies, management
and the administrative, sales and marketing and technical organizations
of PSINet and TNI;
. the expectation that the merger will be a reorganization for federal
income tax purposes; and
. reports from management and legal advisors on the results of TNI's due
diligence analysis of PSINet.
In considering the Morgan Stanley opinion, the TNI board took into account the
fees payable to Morgan Stanley. See "Opinion of Morgan Stanley & Co.
Incorporated."
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<PAGE>
In considering the merger, the TNI board acknowledged that there are certain
risks associated with the merger, including:
. the uncertainty of customer acceptance of the combined company's bundled
service offerings following the merger;
. the risk that integration of the technologies, services, organizations
or other operations of the two companies might not be accomplished
smoothly and might require more time, expense and management attention
than anticipated;
. the possibility that the benefits anticipated from the merger might not
be achieved or might not occur as rapidly or to the extent currently
anticipated;
. the risk that, despite the efforts of the combined company, key
technical, management and sales personnel of PSINet and TNI might not be
retained by the combined company;
. the risk that the merger would not be effected, and the disruption in
the business of TNI and the potential adverse effect on the market price
of the TNI common stock if the merger is abandoned; and
. the other risks described above in "Risk Factors."
The TNI board of directors believed that some of these risks were unlikely
to occur, that TNI could avoid or mitigate others, and that, overall, these
risks were outweighed by the potential benefits of the merger.
In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the merger, the TNI board of directors
did not find it practicable to and did not quantify or otherwise assign
relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the TNI board of directors
may have given different weight to different factors.
Recommendation of the TNI Board of Directors. After careful consideration,
the TNI board of directors has unanimously determined that the terms of the
merger agreement and the merger are fair to, and in the best interests of, TNI
and its stockholders and has approved the merger agreement and the merger. The
TNI board of directors unanimously recommends that the stockholders of TNI vote
"for" the adoption of the merger agreement.
PSINet's Reasons for the Merger
In reaching its decision to approve the merger agreement and the merger, the
PSINet board of directors consulted with its management teams and advisors and
independently considered the proposed merger agreement and the transactions
contemplated thereby. Based upon, among other things, this review, the PSINet
board of directors approved the merger agreement and the transactions
contemplated by the agreement.
The strategic basis for the merger is PSINet's belief that the integration
of TNI's eCommerce business and technology with PSINet's Internet connectivity,
Web hosting and a suite of value-added products and services designed to
maximize utilization of the Internet will present a significant opportunity to
create a combined organization that will be a leader in providing global
eCommerce and Internet solutions to businesses. PSINet believes that TNI's
relationship with leading transaction processing companies and TNI's
proprietary eCommerce software will enable PSINet to utilize its
telecommunications network assets to position the combined company as a leader
in enabling eCommerce solutions to businesses. TNI has relationships with
transaction processing companies that have an aggregate customer base of
approximately two million merchants. PSINet believes these relationships will
offer the combined company an opportunity to market bundled data and Internet
service offerings, including turnkey eCommerce solutions. PSINet also believes
that its global presence will create additional opportunities to expand TNI's
service offerings geographically as well as to further utilize PSINet's
international network backbone. The PSINet board of directors also considered
the
46
<PAGE>
revenue enhancements and cost savings associated with an acquisition of TNI by
PSINet and the impact of the business combination on PSINet's financial
condition, results of operations and cashflows.
The foregoing assessment of the merger is based on PSINet's expectations
about future performance. Neither PSINet nor TNI can assure you that after the
merger any of the results, efficiencies or opportunities described in this
prospectus/proxy statement will be achieved. See "Risk Factors Risks Relating
to the Merger."
In reaching its decision to approve the merger agreement and the
transactions contemplated thereby, the PSINet board also considered, among
other things, the following factors:
. the effect on shareholder value of a combination with TNI in light of
the financial condition and prospects of PSINet and TNI and the current
economic and industry environment, including, but not limited to other
strategic alternatives for PSINet and the possibility of synergies from
combining PSINet's and TNI's product and service offerings and sales and
marketing organizations;
. results of due diligence investigations by PSINet's management and
legal, financial and accounting advisors concerning the business,
products and services, technology, operations, financial condition and
prospects of TNI;
. its knowledge of the business operations, properties, assets, financial
condition and operating results of TNI;
. PSINet's future prospects and whether such prospects could be
significantly enhanced by the merger and the anticipated operating
results of TNI;
. the terms and conditions of the merger agreement, which were the product
of extensive arms' length negotiations (see "The Merger Agreement");
. the compatibility of the respective business philosophies and corporate
cultures of PSINet and TNI;
. the management resources available to address the management needs of
PSINet and management's experience in managing operations at different
locations in integrating acquisitions; and
. the impact of the merger on PSINet's and TNI's customers, suppliers and
employees.
The PSINet board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
. TNI's concentration of customers;
. the risk that the combined company's ability to achieve synergies would
be dependent upon customer acceptance of bundled service offerings and
the pricing of bundled services, including the maintenance of current
pricing levels and retention of key customers;
. the risk that despite the efforts of PSINet, management, marketing and
technical personnel of TNI might not choose to remain employed by
PSINet;
. the risk that the operations of the two companies would not be
successfully integrated; and
. the other risks associated with PSINet's and TNI's businesses and with
the merger described under "Risk Factors."
The PSINet board of directors believe that certain of these risks were
unlikely to occur while others could be avoided or mitigated by PSINet, and
that, overall, these risks were outweighed by the potential benefits of the
merger.
The foregoing discussion of the information and factors considered by the
PSINet board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the PSINet board of
47
<PAGE>
directors. In view of the variety of factors considered with its evaluation of
the merger, the PSINet board of directors did not find it practicable to and
did not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, individual members of
the PSINet board of directors may have given different weight to different
factors.
Opinion of Morgan Stanley & Co. Incorporated
TNI retained Morgan Stanley to act as its financial advisor in connection
with the merger and related matters based upon Morgan Stanley's qualifications,
expertise and reputation. On August 22, 1999, Morgan Stanley rendered an oral
opinion, which was confirmed in writing, to the TNI board of directors that,
based on and subject to the considerations set forth in the written opinion,
the consideration to be received by the holders of shares of TNI common stock
pursuant to the merger agreement was fair from a financial point of view to
those holders, as of the date of the opinion.
We have attached as Annex 2 to this prospectus/proxy statement the full text
of the Morgan Stanley opinion, dated as of August 22, 1999, which sets forth
the assumptions made, procedures followed, matters considered and limitations
on the review undertaken. The Morgan Stanley opinion is directed to the TNI
board of directors and only addresses the fairness from a financial point of
view of the consideration to be received by the holders of shares of TNI common
stock pursuant to the merger agreement as of the date of the opinion. It does
not address any other aspect of the merger, nor is it a recommendation to any
TNI stockholder as to how they should vote at the TNI special meeting. The
summary of the Morgan Stanley opinion included below should not be viewed as a
substitute for the full text of the opinion. TNI stockholders should read the
Morgan Stanley opinion in its entirety.
In arriving at its opinion, Morgan Stanley:
. reviewed certain publicly available financial statements and other
information of TNI and PSINet;
. reviewed certain internal financial statements and other financial and
operating data concerning TNI and PSINet prepared by the managements of
TNI and PSINet;
. reviewed certain financial projections of TNI and PSINet prepared by the
managements of TNI and PSINet;
. discussed the past and current operations and financial conditions and
the prospects of TNI and PSINet with the managements of TNI and PSINet;
. analyzed the estimated pro forma impact of the merger on PSINet's
revenues and cash flow;
. reviewed the reported prices and trading activity for TNI common stock
and PSINet common stock;
. compared the financial performance of TNI and PSINet and the prices and
trading activity of TNI common stock and PSINet common stock with those
of certain other comparable publicly traded companies and their
securities;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
. participated in discussions and negotiations among representatives of
TNI and PSINet and their financial and legal advisors;
. reviewed the merger agreement and certain related documents; and
. performed such other analyses and considered such other factors as it
deemed appropriate.
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<PAGE>
Morgan Stanley assumed and relied upon without independent verification, the
accuracy and completeness of the information reviewed by it for the purposes of
its opinion. Morgan Stanley assumed that the financial projections have been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the future financial performance of TNI and PSINet.
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities of TNI, nor were they furnished with any appraisals.
The Morgan Stanley opinion was necessarily based on financial, economic,
market and other conditions as in effect on, and the information made available
to it as of, the date of the opinion.
Morgan Stanley further assumed, with TNI's consent, that the merger will be
consummated in accordance with the terms set forth in the merger agreement
without waiver of any condition specified in the agreement and will be treated
as a tax-free reorganization or exchange for purposes of the Internal Revenue
Code of 1986.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
TNI or any of its assets.
Morgan Stanley acted as financial advisor to the TNI board of directors in
connection with the merger and will receive a fee for its services. In the
past, Morgan Stanley and its affiliates have provided financial advisory and
financing services for PSINet and have received fees for the rendering of these
services.
The following is a brief summary of the material financial analyses
performed by Morgan Stanley in preparing its opinion to the TNI board of
directors on August 22, 1999. Some of these summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses used by Morgan Stanley, the tables must be read together
with the text of each summary. The tables alone do not represent a complete
description of the financial analyses.
Historical Stock Price Performance. Morgan Stanley reviewed the recent stock
price performance of TNI based on an analysis of historical intra-day and
closing prices and trading volumes during the period from the TNI initial
public offering on April 22, 1994 through August 20, 1999. The following table
summarizes the price performance of TNI's common stock over that period:
Historical TNI
Common Stock Prices
<TABLE>
<CAPTION>
<S> <C>
August 20, 1999................................................... $34.25
Previous All-Time High Price (September 24, 1998)................. $33.75
Last Twelve Months Low Price (December 23, 1998).................. $12.00
All-Time Low Price (June 8, 1994)................................. $ 5.88
</TABLE>
Morgan Stanley also reviewed the recent stock price performance of PSINet
based on an analysis of historical intra-day and closing prices and trading
volumes during the period from the PSINet initial public offering on May 2,
1995 through August 20, 1999. The following table summarizes the price
performance of PSINet's common stock over that period:
Historical PSINet
Common Stock Prices
<TABLE>
<CAPTION>
<S> <C>
August 20, 1999................................................... $45.56
Last Twelve Months High Price (April 13, 1999).................... $73.75
Last Twelve Months Low Price (October 8, 1998).................... $ 8.38
</TABLE>
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<PAGE>
Comparative Stock Price Performance. Morgan Stanley reviewed the recent
stock price performance of TNI and compared this performance with that of the
S&P 500 Index and the following composite indices: Large IT Services (comprised
of Affiliated Computer Services, Automatic Data Processing, Computer Sciences,
Electronic Data Systems, First Data and Perot Systems) and Transaction
Processors (comprised of Ceridian, Concord EFS, DST Systems, Equifax, National
Data, NOVA, Paychex, Paymentech, ProBusiness Services, SunGard Data Systems and
The Sabre Group Holdings). Morgan Stanley observed that over the period from
September 19, 1997 to August 20, 1999, the closing market prices appreciated as
set forth below:
<TABLE>
<CAPTION>
Company % Appreciation
------- --------------
<S> <C>
TNI....................................................... 68.3%
Large IT Services Index................................... 45.8%
Transaction Processors Index.............................. 40.4%
S&P 500 Index............................................. 40.3%
</TABLE>
Morgan Stanley also reviewed the recent stock price performance of PSINet
and compared this performance with the S&P 500 Index and the following Internet
data services companies: Verio and Concentric Network. Morgan Stanley observed
that over the period from May 12, 1998 to August 20, 1999, the closing market
prices appreciated as set forth below:
<TABLE>
<CAPTION>
Company % Appreciation
------- --------------
<S> <C>
PSINet.................................................... 253.9%
Concentric Network........................................ 89.6%
Verio..................................................... 161.9%
S&P 500 Index............................................. 19.8%
</TABLE>
Historical Price-to-Earnings Multiple Analysis. Morgan Stanley reviewed the
historical share price of TNI expressed as a multiple of both historical and
forecast earnings per share ("P/E multiple") during the period from July 29,
1994 through July 30, 1999. The average P/E multiples over this period were as
set forth below:
<TABLE>
<CAPTION>
Average
P/E Multiple Statistic P/E Multiple
---------------------- -------------
<S> <C>
Last Twelve Months......................................... 34.5x
One-Year Forward........................................... 28.9x
Two-Year Forward........................................... 21.1x
</TABLE>
Morgan Stanley applied the one-year forward and two-year forward average P/E
multiples to both selected research analyst forecast earnings per share and
management forecast earnings per share. Based on research analyst forecast
earnings per share, the analysis implied a range of public market trading
values for TNI common stock of $34 to $35 per share. Based on management
forecast earnings per share, the analysis implied a range of public market
trading values for TNI common stock of $37 to $49 per share.
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<PAGE>
Comparable Company Trading Analysis. Morgan Stanley reviewed and analyzed
the financial information of nine publicly-traded transaction processing
companies and compared the results to financial information relating to TNI.
Morgan Stanley noted that none of these companies were, and that there was no
other publicly-traded company that was, directly comparable to TNI. However,
Morgan Stanley noted that both TNI and transaction processing companies were
influenced by similar industry dynamics and trends. Morgan Stanley analyzed,
among other things, current P/E multiples and current P/E multiples as a
multiple of forecast earnings growth rate ("P/E-to-growth multiple"). Based on
forecasts of 1999 and 2000 earnings per share taken from I/B/E/S International,
the statistics derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
1999E P/E 2000E P/E 1999E P/E-to-Growth 2000E P/E-to-Growth
Multiple Multiple Multiple Multiple
--------- --------- ------------------- -------------------
<S> <C> <C> <C> <C>
TNI................... 24.1x 16.8x 0.9x 0.6x
Ceridian.............. 28.0x 22.9x 1.4x 1.1x
Concord EFS........... 38.9x 28.5x 1.2x 0.9x
DST Systems........... 33.5x 29.2x 1.7x 1.5x
Equifax............... 18.0x 15.2x 1.1x 0.9x
National Data......... 15.8x 13.3x 0.8x 0.7x
NOVA.................. 24.6x 18.7x 0.9x 0.7x
Paychex............... 41.7x 35.1x 1.5x 1.3x
SunGard Data Systems.. 18.9x 15.9x 0.9x 0.8x
The Sabre Group
Holdings............. 29.1x 25.7x 1.9x 1.7x
</TABLE>
Morgan Stanley also analyzed the current aggregate value of each company
expressed as a multiple of forecast earnings before interest, taxes,
depreciation and amortization ("EBITDA") and forecast earnings before interest
and taxes ("EBIT") for 1999. As of August 20, 1999 and based on forecasts of
EBITDA and EBIT taken from selected securities research analysts, the
statistics derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
Aggregate Value Aggregate Value
as a Multiple of as a Multiple of
1999E EBITDA 1999E EBIT
----------------- ----------------
<S> <C> <C>
TNI.................................. 9.6x 16.0x
Ceridian............................. 14.7x 18.7x
DST Systems.......................... 13.1x 19.7x
Equifax.............................. 9.0x 11.5x
National Data........................ 8.5x 11.9x
NOVA................................. 9.9x 13.9x
Paychex.............................. 18.0x 20.4x
SunGard Data Systems................. 7.5x 11.1x
The Sabre Group Holdings............. 10.7x 17.8x
</TABLE>
The comparable company analysis implied a range of public market trading
values for TNI common stock of $25 to $38 per share.
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<PAGE>
Morgan Stanley also reviewed and analyzed the financial information of six
Internet data services companies and compared the results to financial
information relating to PSINet. Morgan Stanley noted that Concentric Network
and Verio were more comparable to PSINet than the other four Internet data
services companies reviewed. Morgan Stanley analyzed, among other things, the
current aggregate value of each company expressed as a multiple of forecast
revenues in 1999 and 2000. As of August 25, 1999 and based on forecasts of
revenues taken from selected securities research analysts, the statistics
derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
Aggregate Value as of
Multiple of Revnues
---------------------
1999E 2000E
---------- ----------
<S> <C> <C>
PSINet.............................................. 8.0x 5.2x
AboveNet Communications............................. 30.5x 10.2x
Concentric Network.................................. 8.2x 4.7x
Equant.............................................. 15.6x 11.2x
Exodus Communications............................... 36.2x 17.1x
Globix.............................................. 17.1x 10.4x
Verio............................................... 13.5x 8.8x
</TABLE>
No company used in the comparable company analysis is identical to TNI or
PSINet. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of TNI and PSINet, such as the impact of competition on TNI
or PSINet and the industry generally, industry growth and the absence of any
material adverse change in the financial condition and prospects of TNI or
PSINet or the industry or in the financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using comparable company data.
Securities Research Analysts' Future Price Targets. Morgan Stanley reviewed
and analyzed future public market trading price targets for TNI common stock
prepared and published by particular securities research analysts in the period
from April 22, 1999 to August 20, 1999. These targets reflected each analyst's
estimate of the future public market trading price of TNI common stock at the
end of the particular time period considered for each time estimate (typically
6 to 18 months). Morgan Stanley discounted, at a cost of equity rate of 13%,
each TNI research analyst's public market trading price target to August 20,
1999. Morgan Stanley also reviewed and analyzed future public market trading
price targets for PSINet common stock prepared and published by particular
securities research analysts in the period from April 28, 1999 to August 20,
1999. These targets reflected each analyst's estimate of the future public
market trading price of PSINet common stock at the end of the particular time
period considered for each time estimate (typically 12 months).
<TABLE>
<CAPTION>
Value Per
Share Range
------------
Low High
----- ------
<S> <C> <C>
TNI Public Market Trading Price Target...................... $ 31 $ 42
Present Value of TNI Public Market Trading Price Target..... $ 28 $ 36
PSINet Public Market Trading Price Target................... $ 72 $ 100
</TABLE>
Morgan Stanley noted that the public market trading price targets published
by the securities research analysts do not reflect current market trading
prices for TNI or PSINet common stock and that these estimates are subject to
uncertainties, including the availability of information, the future financial
performance of TNI and PSINet and future financial market conditions.
Precedent Transaction Analysis. As part of its analysis, Morgan Stanley
reviewed the following nine transactions involving payment services providers
since September 1994 (listed as acquiror/acquiree):
. September 1994: FFMC Securities/Western Union Financial Services
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<PAGE>
. June 1995: First Data/First Financial Management Corporation
. August 1995: Ceridian/Comdata Holdings
. April 1997: Hewlett-Packard/Verifone
. April 1998: Viad/MoneyGram Payment Systems
. June 1998: PMT Services/NOVA
. September 1998: DST Systems/USCS International
. December 1998: Bank of America/BA Merchant Services
. May 1999: Ceridian/ABR Information Services
For each of these transactions, Morgan Stanley reviewed the price paid and
calculated, and among other things, the following:
. the premium paid to the unaffected stock price;
. the one-year forward P/E-to-growth multiple; and
. the multiples of forecast EBITDA and EBIT.
This analysis implied a range of private market, or acquisition, values for TNI
common stock of $32 to $42 per share.
No transaction used in the precedent transaction analysis is identical to
the merger. In evaluating these transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of TNI and PSINet, such as the impact of competition on TNI or PSINet
and the industry generally, industry growth and the absence of any material
adverse change in the financial condition and prospects of TNI or PSINet or the
industry or in the financial markets in general. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of
using precedent transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis, which is an analysis of the present value of projected cash
flows using discount rates and terminal year EBITDA multiples (as indicated
below), of TNI. Morgan Stanley analyzed TNI's business using a management
forecast for the period beginning June 30, 1999 and ending December 31, 2005.
Morgan Stanley estimated TNI's discounted cash flow value using discount rates
ranging from 11% to 12% and perpetual growth rates ranging from 3.5% to 4.5%.
The discounted cash flow analysis implied a range of values for TNI common
stock of $43 to $56 per share. Morgan Stanley also performed a discounted cash
flow sensitivity analysis on the management forecast by adjusting forecast
revenue growth to reflect a 15% compound annual growth rate. This analysis
implied a range of values for TNI common stock of $39 to $50 per share.
Morgan Stanley also performed a discounted cash flow analysis of PSINet.
Morgan Stanley analyzed PSINet's business using a Morgan Stanley equity
research analyst forecast for the period beginning June 30, 1999 and ending
December 31, 2009. Morgan Stanley estimated PSINet's discounted cash flow value
using discount rates ranging from 13% to 14% and terminal multiples of
estimated 2008 EBITDA ranging from 11x to 13x. The discounted cash flow
analysis implied a range of values for PSINet common stock of $46 to $60 per
share.
Exchange Ratio Analysis. Morgan Stanley compared the "effective" exchange
ratio of 0.9938 PSINet shares to each TNI share (calculated based on the
consideration provided in the merger agreement of 0.5 PSINet shares, which
closed at a price of $45.56 per share on August 20, 1999, plus $22.50 in cash
per TNI share) to the ratio of the closing market prices of TNI and PSINet
common stock on August 20, 1999. Morgan Stanley also compared this ratio to
selected average historical ratios of the closing market price of TNI
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common stock to PSINet common stock over various periods ending August 20,
1999. The results of this analysis were as set forth below:
<TABLE>
<CAPTION>
Market Price Ratio
------------------
<S> <C>
August 20, 1999....................................... 0.75x
1-Month Average....................................... 0.60x
3-Month Average....................................... 0.58x
6-Month Average....................................... 0.51x
1-Year Average........................................ 0.90x
Since PSINet IPO (May 2, 1995)........................ 1.39x
</TABLE>
Morgan Stanley performed a variety of financial and comparative analyses
solely for purposes of providing its opinion to the TNI board as to the
fairness of the consideration to be received by the holders of shares of TNI
common stock pursuant to the merger agreement from a financial point of view to
such holders. The summary set forth above does not purport to be a complete
description of the analyses performed by Morgan Stanley in connection with the
merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Morgan Stanley considered the results of all of its analyses as
a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors and
may have considered various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of TNI or PSINet. In performing its analyses, Morgan Stanley made
a number of assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of TNI or PSINet. Any estimates used by Morgan Stanley in rendering its opinion
or reflected in this prospectus/proxy statement are not necessarily indicative
of future results or actual values, which may be significantly more or less
favorable than those suggested by the estimates. The analyses performed were
prepared solely as part of Morgan Stanley's analysis of the fairness of the
consideration to be received by the holders of shares of TNI common stock
pursuant to the merger agreement from a financial point of view to those
holders and were conducted in connection with the delivery of its opinion to
the TNI board of directors. The analyses are not intended to be appraisals or
to reflect the prices at which TNI or PSINet might actually be sold or the
price at which their securities may trade.
The merger consideration was determined through arm's-length negotiations
between TNI and PSINet and was approved by the TNI board of directors. Morgan
Stanley did not recommend any specific merger consideration to TNI or that any
specific merger consideration constituted the only appropriate merger
consideration for the merger. Morgan Stanley's opinion to the TNI board of
directors was one of many factors taken into consideration by the TNI board of
directors in making its determination to approve the merger. Consequently, you
should not view the Morgan Stanley analyses described above as the opinion of
the TNI board of directors with respect to the value of TNI or whether the TNI
board of directors would have been willing to agree to different merger
consideration. Morgan Stanley was not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of TNI or any
of its assets or any other strategic alternative, other than the merger.
The TNI board of directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan
Stanley, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of Morgan
Stanley's trading, brokerage and financing
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<PAGE>
activities, Morgan Stanley or its affiliates may at any time hold long or short
positions, may trade, make a market or otherwise effect transactions, for its
own account or for the accounts of customers, in the securities of TNI or
PSINet. In the past, Morgan Stanley and its affiliates have provided financial
advisory and financing services for PSINet and have received fees for rendering
those services.
Under a letter agreement dated as of June 9, 1999, Morgan Stanley provided
advisory services and a fairness opinion in connection with the merger, and TNI
agreed to pay a customary fee to Morgan Stanley. TNI also agreed to reimburse
Morgan Stanley for its out-of-pocket expenses incurred in performing its
services. In addition, TNI agreed to indemnify Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates against
specified liabilities, including liabilities under the federal securities laws,
and expenses, including the fees of its legal counsel, arising out of Morgan
Stanley's engagement and any related transactions in connection with its
engagement.
Interests of TNI Directors and Management in the Merger
In considering the recommendation of the TNI board of directors in favor of
the merger, stockholders of TNI should be aware that the directors and
executive officers of TNI have interests in the merger that are different from,
or in addition to, the interests of stockholders of TNI. Those interests relate
to or arise from, among other things, the terms of the merger agreement
providing for the continued indemnification of current directors and officers
of TNI, the accelerated vesting of TNI stock options and the continuation of
TNI employee benefits.
Indemnification and Insurance. The merger agreement provides that all rights
of indemnification and exculpation from liabilities existing in favor of the
current and former directors or officers of TNI and its subsidiaries as
provided in their respective certificates of incorporation and by-laws of TNI
will be assumed by the surviving corporation in the merger, and will continue
in full force and effect in accordance with their terms for at least six years
after the effective time of the merger. The merger agreement provides that for
three years after the effective time of the merger, PSINet will maintain
directors' and officers' liability insurance for acts or omissions occurring
prior to the effective time of the merger covering those persons who were, as
of the date of the merger agreement, covered by TNI's directors' and officers'
liability insurance policy, on terms no less favorable than those in effect on
the date of the merger agreement.
TNI Stock Options. Stock options issued by TNI became fully vested and
exercisable in connection with the signing of the merger agreement. Under the
merger agreement, PSINet will assume outstanding TNI options as of the
effective time of the merger and such options will be exercisable for shares of
PSINet common stock. The members of the TNI board hold options to purchase
shares of TNI common stock as follows: Mr. McDonnell, Jr.--182,553 shares; Mr.
Guidi--0 shares; Mr. Manchot--27,500 shares; Mr. Melton--27,500 shares; Mr.
Nichols--27,500 shares; and Mr. Squarzini--12,500 shares. In addition to Mr.
McDonnell, Jr., TNI's other executive officers hold options to purchase shares
of TNI common stock as follows: Mr. Bates--113,000 shares; Mr. Graham--40,000
shares; Mr. Lyman--17,500 shares; Mr. McDonnell III--23,271 shares; Mr. Mudd--
110,250 shares; Mr. Mullen--40,000 shares; Mr. Peters--25,000 shares; Mr.
Reingold--18,000 shares; Mr. Schanz--59,764 shares; Mr. Scheibel--30,000
shares; Mr. Stutzman--55,001 shares and Mr. Ziegler--25,568 shares.
Continuation of TNI Employee Benefits. PSINet has agreed that, from the
effective time of the merger until the second anniversary of the effective time
of the merger, it will provide benefit plans, programs and arrangements to
employees of TNI that are substantially equivalent to those provided to
employees of TNI immediately prior to the effective time of the merger. To the
extent that directors and management were covered under these plans as TNI
employees prior to the merger, they will continue to receive such benefits. For
a more detailed description of the continuation of employee benefits, see page
67.
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<PAGE>
Employment Agreement. TNI has entered into an employment agreement with Mr.
McDonnell to serve as TNI's president and chief executive officer. The
agreement has a term of three years and six months expiring December 31, 2002,
and the term automatically extends for 18 months on January 1, 2003 and on the
expiration of each extension period, unless either TNI or Mr. McDonnell gives
six months notice that the agreement is not to be extended.
The agreement provides that Mr. McDonnell is entitled to:
. a base salary of $450,000 per year, subject to annual review and
increase by the TNI board;
. an annual bonus, with the target bonus ranging up to four times the base
salary, depending upon TNI's earnings per share achieved during the
year;
. stock options, with a target amount of 70,000 shares per year, but the
actual amount is subject to the discretion of the compensation committee
of the TNI board;
. reimbursement of reasonable and ordinary business expenses;
. all employee benefits made available to other TNI officers;
. payment of the annual premiums on (1) a $5 million term life insurance
policy belonging to Mr. McDonnell and (2) a disability policy providing
benefits up to 60 percent of base salary, plus an amount sufficient to
pay the taxes applicable to the payments;
. paid vacations consistent with TNI's vacation policy applicable to
executive officers; and
. indemnification in his capacity as a director and officer of TNI.
TNI may terminate Mr. McDonnell at any time for cause, as defined in the
agreement, and may terminate him for any other reason after 90 days notice. Mr.
McDonnell also may terminate the agreement after 90 days notice. The agreement
terminates if Mr. McDonnell becomes disabled or dies. The agreement defines
cause to include:
. continued failure to perform his material responsibilities;
. engaging in willful or reckless conduct that is demonstrably injurious
to the company;
. conviction of a felony;
. material misrepresentation of his professional qualifications; or
. commission or omission of an act that is materially inimical to the best
interest of the company and constitutes fraud, malfeasance, misfeasance
or nonfeasance of duty.
To terminate Mr. McDonnell for cause, the company must give him reasonable
notice setting forth the company's reasons to terminate him for cause and a
reasonable opportunity to be heard, and a majority of the company's board must
find, in its good faith opinion, that he is guilty of conduct constituting
cause as defined in the agreement.
If the agreement is terminated by TNI for cause, by Mr. McDonnell, other
than in the circumstances described below, or upon his death, Mr. McDonnell, or
his estate, would be entitled to receive all of his accrued and unpaid base
salary, accrued vacation pay and earned incentive compensation for the period
prior to termination. If the agreement is terminated due to disability, Mr.
McDonnell would continue to receive his salary and benefits until he became
eligible for disability payments under TNI's disability income plan. He would
also be entitled to receive an amount equal to the difference between his base
salary and the disability payments until the expiration of the agreement.
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<PAGE>
If the agreement is terminated by TNI other than for cause or by Mr.
McDonnell for good reason, TNI is required to pay Mr. McDonnell:
. his base salary for the remainder of the then-current term of the
agreement or two years, whichever is greater;
. any deferred salary and bonus compensation, whether or not then
otherwise vested or payable; and
. an amount equal to two times the highest incentive bonus paid to him for
any of the three calendar years preceding the termination, prorated
through the month of departure.
In addition, all of his stock options would vest, and he would be entitled to
continue to participate in TNI's life, health, disability and other benefit
programs for the remainder of the then-current term of the agreement or two
years, whichever is greater, at no higher cost than the cost immediately before
the date of termination.
Mr. McDonnell may terminate the agreement for good reason upon 30 days
notice. The agreement defines good reason to include:
. the company relocates its general and administrative offices or Mr.
McDonnell's place of employment to an area other than the Washington,
D.C. metropolitan area;
. the company assigns him duties inconsistent with his responsibilities or
substantially adversely alters the nature or status of his
responsibilities;
. the company reduces his base salary, as it may be increased from time to
time;
. the company fails to pay him any portion of his compensation within
seven days after payment is due;
. the company fails to continue any compensation plan in which Mr.
McDonnell participates which is material to his compensation, unless an
equitable substitute arrangement is made, or fails to continue his
participation in the plan on a basis not materially less favorable to
him;
. the company fails to continue to provide Mr. McDonnell with benefits
substantially similar to the benefits he receives under any pension,
life insurance, medical, health and accident or disability plan;
. the company materially reduces any of Mr. McDonnell's benefits, deprives
him of any material fringe benefit or fails to provide him with the
amount of paid vacation days to which he is entitled; or
. the company purports to terminate Mr. McDonnell for cause not in
compliance with the terms of the agreement.
If the agreement is terminated for any reason, other than a termination for
cause, within two years following a change in control of the company, TNI is
required to pay Mr. McDonnell:
. an amount equal to three times his base salary in effect as of the date
of termination;
. any deferred salary and bonus compensation, whether or not then
otherwise vested or payable; and
. an amount equal to three times the highest incentive bonus paid to him
for any of the three calendar years preceding the termination, prorated
through the month of departure.
In addition, all of his stock options would vest, and he would be entitled to
continue to participate in TNI's life, health, disability and other benefit
programs for three years at no higher cost than the cost immediately prior to
the date of termination.
If Mr. McDonnell would be subject to excise tax under the provisions of the
Internal Revenue Code relating to payments after a change of control, the
payments would be required to be grossed up so that TNI would make additional
payments to Mr. McDonnell equal to the amount of the excise tax plus the amount
of the tax on the additional payments. The merger will constitute a "change of
control" for the purposes of the agreement.
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During the 24 months following termination of employment described above,
except (1) any termination by the company other than for cause, (2) any
termination by Mr. McDonnell for good reason or (3) any termination within two
years following a change in control, Mr. McDonnell would be subject to
specified non-competition covenants. Also, following termination of employment
Mr. McDonnell is required to keep secret all of the company's confidential
information that he obtained during his employment and that has not become
public knowledge. The company, however, may not defer or withhold any benefits
otherwise payable under the agreement based upon an asserted violation of this
provision.
Change in Control Agreements. TNI has entered into change in control
agreements with its executive officers, Messrs. Bates, Graham, Lyman, McDonnell
III, Mudd, Mullen, Peters, Reingold, Schanz, Scheibel, Stutzman and Ziegler,
and other officers as well. Before a change in control of TNI, the agreements
may be terminated on 24 months advance written notice and automatically
terminate upon termination of the officer's employment, unless the officer is
terminated within six months before a change in control at the request of the
acquiring person or otherwise in connection with the change in control. The
merger will constitute a "change in control" for the purposes of the
agreements.
If within 36 months after a change in control of TNI, (1) TNI or its
successor terminates the officer, other than for cause or the officer's death
or disability, or (2) the officer terminates his employment for good reason,
TNI or its successor is obligated to provide the officer the following
benefits:
. a lump sum cash payment composed of (1) the officer's accrued and unpaid
salary and unused vacation pay and (2) a severance payment in an amount
equal to the product of a multiple times the officer's average annual
compensation from TNI for the five calendar years before the change in
control. The multiple is 2.99 for executive officers and 1.5 for other
officers;
. a lump sum cash payment for the officer's stock options equal to the
difference between the exercise price of the options and the higher of
(1) the fair market value of the shares on the date of termination or
(2) the highest price paid for the shares by the acquiring person;
. life insurance and health plan coverage substantially comparable to the
coverage the officer was receiving immediately before termination until
the earlier of (1) the date on which the officer becomes eligible for
comparable coverage in connection with subsequent employment or (2) 36
months, for an executive officer or 18 months for any other officer; and
. all of the officer's benefits accrued under any supplemental retirement
plans, excess retirement plans and deferred compensation plans shall
immediately become vested in full.
If the benefit under this agreement would not be deductible by the company
for federal income tax purposes under the provisions of the Internal Revenue
Code relating to payments after a change of control, the payments would be
reduced only to the extent required, in the opinion of the company's tax
counsel, to prevent the nondeductibility of any part of the benefits. The
officer is entitled to determine which elements of the benefits will be reduced
to conform to this provision.
The agreement defines cause to include:
. continued failure of the employee to perform his material
responsibilities;
. engaging in willful or reckless conduct that is demonstrably injurious
to the company;
. conviction of a felony;
. material misrepresentation by the employee of his professional
qualifications; or
. commission or omission of an act that is materially inimical to the best
interest of the company and constitutes fraud, malfeasance, misfeasance
or nonfeasance of duty.
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To terminate an officer for cause, the company must give the officer reasonable
notice setting forth the company's reasons to terminate him for cause and a
reasonable opportunity to be heard, and a majority of the company's board must
find, in its good faith opinion, that the officer is guilty of conduct
constituting cause as defined in the agreement.
Under the agreement an officer may terminate his employment for good reason
if:
. the company assigns the officer any duties inconsistent with the
officer's position or takes any other action that results in a
diminution of the officer's position, authority, duties or
responsibilities;
. the company reduces the officer's base salary in effect at the change in
control or as increased from time to time;
. the company fails to maintain plans providing benefits at least as
beneficial as those provided by any plan in which the officer
participated immediately before the change in control;
. the company takes any action to adversely affect the officer's
participation in or opportunity to benefit under any plan or to deprive
the officer of any material fringe benefit;
. the company requires the officer to be based at an office in excess of
50 miles from his office location immediately before the change in
control;
. the company purports to terminate the officer for cause not in
compliance with the terms of the agreement; or
. the company fails to cause its successor to assume the obligations under
this agreement.
Following termination of employment, the officer is required to keep secret
all of the company's confidential information that he obtained during his
employment and that has not become public knowledge. The company, however, may
not defer or withhold any benefits otherwise payable under the agreement based
upon an asserted violation of this provision.
Tax Treatment
Completion of the merger is conditioned upon its being accounted for as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code and the receipt by PSINet and TNI of letters from Nixon Peabody
LLP and Arent Fox Kintner Plotkin & Kahn, PLLC, respectively, that the merger
qualifies as a reorganization under such section.
Form of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with Delaware law, at the effective time of the merger, TNSI shall
be merged with and into PSINet Shelf I Inc. The separate existence of TNI will
cease and PSINet Shelf I Inc. shall survive the merger as a wholly-owned
Delaware subsidiary of PSINet. PSINet Shelf I Inc. will continue under the name
"Transaction Network Services, Inc."
Merger Consideration
In the merger, each share of outstanding TNI stock (other than those that
are held by TNI stockholders who have not voted in favor of the merger and have
properly demanded dissenters' rights) will be converted into the right to
receive (i) $45.00 in cash, (ii) one share of PSINet common stock, or (iii) a
combination of cash and PSINet common stock totaling $45.00 in value, assuming
that one share of PSINet common stock is valued at $45.00.
Each stockholder can elect the form of consideration he or she would like to
receive, but this election is subject to proration. Under the merger agreement,
50% of all issued and outstanding TNI shares must be
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exchanged for cash, and 50% must be exchanged for PSINet shares. If TNI
stockholders owning more than 50% of TNI shares elect to receive cash, the
number of TNI shares converted into cash will be fewer than the number which
elected cash consideration. Similarly, if TNI stockholders owning more than 50%
of TNI shares elect to receive PSINet common stock, the number of TNI shares
converted into stock will be less than the number which elected to receive
PSINet common stock. Assuming the exercise of all outstanding options, no more
than 7,804,546 shares of PSINet common stock will be issued as stock
consideration and a maximum aggregate of $351,204,570 will be issued as cash
consideration in the merger. If the aggregate number of shares of TNI stock
covered by stock elections exceeds the number of shares of PSINet shares
available for stock consideration in the merger, each holder of TNI shares
making a stock election will receive PSINet common stock on a pro rata basis
with all other holders making stock elections and will receive cash
consideration for the balance. Similarly, if the aggregate number of shares of
TNI shares covered by cash elections exceeds the aggregate amount of cash
consideration available in the merger, each holder of TNI shares making a cash
election will receive cash on a pro rata basis with all other holders making
cash elections and will receive stock consideration for the balance. A holder
of TNI shares who fails to make an election prior to the deadline will be
treated as having made a mixed election and will receive consideration for 50
percent of his or her shares in cash and 50 percent in PSINet common stock.
TNI stockholders will receive cash for any fractional shares of PSINet
common stock which they would otherwise receive in the merger. As of the
effective time of the merger, all shares of TNI common stock will automatically
be canceled and will cease to exist, and each holder of a certificate
representing any shares of TNI common stock will cease to have any rights as a
stockholder except the right to receive PSINet common stock or cash or a
combination of cash and stock in the merger.
Conversion of Shares; Procedures for Exchange of Certificates; Fractional
Shares
The conversion of TNI common stock into the right to receive merger
consideration will occur automatically at the effective time of the merger.
Within thirty days prior to, but no later than seven business days prior to the
effective time of the merger, the paying agent will send a Form of Election to
each TNI stockholder. The Form of Election will contain instructions for
surrendering certificates representing TNI common stock in exchange for shares
of PSINet common stock and/or cash consideration. TNI stockholders should not
return stock certificates with the enclosed proxy.
Each holder of a certificate representing TNI common stock will be asked to
surrender and deliver the certificate to First Chicago Trust Company of New
York, as the paying agent, together with a properly completed and executed Form
of Election no later than 5:00 p.m., New York City time, the third business day
following the effective time of the merger. Promptly after surrender and
delivery, the holder will receive a certificate representing the number of
whole shares of PSINet common stock for which the holder's shares of TNI common
stock has been converted for stock elections, together with a check for any
cash in lieu of any fractional share of PSINet common stock, or a check for
cash payable with respect to cash elections, or both stock consideration and
cash consideration. TNI stockholders who do not submit a Form of Election prior
to the election deadline and TNI stockholders who (in the discretion of PSINet,
which discretion it may delegate to the paying agent) are deemed to have made
an improper election will be treated as having made a mixed election, of one-
half stock consideration and one-half cash consideration. Until so surrendered
and exchanged, each certificate formerly representing an outstanding share of
TNI common stock will be treated for all purposes to evidence only the right to
receive stock consideration, any cash payable in lieu of fractional shares, or
cash consideration or both based upon such holder's election, as adjusted.
At the effective time, the stock transfer books of TNI will be closed and no
transfer of shares of TNI common stock will be made after that, other than
registration of transfers of shares of TNI common stock that occurred prior to
the effective time. If certificates are presented for transfer to the transfer
agent for TNI, PSINet, or PSINet Shelf I Inc. after the effective time, they
will be delivered to the paying agent and exchanged for stock consideration,
any cash payable in lieu of fractional shares, or cash consideration or both.
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Any shares of PSINet common stock or any cash that remains undistributed to
TNI stockholders as of the first anniversary of the effective time will be
delivered to PSINet by the paying agent, upon demand, and any former
stockholders of TNI who have not previously complied with these procedures for
exchange may look only to PSINet for payment of their claim for stock
consideration, any cash payable in lieu of fractional shares, or cash
consideration or both.
Neither the paying agent nor any of TNI, PSINet or PSINet Shelf I, Inc. will
be liable to any holder of shares of TNI common stock with respect to any
shares of PSINet common stock (or dividends or distributions with respect to
PSINet common stock) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law, rule, regulation, statute, order,
judgment or decree.
If any TNI certificates have been lost, stolen or destroyed, the paying
agent may require the claiming holder to make an affidavit of that fact and
deliver a bond as the paying agent may reasonably require, and the paying agent
may then issue stock consideration, any cash payable in lieu of fractional
shares, or cash consideration and any dividends or other distributions with
respect to PSINet common stock to which the holder is entitled in exchange for
the lost, stolen or destroyed certificates.
Stockholders of TNI will not be required to pay any transfer taxes with
respect to the issuance of the PSINet common stock, unless any PSINet common
stock is to be issued in a name other than that in which the certificate
surrendered has been registered. In such case, the person requesting the
issuance must pay to PSINet any transfer taxes payable by reason of the
transfer, or of any prior transfer of the surrendered certificate, or establish
to the satisfaction of PSINet that the taxes have been paid or are not payable.
Effective Time of the Merger
The merger will become effective once the certificate of merger has been
filed with the Secretary of State for the State of Delaware and has become
effective in accordance with Delaware law.
Listing of PSINet Common Stock on The Nasdaq Stock Market
It is a condition to the completion of the merger that PSINet common stock
issuable to TNI stockholders in the merger be approved for listing on The
Nasdaq Stock Market, subject to official notice of issuance.
Delisting and Deregistration of TNI Common Stock
If the merger is completed, TNI common stock will be delisted from the New
York Stock Exchange and will be deregistered under the Securities Exchange Act
of 1934.
Material United States Federal Income Tax Consequences of the Merger
The following discussion is a summary description of the material U.S.
federal income tax consequences of the merger applicable to TNI stockholders.
This discussion is for general information only and does not purport to
consider all aspects of U.S. federal income taxation that may be relevant to a
TNI stockholder. This discussion is based upon the provisions of the Internal
Revenue Code, existing regulations, and administrative and judicial
interpretations of the Internal Revenue Code, all as in effect as of the date
hereof and all of which are subject to change (possibly with retroactive
effect). This discussion applies only to TNI stockholders who hold their TNI
shares as capital assets within the meaning of Section 1221 of the Internal
Revenue Code and does not apply to the following:
. stockholders who received their TNI shares pursuant to the exercise of
employee stock options or similar securities or otherwise as
compensation;
. stockholders who hold their TNI shares as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security" or other integrated
investment;
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. stockholders (including, without limitation, financial institutions,
insurance companies, tax-exempt organizations, dealers or traders in
securities, and stockholders subject to the alternative minimum tax) who
may be subject to special rules;
. stockholders whose functional currency is not the U.S. dollar; or
. stockholders who, for U.S. federal income tax purposes, are non-resident
alien individuals, foreign corporations, foreign partnerships, or
foreign estates or trusts.
This discussion also does not consider the effect of any foreign, state or
local laws or any U.S. federal laws other than those pertaining to the income
tax.
ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR TO DETERMINE THE TAX EFFECT
TO YOU OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, OR U.S.
FEDERAL, STATE, LOCAL OR OTHER TAX LAWS.
Tax Opinion and Merger. The consummation of the merger is contingent upon
the receipt by:
. PSINet of an opinion from its attorneys to the effect that the merger
will be treated as a reorganization within the meaning of Section
368(a)(2)(D) of the Internal Revenue Code; and
. TNI of an opinion from its attorneys to the effect that the merger will
be treated as a reorganization within the meaning of Section
368(a)(2)(D) of the Internal Revenue Code.
The opinions will be based upon certain customary assumptions and
representations of fact, including representations of fact contained in
certificates of officers of PSINet, TNI and others. No ruling has been or will
be sought from the Internal Revenue Service as to the U.S. federal income tax
consequences of the merger, and the opinions of counsel are not binding upon
the Internal Revenue Service or any court. Accordingly, there can be no
assurances that the Internal Revenue Service will not contest the conclusions
expressed in the opinions or that a court will not sustain such contest.
To qualify as a reorganization, among other requirements, the merger must
satisfy a "continuity of interest" test, under which the TNI stockholders must
continue to retain a meaningful ownership interest in PSINet after the merger.
Generally, this test will be considered satisfied if TNI stockholders in the
aggregate exchange a substantial part of their TNI common stock for PSINet
common stock in the merger. The merger has been structured with the intent that
50% of the consideration provided in the merger will consist of PSINet common
stock. It is possible, however, that the value of the PSINet common stock
issued at the time of the merger could fall below this 50% threshold.
For advance ruling purposes, the Internal Revenue Service has provided a
safe harbor with respect to the minimum degree of continuity necessary to
satisfy the continuity of interest requirement. This safe harbor requires that
taxpayers requesting a private letter ruling from the Internal Revenue Service
demonstrate that the historic stockholders of the acquired entity will exchange
at least 50%, by value, of the total outstanding stock of the acquired entity
for stock of the acquiring entity. This safe harbor, however, merely indicates
the level of continuity required by the Internal Revenue Service for the
issuance of an advance ruling. It does not represent the degree of continuity
that is required to qualify as a reorganization. In fact, the Internal Revenue
Service has explicitly stated that the safe harbor is not intended to define
the lower limits of the continuity of interest requirement. The case law is
less restrictive than the Internal Revenue Service's ruling guidelines in this
area and, in one early case, the United States Supreme Court held that the
continuity of interest requirement was satisfied where the stockholders of the
acquired company received stock of the acquiring company having a value of less
than 40% of the value of the formerly outstanding stock of the acquired
company.
Thus, although no assurance can be given that the Internal Revenue Service
or a court would ultimately determine that the continuity of interest
requirement has been met (and that the merger qualifies as a
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reorganization) if the amount of stock consideration received by TNI
stockholders is less than 50% of the aggregate merger consideration (including
payments to dissenters and payments in lieu of fractional shares), it is the
opinion of Arent Fox Kinter Plotkin & Kahn, PLLC, attorneys for TNI, and Nixon
Peabody LLP, attorneys for PSINet, that the "continuity of interest"
requirement as specified in Treas. Reg. Sec. 1.368-1(b) and as interpreted in
certain Internal Revenue Service rulings and federal judicial decisions will be
satisfied if the amount of stock received by TNI stockholders is at least 40%
(and the amount of cash received is no more than 60%) of the aggregate merger
consideration (including payments to dissenters and payments in lieu of
fractional shares). Arent Fox Kinter Plotkin & Kahn, PLLC and Nixon Peabody LLP
have not and will not issue an opinion that the continuity of interest
requirement would be met if the amount of stock received by TNI stockholders is
less than 40% (and the amount of cash received is more than 60%) of the
aggregate merger consideration (including payments to dissenters and payments
in lieu of fractional shares).
The following discussion of U.S. federal income tax consequences of the
merger to TNI stockholders assumes that the merger will qualify as a
"reorganization" within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code. As discussed below, the U.S. federal income tax consequences of
the merger to a TNI stockholder depend on the form of consideration received by
the stockholder.
Stockholders Who Receive Solely PSINet Common Stock. A TNI stockholder who
exchanges TNI shares solely for PSINet shares will not recognize any gain or
loss on that exchange (except to the extent the stockholder receives cash in
lieu of fractional shares of PSINet, as discussed below). The aggregate
adjusted tax basis of PSINet shares received will equal the TNI stockholder's
aggregate adjusted tax basis in the TNI shares surrendered. The holding period
of the PSINet shares received pursuant to the merger will include the holding
period of the TNI shares surrendered.
Stockholders Who Receive Cash and PSINet Common Stock. If the consideration
received in the merger by a TNI stockholder consists of part cash and part
PSINet common stock, then any gain realized by the stockholder will be
recognized to the extent of the lesser of (1) the excess of the sum of the
amount of cash and the fair market value, as of the date of the merger, of the
shares of PSINet common stock received, over the adjusted basis of the TNI
shares surrendered in exchange therefor, and (2) the amount of cash received by
the stockholder in the exchange. However, if a TNI stockholder's adjusted basis
in the TNI shares surrendered in the transaction is greater than the sum of the
amount of cash and the fair market value of the PSINet shares received, the TNI
stockholder's loss will not be currently allowed or recognized for U.S. federal
income tax purposes.
In the case of a TNI stockholder who recognizes gain on the exchange, if the
exchange sufficiently reduces the stockholder's proportionate stock interest
(as discussed below), the gain will be characterized as a capital gain. If the
exchange does not sufficiently reduce the stockholder's proportionate stock
interest, such gain will be taxable as a dividend to the extent of the
stockholder's ratable share of accumulated earnings and profits (and the
remainder, if any, of such recognized gain will be capital gain).
The determination of whether the exchange sufficiently reduces a TNI
stockholder's proportionate stock interest will be made in accordance with
Section 302 of the Internal Revenue Code, taking into account the stock
ownership attribution rules of Section 318 of the Internal Revenue Code. Under
Section 318, individuals are treated as constructively owning stock owned by
specified members of the individual's family or by certain entities in which
the individual or his family members have a beneficial interest and certain
entities are treated as constructively owning stock owned by persons having a
beneficial interest in the entity. For purposes of determining whether the
exchange sufficiently reduces a stockholder's proportionate stock interest, a
TNI stockholder is treated as if (1) all such stockholder's TNI shares were
first exchanged in the merger for PSINet shares, and (2) a portion of those
PSINet shares were then redeemed for the cash actually received in the merger.
The TNI stockholder's hypothetical stock interest in PSINet (both actual and
constructive) after hypothetical step (2) is compared to such TNI stockholder's
hypothetical stock interest in PSINet (both actual and constructive) after
hypothetical step (1). Dividend treatment will apply unless the stockholder's
stock
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interest in PSINet has been completely terminated, there has been a
"substantially disproportionate" reduction in the stockholder's stock interest
in PSINet (i.e., such interest after hypothetical step (2) is less than 80% of
the interest after hypothetical step (1)), or the exchange is not "essentially
equivalent to a dividend." While the determination is based on a TNI
stockholder's particular facts and circumstances, the Internal Revenue Service
has indicated in published rulings that a distribution is not "essentially
equivalent to a dividend" and will therefore result in capital gain treatment
if the distribution results in any actual reduction in the stock interest of an
extremely small minority stockholder in a publicly held corporation and the
stockholder exercises no control with respect to corporate affairs.
BECAUSE THE DETERMINATION OF WHETHER A PAYMENT WILL BE TREATED AS HAVING THE
EFFECT OF THE DISTRIBUTION OF A DIVIDEND GENERALLY WILL DEPEND UPON THE FACTS
AND CIRCUMSTANCES OF EACH TNI STOCKHOLDER, TNI STOCKHOLDERS ARE STRONGLY
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF CASH
RECEIVED IN THE MERGER, INCLUDING THE APPLICATION OF THE CONSTRUCTIVE OWNERSHIP
RULES OF THE INTERNAL REVENUE CODE AND THE EFFECT OF ANY TRANSACTIONS IN PSINET
SHARES OR TNI SHARES BY THE TNI STOCKHOLDER.
The basis of a TNI stockholder who receives cash and PSINet shares in the
merger in the PSINet shares received will equal such stockholder's adjusted
basis in the stockholder's TNI shares increased by any gain recognized as a
result of the merger and reduced by the amount of cash received in the merger.
The holding period of the PSINet shares received will include the holding
period of the TNI shares surrendered.
Stockholders Who Receive Solely Cash. The exchange of TNI shares solely for
cash generally will result in recognition of gain or loss by the stockholder in
an amount equal to the difference between the amount of cash received and the
stockholder's adjusted tax basis in the TNI shares surrendered. The gain or
loss recognized will be long-term capital gain or loss if the stockholder's
holding period for the TNI shares surrendered exceeds one year. There are
limitations on the extent to which stockholders may deduct capital losses from
ordinary income.
If a TNI stockholder who receives only cash in exchange for all such
stockholder's TNI shares actually or constructively owns PSINet shares after
the merger (as the result of constructive ownership of TNI shares that are
exchanged for PSINet shares in the merger, prior actual or constructive
ownership of PSINet shares or otherwise), all or a portion of the cash received
by the stockholder may, in certain circumstances, be taxed as a dividend, and
such stockholders should consult their tax advisors to determine the amount and
character of the income recognized in connection with the merger.
Cash Received in Lieu of Fractional Shares. A TNI stockholder who receives
cash in lieu of a fractional PSINet share will be treated as having first
received such fractional PSINet share in the merger and then as having received
cash in exchange for the fractional share interest. Thus, such a TNI
stockholder generally will recognize gain or loss in an amount equal to the
difference between the amount of cash received in lieu of the fractional PSINet
share and the portion of the basis in the TNI shares allocable to that
fractional interest.
Special Rules for Stockholders that are Corporations. To the extent that
cash received in exchange for TNI shares is taxable as a dividend (as described
above) to a TNI stockholder that is a corporation, that stockholder will be (1)
eligible for a dividends received deduction (subject to applicable
limitations), and (2) subject to the "extraordinary dividend" provisions of the
Internal Revenue Code. Under recently enacted legislation, any such cash that
is taxable as a dividend to a corporate stockholder will constitute an
extraordinary dividend. Consequently, the nontaxed portion of any such dividend
will reduce the adjusted tax basis of a TNI stockholder that is a corporation
in the PSINet shares received in the merger, but not below zero, and will
thereafter be taxable as capital gain.
Income Tax Rates. Capital gain recognized in the merger by individuals and
certain other noncorporate TNI stockholders who have held their TNI shares for
more than one year generally will be subject to a U.S.
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federal income tax rate of 20%. Gain or dividend income otherwise recognized by
TNI stockholders generally will be subject to a (1) maximum 39.6% U.S. federal
income tax rate for individuals and certain other noncorporate stockholders, or
(2) maximum 35% U.S. federal income tax rate for corporations.
Material Federal Income Tax Consequences to PSINet, TNI and PSINet Shelf I
Inc. Assuming that the merger is treated as a reorganization, none of PSINet,
TNI or PSINet Shelf I Inc. will recognize gain or loss as a result of the
merger.
PSINet had a federal consolidated net operating loss ("NOL") carryover of
approximately $216.7 million as of December 31, 1998, of which $77.6 million is
not subject to limitation under Section 382 of the Code and which is generally
expected to be available to offset future taxable income of PSINet's
consolidated post-merger group, subject to expiration at different intervals.
In addition, PSINet generated a net operating loss of approximately $88.1
million from January 1, 1999 through June 30, 1999, and it expects to generate
further net operating losses up to the date of merger, which will increase
PSINet's NOL carryover. The use of this NOL carryover is subject to the rules
of Section 382 of the Code, which generally restricts NOL utilization after an
"ownership change" (generally a more than 50% increase in stock ownership
during a 3-year "testing period" by "5% stockholders" of a "loss corporation"
measured by value). While the merger will result in a substantial increase in
percentage holdings by 5% stockholders, the merger (in conjunction with other
relevant increases by other 5% stockholders) will not result in an ownership
change. However, no assurance can be given that an ownership change may not
occur in the future. In the event of an ownership change, the amount of
PSINet's NOL carryover that could be utilized in any taxable year would be
generally limited to the value of PSINet's stock on the date of the ownership
change multiplied by a prescribed rate of return (5.26% in September 1999). As
of September 28, 1999, under this formula, PSINet would have been entitled to
use approximately $156.5 million of its NOL carryover per taxable year as an
offset to its future taxable income. Any amount of the $156.5 million of NOL
carryovers not utilized in a taxable year would be permitted to be carried over
to the next taxable year for use in that year, subject to the expiration of the
NOL carryovers. PSINet presently does not expect that the Section 382
limitation will cause any part of its NOL carryover to be unavailable for use
prior to the expiration of any of its NOL carryovers.
Backup Withholding. Payments in connection with the merger may be subject
"backup withholding" at a rate of 31%, unless a TNI stockholder, (1) provides a
correct taxpayer identification number (which, for an individual stockholder,
is the stockholder's social security number) and any required information to
the paying agent, or (2) is a corporation or comes within certain exempt
categories and, when required, demonstrates that fact and otherwise complies
with applicable requirements of the backup withholding rules. A TNI stockholder
who does not provide a correct taxpayer identification number may be subject to
penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding does not constitute an additional tax and will be creditable
against the stockholder's U.S. federal income tax liability. Each TNI
stockholder should consult with his own tax advisor as to his qualification for
exemption from backup withholding and the procedure for obtaining such
exemption. TNI STOCKHOLDERS MAY PREVENT BACKUP WITHHOLDING BY COMPLETING A
SUBSTITUTE FORM W-9 (CONTAINED WITH THE FORM OF ELECTION TO BE FORWARDED TO TNI
STOCKHOLDERS) AND SUBMITTING IT TO THE PAYING AGENT FOR THE MERGER WHEN THEY
SUBMIT THEIR TNI SHARE CERTIFICATES.
Accounting Treatment
The acquisition of TNI will be accounted for as a purchase business
combination and, accordingly, the purchase price of TNI will be allocated to
tangible and intangible assets acquired and liabilities assumed, based upon
their respective fair values, with the excess allocated to goodwill to be
amortized over the estimated economic life of the goodwill. PSINet has
undertaken a study by an independent third party to determine the allocation of
the total purchase price of the merger to the various assets acquired,
including in-process research and development, and the liabilities assumed. Any
portion of the purchase price allocated to in-process research and development
will be recognized as a charge against income in PSINet's financial statements
for the period
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in which the merger closes, which is expected to be the fourth quarter of 1999.
The results of operations of TNI will be included in PSINet's consolidated
results of operations upon the consummation of the merger.
Regulatory Matters
United States Antitrust. Under the Hart-Scott-Rodino Act and related rules,
the merger may not be completed unless applicable waiting period requirements
have been satisfied. On August 30, 1999, PSINet and TNI each filed a
Notification and Report Form with the Antitrust Division of the Department of
Justice and the Federal Trade Commission, and the Federal Trade Commission has
granted early termination of the waiting period. At any time before or after
the effective time of the merger, the Antitrust Division, the Federal Trade
Commission or others could take action under the antitrust laws, including
seeking to prevent the merger, to rescind the merger or to conditionally
approve the merger upon the divestiture of substantial assets of PSINet or TNI.
There can be no assurance that a challenge to the merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful. Based upon the advice of counsel, neither PSINet nor TNI expect any
conditions to be imposed by either the Antitrust Division or the Federal Trade
Commission.
Other Regulatory Approvals. The merger also requires the approval of the
Irish Department of Enterprise, Trade and Employment. Application has been made
to obtain its approval of the merger.
General. It is possible that any of the governmental entities with which
filings are made may seek, as conditions for granting approval of the merger,
various regulatory concessions. There can be no assurance that:
. PSINet or TNI will be able to satisfy or comply with such conditions
. compliance or non-compliance will not have adverse consequences for
PSINet after completion of the merger
. the required regulatory approvals will be obtained within the time frame
contemplated by PSINet and TNI and referred to in this prospectus/proxy
statement or on terms that will be satisfactory to PSINet and TNI.
Appraisal Rights
Record holders of TNI common stock that follow the appropriate procedures
are entitled to dissenters rights under Section 262 of the Delaware General
Corporation Law (the "DGCL") in connection with the merger.
The following discussion of the applicable provisions of the DGCL is not
intended to be a complete statement of those provisions you should refer to the
full text of Section 262 of the DGCL, which is reprinted in its entirety and
attached as Annex 3 to this prospectus/proxy statement. This discussion and
Annex 3 should be reviewed carefully by any stockholder of TNI who wishes to
exercise statutory dissenters' rights or who wishes to preserve the right to do
so. Failure to strictly comply with any of the procedural requirements of the
DGCL may result in a termination or waiver of dissenters' rights under the
DGCL.
Under the DGCL, each TNI stockholder has the right to dissent from the
merger and demand payment of the fair value of his or her shares of TNI common
stock. If a stockholder elects to dissent, the stockholder must file with TNI a
written notice of dissent stating that the stockholder intends to demand
payment for his or her shares if the merger is consummated. The written notice
of dissent must be filed with TNI before the vote of TNI stockholders on the
merger. Upon making the demand, the dissenting stockholder will cease to have
any of the rights of a stockholder except the right to be paid the fair value
of his or her shares and other rights of a dissenting stockholder under DGCL.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger any dissenting stockholder will have the right to withdraw
his or her demand for appraisal and to accept the terms offered upon the
merger.
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Within 120 days after the effective date of the merger, the surviving or
resulting corporation or any stockholder who is entitled to appraisal rights
may file a petition in the Court of Chancery demanding a determination of the
value of the stock of all dissenting stockholders. Upon the filing of any such
petition by a stockholder, service of a copy will be made upon the surviving or
resulting corporation, which will within 20 days after receipt of service file
in the Office of the Register in Chancery a list containing the names and
addresses of all dissenting stockholders. The Register will give notice of the
time and place fixed for the hearing to the stockholders shown on the list. At
the hearing, the Court will determine the stockholders who are entitled to
appraisal rights. The Court will then appraise the shares, determining their
fair value together with a fair rate of interest, if any, and will direct the
payment of the fair value of the shares by the surviving or resulting
corporation to the stockholders entitled to the payment.
The Court may also determine the costs of the proceeding and may impose such
costs upon the parties as it deems equitable. The Court may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding to be charged pro rata against the value of the shares
entitled to an appraisal.
Continuation of TNI Employee Benefits
PSINet has agreed that, from the effective time of the merger until the
second anniversary of the effective time of the merger, it will provide, or
cause to be provided, benefit plans, programs and arrangements to employees of
TNI that are no less favorable in the aggregate to those provided to employees
of TNI immediately before the effective time of the merger.
PSINet has agreed that, to the extent permitted under applicable benefit
plans or insurance policies:
. it will credit continuing employees of TNI with their service with TNI
and its affiliates for purposes of participation, vesting and
entitlement to benefits in any employee benefits plans, programs or
arrangements in which they subsequently participate after the effective
time of the merger
. it will provide each TNI employee with credit for any co-payments and
deductibles paid before the effective time of the merger in satisfying
any applicable deductible or out-of-pocket requirements
. it will not impose any limitations more onerous than those currently in
effect as to pre-existing conditions, exclusions and waiting periods
with respect to participation and coverage requirements applicable to
TNI employees.
Effect on Options Awards Outstanding under TNI Stock Plans
The outstanding and unexercised employee stock options to acquire an
aggregate of 2,400,886 shares of TNI common stock became vested and immediately
exercisable in accordance with their terms upon the signing of the merger
agreement. Under the merger agreement, at the effective time of the merger, the
options not previously exercised will become exercisable for shares of PSINet
common stock. Each option to acquire shares of TNI common stock will be
converted into an option to acquire PSINet common stock on the same terms and
conditions, based upon the 1:1 exchange ratio provided by the merger agreement.
TNI agreed not to issue any additional stock options prior to the effective
time of the merger other than up to 12,000 options offered under an offer
letter outstanding at the time the merger agreement was signed.
Resale of PSINet Common Stock
PSINet common stock issued in the merger will not be subject to any
restrictions on transfer arising under the Securities Act of 1933, except for
shares issued to any TNI stockholder who may be deemed to be an "affiliate" of
TNI or PSINet for purposes of Rule 145 under the Securities Act. It is expected
that each such affiliate will agree not to transfer any PSINet common stock
received in the merger except in compliance with the resale provisions of Rule
144 or 145 under the Securities Act or as otherwise permitted under the
Securities Act.
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THE MERGER AGREEMENT
The following description summarizes the material provisions of the merger
agreement. You should read carefully the merger agreement, which is attached as
Annex 1 to this prospectus/proxy statement.
Conditions to the Completion of the Merger. Each party's obligation to
effect the merger is subject to the satisfaction or waiver of various
conditions which include, in addition to other customary closing conditions,
the following:
. holders of a majority of the outstanding shares of TNI common stock must
adopt the merger agreement;
. the waiting period required under the Hart-Scott-Rodino Act must expire
or be terminated (the waiting period was terminated on September 9,
1999) and any other required consents from governmental entities and
other third parties must be received;
. TNI's $75 million revolving credit facility ($62.0 million of which was
outstanding at September 30, 1999) must be paid prior to the
effectiveness of the merger;
. PSINet common stock issuable to TNI stockholders in the merger must have
been approved for listing on the Nasdaq National Market;
. no court with appropriate jurisdiction has issued an order, judgment,
decree, injunction or ruling which restrains, enjoins, prohibits or
prevents, after the best efforts of the parties to cause such action to
be vacated or lifted, the completion of the merger; and
. the registration statement of which this prospectus/proxy statement
forms a part must have been declared effective by the SEC and must
remain effective.
In addition, each of PSINet's and TNI's obligation to effect the merger is
also subject to the satisfaction or waiver of the following additional
conditions:
. the representations and warranties of the other party set forth in the
merger agreement that are modified by materiality or material adverse
effect shall be true and correct in all respects, and those that are not
so modified shall be true and correct in all material respects as of the
date of the merger agreement and as of the date on which the merger is
to be effective as though made on and as of the date on which the merger
is to be completed, or, if such representations and warranties expressly
relate to an earlier date, then as of such date, except that
representations set forth by TNI with respect to capitalization of TNI
shall be true and correct in all respects;
. the other party to the merger agreement having performed or complied
with all agreements and covenants required to be performed by it under
the merger agreement on or prior to the date on which the merger is to
be completed, in all material respects (other than certain covenants
made by TNI with respect to issuance of shares of TNI capital stock or
options) and TNI having issued the additional common stock or options to
acquire common stock except as provided in the merger agreement; and
. TNI having received from Arent Fox Kintner Plotkin & Kahn, PLLC, counsel
to TNI, and PSINet having received from Nixon Peabody LLP, counsel to
PSINet, on the date on which the merger is to be completed, an opinion
in each case dated as of such respective date and stating that the
merger will qualify for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. The issuance of such opinions will be conditioned upon the
receipt by such tax counsel of customary representation letters from
each of TNI, PSINet and PSINet Shelf, Inc., in each case, in form and
substance reasonably satisfactory to such tax counsel.
TNI can provide no assurance that all of the conditions precedent to the
merger will be satisfied or waived by the party permitted to do so. TNI cannot
at this point determine whether it would resolicit proxies in the
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event that it decides to waive any of the items listed above. This decision
would depend upon the facts and circumstances leading to TNI's decision to
complete the merger and whether TNI believes there has been a material change
in the terms of the merger and its effect on TNI stockholders. In making its
determination, TNI would consider, among other factors, the reasons for the
waiver, the effect of the waiver on the terms of the merger, whether the
requirement being waived was necessary in order to make the deal fair to the
stockholders from a financial point of view, the availability of alternative
transactions and the prospects of TNI as an independent entity. If TNI
determines that a waiver of a condition would materially change the terms of
the merger, including the expected qualification of the merger as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, it would resolicit proxies.
No Solicitation of Alternate Transactions. The merger agreement provides
that TNI will not, nor will its subsidiaries, nor any of their directors,
officers or employees, or any investment banker, attorney, accountant or other
representative retained by it or any of its subsidiaries, directly or
indirectly through another person:
. initiate, solicit, encourage or knowingly facilitate, including by way
of furnishing information, any inquiries or the making of any
acquisition proposal, as described below;
. participate in any discussions, provide any confidential information or
data relating to, or engage in any negotiations regarding, any
acquisition proposal or knowingly facilitate any effort or attempt to
implement an acquisition proposal or accept an acquisition proposal;
provided, however, that if, at any time prior to the date of the special
meeting, the TNI board of directors determines in good faith, that an
unsolicited bona fide written acquisition proposal could reasonably be expected
to be a superior proposal, as defined below, TNI may, in response to a superior
proposal which was subject to providing prior notice of its decision to do so
to PSINet:
. furnish under a customary confidentiality agreement information about
TNI and its subsidiaries to any person making a superior proposal
. participate in discussions or negotiations regarding the superior
proposal.
The merger agreement provides that:
. the term "acquisition proposal" means any inquiry, proposal or offer
from any person relating to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving TNI, or any purchase or
sale of all or any significant portion of the assets of TNI or more than
10% of the TNI common stock or the assets or capital sock of any of its
subsidiaries;
. the term "superior proposal" means any bona fide unsolicited written
acquisition proposal made by a third party to acquire more than 50% of
the voting power of the shares of TNI common stock then outstanding or
all or substantially all the assets of TNI, for consideration consisting
of cash and/or securities, that the TNI board of directors concludes in
good faith, after consultation with its financial advisors and legal
counsel, taking into account legal, financial, regulatory and other
aspects of the proposal and the proposer, would, if consummated, result
in a transaction materially more favorable from a financial point of
view to TNI's stockholders than the merger and which is reasonably
capable of being completed, including its financing, to the extent
required, is then committed or is, in the good faith judgment of the TNI
board of directors, reasonably capable of being financed.
Except as expressly permitted by the merger agreement, neither the TNI board
of directors nor any committee of the board will:
. withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to PSINet, or take any other action not explicitly
permitted by the merger agreement that would be inconsistent with, the
approval or recommendation by the TNI board of directors or that
committee of the merger;
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. approve or recommend, or propose publicly to approve or recommend, any
acquisition proposal; or
. cause TNI to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any
acquisition proposal, other than any agreement entered into concurrently
with a termination as described in the next sentence in order to
facilitate such action.
Notwithstanding the foregoing, if prior to the special meeting, TNI's board
of directors determines in good faith, after giving effect to all concessions
which may be offered by PSINet, that an acquisition proposal constitutes a
superior proposal which was not solicited by TNI and which did not otherwise
result from a breach of the provisions of the merger agreement described above,
the TNI board of directors may terminate the merger agreement, but only at a
time that is after the fifth day following PSINet's receipt of written notice
advising PSINet that the TNI board of directors is prepared to accept a
superior proposal. TNI must pay a fee in the amount of $15 million to PSINet as
a condition to the termination. See "--Termination" and "--Termination Fees."
Termination. The merger agreement may be terminated at any time before the
effective time of the merger, whether before or after adoption of the merger
agreement by the stockholders of TNI:
1. by mutual written consent of PSINet and TNI;
2. by PSINet or TNI, if the other party has materially breached the
merger agreement, which breach has not been cured and which would cause a
closing condition to be incapable of being satisfied by February 29, 2000;
3. by PSINet or TNI if any court of competent jurisdiction has issued,
enacted, entered, promulgated or enforced any order, judgment, decree,
injunction or ruling, after reasonable efforts on the part of PSINet and
TNI to resist, resolve or lift, which permanently restrains, enjoins or
otherwise prohibits the merger and the order, judgment, decree, injunction
or ruling has become final and nonappealable;
4. by PSINet or TNI, if the merger has not been completed by February
29, 2000 provided that the terminating party is not otherwise in material
breach of its representations, warranties or obligations under the merger
agreement;
5. by PSINet or TNI, if the TNI special meeting (including as it may be
adjourned from time to time) concluded without TNI having obtained the
required stockholder approval of the merger;
6. by PSINet if, before the TNI special meeting, the TNI board of
directors: (a) withdraws or modifies in any adverse manner its approval of
the merger agreement, (b) approves or recommends a superior proposal, or
(c) resolves to take either of the foregoing actions; or
7. by TNI at any time before the TNI special meeting, upon five business
days' prior notice to PSINet, if TNI's board of directors approves a
superior proposal provided that (a) TNI has not violated its agreement not
to solicit acquisition proposals, (b) the TNI board of directors has
concluded in good faith, after giving effect to all concessions which may
be offered by PSINet described in (c) below, on the basis of the advice of
its financial advisors and outside counsel, that the proposal is a superior
proposal and (c) before any termination, TNI has negotiated, and caused its
financial and legal advisors to negotiate, with PSINet to make adjustments
in the terms and conditions of the merger agreement as would enable PSINet
to proceed with the merger, and (d) TNI has paid the termination fee.
Termination Fees. If the merger agreement is terminated under specified
circumstances, TNI must pay PSINet a $15 million termination fee. The
termination fee is due before, and as a pre-condition to the effectiveness of,
a termination by TNI relating to TNI's board of directors approval of a
superior proposal as described in paragraph 7 above. TNI will be required to
pay the termination fee if PSINet terminates the merger agreement as a result
of TNI's board of directors having approved or recommended, before the TNI
special meeting, a superior proposal or if TNI or PSINet terminates the merger
agreement as described in
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paragraph 5 above due to the failure to the TNI stockholders to approve and
adopt the merger agreement and, in each case, before the termination, there
existed an acquisition proposal and within 12 months after the termination TNI
enters into a definitive agreement with respect to, or consummates, an
acquisition proposal. TNI will also be required to pay the termination fee if
PSINet terminates the merger agreement based on TNI's material breach of the
merger agreement as described in paragraph 2 above, the failure to consummate
the merger by February 29, 2000 as described in paragraph 4 above, or a
withdrawal or modification in the recommendation of TNI's board of directors to
its stockholders or resolution of TNI's board of directors to do so or to
approve or recommend a superior proposal as described in paragraph 6 above or
if PSINet or TNI terminates the merger agreement based on a court's prohibition
of the transaction as described in paragraph 3 above, and, in each case, if
before the date giving rise to the right of termination, there existed an
acquisition proposal and TNI intentionally breaches the merger agreement and,
within 12 months after the termination, TNI enters into a definitive agreement
with respect to, or consummates, an acquisition proposal.
Conduct of Business Pending the Merger. Before the effective time, except as
contemplated by the merger agreement or unless PSINet otherwise agrees in
writing, TNI has agreed that it will, and will cause its subsidiaries to, carry
on their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted immediately before the signing of
the merger agreement and to use reasonable efforts to conduct their business in
a manner consistent with the budgets and plans made available to PSINet. TNI
has agreed to cause its subsidiaries to use reasonable efforts to preserve
intact their business organizations, keep available the services of their
employees and preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with
them to the end that their goodwill and on-going businesses will not be
impaired in any material respect at the effective time of the merger. TNI has
also agreed that, unless PSINet otherwise agrees in writing, before the
effective time of the merger, it will not and will not permit its subsidiaries
to:
. declare, set aside, or pay any dividends on, or make any other
distributions with respect to, any of its capital stock, other than
dividends and distributions by any direct or indirect subsidiary of TNI
to its parent(s);
. split, combine or reclassify any of its capital stock or, other than
pursuant to the exercise of TNI stock options or options under its
employee stock purchase plan (ESPP) outstanding on the date of the
merger agreement, issue or authorize the issuance of any other
securities with respect to, instead of or in substitution for shares of
its capital stock;
. purchase, redeem or otherwise acquire, other than pursuant to the
exercise of TNI stock options or ESPP options outstanding on the date of
the merger agreement, any shares of TNI capital stock or any of its
subsidiaries or any other equity securities of TNI or its subsidiaries
or any rights, warrants, or options to acquire any of those shares or
other securities other than purchases, redemptions or acquisitions of
equity securities of wholly-owned subsidiaries of TNI or rights,
warrants or options to acquire those securities;
. issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock including any TNI employee stock options (other than those
agreed to previously by PSINet) or any ESPP options, any other voting
securities of TNI or any securities convertible into, or any rights,
warrants or options to acquire, any of those shares or voting securities
(other than the issuance of TNI common stock upon the exercise of stock
options or ESPP options outstanding on the date of the merger agreement)
or amend the terms of any of those securities, rights, warrants or
options;
. amend its certificate of incorporation or by-laws or comparable
organizational documents of any of its subsidiaries or ventures;
. acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, any business or any
corporation, partnership, joint venture, association or other business
organization or division, or any assets that are material to TNI and its
subsidiaries taken as a whole, except, in the ordinary course of
business;
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<PAGE>
. subject to a lien or sell, lease or otherwise dispose of any of its
material properties or assets, including the ventures and other
investments referred to in the merger agreement, except in the ordinary
course of business;
. incur any indebtedness for borrowed money or guarantee any indebtedness
of another person, issue or sell any debt securities of TNI or any of
its subsidiaries, guarantee any debt securities of another person (other
than indebtedness to, guarantees of, or issuances or sales to TNI or a
wholly-owned subsidiary of TNI), or enter into any "keep well" or other
agreement to maintain any financial condition of another person, except,
in any case, for borrowings or other transactions incurred in the
ordinary course of business including to repay existing indebtedness
pursuant to the terms of the indebtedness;
. except in the ordinary course of business, make any loans, advances or
capital contributions to, or investments in, any other person, other
than to TNI or any direct or indirect subsidiary of TNI or settle or
compromise any material claims or litigation;
. authorize any of, or commit or agree to take any of, the foregoing
actions.
These limitations upon TNI's conduct do not generally apply to these
transactions or actions if they are between TNI and a wholly-owned subsidiary
of TNI or if they are between two wholly-owned subsidiaries of TNI.
TNI has agreed to promptly provide PSINet copies of all filings made by TNI
with any governmental entity in connection with the merger agreement and the
transactions contemplated by the agreement. Before settling or compromising any
material income tax liability of TNI or any of its subsidiaries, TNI has agreed
to consult with PSINet and its advisors as to the positions and elections that
will be taken or made with respect to the matter.
Amendment and Waiver. Subject to applicable law:
. the merger agreement provides that it may be amended by the parties in
writing at any time, except that after the merger agreement has been
adopted by the stockholders of TNI, no amendment may be entered into
which changes the form or decreases the amount of merger consideration,
materially affects the rights of TNI stockholders or requires further
approval by TNI stockholders, unless further approval is obtained; and
. at any time before the effective time of the merger, any party may by
written instrument extend the time for performance of the obligations of
any other party to the merger agreement, waive inaccuracies in
representations and warranties of any other party contained in the
merger agreement or in any related document and, except as provided in
the merger agreement, waive compliance by any other party with any
agreements or conditions in the merger agreement.
Under Section 251(d) of the Delaware General Corporation Law, no amendment
to the merger agreement made after the adoption of the merger agreement by the
stockholders of TNI may, without further stockholder approval, alter or change
the amount or kind of shares, securities, cash, property or rights to be
received by TNI stockholders in the merger, or alter or change any terms and
conditions of the merger agreement if the alteration or change would adversely
affect the holders of any class or series of stock of TNI.
Expenses. Whether or not the merger is consummated, all costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated by the agreement will be paid by the party incurring the fees or
expenses, except as otherwise provided in the merger agreement. Notwithstanding
the above, PSINet Shelf I Inc. will pay all real property transfer, gains and
other similar taxes and all documentary stamps, filing fees, recording fees and
sales and use taxes, if any, and any related penalties or interest, payable in
connection with the consummation of the merger without any offset, deduction,
counterclaim or deferment of the payment of the merger consideration. If the
merger agreement is terminated, PSINet and TNI will share equally the
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<PAGE>
expenses incurred in connection with filing and printing of this
prospectus/proxy statement and the filing fees for the premerger notification
and report forms under the Hart-Scott-Rodino Act.
Representations and Warranties. The merger agreement contains customary
representations and warranties relating to, among other things:
. corporate organization and similar corporate matters of PSINet and TNI
and their respective subsidiaries;
. the capital structure of each of PSINet and TNI;
. authorization, execution, delivery, performance and enforceability of,
and required consents, approvals, orders and authorizations of
governmental authorities relating to, the merger agreement and related
matters of PSINet and TNI;
. documents filed by each of PSINet and TNI with the Securities and
Exchange Commission, the accuracy of information contained in those
documents and the absence of undisclosed liabilities of each of PSINet
and TNI;
. the accuracy of information supplied by each of PSINet and TNI in
connection with this prospectus/proxy statement and the registration
statement of which it is a part;
. absence of certain material changes or events concerning PSINet and TNI;
. compliance with applicable laws by TNI;
. absence of changes in benefit plans of TNI;
. matters relating to the Employee Retirement Income Security Act for TNI;
. filing of tax returns and payment of taxes by TNI and its subsidiaries;
. required stockholder vote of TNI to approve the merger;
. engagement and payment of fees of brokers, investment bankers, finders
and financial advisors by each of PSINet and TNI;
. receipt of fairness opinion by TNI from its financial advisor;
. intellectual property and year 2000 matters of TNI;
. outstanding and pending material litigation of each of PSINet and TNI;
. specified material contracts of TNI; and
. environmental matters of TNI.
Amendments to the PSINet Shelf I, Inc. Certificate of Incorporation. As of
the effective time of the merger, the PSINet Shelf I, Inc. certificate of
incorporation will be substantially identical to its certificate of
incorporation immediately prior to the merger except that its name will change
to "Transaction Network Services, Inc." For a summary of some provisions of the
TNI certificate of incorporation and the associated rights of TNI stockholders,
see "Comparison of Rights of Holders of Common Stock of PSINet and TNI."
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of June 30,
1999 and the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1998 and for the six months ended June 30, 1999 ("Pro
Forma Financial Information") present the pro forma effect of the merger,
particular acquisitions and capital raising activity of PSINet Inc. since
January 1, 1998.
The objective of Pro Forma Financial Information is to provide investors
with information about the continuing impact of particular completed or
probable transactions by indicating how the transactions might have affected
historical financial statements had they occurred at an earlier date.
Under the terms of the merger agreement, the aggregate consideration to be
paid to TNI stockholders consists of up to approximately $351.0 million in cash
and up to approximately 7.8 million shares (assuming the exercise of
approximately 2.4 million currently exercisable TNI stock options as of June
30, 1999) of PSINet common stock (which represents an aggregate value of up to
approximately $707.3 million, assuming a price per share of PSINet common stock
of $45.719); additionally, PSINet will repay the $62.0 million of obligations
outstanding under TNI's revolving credit facility (such transactions are
collectively referred to as the "merger"). The source of the cash consideration
for the merger and the cash for the repayment of the TNI revolving credit
facility obligation will be from cash on hand. TNI stockholders may elect to
receive cash, PSINet stock, or both cash and shares, subject to particular
adjustments. The amount of cash paid and shares of PSINet stock issued in the
merger are contingent upon the ultimate number of outstanding TNI stock options
exercised prior to closing. PSINet does not believe that any change in the
consideration paid would materially impact the pro forma financial information
presented herein, and accordingly, alternative presentations have not been
included.
During July 1999, PSINet issued $1.05 billion and euro 150.0 million ($157.6
million, using an exchange rate of $1.00: euro .9520) aggregate principal
amount of 11% senior notes due 2009 (the "11% Senior Notes").
On September 10, 1998, TNI acquired form AT&T Corp. ("AT&T") the right to
provide services under particular customer service contracts and particular
related equipment related to AT&T's Transaction Access Services ("TAS
Acquisition") for approximately $64.3 million in cash, which materially changed
TNI's business. For accounting and reporting purposes, the TAS Acquisition was
considered to be an acquisition of a business.
The following Unaudited Pro Forma Consolidated Balance Sheet at June 30,
1999 presents, on a pro forma basis, PSINet's consolidated financial position
assuming each of the following had occurred on June 30, 1999: (i) the merger,
(ii) PSINet's acquisition of Intercomputer, S.A and Intercomputer Soft, S.A.
("Intercomputer"), and (iii) the issuance by PSINet of the 11% Senior Notes and
the application of the net proceeds from that issuance.
The following Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1998 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the merger;
(2) the TAS Acquisition, assuming that the TAS operations were conducted
under TNI's Communications Services Agreement with AT&T and assuming the
elimination of certain AT&T costs allocated to TAS;
(3) PSINet's acquisitions of iSTAR internet inc., Interactive Networx
GmbH, ioNET Internetworking Services, LinkAge Online Limited, INTERLOG
Internet Services, Inc., Rimnet Corporation, iNet, Inc. and Tokyo Internet
Corporation (the "Other 1998 Acquisitions") and of Planete.net S.A.R.L.,
Satelnet S.A., TeleLinx Ltd., Horizontes Internet Ltda, Wavis Equipamentos
de Informatica Ltda, Sao Paulo On-Line Ltda, Internet de Mexico S.A. de
C.V., Datanet S.A. de C.V., The Internet Company, Caribbean Internet
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Service Corp., The Internet Access Company and Intercomputer (the "Other
1999 Acquisitions" and, collectively with the Other 1998 Acquisitions, the
"Other Acquisitions"); and
(4) the issuance by PSINet of the 11% Senior Notes.
The following Unaudited Pro Forma Consolidated Statement of Operations for
the six months ended June 30, 1999 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the merger;
(2) the Other 1999 Acquisitions; and
(3) the issuance by PSINet of the 11% Senior Notes.
The financial information in this section should be read along with PSINet's
and TNI's historical consolidated financial statements and accompanying notes
incorporated by reference in this prospectus/proxy statement. See "Where You
Can Find More Information" on page 99.
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<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Transaction Transaction Pro Forma for
Network Transaction Network Transaction
Services Access Services Network
PSINet Inc. Inc. Services, Inc. Inc. Services Inc.
Consolidated Consolidated Acquisition Adjustments Acquisition
------------ ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 259,636 $101,906 $40,259 $ -- $ 401,801
Operating costs and
expenses:
Data communications
and operations........ 199,372 68,361 24,749 -- 292,482
Sales and marketing.... 57,026 3,895 -- -- 60,921
General and
administrative........ 45,288 8,579 -- -- 53,867
Depreciation and
amortization.......... 63,424 10,783 3,402 44,737(a) 122,346
Charge for acquired
in-process R&D........ 70,800 -- -- -- 70,800
--------- -------- ------- -------- ---------
Total operating costs
and expenses........ 435,910 91,618 28,151 44,737 600,416
--------- -------- ------- -------- ---------
Income (loss) from
operations............. (176,274) 10,288 12,108 (44,737) (198,615)
Interest expense........ (63,914) (1,205) (2,566) 2,534(b) (65,151)
Interest income......... 19,638 1,532 -- -- 21,170
Other income (expense),
net.................... 6,833 -- -- -- 6,833
Non-recurring
arbitration charge..... (49,000) -- -- -- (49,000)
--------- -------- ------- -------- ---------
Income (loss) before
income taxes, equity in
earnings of affiliate
and minority interest.. (262,717) 10,615 9,542 (42,203) (284,763)
Income tax benefit
(expense).............. 848 (4,425) (3,698) 8,123(f) 848
Equity in earnings of
unconsolidated
affiliate.............. -- 356 -- -- 356
Minority interest in net
loss of consolidated
subsidiary............. -- 319 -- -- 319
--------- -------- ------- -------- ---------
Net income (loss)....... (261,869) 6,865 5,844 (34,080) (283,240)
Return to preferred
shareholders........... (3,079) -- -- -- (3,079)
--------- -------- ------- -------- ---------
Net income (loss)
available to common
shareholders........... $(264,948) $ 6,865 $ 5,844 $(34,080) $(286,319)
========= ======== ======= ======== =========
Basic and diluted loss
per share.............. $ (5.32)
=========
Shares used in computing
basic and diluted loss
per share.............. 49,806 7,800(c)
========= ========
</TABLE>
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<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Other Other
Acquisitions Adjustments Pro Forma
------------ ----------- ---------
<S> <C> <C> <C>
Revenue................................. $111,276 $ -- $ 513,077
Operating costs and expenses:
Data communications and operations..... 67,162 -- 359,644
Sales and marketing.................... 11,760 -- 72,681
General and administrative............. 28,876 -- 82,743
Depreciation and amortization.......... 8,973 28,117 (a) 159,436
Charge for acquired in-process R&D..... -- -- 70,800
-------- --------- ---------
Total operating costs and expenses... 116,771 28,117 745,304
-------- --------- ---------
Income (loss) from operations........... (5,495) (28,117) (232,227)
Interest expense........................ (3,147) (139,073)(b) (207,371)
Interest income......................... 272 -- 21,442
Other income (expense), net............. (500) -- 6,333
Non-recurring arbitration charge........ -- -- (49,000)
-------- --------- ---------
Income (loss) before income taxes,
equity in earnings of affiliate and
minority interest...................... (8,870) (167,190) (460,823)
Income tax benefit (expense)............ (1,680) -- (832)
Equity in earnings of unconsolidated
affiliate.............................. -- -- 356
Minority interest in net loss of
consolidated subsidiary................ -- -- 319
-------- --------- ---------
Net income (loss)....................... (10,550) (167,190) (460,980)
Return to preferred shareholders........ -- -- (3,079)
-------- --------- ---------
Net income (loss) available to common
shareholders........................... $(10,550) $(167,190) $(464,059)
======== ========= =========
Basic and diluted loss per share........ $ (8.06)
=========
Shares used in computing basic and
diluted loss per share................. 57,606
=========
</TABLE>
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<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Transaction Transaction Pro Forma
Network Network for Transaction
Services Services Network
PSINet Inc. Inc. Inc. Services Inc.
Consolidated Consolidated Adjustments Acquisition
------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Revenue................. $ 228,668 $ 80,827 $ -- $ 309,495
Operating costs and ex-
penses:
Data communications
and operations........ 162,341 53,827 -- 216,168
Sales and marketing.... 40,505 3,497 -- 44,002
General and adminis-
trative............... 32,469 6,442 -- 38,911
Depreciation and amor-
tization.............. 61,210 9,266 22,369 (d) 92,845
--------- -------- --------- ---------
Total operating costs
and expenses........ 296,525 73,032 22,369 391,926
--------- -------- --------- ---------
Income (loss) from oper-
ations................. (67,857) 7,795 (22,369) (82,431)
Interest expense........ (61,486) (1,925) 1,783 (e) (61,628)
Interest income......... 12,798 874 -- 13,672
Other income (expense),
net.................... (358) -- -- (358)
--------- -------- --------- ---------
Income (loss) before in-
come taxes, equity in
earnings of affiliate
and minority interest.. (116,903) 6,744 (20,586) (130,745)
Income tax benefit (ex-
pense)................. 450 (2,552) 2,552 (f) 450
Equity in earnings of
unconsolidated affili-
ate.................... -- 93 -- 93
Minority interest in net
loss (income) of con-
solidated subsidiary... -- (128) -- (128)
--------- -------- --------- ---------
Net income (loss)....... (116,453) 4,157 (18,034) (130,330)
Return to preferred
shareholders........... (4,797) -- -- (4,797)
--------- -------- --------- ---------
Net income (loss) avail-
able to common share-
holders................ $(121,250) $ 4,157 $ (18,034) $(135,127)
========= ======== ========= =========
Basic and diluted loss
per share.............. $ (2.10)
=========
Shares used in computing
basic and diluted loss
per share.............. 57,657 7,800 (c)
========= =========
<CAPTION>
Other
1999 Other
Acquisitions Adjustments Pro Forma
------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue................. $ 19,691 $ -- $ 329,186
Operating costs and ex-
penses:
Data communications
and operations........ 8,844 -- 225,012
Sales and marketing.... 1,906 -- 45,908
General and adminis-
trative............... 5,812 -- 44,723
Depreciation and amor-
tization.............. 1,534 4,590 (d) 98,969
--------- -------- ---------
Total operating costs
and expenses........ 18,096 4,590 414,612
--------- -------- ---------
Income (loss) from oper-
ations................. 1,595 (4,590) (85,426)
Interest expense........ (410) (68,545)(e) (130,583)
Interest income......... 110 -- 13,782
Other income (expense),
net.................... (110) -- (468)
--------- -------- ---------
Income (loss) before in-
come taxes, equity in
earnings of affiliate
and minority interest.. 1,185 (73,135) (202,695)
Income tax benefit (ex-
pense)................. (803) -- (353)
Equity in earnings of
unconsolidated affili-
ate.................... -- -- 93
Minority interest in net
loss (income) of con-
solidated subsidiary... -- -- (128)
--------- -------- ---------
Net income (loss)....... 382 (73,135) (203,083)
Return to preferred
shareholders........... -- -- (4,797)
--------- -------- ---------
Net income (loss) avail-
able to common share-
holders................ $ 382 $(73,135) $(207,880)
========= ======== =========
Basic and diluted loss
per share.............. $ (3.18)
=========
Shares used in computing
basic and diluted loss
per share.............. 65,457
=========
</TABLE>
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PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS
The pro forma adjustments outlined below present separate adjustments
related to the acquisition of TNI and the adjustments related to the other
transactions reflected in the Unaudited Pro Forma Consolidated Statements of
Operations.
The purchase price of each acquisition has been allocated to tangible assets
acquired and liabilities assumed, based upon their respective fair values, with
the excess allocated to intangible assets to be amortized over the estimated
economic lives of the intangible assets of up to 20 years from the respective
dates of acquisition. In conjunction with the acquisition of TNI, PSINet has
recorded $72.8 million of net deferred tax liabilities.
PSINet has recently engaged an independent third party to determine the
allocation of the total purchase price of TNI. Until the study is complete,
preliminary estimates have been used in the development of the Pro Forma
Financial Information, including an estimate of the amount of acquired in-
process research and development that will result from this acquisition. As of
the acquisition announcement date, TNI was in the process of working on five
key projects which had not yet been determined to be technologically feasible
and which have no alternative future use, which would give rise to such a
charge. The five key research and development projects include:
. Next Generation Excel C2 Switch. This is a project to develop a major
software enhancement for controlling an Excel switch. Although TNI
purchases the Excel switch, TNI is responsible for writing the software
that controls it. This project is expected to allow TNI to enter new
markets because the software under development may allow the same piece
of hardware to process both outbound and inbound calls. The material
technology risk associated with this project is that the product may not
be capable of supporting the large volume of business that it must be
equipped to handle. This project, under current plans, is expected to be
completed in the first quarter of 2000.
. Outdial. This is a project under development in Ireland for application
in the United Kingdom. This product is designed to give TNI's network
access controllers the ability to originate calls. This technology is
designed to allow TNI to force the host (credit card processor) to call
a merchant's terminal for batch verification rather than the merchant
remembering to dial. This project is expected to allow TNI to enter new
markets because the software allows the same piece of hardware to
receive both outbound and inbound calls. The material technology risk
associated with this project is that the product may not be capable of
supporting the large volume of business that it must be equipped to
handle. This project, under current plans, is expected to be completed
in the first quarter of 2000.
. Next Generation Terminal Adaptor. This is a project under development
designed to increase the speed and connectivity of an ATM terminal. This
project is expected to allow TNI to strengthen its market share by
offering customers more features from the same piece of equipment. The
material technology risk associated with the project is that the product
may not be capable of supporting the large volume of business that it
must be equipped to handle. This project, under current plans, is
expected to be completed in the fourth quarter of 1999.
. Fraud Engine Update. This is a project under development designed to
update the system by which a telephone company verifies the billability
of a long distance call originating from a pay phone. This project is
expected to allow TNI to gain more market share through the introduction
of a more reliable product to market. The material technology risk
associated with this project is that this
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PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS--(Continued)
product is based on an entirely new design and is currently unproven.
This project, under current plans, is expected to be completed in the
first quarter of 2000.
. Local Number Portability. This is a project that is designed to allow
TNI to house the database against which a telephone company verifies the
billability of a long distance call originating from a pay phone in
Australia. This project is expected to open a new market for TNI. The
material technology risk associated with this project is that the
product may not be capable of supporting the large volume of business
that it must be equipped to handle. This project, under current plans,
is expected to be completed in the first quarter of 2000.
If none of these projects is successfully developed, TNI's and, after
completing the acquisition of TNI, PSINet's sales and profitability may be
adversely affected in future periods. However, the failure of any particular
individual project in-process would not have a material impact on PSINet's
financial condition or results of operations. Additionally, the failure of any
particular individual project in-process could impair the value of other
intangible assets acquired.
For purposes of this Pro Forma Financial Information, PSINet has attributed
the excess of the purchase price over the acquired net tangible assets for TNI
of approximately $760.7 million to other intangible assets in accordance with
the preliminary valuation; these include: existing technology including
software, patents, unpatented technology and know-how, tradenames, customer
contracts and relationships, existing workforce and goodwill, with useful lives
from five to 20 years, and $35.0 million to purchased in-process research and
development. To the extent that a portion of the purchase price of TNI is
allocated among the other intangible assets in different proportions, the
adjustment for amortization expense for the twelve months ended December 31,
1998 and for the six months ended June 30, 1999 would be different. For every
$1.0 million change in the amount allocated to purchased in-process research
and development, annual amortization expense reflected in the pro forma
consolidated statement of operations would change by $50,000.
For the Year Ended December 31, 1998
(a) Reflects the increase in amortization resulting from the allocation of
the purchase price to the acquired net tangible and intangible assets
(principally tradename, customer relationships, goodwill, assembled workforce
and existing technology, including software, patents, unpatented technology and
know-how) relating to the acquisitions included herein. The assigned lives of
the acquired intangible assets range from three to 20 years.
80
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS--(Continued)
<TABLE>
<CAPTION>
TNI Other
------------- --------------
(thousands of U.S. dollars)
---------------------------
<S> <C> <C>
Amortization.................................. $ 44,737 $ 28,117
============= =============
</TABLE>
(b) Reflects the following:
<TABLE>
<CAPTION>
TNI Other
------------- --------------
(thousands of U.S. dollars)
---------------------------
<S> <C> <C>
Interest expense on the 11% Senior Notes
from January 1, 1998 December 31, 1998
(assuming an average exchange rate of
$1.00: Euro .8539)...................... $ -- $ 134,824
Amortization of deferred financing costs
associated with the 11% Senior Notes
from January 1, 1998 - December 31,
1998.................................... -- 3,421
Interest expense avoided through assumed
repayment of the TNI revolving credit
facility as of January 1, 1998.......... (2,534) --
Other.................................... -- 828
------------- --------------
$ (2,534) $ 139,073
============= ==============
</TABLE>
(c) Basic and diluted loss per share are computed using net loss available
to common shareholders divided by the weighted average number of shares of
PSINet common stock that were outstanding during the periods presented and
assumes that the issuance of approximately 7,800,000 shares of PSINet common
stock in connection with the acquisition of TNI had occurred on January 1,
1998. Because all common stock equivalents are antidilutive, basic and diluted
loss per share are the same for all periods presented.
For the Six Months Ended June 30, 1999
(d) Reflects the increase in amortization resulting from the allocation of
the purchase price to the acquired net tangible and intangible assets
(principally tradename, customer relationships, goodwill, assembled workforce
and existing technology, including software, patents, unpatented technology and
know-how) relating to the acquisitions included herein. The assigned lives of
the acquired intangible assets range from three to 20 years.
<TABLE>
<CAPTION>
TNI Other
-------------- --------------
(thousands of U.S. dollars)
---------------------------
<S> <C> <C>
Amortization................................. $ 22,369 $ 4,590
============== =============
</TABLE>
81
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS--(Continued)
(e) Reflects the following:
<TABLE>
<CAPTION>
TNI Other
------------- --------------
(thousands of U.S. dollars)
-----------------------------
<S> <C> <C>
Interest expense on the 11% Senior Notes
from January 1, 1999 June 30, 1999
(assuming an average exchange rate of
$1.00: Euro .9178)...................... $ -- $ 66,740
Amortization of deferred financing costs
associated with the 11% Senior Notes
from January 1, 1999 - June 30, 1999.... -- 1,710
Interest expense avoided through assumed
repayment of the TNI revolving credit
facility as of January 1, 1998.......... (1,783) --
Other.................................... -- 95
------------- --------------
$ (1,783) $ 68,545
============= ==============
</TABLE>
For the Year Ended December 31, 1998 and the Six Months Ended June 30, 1999
(f) Reversal of tax expense recorded by TNI and TAS as a result of
availability to offset TNI and TAS taxable income with PSINet taxable losses
for the periods presented.
82
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Transaction Transaction Pro Forma for
Network Network Transaction
Services Services Network
PSINet Inc. Inc. Inc. Services Inc. Intercomputer Other
Consolidated Consolidated Adjustments Acquisition Acquisition Adjustments Pro Forma
------------ ------------ ----------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 609,987 $ 13,940 $ (350,830)(a)
(62,000)(f) $ 211,097 $ 124 $1,173,352 (h)
(25,199)(i) $1,359,374
Restricted cash and
short-term
investments............ 144,504 -- -- 144,504 -- -- 144,504
Short-term investments
and marketable
securities............. 106,369 1,216 -- 107,585 -- -- 107,585
Accounts receivable,
net.................... 58,596 30,049 -- 88,645 2,545 -- 91,190
Prepaid expenses........ 12,361 -- -- 12,361 2 -- 12,363
Other current assets.... 20,513 6,390 -- 26,903 94 -- 26,997
---------- -------- ---------- ---------- ------ ---------- ----------
Total current
assets.............. 952,330 51,595 (412,830) 591,095 2,765 1,148,153 1,742,013
Property, plant and
equipment, net......... 620,687 41,568 -- 662,255 677 -- 662,932
Goodwill and other
intangibles, net....... 373,583 84,788 (84,788)(b)
760,742 (b) 1,134,325 67 27,982 (i) 1,162,374
Other assets and
deferred charges....... 66,859 5,184 -- 72,043 85 34,209 (h) 106,337
---------- -------- ---------- ---------- ------ ---------- ----------
Total assets......... $2,013,459 $183,135 $ 263,124 $2,459,718 $3,594 $1,210,344 $3,673,656
========== ======== ========== ========== ====== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt.............. $ 78,455 $ 90 $ -- $ 78,545 $ 14 $ -- $ 78,559
Trade accounts payable.. 82,504 5,375 -- 87,879 621 -- 88,500
Accrued payroll and
related expenses....... 18,057 1,431 -- 19,488 225 -- 19,713
Other accounts payable
and accrued
liabilities............ 54,110 16,067 17,000 (c) 87,177 923 -- 88,100
Accrued interest
payable................ 29,397 180 -- 29,577 -- -- 29,577
Deferred revenue........ 21,306 1,243 -- 22,549 -- -- 22,549
---------- -------- ---------- ---------- ------ ---------- ----------
Total current
liabilities......... 283,829 24,386 17,000 325,215 1,783 -- 326,998
Long-term debt.......... 1,141,730 62,946 (62,000)(f) 1,142,676 39 1,207,560 (h) 2,350,275
Deferred income taxes... 4,721 -- 72,793 (g) 77,514 -- -- 77,514
Other liabilities....... 53,252 402 -- 53,654 109 4,447 (i) 58,210
Minority interest....... -- 2,596 -- 2,596 -- -- 2,596
---------- -------- ---------- ---------- ------ ---------- ----------
Total liabilities....... 1,483,532 90,330 27,793 1,601,655 1,931 1,212,007 2,815,593
---------- -------- ---------- ---------- ------ ---------- ----------
Shareholders' equity:
Convertible preferred
stock, Series C....... 362,434 -- -- 362,434 -- -- 362,434
Common stock........... 648 131 (131)(d)
78 (a) 726 112 (112)(j) 726
Capital in excess of
par value............. 823,636 62,866 (62,866)(d)
363,058 (a)(g) 1,186,694 -- -- 1,186,694
Accumulated earnings
(deficit)............. (548,847) 30,680 (30,680)(d)
(35,000)(e) (583,847) 1,551 (1,551)(j) (583,847)
Treasury stock......... (2,005) -- -- (2,005) -- -- (2,005)
Accumulated other
comprehensive
income................ 17,672 (872) 872 (d) 17,672 -- -- 17,672
Bandwidth Asset/IRU
Agreement............. (123,611) -- -- (123,611) -- -- (123,611)
---------- -------- ---------- ---------- ------ ---------- ----------
Total shareholders'
equity.............. 529,927 92,805 235,331 858,063 1,663 (1,663) 858,063
---------- -------- ---------- ---------- ------ ---------- ----------
Total liabilities and
shareholders'
equity.............. $2,013,459 $183,135 $ 263,124 $2,459,718 $3,594 $1,210,344 $3,673,656
========== ======== ========== ========== ====== ========== ==========
</TABLE>
83
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS
Reflects the acquisition of TNI, including:
(a) the assumed cash paid and the issuance of approximately 7.8 million
shares of PSINet common stock in connection with the merger assuming the
acquisition had been consummated on June 30,1999 (the shares of PSINet
common stock assume a value of $45.719 per share, based on the average of
the closing price of PSINet common stock on the Nasdaq Stock Market's
National Market on August 20, 1999 and August 23, 1999, and also assume the
exercise in full of approximately 2.4 million currently exercisable TNI
stock options).
(b) the preliminary allocation of the purchase price of TNI which has
been allocated to tangible assets acquired and liabilities assumed, based
upon their respective fair values, with the excess allocated to intangible
assets to be amortized over the estimated economic lives of the intangible
assets, and the elimination of existing intangible assets of TNI.
(c) the estimated closing costs and estimated purchase liabilities
associated with the merger.
(d) the elimination of the TNI common stock, capital in excess of par
value, retained earnings and accumulated other comprehensive income.
(e) the write-off from the preliminary allocation of a portion of the
purchase price of TNI to purchased in-process research and development.
(f) the repayment of the TNI Revolving Credit Facility in accordance
with the merger agreement.
(g) the net deferred tax liabilities recorded in conjunction with the
TNI merger, consisting of $206.0 million of gross deferred tax liabilities
and the reversal of $126.5 million of valuation allowance previously
recorded on PSINet's deferred tax assets. Approximately $6.7 million of
PSINet's valuation allowance has been reversed to capital in excess of par
value arising from the deferred tax asset related to non qualified stock
options.
Reflects other adjustments including:
(h) the issuance by PSINet of the 11% Senior Notes, after giving effect
to underwriter's discounts, commissions and other offering expenses of
$34.2 million.
(i) the cash paid by PSINet for the acquisition of Intercomputer and the
increase in goodwill and other intangible assets and acquisition
liabilities, based on a preliminary allocation.
(j) the elimination of the Intercomputer equity accounts.
PSINet has recently engaged an independent third party to determine the
allocation of the total purchase price of TNI. Until the study is complete,
preliminary estimates have been used in the development of the Pro Forma
Financial Information, including an estimate of the amount of purchased in-
process research and development that will result from this acquisition. For
purposes of this Pro Forma Financial Information, PSINet has attributed the
excess of the purchase price over the acquired net tangible assets for TNI of
$760.7 million to other intangible assets in accordance with the preliminary
valuation; these include: existing technology including software, patents,
unpatented technology and know-how, tradenames, customer contracts and
relationships, existing workforce and goodwill, with useful lives from five to
20 years, and $35.0 million to purchased in-process research and development.
84
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS--(Continued)
To the extent that a different portion of the purchase price is allocated to
in-process research and development, a different charge against operating
results, which may be material, would be recognized in the fourth quarter of
1999, the period in which the merger is expected to be completed, with a
corresponding change in the recorded amount of goodwill.
85
<PAGE>
PRO FORMA CAPITALIZATION OF PSINET
The following table presents the pro forma cash, cash equivalents, short-
term investments and marketable securities, restricted cash and short-term
investments and capitalization of PSINet as of June 30, 1999 after giving pro
forma effect to (i) the merger, (ii) the July 1999 issuance by PSINet of $1.05
billion and euro 150 million of 11% senior notes and (iii) the July 1999
acquisition by PSINet of Intercomputer.
This table should be read in conjunction with PSINet's and TNI's
consolidated financial statements incorporated by reference in this
prospectus/proxy statement and the "Unaudited Pro Forma Consolidated Financial
Information" included in this prospectus/proxy statement on page 74. See also
"Where You Can Find More Information" included in this prospectus/proxy
statement on page 99.
<TABLE>
<CAPTION>
Pro Forma
June 30, 1999
----------------
(in thousands of
U.S. dollars)
<S> <C>
Cash, cash equivalents, short-
term investments and
marketable securities........ $1,466,959
==========
Restricted cash and short-term
investments.................. $ 144,504
==========
Current portion of long-term
debt......................... $ 78,559
==========
Long-term debt:
10% senior notes............. 600,000
11% senior notes............. 1,207,560
11 1/2% senior notes (plus
unamortized premium of
$2,800)........................ 352,800
Notes payable................ 31,559
Capital lease obligations.... 158,356
----------
Total long-term debt.... 2,350,275
----------
Shareholders' equity:
Preferred stock, $.01 par
value; 30,000,000 shares
authorized
Preferred stock, Series A,
1,000,000 shares
designated; no shares
issued or outstanding.... --
Convertible preferred
stock, Series C,
9,200,000 shares
designated, issued and
outstanding.............. 362,434
Common stock, $.01 par
value; 250,000,000 shares
authorized (500,000,000
shares authorized as of
October 8, 1999);
72,477,497 shares issued... 726
Capital in excess of par
value........................ 1,186,694
Accumulated deficit........... (583,847)
Treasury stock, 99,556 shares,
at cost...................... (2,005)
Accumulated other
comprehensive income......... 17,672
Bandwidth asset to be
delivered under IXC
agreement.................... (123,611)
----------
Total shareholders'
equity................. 858,063
----------
Total capitalization.... $3,286,897
==========
</TABLE>
86
<PAGE>
DESCRIPTION OF PSINET CAPITAL STOCK
The following summary of the capital stock of PSINet is subject in all
respects to applicable New York law, PSINet's certificate of incorporation and
by-laws and PSINet's rights agreement. See "Comparison of Rights of Holders of
Common Stock of PSINet and TNI" and "Where You Can Find More Information."
PSINet authorized capital stock consists of 500,000,000 shares of common
stock, par value $.01 per share, and 30,000,000 shares of preferred stock, par
value $.01 per share.
The following summary of PSINet's capital stock and provisions of its
certificate of incorporation, by-laws, and shareholders rights plan does not
purport to be complete and is qualified in its entirety by reference to the
provisions of its certificate of incorporation, by-laws, and shareholders
rights plan. Copies of PSINet's certificate of incorporation, by-laws, and
shareholders rights plan have been filed with the Securities and Exchange
Commission. See "Where You Can Find More Information."
Common Stock
As of October 1, 1999, approximately 64,967,306 shares of PSINet common
stock were outstanding. In addition, a total of approximately 14,256,102 shares
of PSINet common stock were reserved for issuance in connection with
outstanding stock options, 50,000 shares were reserved for issuance in
connection with outstanding warrants to purchase common stock and a total of
9,153,788 additional shares were reserved for issuance under PSINet's Executive
Stock Option Plan, Executive Stock Incentive Plan, Director's Stock Incentive
Plan, Strategic Stock Incentive Plan, Employee Stock Purchase Plan and
International Employee Stock Purchase Plan.
Holders of PSINet's common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the shareholders. Holders
of PSINet's common stock are not entitled to cumulative voting rights with
respect to the election of directors and, as a consequence, minority
shareholders will not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any shares of preferred
stock issued in the future, holders of common stock are entitled to receive
ratably such dividends as may be declared from time to time by PSINet's board
of directors out of funds legally available for payment. In the event of a
liquidation, dissolution or winding up of PSINet, holders of PSINet's common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive rights and no right to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to PSINet's common stock. All shares of
PSINet's common stock to be outstanding upon completion of this offering will
be fully paid and non-assessable, subject to Section 630 of the New York
Business Corporation Law.
Under Section 630 of the New York Business Corporation Law, the ten largest
shareholders of PSINet may become personally liable for unpaid wages and debts
to PSINet's employees if PSINet's capital stock ceases to be listed on a
national or an affiliated securities association.
Preferred Stock
PSINet's board of directors has the authority to issue up to 30,000,000
shares of PSINet's preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of such series, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, without any further vote or action by
shareholders. As of the date of this prospectus/proxy statement, 1,000,000
shares of PSINet's preferred stock were designated as Series A Junior
Participating Preferred Stock, $.01 per value per share, in connection with
PSINet's Shareholder Rights Plan, no shares of which have been issued and
9,200,000 shares of PSINet's preferred stock were designated as 6 3/4% Series C
cumulative convertible preferred stock, all of
87
<PAGE>
which are issued and outstanding. PSINet's board of directors may designate and
authorize the issuance of new series of PSINet's preferred stock with voting
and other rights that could adversely affect the voting power of holders of
PSINet's common stock and the likelihood that such holders will receive
dividend payments and payments upon PSINet's liquidation and could have the
effect of delaying, deferring or preventing a change in control of PSINet.
In November 1997, PSINet issued 600,000 shares of its Series B 8%
convertible preferred stock in a private placement for approximately $30.0
million. During the first quarter of 1999, all outstanding shares of the Series
B preferred stock, which accrued dividends at an annual rate of 8%, were
converted into an aggregate of 3,000,000 shares of PSINet common stock. As a
result of this conversion, PSINet is no longer required to pay the 8% annual
dividends under the terms of the Series B preferred stock. Effective upon this
conversion, the formerly outstanding shares of Series B preferred stock have
resumed the status of authorized and unissued shares of PSINet preferred stock
undesignated as to series, and are available for future issuance as described
in the immediately preceding paragraph.
PSINet's 6 3/4% Series C cumulative convertible preferred stock was issued
in May 1999. Simultaneously with the issuance of the Series C preferred stock,
the purchasers of the convertible preferred stock deposited funds into an
account called the Deposit Account, from which quarterly cash payments of
$0.84375 per share will be made or which may be used at PSINet's option to
purchase shares of common stock from PSINet at 95% of the then current market
price of PSINet's common stock for delivery to holders of the Series C
preferred stock in lieu of cash payments. The funds placed in the Deposit
Account by the purchasers of the Series C preferred stock will, together with
the earnings on those funds, be sufficient to make payments, in cash or stock,
through May 15, 2002. Until the expiration of the Deposit Account, PSINet will
accrete a return to preferred shareholders each quarter from the date of
issuance at an annual rate of approximately 6 3/4% of the liquidation
preference per share. Such amount will be recorded as a deduction from net
income to determine net income available to common shareholders. Upon the
expiration of the Deposit Account, which is expected to occur on May 15, 2002
unless earlier terminated, the Series C Preferred Stock will begin to accrue
dividends at an annual rate of 6 3/4% of the liquidation preference payable, at
PSINet's option, in cash or in shares of its common stock at 95% of the market
price of the common stock on that date. Under specified circumstances, PSINet
can elect to terminate the Deposit Account prior to May 15, 2002, at which time
the remaining funds in the Deposit Account would be distributed to PSINet and
the Series C Preferred Stock would begin to accrue dividends.
Each share of the Series C preferred stock will be convertible at any time
at the option of the holders into 0.8017 shares of PSINet common stock, equal
to an initial conversion price of $62.3675 per share, subject to adjustment.
The shares of Series C preferred stock will be entitled to a liquidation
preference equal to $50 per share.
PSINet may redeem the Series C preferred stock at a redemption premium of
101.929% of the liquidation preference (plus accumulated and unpaid dividends,
if any) on or after November 15, 2000 and prior to May 15, 2002, if the trading
price for the Series C preferred stock equals or exceeds $124.74 per share for
a specified trading period. Additional payments will also be made from the
Deposit Account or by PSINet to the holders of the Series C preferred stock if
PSINet redeems Series C preferred stock under the foregoing circumstances.
Except in the foregoing circumstances, PSINet may not redeem the Series C
preferred stock prior to May 15, 2002. Beginning on May 15, 2002, PSINet may
redeem shares of convertible preferred stock at an initial redemption premium
of 103.857% of the liquidation preference, declining to 100.00% on May 15, 2006
and thereafter, plus in each case all accumulated and unpaid dividends to the
redemption date. PSINet may effect any redemption, in whole or in part, at its
option, in cash by delivery of fully paid and nonassessable shares of its
common stock or a combination thereof (subject to applicable law), by
delivering notice to the holders of the Series C preferred stock.
Holders of Series C preferred stock will have no voting rights except (1) as
required by law, (2) if dividends payable on the Series C preferred stock are
in arrears for six quarterly periods, the holders of
88
<PAGE>
Series C preferred stock voting separately as a class with shares of any other
preferred stock or preference securities having similar voting rights will be
entitled to elect two directors to PSINet's board of directors, and (3) the
affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding Series C preferred stock will be required to permit PSINet to issue
any class or series of stock, or security convertible into stock or evidencing
a right to purchase any shares of any class or series of stock ranking senior
to the Series C preferred stock as to dividends, liquidation rights or voting
rights, and for amendments to PSINet's charter that would adversely affect the
rights of holders of Series C preferred stock.
In the event of a change of control of PSINet (as defined in the charter
amendment designating the convertible preferred stock), holders of Series C
preferred stock will, if the market value of PSINet common stock at such time
is less than the conversion price for the Series C preferred stock, have a one
time option to convert all of their outstanding shares of Series C preferred
stock into shares of PSINet common stock at an adjusted conversion price equal
to the greater of (1) the market value of PSINet common stock as of the date of
the change in control and (2) $38.73. In lieu of issuing shares of common stock
issuable upon conversion in the event of a change of control, PSINet may, at
its option, make a cash payment equal to the market value of the common stock
otherwise issuable.
Registration Rights
In connection with PSINet's acquisitions of InterCon Systems Corporation in
June 1995 and Software Ventures Corporation in July 1995, PSINet granted
registration rights with respect to an aggregate of approximately 1,683,819
shares of its common stock and options to purchase 543,347 shares of its common
stock issued to former InterCon and Software Ventures shareholders. All such
shares of common stock and other securities are called the "registrable
shares". Pursuant to registration rights agreements between PSINet and the
former shareholders of InterCon and Software Ventures, respectively, the
original holders of registrable shares or their permitted transferees are
entitled to registration rights with respect to their registrable shares. If,
prior to May 8, 2000, PSINet proposes to register any of its securities under
the Securities Act of 1933, the holders of registrable shares will be entitled
to notice thereof and, subject to restrictions, to include their registrable
shares in such registration. Furthermore, one or more holders of registrable
shares may require us on up to five occasions prior to September 30, 2006 to
register their shares on Form S-3, subject to specified conditions and
limitations and provided that such holders are not permitted to require such
registration more frequently than once every six months. The former InterCon
shareholders are entitled to three demand registrations and one Form S-3
registration; and some of the former Software Ventures shareholders are
entitled to a single demand registration and a single Form S-3 registration,
subject to specified conditions and limitations and provided that any demand
must be at an aggregate offering price to the public of at least $1.0 million
and no demand may be made within six months of a prior demand. The right of
holders of registrable shares to include their shares in an underwritten
registration is subject to the right of the underwriters to limit the number of
shares included in the offering. Subject to limitations, PSINet is required to
bear all registration, legal (for no more than one independent legal counsel
for all selling holders of registrable shares) and other expenses in connection
with these registrations, other than underwriting discounts and commissions,
and must provide appropriate indemnification. These registration rights rank
ratably.
In connection with the private placement of PSINet's Series B preferred
stock, PSINet granted registration rights to the holders of its Series B
preferred stock with respect to 600,000 shares of Series B preferred stock,
which were converted into an aggregate of 3,000,000 shares of PSINet common
stock. These registration rights rank ratably with and are substantially
similar to those described in the immediately preceding paragraph, except that
PSINet was required to file a registration statement on Form S-3 with respect
to the shares of common stock issuable upon conversion of the Series B
Preferred Stock pursuant to demand registration rights exercised by the holders
of the Series B Preferred Stock, which registration statement was declared
effective by the Securities and Exchange Commission on April 24, 1998, and at
any time prior to November 17, 2000 when that registration statement is not
effective, the former holders of Series B Preferred Stock may be entitled to
notice and piggyback registration rights, which are not subject to an
underwriter's cutback.
89
<PAGE>
In connection with the transactions contemplated by the IRU Purchase
Agreement between PSINet and IXC, PSINet granted registration rights to IXC
with respect to the shares. These registration rights rank ratably with and are
substantially similar to those described in the immediately preceding two
paragraphs except that IXC is entitled to notice and piggyback registration
rights at any time. IXC may make up to three separate demands to have PSINet
file a registration statement under the Securities Act of 1933 with respect to
an underwritten public offering, and IXC is entitled to one demand registration
on Form S-3 every six months.
New York Anti-Takeover Law, Particular Charter and By-law Provisions and Other
Anti-takeover Considerations
As a New York corporation, PSINet is subject to the provisions of Section
912 of the New York Business Corporation Law and will continue to be so subject
if and for so long as it has a class of securities registered under Section 12
of the Securities Exchange Act of 1934, at least 25% of its total employees are
employed primarily within New York or at least 250 employees are so employed
and at least 10% of its voting stock is owned beneficially by residents of the
State of New York. Section 912 provides, with specified exceptions, which
include, among others, transactions with shareholders who became interested
prior to the effective date of an amendment to the New York corporation's
certificate of incorporation providing that the corporation would be subject to
Section 912 if such corporation did not then have a class of stock registered
pursuant to Section 12 of the Exchange Act, that a New York corporation may not
engage in a "business combination" (e.g., merger, consolidation,
recapitalization or disposition of stock) with any "interested shareholder" for
a period of five years from the date that such person first became an
interested shareholder unless:
(1) the transaction resulting in a person becoming an interested
shareholder, or the business combination, was approved by the board of
directors of the corporation prior to that person becoming an interested
shareholder;
(2) the business combination is approved by the holders of a majority of
the outstanding voting stock not beneficially owned by such interested
shareholder; or
(3) the business combination meets specified valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that:
(a) is the beneficial owner of 20% or more of the outstanding voting
stock of a New York corporation; or
(b) is an affiliate or associate of the corporation that at any time
during the prior five years was the beneficial owner, directly or
indirectly, of 20% or more of the then outstanding voting stock.
These provisions are likely to impose greater restrictions on an unaffiliated
shareholder than on the existing shareholders who will continue to own a
majority of our outstanding common stock after this offering.
PSINet's certificate of incorporation and by-laws contain provisions
intended to enhance the likelihood of continuity and stability in the
composition of its board of directors and of the policies formulated by the
board which may discourage a future unsolicited takeover of PSINet. These
provisions could have the effect of discouraging some attempts to acquire
PSINet or remove incumbent management, including incumbent members of PSINet's
board of directors, even if some or a majority of PSINet's shareholders deemed
such an attempt to be in their best interests.
PSINet's certificate of incorporation or by-laws, as applicable, among other
things:
1. provide that the number of directors will be not fewer than three nor
more than nine, with the exact number of directors to be determined from
time to time by resolution adopted by a majority of PSINet's board of
directors;
2. provide for a classified board of directors consisting of two classes
of directors having staggered terms of two years each, with each of the
classes required to consist of at least three directors;
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3. subject to any rights of holders of PSINet preferred stock which may
be granted by PSINet's board of directors in the future and except as
otherwise provided by Section 706(d) of the New York Business Corporation
Law, provide that directors may be removed only for cause;
4. subject to any rights of holders of PSINet preferred stock which may
be granted by PSINet's board of directors in the future, permit vacancies
on the board of directors that may occur between annual meetings and any
newly created seats to be filled only by the board of directors and not by
the shareholders;
5. limit the right of shareholders to call special meetings of
shareholders;
6. prohibit shareholders from proposing amendments to PSINet's
certificate of incorporation;
7. require any shareholder who wished to bring any proposal before a
meeting of PSINet shareholders or to nominate a person to serve as a
director to give written notice thereof and particular related information
at least 60 days prior to the date one year from the date of our
immediately preceding annual meeting, if such proposal or nomination is to
be submitted at an annual meeting, and within ten days of the giving of
notice to our shareholders, if such proposal or nomination is to be
submitted at a special meeting;
8. require the affirmative vote of at least two-thirds of PSINet capital
stock entitled to vote to amend particular provisions of its certificate of
incorporation and to amend its by-laws; and
9. provide that PSINet's board of directors, without action by its
shareholders, may issue and fix the rights and preferences of shares of its
preferred stock.
These provisions may have the effect of delaying, deferring or preventing a
change of control of PSINet without further action by PSINet's shareholders,
may discourage bids for its common stock at a premium over the market price of
its common stock and may adversely affect the market price of, and the voting
and other rights of the holders of, common stock.
Shareholder Rights Plan
Each outstanding share of PSINet common stock has attached to it a preferred
stock purchase right (a "right"). The rights also attach to most future
issuances of common stock. Subject to exceptions, each right will entitle the
registered holder to buy one one-thousandth of a share of PSINet Series A
preferred stock at an exercise price of $75 per right.
Subject to exceptions, the right will become exercisable upon the occurrence
of the earlier of:
. an announcement that a person or group of affiliated or associated
persons (each, an "acquiring person") has acquired beneficial ownership
of 20.50% or more of PSINet outstanding common stock (other than persons
who acquire ownership pursuant to a tender offer or exchange offer which
is for all outstanding shares of PSINet common stock, or persons who
acquire ownership directly from PSINet, William L. Schrader, the
Chairman and Chief Executive Officer, or his or PSINet's affiliates so
long as such persons beneficially own less than 50% of PSINet
outstanding common stock); or
. an announcement or commencement of an intention to make a tender offer
or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 20.50% or more of the
outstanding shares of PSINet common stock (the earlier of such dates
being called the "distribution date").
In such event, each holder of a right, other than rights beneficially owned by
the acquiring person, will thereafter have the right, subject to exceptions, to
receive upon exercise thereof a number of shares (or portions of shares) of
Series A preferred stock or, at the discretion of PSINet's board of directors,
a number of additional shares of common stock as set forth in the rights plan.
The acquisition of shares of PSINet's common stock by IXC or its controlled
affiliates pursuant to the IRU purchase agreement between IXC and PSINet,
however, will not render it an acquiring person. In addition, Ralph J. Swett,
the former Chairman of IXC, will not become an acquiring person solely by
reason of the issuance or exercise of options, if any, granted to him in his
capacity as a director of PSINet.
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All rights expire on June 5, 2006, unless the rights are earlier redeemed or
exchanged by PSINet or expire earlier upon the consummation of certain
transactions. Shares of PSINet Series A preferred stock purchasable upon
exercise of the rights will not be redeemable. Each share of Series A preferred
stock will be entitled, when, as and if declared, to an aggregate dividend of
1,000 times the dividend declared per share of PSINet's common stock. No
dividend may be declared on the common stock without the concurrent declaration
of a dividend on the Series A preferred stock. In the event of liquidation,
holders of the Series A preferred stock will be entitled to a minimum
preferential liquidation payment of $1,000 per share, plus any accrued but
unpaid dividends, but will be entitled to an aggregate payment of 1,000 times
the payment made per share of common stock; thereafter, holders of the Series A
preferred stock and the holders of common stock will share pari passu per share
in any of PSINet's remaining assets. Each share of PSINet's Series A preferred
stock will have 1,000 votes, voting together with PSINet's common stock.
Finally, in the event of any merger, consolidation or other transaction in
which shares of common stock are converted or exchanged, each share of Series A
preferred stock will be entitled to receive 1,000 times the amount received per
share of common stock.
In the event that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a right, other than rights
beneficially owned by the acquiring person which will thereupon become void,
will thereafter have the right (the "flip-in right") to receive, upon exercise
of a right at the then current exercise price of the right, that number of one
one-thousandths of a share of Series A preferred stock or, in the discretion of
PSINet's board of directors, that number of shares of common stock or, in
certain circumstances, other of PSINet's securities, having a market value of
two times the exercise price of the right. The flip-in right provisions do not
apply to a merger or other business combination with a person who has acquired
shares of PSINet's common stock pursuant to certain transactions approved by
its board of directors (each, a "permitted offer").
In the event that, after a person or group has become an acquiring person,
PSINet is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold or transferred,
except pursuant to a permitted offer, proper provision will be made so that
each holder of a right, other than rights beneficially owned by an acquiring
person which will have become void, will thereafter have the right (the "flip-
over right") to receive, upon the exercise thereof at the then current exercise
price of the right, that number of shares of common stock of the person with
which PSINet has engaged in the foregoing transaction (or its parent), which
number of shares at the time of such transaction will have a market value of
two times the exercise price of the right. The holder of a right will continue
to have the flip-over right whether or not such holder exercises or surrenders
the flip-in right.
At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under other specified
circumstances, PSINet may redeem the rights at a redemption price of $.01 per
right. PSINet's may, at its option, pay the redemption price in shares of its
common stock. After the date that a person becomes an acquiring person, PSINet
may redeem the then outstanding rights, at the redemption price, provided that
such redemption is in connection with a merger or other business combination
transaction or series of transactions involving PSINet in which all holders of
shares of common stock are treated alike.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire PSINet without
conditioning the offer on the rights being redeemed, a substantial number of
rights being acquired, or the offer being deemed a permitted offer under the
rights plan. However, the rights should not interfere with any merger or other
business combination in connection with a permitted offer or that is approved
by PSINet's board of directors because the rights are redeemable under
specified circumstances.
1999 Employee Stock Purchase Plan and the 1999 International Employee Stock
Purchase Plan.
On September 28, 1999, PSINet's stockholders approved the adoption of
PSINet's 1999 Employee Stock Purchase Plan and PSINet's 1999 International
Employee Stock Purchase Plan, which are referred to as the purchase plans, to
encourage PSINet's employees and employees of PSINet's subsidiaries to acquire
a proprietary interest in PSINet by purchasing shares of PSINet's common stock
through voluntary payroll
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deductions. The 1999 Employee Stock Purchase Plan is designed as an "employee
stock purchase plan" within the meaning of Section 423(b) of the Internal
Revenue Code. The 1999 International Employee Stock Purchase Plan for non-U.S.
employees does not provide the same tax incentives due to differences in
applicable law. An aggregate of 1,057,500 shares of PSINet common stock has
been reserved for issuance under the purchase plans. Any person regularly
employed by PSINet or by one of PSINet's subsidiaries for at least 20 hours per
week is eligible to participate in the applicable purchase plan. No person who
owns or holds options or rights to acquire, or as a result of participation in
the 1999 Employee Stock Purchase Plan would own or hold options or rights to
acquire, 5% or more of PSINet's common stock may participate in the purchase
plans. As of July 31, 1999, approximately 1,015 U.S. employees were eligible to
participate in the 1999 Employee Stock Purchase Plan. In addition, if the
merger is consummated, PSINet will have approximately 200 additional U.S.
employees. The international purchase plan covers certain of our non-U.S.
employees as determined from time to time by the committee depending on the
number of employees in a particular jurisdiction and the requirements of
applicable local law. The purchase price per share at which shares of common
stock are sold to participating employees under each of the purchase plans will
be 85% of the lower of the fair market value per share of common stock on (1)
the trading day immediately preceding the first business day of the calendar
quarter or (2) the trading day immediately preceding the last business day of
the calendar quarter. The fair market value of the common stock on a given date
is determined by reference to the closing price of the common stock on the
Nasdaq National Stock Market.
Transfer Agent and Registrar
First Chicago Trust Company of New York is the transfer agent and registrar
for PSINet's common stock and PSINet's Series C preferred stock. Its telephone
number for such purposes is (201) 222-4099.
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COMPARISON OF RIGHTS OF HOLDERS OF COMMON STOCK OF PSINET AND TNI
PSINet is a business corporation incorporated in New York and the rights of
PSINet shareholders are currently governed by the New York Business Corporation
Law, PSINet's certificate of incorporation and PSINet's by-laws. TNI is a
business corporation incorporated in Delaware and the rights of TNI
stockholders are currently governed by the Delaware General Corporation Law,
TNI's certificate of incorporation and TNI's by-laws. Upon completion of the
merger, the rights of TNI stockholders who become shareholders of PSINet in the
merger will be governed by the New York Business Corporation Law, PSINet's
certificate of incorporation and PSINet's by-laws.
The following description summarizes the material differences which may
affect the rights of stockholders of PSINet and TNI but is not a complete
statement of all the differences, or a complete description of the specific
provisions referred to in this summary. The identification of specific
differences is not intended to indicate that other equally or more significant
differences do not exist. You should read carefully the relevant provisions of
the New York Business Corporation Law, the Delaware General Corporation Law,
PSINet's certificate of incorporation, PSINet's by-laws, TNI's certificate of
incorporation and TNI's by-laws.
PSINet TNI
Authorized Capital Stock
PSINet's authorized capital stock TNI's authorized capital stock
consists of 500,000,000 shares of consists of 20,000,000 shares of
common stock, par value $.01 per common stock, par value $.01 per
share, of which approximately share, of which 14,175,764 were
64,967,306 were outstanding at the outstanding at the close of business
close of business on October 1, on October 1, 1999, and 38,681
1999, and 30,000,000 shares of shares of preferred stock, par value
preferred stock, par value $.01 per $.01 per share, none of which was
share, of which 10,200,000 shares outstanding at the close of business
have been designated and 9,200,000 on October 1, 1999.
were outstanding at the close of
business on October 1, 1999.
Under the New York Business
Corporation Law, the ten largest
stockholders (as determined by the
fair value of their beneficial
holdings) of a corporation which
does not have a class of stock which
is listed on a national stock
exchange are jointly and severally
liable for any unpaid wages and
salaries owed to the corporation's
employees.
Dividends
Under the New York Business Under the Delaware General
Corporation Law, PSINet may declare Corporation Law, TNI may make
and pay dividends or make other distributions to its stockholders
distributions to its stockholders (subject to the rights of preferred
(subject to the rights of preferred stockholders) out of its surplus, or
stockholders) out of its surplus, in the event there is no surplus,
unless PSINet is insolvent at the out of its net profits for the
time, if PSINet would become fiscal year in which the dividend is
insolvent by doing so, or when doing declared or the preceding fiscal
so would be contrary to any year. If TNI's capital is diminished
restrictions contained in its to an amount less than the aggregate
certificate of incorporation. The amount of the capital represented by
net assets of PSINet remaining after the issued and outstanding stock of
a declaration or payment of all classes having a preference upon
dividends must be at least as much the distribution of assets, however,
as its stated capital. no dividends may be paid until the
deficiency in the amount of the
capital represented by such stock is
repaired.
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Classification of the Board of Directors
Under the New York Business Under the Delaware General
Corporation Law, a corporation's Corporation Law, a corporation's
certificate of incorporation or a certificate of incorporation or a
by-law adopted by its stockholders bylaw adopted by its stockholders
may provide that the directors be may provide that the directors be
divided into two, three or four divided into two or three classes.
classes. The PSINet certificate of The TNI certificate of incorporation
incorporation and by-laws provide provides that the board of directors
that the board of directors shall be shall be comprised of three classes
comprised of two classes of at least as nearly equal in number as
three directors each. One class is possible. One class is elected each
elected each year for a two-year year for a three-year term.
term.
Size of the Board of Directors
Under the New York Business Under the Delaware General
Corporation Law, the number of Corporation Law, the number of
directors constituting a directors constituting a
corporation's board may be fixed by corporation's board may be fixed by,
its by-laws, by action of its or in the manner provided in, its
stockholders or by action of its by-laws unless its certificate of
board pursuant to a by-law adopted incorporation fixes the number of
by the stockholders. Under the directors. Under the TNI certificate
PSINet certificate of incorporation of incorporation and by-laws, the
and by-laws, the board may fix the board may fix the number of
number of directors, provided that directors, provided that such number
such number must be between three must be between three and seven. The
and nine. The PSINet board of TNI board of directors currently
directors currently consists of six consists of six directors.
directors.
Removal of Directors; Filling of Vacancies
Under the PSINet certificate of Under the Delaware General
incorporation and by-laws, except as Corporation Law, a director of a
otherwise provided by the New York corporation having a classified
Business Corporation Law, a director board may only be removed for cause.
may be removed only for cause and Any vacancies on the TNI board of
only at an annual or special meeting directors may be filled solely by
of stockholders. Any vacancies on the affirmative vote of a majority
the PSINet board of directors may be of the remaining directors.
filled solely by the affirmative
vote of a majority of the remaining
directors.
Special Meetings of the Stockholders
Under the New York Business Under the Delaware General
Corporation Law, special meetings of Corporation Law, special meetings of
stockholders may be called by the stockholders may be called by the
board or by such person or persons board or by such person or persons
as are authorized by the certificate as are authorized by the certificate
of incorporation or by-laws. The of incorporation or by-laws. Under
only business that may be conducted the TNI by-laws, special meetings of
at a special meeting of stockholders stockholders may be called by the
is that which is related to the Chairman, the President or at the
purposes set forth in the notice of written request of a majority of the
the meeting. Under the PSINet by- board of directors or of holders
laws, special meetings of owning more than one-third of the
stockholders may be called by the shares of capital stock issued and
Chairman, the President or at the outstanding and entitled to vote at
written request of a majority of the any such meeting. TNI stockholders
board of directors. PSINet may act may act without a meeting, without
without a meeting but only by prior shareholders notice and
unanimous written consent. without a vote, upon the written
consent of the number of
stockholders having not less than
the minimum number of votes
necessary to authorize such action
at a meeting at which all
stockholders entitled to vote were
present and voted.
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Stockholder Proposals
PSINet
Under the PSINet certificate of incorporation and by-laws, for a stockholder
to bring a matter before a meeting of stockholders, the Secretary of PSINet
must receive advance written notice of the stockholder's intent, containing
certain required information. With respect to a stockholder proposal to be
submitted at an annual meeting, the Secretary must receive the notice no later
than sixty days before the anniversary of the preceding annual meeting. With
respect to a stockholder proposal to be submitted at a special meeting, the
Secretary must receive the notice no later than the tenth day following the
date on which notice of such meeting is first given to stockholders.
TNI
TNI's by-laws do not include a requirement for advance notice of stockholder
proposals.
Indemnification of Officers and Directors
PSINet
The New York Business Corporation Law generally provides that a corporation
may indemnify an officer or director made a party or threatened to be made a
party to a legal proceeding against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorneys' fees) actually and
necessarily incurred in connection with the proceeding if:
. he acted in good faith for a
purpose he reasonably believed to
be in or not opposed to the best
interests of the corporation;
. in the case of a criminal
proceeding, he had no reasonable
cause to believe that his conduct
was unlawful; and
. in the case of a suit by or in
the right of the corporation, the
suit is not settled and he is not
adjudged to be liable to the
corporation, unless a proper
court determines that he is
nonetheless entitled to
indemnification.
The New York Business Corporation Law also permits corporations to indemnify
corporate personnel other than officers and directors but provides no specific
criteria for such indemnification.
PSINet's certificate of incorporation and by-laws generally provide for
indemnification, as described above, of directors and officers, as well as
others serving at the request of PSINet, to the extent not prohibited by law.
Furthermore, to the extent not prohibited by law, such persons will not be
liable to PSINet except in the event of bad faith, intentional misconduct, a
knowing violation or law or a violation of certain statutory provisions
relating to the payment of dividends and the distribution of the assets of the
corporation. Under PSINet's by-laws, a director, officer or employee may also
be entitled to other indemnification rights, including any arising under any
agreement with the corporation.
TNI
The Delaware General Corporation Law generally provides that a corporation
may indemnify any person made a party or threatened to be made a party to a
legal proceeding by reason of the fact that such person is or was an officer,
director, employee or agent of the corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement if:
. the acted in good faith and in a
manner he reasonably believed to
be in or not opposed to the best
interests of the corporation;
. in the case of a criminal
proceeding, he had no reasonable
cause to believe that his conduct
was unlawful; and
. in the case of a suit by or in
the name of the corporation, he
is not adjudged to be liable to
the corporation, unless the Court
of Chancery determines that he is
nonetheless entitled to
indemnification.
TNI's certificate of incorporation and by-laws provide for indemnification
to the fullest extent permitted by law for all persons it is permitted to
indemnify. Furthermore, to the extent not prohibited by law, such persons would
not be liable to TNI except for their own willful misconduct or actions taken
in bad faith. Under the Delaware General Corporation Law, such person may also
be entitled to other indemnification rights arising under any by-law, agreement
or stockholder vote.
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Amendment of Certificate of Incorporation
The PSINet certificate of Under the Delaware General
incorporation generally may be Corporation Law, unless otherwise
amended by a majority of the specified in the certificate of
outstanding PSINet shares entitled incorporation, an amendment to the
to vote thereon, but the provision certificate of incorporation
relating to amendments to specified requires the affirmative vote of a
by-laws may be amended only by two- majority of the outstanding shares
thirds of the votes of the entitled to vote thereon. Under
outstanding PSINet shares. TNI's certificate of incorporation,
Furthermore, under the New York amendments which would change the
Business Corporation Law, any relative rights of any series of
amendment to the PSINet certificate preferred stock to its disadvantage
of incorporation must be authorized must be approved by a majority of
by its board of directors. the outstanding shares of such
series. Furthermore, under the
Delaware General Corporation Law,
any amendment to the TNI certificate
of incorporation must also be
authorized by its board of
directors.
Amendment of By-Laws
The PSINet by-laws may be amended Under the Delaware General
by two-thirds of the outstanding Corporation Law, a majority of the
PSINet shares entitled to vote in stockholders may adopt, amend or
the election of directors or by a repeal TNI's by-laws. Under TNI's
majority of the PSINet directors certificate of incorporation and by-
present at a meeting of the board of laws, a majority of the board of
directors. However, any by-law directors can also adopt, amend or
adopted by the board may be amended repeal its by-laws.
or repealed by two-thirds of the
outstanding shares at an annual or
special meeting.
Business Combinations
Under the PSINet certificate of Under the Delaware General
incorporation, a majority of the Corporation Law, a majority of the
outstanding PSINet shares is needed outstanding shares is needed to
to adopt a plan of merger or adopt a plan of merger or
consolidation. consolidation.
The New York Business Corporation The Delaware General Corporation
Law prohibits a New York corporation Law prohibits a Delaware corporation
which has a class of voting stock which has a class of stock which is
which is registered with the SEC listed on a national stock exchange
from engaging in business or which has 2,000 or more
combinations with an interested stockholders of record from engaging
stockholder (generally, the in business combinations with an
beneficial owner of 20% or more of interested stockholder (generally,
the corporation's voting stock) for the beneficial owner of 15% or more
five years following the time the of the corporation's outstanding
stockholder became an interested voting stock) for three years
stockholder, unless, prior to that following the time the stockholder
time, the corporation's board of became an interested stockholder,
directors approved either the unless, prior to that time, the
business combination or the corporation's board of directors
transaction that resulted in the approved either the business
stockholder becoming an interested combination or the transaction that
stockholder. After five years, these resulted in the stockholder becoming
business combinations may occur if an interested stockholder, or if
approved by a majority vote of two-thirds of the outstanding shares
shares not owned by the interested not owned by such interested
stockholder, or if certain fair stockholder approve the business
price requirements are met. combination, or if, upon becoming an
interested stockholder, such
stockholder owned 85% of the
outstanding shares (excluding those
held by officers, directors and
certain employee stock plans).
Stockholder Rights Plan
PSINet's stockholder rights plan TNI does not have a stockholder
is described in the preceding rights plan.
section.
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LEGAL MATTERS
The legality of PSINet common stock offered by this prospectus/proxy
statement and certain United States federal income tax consequences of the
merger will be passed upon for PSINet by Nixon Peabody LLP, New York, New York,
counsel for PSINet. Certain attorneys with Nixon Peabody LLP currently own in
the aggregate less than one percent of PSINet's common stock.
Certain United States federal income tax consequences of the merger will be
passed upon for TNI by its counsel, Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington, D.C. Certain attorneys with Arent Fox Kintner Plotkin & Kahn, PLLC
currently own in the aggregate less than one percent of TNI's common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. incorporated in this
prospectus/proxy statement by reference to PSINet Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Transaction Network Services, Inc. ("TNI") as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 are incorporated by reference in this prospectus/proxy
statement from TNI's Annual Report on Form 10-K for the year ended December 31,
1998. Such financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report incorporated by
reference herein in reliance upon the authority of such firm as experts in
giving said reports.
The financial statements of Transaction Access Service (a fully integrated
business of AT&T Corp.) as of August 31, 1998 and November 30, 1997 and for the
nine month period ended August 31, 1998 and the twelve month period ended
November 30, 1997 incorporated in this prospectus/proxy statement by reference
to TNI's Current Report on Form 8-K Amendment No. 1 filed with the Securities
and Exchange Commission on November 24, 1998, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
give on the authority of said firm as experts in auditing and accounting.
The financial statements of OmniLink Communications Corporation for the
fiscal year ended December 31, 1997 are incorporated by reference in this
prospectus/proxy statement from TNI's Current Report on Form 8-K Amendment No.1
filed with the Securities and Exchange Commission on September 14, 1998. Such
financial statements have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report incorporated by reference herein
in reliance upon the authority of such firm as experts in giving said reports.
Representatives of Arthur Andersen, LLP are not expected to be present at
the TNI special meeting.
STOCKHOLDER PROPOSALS
TNI will hold an annual meeting of TNI stockholders in the year 2000 only if
the merger is not completed before the time of the annual meeting. The deadline
for submission of stockholder proposals for inclusion in TNI's proxy materials
for the TNI annual meeting to be held in the year 2000 is November 15, 1999.
If the merger is not completed, TNI stockholders may present proper
proposals for consideration at the next annual meeting of TNI stockholders by
submitting their proposal in writing to the Secretary of TNI in a timely
manner.
OTHER MATTERS
As of the date of this prospectus/proxy statement, the TNI board of
directors knows of no matters that will be presented for consideration at the
special meeting other than as described in this prospectus/proxy statement.
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WHERE YOU CAN FIND MORE INFORMATION
PSINet and TNI file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that PSINet and TNI file
with the Securities and Exchange Commission at the Securities and Exchange
Commission's public reference rooms at the following locations:
<TABLE>
<S> <C>
Public Reference Room New York Regional Office
450 Fifth Street, N.W 7 World Trade Center
Room 1024 Suite 1300
Washington, D.C. 20549 New York, NY 10048
</TABLE>
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. These Securities and
Exchange Commission filings are also available to the public from commercial
document retrieval services and at the Internet world wide web site maintained
by the Securities and Exchange Commission at "http://www.sec.gov." Reports,
proxy statements and other information concerning TNI may also be inspected at
the offices of the New York Stock Exchange at 20 Broad Street, New York, New
York 10005. Reports, proxy statements and other information pertaining to
PSINet are also available for inspection at the offices of The Nasdaq Stock
Market, which is located at 1735 K Street, N.W., Washington, D.C. 20006.
PSINet filed a registration statement on Form S-4 on October 1, 1999 to
register with the Securities and Exchange Commission the PSINet common stock to
be issued to TNI stockholders in the merger and filed Amendment No. 1 to such
registration statement on Form S-4 on October 19, 1999. This prospectus/proxy
statement is a part of that registration statement, as amended, and constitutes
a prospectus of PSINet in addition to being a proxy statement of TNI. As
allowed by Securities and Exchange Commission rules, this prospectus/proxy
statement does not contain all the information you can find in PSINet's
registration statement or the exhibits to the registration statement.
The Securities and Exchange Commission allows PSINet and TNI to "incorporate
by reference" information into this prospectus/proxy statement, which means
that the companies can disclose important information to you by referring you
to other documents filed separately with the Securities and Exchange
Commission. The information incorporated by reference is considered part of
this prospectus/proxy statement, except for any information superseded by
information contained directly in this prospectus/proxy statement or in later
filed documents incorporated by reference in this prospectus/proxy statement.
This prospectus/proxy statement incorporates by reference the documents set
forth below that PSINet and TNI have previously filed with the Securities and
Exchange Commission. These documents contain important business and financial
information about PSINet and TNI that is not included in or delivered with this
prospectus/proxy statement.
PSINet and TNI also incorporate by reference additional documents that may
be filed with the Securities and Exchange Commission under Section 13(a),13(c),
14 or 15(d) of the Exchange Act between the date of this prospectus/proxy
statement and the date of the special meeting. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
PSINet has supplied all of the information contained or incorporated by
reference in this prospectus/proxy statement relating to PSINet and TNI has
supplied all of the information relating to TNI.
TNI stockholders should not send in their TNI certificates until they
receive the transmittal materials from the paying agent. TNI stockholders of
record who have further questions about their share certificates or the
exchange of their TNI common stock for PSINet common stock or cash
consideration in the merger should call the paying agent.
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If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through the
companies, the Securities and Exchange Commission or the Securities and
Exchange Commission's Internet web site as described above. Documents
incorporated by reference are available from the companies without charge,
excluding all exhibits, except that if the companies have specifically
incorporated by reference an exhibit in this prospectus/proxy statement, the
exhibit will also be provided without charge. Stockholders may obtain documents
incorporated by reference in this prospectus/proxy statement by requesting them
in writing or by telephone from the appropriate company at the following
addresses:
<TABLE>
<S> <C>
PSINet Inc. Transaction Network Services, Inc.
510 Huntmar Park Drive 1939 Roland Clarke Place
Herndon, Virginia 20170 Reston, Virginia 20191
Attention: Corporate Secretary Attention: Karen Kazmark
Telephone: (703) 904-4100 Telephone: 703-453-8406
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus/proxy statement. We have not authorized anyone to
provide you with information that is different from what is contained in this
prospectus/proxy statement. This prospectus/proxy statement is dated October
22, 1999. You should not assume that the information contained in this
prospectus/proxy statement is accurate as of any date other than that date.
Neither the mailing of this prospectus/proxy statement stockholders nor the
issuance of PSINet common stock in the merger creates any implication to the
contrary.
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DOCUMENTS INCORPORATED BY REFERENCE
PSINet
PSINet is incorporating by reference in this prospectus the following
documents which have been filed with the Securities and Exchange Commission:
1. Annual report on Form 10-K for the fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for PSINet and its
subsidiaries as of December 31, 1998 and 1997
. related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended
December 31, 1996, 1997 and 1998
2. Quarterly reports on Form 10-Q for the quarters ended:
. March 31, 1999
. June 30, 1999
3. Current reports on Form 8-K dated:
. April 27, 1999
. May 7, 1999
. July 6, 1999
. July 16, 1999
. August 22, 1999
. August 22, 1999
. July 31, 1997 (solely insofar as it relates to our Shareholder
Rights Agreement dated May 8, 1996, as amended)
. August 20, 1997
4. Registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812).
5. Registration statement on Form 8-A dated June 4, 1996, as amended
(registration no. 0-25812).
TNI
TNI is incorporating by reference in this prospectus the following
documents which have been filed with the Securities and Exchange Commission:
1. Annual report on Form 10-K for the fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for TNI and its subsidiaries
as of December 31, 1998 and 1997
. related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended
December 31, 1996, 1997 and 1998
2. Quarterly reports on Form 10-Q for the quarters ended:
. March 31, 1999
. June 30, 1999
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3. Current reports on Form 8-K dated:
. July 15, 1998, as amended
. September 23, 1998, as amended
. July 29, 1999
. August 23, 1999
4. Registration statement on Form 8-A dated May 25, 1999 (registration
no. 00115033).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus/proxy statement contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations, business strategies,
operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, plans and objectives of management,
markets for stock of PSINet and TNI and other matters. Statements in this
prospectus/proxy statement that are not historical facts are hereby identified
as "forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act. Such
forward-looking statements, including, without limitation, those relating to
the future business prospects, revenues and income, in each case relating to
PSINet and TNI, wherever they occur in this prospectus/proxy statement, are
necessarily estimates reflecting the best judgment of the senior management of
PSINet and TNI and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the forward-looking
statements. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in this
prospectus/proxy statement. Important factors that could cause actual results
to differ materially from estimates or projections contained in the forward-
looking statements include without limitation:
. the ability to integrate the operations of PSINet and TNI, including
their respective product lines; and
. the effects of vigorous competition in the markets in which PSINet and
TNI operate.
Words such as "estimate," "project," "plan," "intend," "expect," "believe,"
"anticipate" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places
throughout this prospectus/proxy statement and the other documents incorporated
by reference, including, but not limited to, the Annual Report on Form 10-K for
the year ended December 31, 1998 of PSINet, including any amendments, and the
Annual Report on Form 10-K for the year ended December 31, 1998 of TNI,
including any amendments. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus/proxy statement. Neither PSINet nor TNI undertakes any obligation to
publicly update or release any revisions to these forward-looking statements to
reflect events or circumstances after the date of this prospectus/proxy
statement or to reflect the occurrence of unanticipated events.
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Annex 1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August 22,
1999, by and among PSINET INC. ("Parent"), a New York corporation, PSINET SHELF
I INC. ("Merger Subsidiary"), a Delaware corporation and a wholly-owned
subsidiary of Parent, and TRANSACTION NETWORK SERVICES, INC. (the "Company"), a
Delaware corporation.
WHEREAS, the respective Boards of Directors of Parent, Merger Subsidiary and
the Company have approved the merger of the Company with and into the Merger
Subsidiary (the "Merger"), upon the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), the Company shall
be merged with and into Merger Subsidiary and the separate existence of the
Company shall thereupon cease, and the Merger Subsidiary shall continue as the
surviving corporation in the Merger (the "Surviving Corporation") under the
laws of the State of Delaware under the name "Transaction Network Services,
Inc." as a wholly-owned subsidiary of Parent. Throughout this Agreement, the
term "Merger Subsidiary" shall refer to the Merger Subsidiary prior to the
Merger and the term "Surviving Corporation" shall refer to the Merger
Subsidiary in its status as the surviving corporation in the Merger.
Section 1.2 Closing. The closing of the Merger will take place as promptly
as practicable (and in any event within two business days) after satisfaction
or waiver in writing of the conditions set forth in Article VIII (the "Closing
Date"). The Closing shall be held at the offices of Nixon Peabody LLP, One
Thomas Circle, Washington, D.C., unless another date, time or place is agreed
to in writing by the parties hereto.
Section 1.3 Effective Time of the Merger. The Merger shall become effective
upon the filing of a certificate of merger ("Certificate of Merger") pursuant
to and in compliance with this Agreement and Section 251 of the General
Corporation Law of the State of Delaware (the "Delaware Law") with the
Secretary of State of the State of Delaware. When used in this Agreement, the
term "Effective Time" shall mean the time at which the Certificate of Merger
has been filed and become effective in accordance with Delaware Law.
Section 1.4 Effect of the Merger. The Merger shall, from and after the
Effective Time, have all the effects provided by Delaware Law. If at any time
after the Effective Time the Surviving Corporation shall consider or be advised
that any further deeds, conveyances, assignments or assurances in law or any
other acts are necessary, desirable or proper to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, the title to any property or
rights of the Company to be vested in the Surviving Corporation, by reason of,
or as a result of, the Merger, or otherwise to carry out the purposes of this
Agreement, the Company agrees that the Surviving Corporation and its proper
officers and directors shall execute and deliver all such deeds, conveyances,
assignments and assurances in law and do all things necessary, desirable or
proper to vest, perfect or confirm title to such property or rights in the
Surviving Corporation and otherwise to carry out the purposes of this
Agreement, and that the proper officers and directors of the Surviving
Corporation are fully authorized in the name of each of the Company and the
Merger Subsidiary or otherwise to take any and all such actions.
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ARTICLE II
The Surviving Corporation
Section 2.1 Certificate of Incorporation. The certificate of incorporation
of the Merger Subsidiary as in effect immediately prior to the Effective Time
shall be the certificate of incorporation of the Surviving Corporation until
thereafter duly amended, except that the name of the Surviving Corporation
shall be "Transaction Network Services, Inc."
Section 2.2 By-laws. The By-laws of the Merger Subsidiary as in effect
immediately prior to the Effective Time shall be the By-laws of the Surviving
Corporation until thereafter duly amended.
Section 2.3 Board of Directors; Officers. The directors of the Merger
Subsidiary in office immediately prior to the Effective Date shall be the
directors of the Surviving Corporation immediately after the Effective Time and
the officers of the Merger Subsidiary in office immediately prior to the
Effective Date shall be the officers of the Surviving Corporation immediately
after the Effective Time in each case, until the earlier of their respective
deaths, resignations, or removals, and the time that their respective
successors have been duly elected or appointed and shall have qualified.
ARTICLE III
Conversion of Shares
Section 3.1 Merger Consideration. As of the Effective Time, by virtue of the
Merger and without any action on the part of any stockholder of the Company or
Merger Subsidiary:
(a) Shares Of Merger Subsidiary Stock. Each share of common stock, par
value $.01 per share, of Merger Subsidiary (the "Merger Subsidiary Common
Stock") that is issued and outstanding immediately prior to the Effective
Time shall remain issued and outstanding unchanged by reason of the Merger
as one fully paid and nonassessable share of common stock, par value $.01
per share, of the Surviving Corporation.
(b) Cancellation Of Certain Company Common Stock. Each share of the
Company's common stock, par value $.01 per share ("Company Common Stock")
that is owned by the Company as treasury stock and any shares of Company
Common Stock that are owned by Parent shall be canceled and shall cease to
exist, and no stock of Parent or other consideration shall be delivered in
exchange therefor.
(c) Conversion Of Company Common Stock. Subject to the provisions of
this Section 3.1, each share of Company Common Stock, other than Dissenting
Shares (as defined in Section 3.1(n)) and shares canceled pursuant to
Section 3.1(b), issued and outstanding immediately prior to the Effective
Time shall by virtue of the Merger and without any action on the part of
the holder thereof, be converted into the right to receive the merger
consideration as follows (the "Merger Consideration") (i) $45.00 in cash
(the "Cash Consideration"), or (ii) a number of validly issued, fully paid
and nonassessable (subject to Section 630 of the New York Business
Corporation Law ("NYBCL") shares of Common Stock, par value $.01 per share,
of Parent ("Parent Common Stock") equal to the Exchange Ratio (as defined
below) (the "Stock Consideration"), or (iii) the right to receive a
combination of cash and shares of Parent Common Stock determined in
accordance with this Section 3.1 (the "Mixed Consideration").
Notwithstanding any provision of this Agreement to the contrary (other than
Section 3.1(l)) and assuming all outstanding Company Stock Options, ESPP
Options and any options issued pursuant to Section 6.1(a)(ii) are exercised
prior to the Effective Time, no more than 7,796,223 shares of Parent Common
Stock shall be issued as Stock Consideration and a maximum aggregate of
$350,830,015 shall be issued as Cash Consideration in the Merger. The
"Exchange Ratio" shall be equal to 1:1. No fractional shares of Parent
Common Stock shall be issued in connection with the Merger and in lieu
thereof the holder of shares of Company Common Stock shall have the right
to receive cash in an amount equal to the closing price of the Parent
Common Stock on the third trading day prior to the Effective Time
multiplied by the fractional share amount.
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(d) Cash Election. Subject to the limitations of the Cash Election
Number (defined below), each record holder of shares of Company Common
Stock immediately prior to the Effective Time shall be entitled to elect to
receive cash for all or any part of such holder's shares of Company Common
Stock (a "Cash Election"). Notwithstanding the foregoing, the maximum
aggregate number of shares of Company Common Stock that may be converted
into the right to receive cash in the Merger plus any Dissenting Shares
shall be 50% of the total number of shares of Company Common Stock issued
and outstanding as of the Effective Time (the "Cash Election Number"). Cash
Elections shall be made on a form designed for that purpose (a "Form of
Election"). A holder of record of shares of Company Common Stock who holds
such shares as nominee, trustee or in another representative capacity (a
"Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the
shares of Company Common Stock held by such Representative for a particular
beneficial owner.
(e) Cash Election Shares. If the aggregate number of shares of Company
Common Stock covered by Cash Elections (the "Cash Election Shares") exceeds
the Cash Election Number, each Cash Election Share shall be converted into
(i) the right to receive an amount in cash, without interest, equal to the
product of (A) the Cash Consideration and (B) a fraction (the "Cash
Fraction"), the numerator of which shall be the Cash Election Number and
the denominator of which shall be the total number of Cash Election Shares,
and (ii) a number of shares of Parent Common Stock equal to the product of
(A) the Exchange Ratio and (B) a fraction equal to one minus the Cash
Fraction. The adjustments provided in this Section 3.1(e), if applicable,
will result in each holder of Company Common Stock making a Cash Election
receiving Cash Consideration for such holder's Cash Election Shares on a
pro rata basis with all other holders of Cash Election Shares and Stock
Consideration for the balance of such holder's shares of Company Common
Stock so that the maximum aggregate Cash Election Number is not exceeded.
(f) Stock Election. Subject to the limitations of the Stock Election
Number (as defined below), each record holder of shares of Company Common
Stock immediately prior to the Effective Time shall be entitled to elect to
receive shares of Parent Common Stock for all or any part of such holder's
shares of Company Common Stock (a "Stock Election"). Notwithstanding the
foregoing, the maximum aggregate number of shares of Company Common Stock
that may be converted into the right to receive shares of Parent Common
Stock in the Merger shall be 50% of the total number of shares of Company
Common Stock issued and outstanding as of the Effective Time (the "Stock
Election Number"). Stock Elections shall be made on a Form of Election. A
Representative may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the
shares of Company Common Stock held by such Representative for a particular
beneficial owner.
(g) Stock Election Shares. If the aggregate number of shares of Company
Common Stock covered by Stock Elections (the "Stock Election Shares")
exceeds the Stock Election Number, each Stock Election Share shall be
converted into (i) the right to receive a number of shares of Parent Common
Stock, equal to the product of (A) the Exchange Ratio and (B) a fraction
(the "Stock Fraction"), the numerator of which shall be the Stock Election
Number and the denominator of which shall be the total number of Stock
Election Shares, and (ii) an amount in cash, without interest, equal to the
product of (A) the Cash Consideration and (B) a fraction equal to one minus
the Stock Fraction. The adjustments provided in this Section 3.1(g), if
applicable, will result in each holder of Company Common Stock making a
Stock Election receiving Stock Consideration for such holder's Stock
Election Shares on a pro rata basis with all other holders of Stock
Election Shares and Cash Consideration for the balance of such holder's
shares of Company Common Stock so that the maximum aggregate Stock Election
Number is not exceeded.
(h) Mixed Election. Subject to the limitations of the Cash Election
Number and the Stock Election Number, each record holder of shares of
Company Common Stock immediately prior to the Effective Time shall be
entitled to elect to receive shares of Parent Common Stock for part of such
holder's shares of Company Common Stock and cash for the remaining part of
such holder's shares of Company Common Stock (the "Mixed Election" and,
collectively with Stock Election and Cash Election, the
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"Election"). Mixed Elections shall be made on a Form of Election. A
Representative may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the
shares of Company Common Stock held by such Representative for a particular
beneficial owner. With respect to each holder of Company Common Stock who
makes a Mixed Election, the shares of Company Common Stock such holder
elects to be converted into the right to receive Cash Consideration shall
be treated as Cash Election Shares for purposes of the provisions contained
in Sections 3.1(d) and (e), and the shares such holder elects to be
converted into the right to receive shares of Parent Common Stock shall be
treated as Stock Election Shares for purposes of the provisions contained
in Sections 3.1(f) and (g).
(i) Form Of Election. To be effective, a Form of Election must be
properly completed, signed and submitted to Parent's transfer agent and
registrar, as paying agent or such other entity as may be designated by
Parent (the "Paying Agent"). Parent shall have the discretion, which it may
delegate in whole or in part to the Paying Agent, to determine whether
Forms of Election have been properly completed, signed and submitted or
revoked and to disregard immaterial defects in Forms of Election. The
decision of Parent (or the Paying Agent) in such matters shall be
conclusive and binding. Neither Parent nor the Paying Agent shall be under
any obligation to notify any person of any defect in a Form of Election
submitted to the Paying Agent. The Paying Agent shall also make all
computations contemplated by this Section 3.1, and all such computations
shall be conclusive and binding on the holders of shares of Company Common
Stock.
(j) Failure to Make an Election. For the purposes hereof, a holder of
shares of Company Common Stock who does not submit a Form of Election that
is received by the Paying Agent prior to the Election Deadline (as defined
in Section 3.1(k)) (the "No Election Shares") shall be deemed not to have
made a Cash Election, Stock Election or Mixed Election. If Parent or the
Paying Agent shall determine that any purported Election was not properly
made, the shares subject to such improperly made Election shall be treated
as No Election Shares. No Election Shares shall be treated by the Parent as
a Mixed Election designating one-half as Cash Election Shares and one-half
as Stock Election Shares.
(k) Election Deadline. Parent and the Company shall each use its
reasonable commercial efforts to cause copies of the Form of Election to be
mailed to the record holders of the Company Shares not fewer than thirty
days prior to the Effective Time and to make the Form of Election available
to all persons who become record holders of Company Shares subsequent to
the date of such mailing and no later than the close of business on the
seventh business day prior to the Effective Time. A Form of Election must
be received by the Paying Agent by 5:00 p.m., New York City time, on third
Business Day following the Effective Date (the "Election Deadline") in
order to be effective. All elections may be revoked until the Election
Deadline in writing by the record holders submitting Forms of Election.
(l) Anti-Dilution Provisions. In the event Parent (i) changes (or
establishes a record date for changing) the number of shares of Parent
Common Stock issued and outstanding prior to the Effective Time as a result
of a stock split, stock dividend, stock combination, recapitalization,
reclassification, reorganization or similar transaction with respect to the
outstanding Parent Common Stock or (ii) pays or makes an extraordinary
dividend or distribution in respect of Parent Common Stock (other than a
distribution referred to in clause (i) of this sentence) and, in either
case, the record date therefor shall be prior to the Effective Time, the
Merger Consideration shall be proportionately adjusted. If, between the
date hereof and the Effective Time, Parent shall merge or consolidate with
or into any other corporation (a "Business Combination") and the terms
thereof shall provide that Parent Common Stock shall be converted into or
exchanged for the shares of any other corporation or entity, then provision
shall be made so that shareholders of the Company who would be entitled to
receive shares of Parent Common Stock pursuant to this Agreement shall be
entitled to receive, in lieu of each share of Parent Common Stock issuable
to such shareholders as provided herein, the same kind and amount of
securities or assets as shall be distributable upon such Business
Combination with respect to one share of Parent Common Stock and the
parties hereto shall agree on an appropriate restructuring of the
transactions contemplated herein.
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(m) Company Stock Options. Pursuant to the terms of the plans pursuant
to which the Company Stock Options (as defined in Section 4.2(a)) were
issued and this Agreement, which are expressly assumed by the Parent as of
the Effective Time, the outstanding and unexercised Company Stock Options
shall, at the Effective Time, become exercisable for shares of Parent
Common Stock in accordance with their terms except that the number of
shares of Parent Common Stock subject to such Options shall be equal to the
product of the (i) number of shares of Company Common Stock subject to the
original Option, and (ii) the Exchange Ratio, and the exercise price per
share of Parent Common Stock under such Option shall be equal to (iii) the
exercise price under the Option as written divided by (iv) the Exchange
Ratio. The adjustments provided herein with respect to any Options which
are "incentive stock options" (as defined in Section 422 of the Code) shall
be effected in a manner consistent with Section 424(a) of the Code.
(n) Dissenting Shares. Each outstanding share of Company Common Stock
the holder of which has perfected his right to dissent under applicable law
and has not effectively withdrawn or lost such right as of the Effective
Time (the "Dissenting Shares") shall not be converted into or represent a
right to receive the Merger Consideration, and the holder thereof shall be
entitled only to such rights as are granted by applicable law; provided,
however, that any Dissenting Share held by a person at the Effective Time
who shall, after the Effective Time, withdraw the demand for payment for
shares or lose the right to payment for shares, in either case pursuant to
the Delaware Law, shall be deemed to be converted into, as of the Effective
Time, into the right to receive Stock Consideration, any cash in lieu of
fractional shares, and/or Cash Consideration pursuant to Section 3.1(c) in
the same manner as if such shares were No Election Shares. The Company
shall give Parent prompt notice upon receipt by the Company of any such
written demands for payment of the fair value of such shares of Company
Common Stock and of withdrawals of such notice and any other instruments
provided pursuant to applicable law. Any payments of Cash Consideration
made in respect of Dissenting Shares shall be made by the Surviving
Corporation.
3.2 Stockholders' Rights at the Effective Time. On and after the Effective
Time, the certificates that immediately prior to the Effective Time represented
shares of the Company Common Stock (the "Certificates") shall cease to
represent any rights with respect to the Company and shall only represent the
right to receive the Cash Consideration and/or the Stock Consideration,
together with the amount of cash, if any, payable in lieu of fractional shares
of Parent Common Stock into which any shares of Company Common Stock have been
converted, provided, however, that no dividends or other distributions, if any,
in respect of the shares of Parent Common Stock, declared after the Effective
Time and payable to holders of record after the Effective Time, and no interest
with respect to any Cash Consideration, shall be paid to the holders of any
unsurrendered Certificates until such Certificates and transmittal letters are
surrendered and delivered as provided in Section 3.3 of this Agreement. Subject
to applicable Delaware Law, after the surrender and exchange of Certificates,
the record holders thereof will be entitled to receive any such dividends or
other distributions declared after the Effective Time without interest thereon,
which theretofore have become payable with respect to the number of shares of
Parent Common Stock for which such Certificates were exchangeable.
Notwithstanding anything herein to the contrary, holders of any unsurrendered
Certificates shall not be entitled to exercise any rights as a holder of Parent
Common Stock, including, without limitation, the right to vote the Parent
Common Stock, until such Certificates are surrendered and exchanged pursuant to
this Agreement.
3.3 Surrender and Exchange of Share Certificates.
(a) Promptly after the Effective Time, the Parent shall make available to
the Paying Agent such certificates evidencing such number of shares of Parent
Common Stock and such amount of cash in order to enable the Paying Agent to
effect the conversion of Company Common Stock into Stock Consideration, any
cash in lieu of fractional shares, and/or Cash Consideration.
(b) On the Closing Date, Parent shall instruct the Paying Agent to mail to
each person who was a holder of record of shares of the Company Common Stock
immediately prior to the Effective Time: (i) a letter of transmittal; and (ii)
instructions for use in effecting the surrender of the Certificates nominally
representing the Company Common Stock in exchange for Stock Consideration, and
any cash payable in lieu of fractional
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shares, and/or Cash Consideration based upon such holder's Election, as
adjusted, or otherwise as provided in Section 3.1.
(c) After the Effective Time, each holder of a Certificate shall surrender
and deliver such Certificate to the Paying Agent together with a duly completed
and executed transmittal letter and accompanied by the Certificate (or by an
appropriate guarantee of delivery of such Certificate signed by a firm that is
a member of any registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or a bank, broker, dealer,
credit union, savings association or other entity that is a member in good
standing of an acceptable signature guarantee program of transfer agents or
securities exchanges). Promptly after such surrender and delivery, the holder
shall receive a certificate representing the number of whole shares of Parent
Common Stock for which such holder's shares of the Company Common Stock have
been converted for Stock Elections, together with a check for any cash in lieu
of any fractional share of Parent Common Stock, or a check for the cash payable
in respect of such shares for Cash Elections or both. Until so surrendered and
exchanged, each Certificate formerly representing an outstanding share of
Company Common Stock shall after the Effective Time be deemed for all purposes
to evidence only the right to receive Stock Consideration, and any cash payable
in lieu of fractional shares, and/or Cash Consideration elected based upon such
holder's Election, as adjusted, or otherwise, as provided in Section 3.1.
(d) At the Effective Time, the stock transfer books of the Company shall be
closed and no transfer of shares of Company Common Stock shall be made
thereafter, other than transfers of shares of Company Common Stock that have
occurred prior to the Effective Time. In the event that, after the Effective
Time, certificates are presented for transfer to the transfer agent for the
Company, the Merger Subsidiary or Parent, they shall be delivered to the Paying
Agent and exchanged for Stock Consideration, and any cash payable in lieu of
fractional shares, and/or Cash Consideration, all as provided for in this
Section 3.3.
(e) Any shares of Parent Common Stock or cash that remains undistributed to
the stockholders of the Company as of the Effective Time for one year after the
Effective Time shall be delivered to the Company by the Paying Agent, upon
demand, and any former stockholders of the Company who have not previously
complied with this Section 3.3 shall thereafter look only to Parent for payment
of their claim for Stock Consideration, any cash payable in lieu of fractional
shares, and/or Cash Consideration.
(f) Neither the Paying Agent, nor any of the Company, Merger Subsidiary or
Parent shall be liable to any holder of shares of Company Common Stock with
respect to any shares of Parent Common Stock (or dividends or distributions
with respect to Parent Common Stock) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law, rule, regulation,
statute, order, judgment or decree.
(g) In the event any Certificates shall have been lost, stolen or destroyed,
the Paying Agent shall issue such Stock Consideration, and any cash payable in
lieu of fractional shares, and/or Cash Consideration and any dividends or other
distributions with respect to Parent Common Stock to which such holder is
entitled in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof and the delivery of
such bond as the Paying Agent may reasonably require.
(h) No transfer taxes shall be payable by any stockholder of the Company in
respect of the issuance of the Parent Common Stock under this Section 3.3,
except that if any Parent Common Stock is to be issued in a name other than
that in which the Certificate surrendered has been registered, it shall be a
condition of such issuance that the person requesting such issuance shall pay
to Parent any transfer taxes payable by reason thereof, or of any prior
transfer of such surrendered certificate, or establish to the satisfaction of
Parent that such taxes have been paid or are not payable.
Section 3.4 No Further Rights. From and after the Effective Time, holders of
certificates theretofore evidencing shares of Company Common Stock shall cease
to have any rights as stockholders of the Company, except as provided herein or
by law.
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Section 3.5 Registration Statement; Prospectus/Proxy Statement.
(a) For the purposes of (i) registering the issuance of Parent Common Stock
to holders of the shares of Company Common Stock in connection with the Merger
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act"), and complying with applicable state securities laws and (ii)
holding the meeting of the Company stockholders ("Company Special Meeting") to
approve the Merger (the "Company Proposal"), Parent and the Company will
cooperate in the preparation of a registration statement on Form S-4 (such
registration statement, together with any and all amendments and supplements
thereto, being herein referred to as the "Registration Statement"), including a
prospectus/proxy statement satisfying all requirements of applicable state
securities laws, the Securities Act and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder (the "Exchange
Act"). Such prospectus/proxy statement in the form mailed by the Company and,
if required, Parent to their respective stockholders, together with any and all
amendments or supplements thereto, is herein referred to as the
"Prospectus/Proxy Statement."
(b) The Company will furnish Parent with such information concerning the
Company and its subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to the Company and its
subsidiaries, to comply with applicable law. None of the information relating
to the Company and its subsidiaries supplied by the Company for inclusion in,
or incorporated by reference in, the Prospectus/Proxy Statement will be false
or misleading with respect to any material fact or will omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company agrees promptly to advise Parent if, at any time
prior to the Company Special Meeting, any information provided by it for
inclusion in, or incorporated by reference in, the Prospectus/Proxy Statement
is or becomes incorrect or incomplete in any material respect and to provide
Parent with the information needed to correct such inaccuracy or omission. The
Company will furnish Parent with such supplemental information as may be
necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to the Company and its subsidiaries, to comply with applicable law
after the mailing thereof to the stockholders of the Company.
(c) Parent will include in the Prospectus/Proxy Statement such information
concerning Parent and its subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to Parent and its
subsidiaries, to comply with applicable law. None of the information relating
to Parent and its subsidiaries included in, or incorporated by reference in,
the Prospectus/Proxy Statement will be false or misleading with respect to any
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If, at any time prior
to the Company Special Meeting, any information included in or incorporated by
reference by Parent in the Prospectus/Proxy Statement is or becomes incorrect
or incomplete in any material respect, Parent shall correct such inaccuracy or
omission. Parent will furnish such supplemental information as may be necessary
in order to cause the Prospectus/Proxy Statement, insofar as it relates to
Parent and its subsidiaries, to comply with applicable law after the mailing
thereof to the stockholders of the Company.
(d) The Company and Parent agree to cooperate in making any preliminary
filings of the Prospectus/Proxy Statement with the SEC, as promptly as
practicable, pursuant to Rule 14a-6 under the Securities Exchange Act, and
shall cooperate in responding to any comments with respect thereto received
from the SEC.
(e) Parent will file the Registration Statement with the SEC and appropriate
materials with applicable state securities agencies as promptly as practicable
and will use all reasonable efforts to cause the Registration Statement to
become effective under the Securities Act and all such state filed materials to
comply with applicable state securities laws. The Company authorizes Parent to
utilize in the Registration Statement and in all such state filed materials,
the information concerning the Company and its subsidiaries provided to Parent
for inclusion in, or incorporated by reference in, the Prospectus/Proxy
Statement. Parent promptly will advise the Company when the Registration
Statement has become effective and of any supplements or amendments thereto,
and Parent will furnish the Company with copies of all such documents. Except
for the Prospectus/
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Proxy Statement or the preliminary prospectus/proxy statement, neither Parent
nor the Company shall distribute any written material that might constitute a
"prospectus" relating to the Merger or the Company Proposal within the meaning
of the Securities Act or any applicable state securities law without the prior
written consent of the other party.
(f) The Company shall mail the Prospectus/Proxy Statement to its
stockholders as promptly as practicable after the date the Registration
Statement is declared effective under the Securities Act.
Section 3.6 Tax-Free Reorganization. The parties intend that the Merger
qualify as a reorganization within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"). None of the parties will knowingly take any action that would cause
the Merger to fail to qualify as a reorganization within the meaning of Section
368(a) of the Code or applicable SEC rules. Each of the parties shall report
the Merger for income tax purposes as a reorganization within the meaning of
Section 368(a)(2)(D) of the Code (and any comparable state or local tax
statute), subject to the receipt of the opinions described in Sections 8.2(c)
and 8.3(c).
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to Parent and Merger Subsidiary that,
except as disclosed in the Company Disclosure Schedule which has been delivered
to Parent prior to the execution of this Agreement (the "Company Disclosure
Schedule"):
Section 4.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Each of the Company and its Significant Subsidiaries (as
defined in Section 10.8(a)) has the requisite corporate power and authority to
carry on its business as it is now being conducted and is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified will not have a Company Material Adverse Effect (as defined in
Section 10.8(a)). The Company has heretofore made available to Parent and
Merger Subsidiary a complete and correct copy of the Certificate of
Incorporation and By-laws or comparable organizational documents, each as
amended to the date hereof, of the Company and each of its Significant
Subsidiaries.
Section 4.2 Capitalization.
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock and 38,681 shares of Company preferred stock. As
of the date of this Agreement, 13,172,942 shares of Company Common Stock were
validly issued and outstanding, fully paid and nonassessable and no shares of
Company preferred stock were outstanding. There are no bonds, debentures, notes
or other indebtedness or other securities issued or outstanding having general
voting rights with respect to the Company or directly or indirectly convertible
in to securities having general voting rights. The Company holds no shares of
capital stock as treasury shares. As of the date hereof, except for stock
options to acquire an aggregate of 2,400,886 shares of Company Common Stock
(the "Company Stock Options"), options to acquire approximately 6,617 shares of
the Company Common Stock issued pursuant to the Company's employee stock
purchase plan ("ESPP Options"), there are no options, warrants, calls or other
rights, agreements or commitments presently outstanding obligating the Company
to issue, deliver or sell shares of its capital stock, or obligating the
Company to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment.
(b) All the outstanding shares of capital stock of each Significant
Subsidiary of the Company are validly issued, fully paid and nonassessable and,
except as disclosed in the Company SEC Reports (as defined in
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Section 4.5(a)), are owned by the Company or by a wholly-owned subsidiary of
the Company, free and clear of any Liens. There are no existing options,
warrants, calls or other rights, agreements or commitments of any character
relating to the sale, issuance or voting of any shares of the issued or
unissued capital stock of any of the Significant Subsidiaries of the Company
which have been issued, granted or entered into by the Company or any of its
Significant Subsidiaries. The Significant Subsidiaries of the Company are
listed in Section 4.2(b) of the Company Disclosure Schedule.
(c) The Company SEC Reports set forth all entities in which the Company or
any subsidiary holds less than all of the outstanding equity interests (the
"Ventures"') and each entity in which the Company or any subsidiary holds the
right or obligation to acquire any equity interests ("Other Investments"').
Except as set forth in the Company SEC Reports, the Company has not exercised
any call with respect to any interest in the Ventures nor has the holder of any
interest in the Ventures exercised any put with respect to any such interest to
the Company. The Company has no obligation to acquire any additional interests
in the Other Investments and neither the Company nor any other Person has taken
any action to acquire additional interests in, or to dispose of any equity in,
such Other Investments.
Section 4.3 Authority Relative to this Agreement. The Company has the
necessary corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement and the transactions contemplated
hereby by the holders of the Company Common Stock, to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby by the Company
have been duly and validly authorized and approved by the Company's Board of
Directors and no other corporate proceedings on the part of the Company are
necessary to authorize or approve this Agreement or to consummate the
transactions contemplated hereby (other than, with respect to the Merger, the
approval of this Agreement by the necessary vote of the stockholders of the
Company). This Agreement has been duly executed and delivered by the Company,
and assuming the due authorization, execution and delivery by Parent and Merger
Subsidiary, and subject to the stockholder approval referred to in the
preceding sentence, constitutes the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
Section 4.4 No Conflicts, Required Filings and Consents.
(a) None of the execution and delivery of this Agreement by the Company, the
consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will (i) subject to
approval by the Company's stockholders referred to in Section 4.3, conflict
with or violate the Certificate of Incorporation or By-laws of the Company or
the comparable organizational documents of any of the Company's Significant
Subsidiaries or Ventures, (ii) subject to receipt or filing of the required
Consents (as defined in Section 4.4(b)), conflict with or violate any statute,
ordinance, rule, regulation, order, judgment or decree applicable to the
Company or any of its Significant Subsidiaries or by which any of them or any
of their respective properties or assets may be bound or affected, or (iii)
result in a violation or breach of or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of any lien, charge, security interest, pledge, or
encumbrance of any kind or nature (any of the foregoing being a "Lien") on any
of the property or assets of the Company or any of the Company's Significant
Subsidiaries (any of the foregoing referred to in clause (ii) or this clause
(iii) being a "Violation") pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of the Company's Significant
Subsidiaries is a party or by which the Company or any of the Company's
Significant Subsidiaries or any of their respective properties may be bound or
affected except in the case of the foregoing clause (ii) or (iii) for any such
Violations which would not have a Company Material Adverse Effect.
(b) None of the execution and delivery of this Agreement by the Company, the
consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will require any
consent, waiver, license, approval, authorization, order or permit of, or
registration or
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filing with or notification to (any of the foregoing being a "Consent"), any
government or subdivision thereof, domestic, foreign, multinational or
supranational or any administrative, governmental or regulatory authority,
agency, commission, court, tribunal or body, domestic, foreign, multinational
or supranational (a "Governmental Entity"), except for (i) compliance with any
applicable requirements of the Securities Act and the Exchange Act, (ii) the
filing of the Certificate of Merger pursuant to Delaware Law, (iii) certain
state takeover, securities, "blue sky" and environmental statutes, (iv)
compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (v) such filings as may be required in connection with
the taxes described in Section 7.8, and (vi) Consents the failure of which to
obtain or make would not have a Company Material Adverse Effect.
Section 4.5 Reports and Financial Statements.
(a) The Company has filed with the SEC all forms, reports, schedules,
registration statements and definitive proxy statements (the "Company SEC
Reports") required to be filed by it with the SEC since January 1, 1996. As of
their respective dates, the Company SEC Reports complied as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Reports. As of their respective dates and as of
the date any information from such Company SEC Reports has been incorporated by
reference, the Company SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company has filed all material
contracts and agreements and other documents or instruments required to be
filed as exhibits to the Company SEC Reports.
(b) The consolidated balance sheets of the Company as of December 31, 1998
and 1997 and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998 (including the related notes and schedules thereto) contained in the
Company's Form 10-K for the year ended December 31, 1998 (the "Company
Financial Statements") present fairly, in all material respects, the
consolidated financial position and the consolidated results of operations and
cash flows of the Company and its consolidated subsidiaries as of the dates or
for the periods presented therein in conformity with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis during
the periods involved except as otherwise noted therein, including in the
related notes.
(c) The consolidated balance sheets and the related statements of earnings
and cash flows (including, in each case, the related notes thereto) of the
Company contained in the Form 10-Q for the quarterly period ended June 30, 1999
(the "Company Quarterly Financial Statements") have been prepared in accordance
with the requirements for interim financial statements contained in Regulation
S-X, which do not require all the information and footnotes necessary for a
fair presentation of financial position, results of operations and cash flows
in conformity with GAAP. The Company Quarterly Financial Statements reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the consolidated financial position,
results of operations and cash flows of the Company for all periods presented
therein.
Section 4.6 Information. None of the information supplied or to be supplied
by the Company for inclusion or incorporation by reference in the definitive
Prospectus/Proxy Statement will, at the time of filing with the SEC, at the
time of the mailing of the Prospectus/Proxy Statement or any amendments or
supplements thereto to the Company's stockholders or at the time of the Company
Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The portion of the Prospectus/Proxy Statement based on
information supplied by the Company for inclusion or incorporation by reference
therein will comply as to form in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
Section 4.7 Litigation. Except as disclosed in the Company SEC Reports, as
of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of the Company, threatened against or affecting the
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Company or any of its subsidiaries that is reasonably expected to have a
Company Material Adverse Effect, nor is there any judgment, decree, injunction
or order of any Governmental Entity or arbitrator outstanding against the
Company or any of its subsidiaries having, or which is reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
Section 4.8 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Reports or as contemplated by this Agreement, since June 30, 1999,
the Company has conducted its business only in the ordinary course, and there
has not been (i) any change that would have a Company Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock, or any redemption, purchase or other acquisition of
any of its capital stock, (iii) any split, combination or reclassification of
any of the Company's capital stock or, except with respect to the Company Stock
Options and ESPP Options described in Section 4.2 or after the date hereof, as
expressly permitted by Section 6.1(a)(ii) hereof, any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of the Company's capital stock, (iv) any granting
by the Company or any of its subsidiaries to any officer of the Company of any
increase in compensation, except in the ordinary course of business consistent
with prior practice or as required under employment agreements in effect as of
December 31, 1998, (v) any granting by the Company or any of its subsidiaries
to any officer of the Company of any increase in severance or termination pay,
except as required under employment, severance or termination agreements or
plans in effect as of December 31, 1998, (vi) any entry by the Company or any
of its subsidiaries into any employment, severance or termination agreement
with any officer of the Company, or any increase in benefits available under or
establishment of any Company Benefit Plan (as defined in Section 4.9(a) below)
except in the ordinary course of business consistent with past practice, or
(vii) any material change in accounting methods, principles or practices by the
Company, except insofar as may have been required by a change in GAAP.
Section 4.9 Employee Benefit Plans. (a) Schedule 4.9 of the Company
Disclosure Schedule sets forth a complete and correct list of all "employee
benefit plans", as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and any other pension plans or
employee benefit arrangements or payroll practices (including, without
limitation, severance pay, vacation pay, company awards, salary continuation
for disability, sick leave, deferred compensation, bonus or other incentive
compensation, stock option or stock purchase arrangements or policies)
maintained, or contributed to, by the Company, its subsidiaries or any trade or
business (whether or not incorporated) which is treated with the Company or its
subsidiaries as a single employer under Section 414(b), (c), (m) or (o) of the
Code ("ERISA Affiliate") with respect to employees of the Company, its
subsidiaries or their ERISA Affiliates ("Company Benefit Plans"). Each Plan is
in writing and the Company has previously furnished Parent with a true and
complete copy of each Plan document, including all amendments thereto, and a
true and complete copy of each material document prepared in connection with
each such Plan, including, without limitation, (i) a copy of each trust or
other funding arrangement, (ii) each summary plan description and summary of
material modifications, (iii) the three most recently filed Form 5500's,
including all attachments thereto, (iv) the most recently received Internal
Revenue Service ("IRS") determination letter for each such Plan, and (v) the
most recently prepared actuarial report and financial statement in connection
with each such Plan. Neither the Company nor its subsidiaries have any express
or implied commitment (x) to create or incur liability with respect to or cause
to exist any other employee benefit plan, program or arrangement, (y) to enter
into any contract or agreement to provide compensation or benefits to any
individual, or (z) to modify, change or terminate any Plan, other than with
respect to a modification, change or termination required by ERISA or the Code.
(b) The Company, its subsidiaries and their ERISA Affiliates have never
sponsored, contributed to, or incurred any liability with respect to an
employee benefit plan that is subject to Title IV of ERISA or Section 412 of
the Code and no fact or event exists which could give rise to any liability
under Title IV of ERISA or Section 412 of the Code.
(c) Each of the Company Benefit Plans intended to qualify under Section
401(a) of the Code ("Qualified Plans") has received a favorable determination
letter from the Internal Revenue Service that such Plan is so
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qualified, and, except as disclosed on Schedule 4.9(c), nothing has occurred
with respect to the operation of any such Plan which, either individually or in
the aggregate, would cause the loss of such qualification or the imposition of
any material liability, penalty or tax under ERISA or the Code.
(d) There has been no prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Code) with respect to any Company Benefit
Plan. Neither the Company nor any Subsidiary is currently liable or has
previously incurred any liability for any tax or penalty arising under Section
4971, 4972, 4975, 4979, 4980 or 4980B of the Code or Section 502 of ERISA, and
no fact or event exists which could give rise to any such liability.
(e) All contributions and premiums required by law or by the terms of any
Company Benefit Plan or any agreement relating thereto have been timely made
(without regard to any waivers granted with respect thereto) in all material
respects.
(f) The liabilities of each Company Benefit Plan that has been terminated or
otherwise wound up, have been fully discharged in material compliance with
applicable law.
(g) There has been no violation of ERISA with respect to the filing of
applicable returns, reports, documents and notices regarding any of the Company
Benefit Plans with the Secretary of Labor or the Secretary of the Treasury or
the furnishing of such notices or documents to the participants or
beneficiaries of the Company Benefit Plans which, either individually or in the
aggregate, could result in a material liability to the Company.
(h) There are no pending legal proceedings which have been asserted or
instituted against any of the Company Benefit Plans, the assets of any such
Plans or the Company or any ERISA Affiliate or the plan administrator or any
fiduciary of the Company Benefit Plans with respect to the operation of such
plans (other than routine, uncontested benefits claims).
(i) Each of the Company Benefit Plans has been maintained, in all material
respects, in accordance with its terms and all provisions of applicable laws
and regulations. All amendments and actions required to bring each of the
Company Benefit Plans into conformity in all material respects with all of the
applicable provisions of ERISA and other applicable laws and regulations have
been made or taken except to the extent that such amendments or actions are not
required by law to be made or taken until a date after the Closing Date.
(j) The Company and its subsidiaries have never maintained a welfare benefit
plan providing continuing benefits after the termination of employment (other
than as required by Section 4980B of the Code and at the former employee's own
expense), and the Company, its subsidiaries and each of their ERISA Affiliates
have complied in all material respects with the notice and continuation
requirements of Section 4980B of the Code and the regulations thereunder.
(k) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation or golden parachute) becoming due to any director or employee of
the Company or it subsidiaries, (ii) materially increase any benefits otherwise
payable under any Company Benefit Plan, or (iii) result in the acceleration of
the time of payment or vesting of any such benefits to any material extent
other than vesting of the Company Stock Options in accordance with their terms.
(l) The Company and its subsidiaries are in compliance in all material
respects with applicable laws and collective bargaining agreements with respect
to all benefit plans, contracts and arrangements covering non-U.S. Business
Employees ("Non-U.S. Benefit Plans"). The Company and its subsidiaries have no
unfunded liabilities in violation of local law or that would, if the plan were
covered by ERISA, violate the funding obligations prescribed by ERISA, which,
either individually or in the aggregate, in any material respect. All benefits
payable under each of the Non-U.S. Benefit Plans are provided in accordance
with the terms of the
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governing provisions of the relevant Non-U.S. Benefit Plan. The Company and the
Subsidiaries are not aware of any failure to comply with any applicable law
which would or might result in the loss of tax approval or qualification of any
Non-U.S. Benefit Plans.
Section 4.10 Labor Relations. There are no labor controversies pending or
threatened with respect to the Company and neither the Company nor any U.S.
subsidiary is a party to any collective bargaining agreements with any labor
union or other representative of employees. No non-U.S. subsidiary is a party
to any collective bargaining agreement with any labor union or other
representative of employees or any works' council or similar entity under
applicable laws. To the knowledge of the Company, there no any pending or
threatened union organization activity by or among any of its or its
subsidiaries' employees.
Section 4.11 Taxes. The Company and its subsidiaries have duly filed all
material foreign, federal, state and local income, franchise, excise, real and
personal property and other Tax (as defined in Section 10.8(a)) returns and
reports (including, but not limited to, those filed on a consolidated, combined
or unitary basis) required to have been filed by the Company and its
subsidiaries prior to the date hereof. All of the foregoing returns and reports
are true and correct in all material respects, and the Company and its
subsidiaries have paid or, prior to the Effective Time will pay, all Taxes,
interest and penalties shown on such returns or reports as being due or (except
to the extent the same are contested in good faith) claimed to be due to any
federal, state, local or other taxing authority. The Company has paid and will
pay all installments of estimated taxes due on or before the Effective Time.
The Company and its subsidiaries have paid or made adequate provision in
accordance with GAAP in the financial statements of the Company for all Tax
payable in respect of all periods ending on or prior to the date of this
Agreement and will have made or provided for all taxes payable in respect of
all periods entering in or prior to the Closing Date. As of the date hereof,
all deficiencies proposed as a result of any audits have been paid or settled.
The Company and each subsidiary has paid, collected or withheld, or caused to
be paid, collected or withheld, all amounts of Tax required to be paid,
collected or withheld, other than such Taxes for which adequate reserves in the
Company Financial Statements have been established or which are being contested
in good faith. There are no claims or assessments pending against the Company
or any Significant Subsidiary for any alleged deficiency in any Tax, and the
Company has not been notified in writing of any proposed Tax claims or
assessments against the Company or any Significant Subsidiary. There is no
contract, agreement, plan or arrangement covering any Person that, individually
or collectively, could give rise to the payment of any amount that would not be
deductible by the Parent, the Company, or any of the subsidiaries of the
Company by reason of Section 280G of the Code.
Section 4.12 Compliance with Applicable Laws. The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for them to own, lease or
operate their properties and assets and to carry on their businesses
substantially as now conducted (the "Company Permits"), except for such
permits, licenses, variances, exemptions, orders and approvals the failure of
which to hold would not have a Company Material Adverse Effect. The Company and
its subsidiaries are in material compliance with applicable laws and the terms
of the Company Permits. Except as disclosed in the Company SEC Reports filed
prior to the date of this Agreement, the Company has not received any notice
that the business operations of the Company and its subsidiaries are being
conducted in violation of any law, ordinance or regulation of any Governmental
Entity.
Section 4.13 Voting Requirements. The affirmative vote of the holders of a
majority of the total number of votes entitled to be cast by the holders of the
Company Common Stock outstanding as of the record date for the Company Special
Meeting is the only vote of the holders of any class or series of the Company's
capital stock or other securities necessary to approve this Agreement and the
transactions contemplated by this Agreement.
Section 4.14 Material Contracts. Neither the Company nor any subsidiary is a
party or is subject to any material note, bond, mortgage, indenture, contract,
lease, license, agreement, understanding, instrument, bid
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or proposal that is required to be described in or filed as an exhibit to any
Company SEC Report ("Company Material Contract") that is not so described in or
filed as required by the Securities Act or the Exchange Act, as the case may
be. The Company has made available to Parent true and accurate copies of the
Company Material Contracts. All such Company Material Contracts are valid and
binding and are in full force and effect and enforceable against the Company or
its subsidiaries in accordance with their respective terms. Other than
contracts included in the Company Material Contracts, none of the Company's
contracts which are material individually or in the aggregate provide for
consideration to be paid or received other than cash on the one hand and goods
and services customarily provided by the Company or used by the Company in its
business in the ordinary course on the other hand. No Consent of any person is
needed in order that each such Company Material Contract shall continue in full
force and effect in accordance with its terms without penalty, acceleration or
rights of early termination by reason of the consummation of the transactions
contemplated by this Agreement, except for Consents the absence of which would
not, in the aggregate, have a Company Material Adverse Effect, and neither the
Company nor any of its subsidiaries is in violation or breach of or default
under any such Company Material Contract; nor to the Company's knowledge is any
other party to any such Company Material Contract in violation or breach of or
default under any such Company Material Contract.
Section 4.15 Title to Property. The Company and each of its subsidiaries has
good and defensible title to all of its material properties and assets, free
and clear of all Liens, except Liens for taxes not yet due and payable and such
Liens or other imperfections of title, that do not constitute a Company
Material Adverse Effect, and all leases, easements, licenses, rights of way,
and other rights pursuant to which the Company or any of its subsidiaries lease
from others or otherwise have the right to use material real or personal
property, individually or in the aggregate material to the business of Company
(all of the foregoing, collectively, the "Company Real Property Rights"), are
valid and effective in accordance with their respective terms, and there is
not, under any of such leases, easements, licenses, and other rights, any
existing material default or event of default (or event which with notice or
lapse of time, or both, would constitute a material default), except where the
lack of such validity and effectiveness or the existence of such default or
event of default does not constitute a Company Material Adverse Effect. Neither
the Company nor any subsidiary is a party or is subject to any Company Real
Property Rights that is required to be described in or filed as an exhibit to
any Company SEC Report that is not so described in or filed as required by the
Securities Act or the Exchange Act, as the case may be. The Company has made
available to Parent true and accurate copies of the Company Real Property
Rights. All such Company Real Property Rights are valid and binding and are in
full force and effect and enforceable against the Company or its subsidiaries
in accordance with their respective terms. No Consent of any person is needed
in order that each such Company Real Property Rights shall continue in full
force and effect in accordance with its terms without penalty, acceleration or
rights of early termination by reason of the consummation of the transactions
contemplated by this Agreement, except for Consents the absence of which would
not have a Company Material Adverse Effect, and neither the Company nor any of
its subsidiaries is in violation or breach of or default under any such Company
Real Property Rights; nor to the Company's knowledge is any other party to any
such Company Real Property Rights in violation or breach of or default under
any such Company Real Property Rights.
Section 4.16 Intellectual Property.
(a) The Company and its subsidiaries, directly or indirectly, own, or are
licensed or otherwise possess legally enforceable rights to use, all patents,
trademarks, trade names, service marks, copyrights and any applications
therefor, technology, know-how and tangible or intangible proprietary
information or materials that are material to the business of the Company and
its subsidiaries (the "Company Intellectual Property Rights").
(b) Either the Company or one of its subsidiaries is the sole and exclusive
owner of, or the exclusive or non-exclusive licensee of, with all right, title
and interest in and to (free and clear of any Liens), the Company Intellectual
Property Rights, and, in the case of the Company Intellectual Property Rights
owned by the Company or one of its subsidiaries, has sole and exclusive rights
(and is not contractually obligated to pay any
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compensation to any third party in respect thereof) to the use thereof or the
material covered thereby in connection with the services or products in respect
of which the Company Intellectual Property Rights are being used. Except as
described in the Company SEC Reports, no claims with respect to the Company
Intellectual Property Rights have been asserted or, to the knowledge of the
Company, are threatened by any person that are reasonably likely to constitute
a Company Material Adverse Effect: (i) to the effect that the manufacture,
sale, licensing, or use of any of the services or products of the Company or
any of its subsidiaries as now manufactured, sold or licensed or used or
proposed for manufacture, use, sale or licensing by the Company or any of its
subsidiaries infringes on any copyright, patent, trade mark, service mark or
trade secret of a third party; (ii) against the use by the Company or any of
its subsidiaries of any trademarks, service marks, trade names, trade secrets,
copyrights, patents, technology or know-how and applications used in the
business of the Company and any of its subsidiaries as currently conducted or
as proposed to be conducted; or (iii) challenging the ownership by the Company
or any of its subsidiaries or the validity of any of the Company Intellectual
Property Rights. All registered trademarks, service marks and copyrights held
by the Company and the Significant Subsidiaries are valid and subsisting,
except to the extent any failure does not constitute a Company Material Adverse
Effect. To the knowledge of the Company, there is no unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property
Rights by any third party, including any employee or former employee of the
Company or any of its subsidiaries that would have a Company Material Adverse
Effect. No Intellectual Property Right is subject to any outstanding decree,
order, judgment, or stipulation restricting in any manner the licensing thereof
by the Company or any subsidiary, except to the extent any such restriction
does not constitute a Company Material Adverse Effect. Neither the Company nor
any of the subsidiaries has entered into any agreement (other than exclusive
distribution agreements) under which the Company or any of the subsidiaries is
restricted from selling, licensing or otherwise distributing any of its
products to any class of customers, in any geographic area, during any period
of time or in any segment of the market, except to the extent any such
restriction does not constitute a Company Material Adverse Effect.
(c) The Company and its subsidiaries have a compliance program in place to
evaluate and address issues regarding whether their computer systems, software,
hardware, firmware, middleware and other information technology (collectively,
"Information Technology") are Year 2000 Ready (as defined below); the Company
and its subsidiaries have taken, are taking, and will take all measures the
Company reasonably believes are necessary to make their Information Technology,
particularly the Information Technology upon which the Company or the
subsidiaries will rely to provide services to customers, Year 2000 Ready,
including remediation and the use of contingency plans, if necessary, should a
year 2000 problem arise from any cause within the control of the Company or any
of the subsidiaries that may affect those services; and the Company and the
subsidiaries have requested or are in the process of requesting from those
third-party vendors and suppliers of the Company or of the subsidiaries that
directly support the services that the Company or any of the subsidiaries
provides to customers reasonable assurances that their Information Technology
are Year 2000 Ready, and that they are taking or have taken adequate measures
to prevent problems caused by the year 2000 that may impact the services and
products they provide to the Company or any of the subsidiaries. The Company
and the subsidiaries have previously made available to Parent copies of all
year 2000 warranties that the Company or any of the subsidiaries has provided,
and currently provides, to customers. As used in this Agreement, "Year 2000
Ready" shall mean that Information Technology is designed to be used prior to,
during and after the calendar year 2000 A.D. and such Information Technology
will accurately receive, provide and process date/time data (including, without
limitation, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries A.D., and leap year calculations and will
not malfunction, cease to function or provide invalid or incorrect results as a
result of date/time data (including, without limitation, to the extent that
other Information Technology used in combination with such Information
Technology properly exchanges date/time data with it).
Section 4.17 Interested Party Transactions. Since December 31, 1998, or as
described in the Company SEC Reports, no event has occurred that would be
required to be reported by the Company pursuant to Item 404 of Regulation S-K
promulgated by the SEC.
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Section 4.18 Undisclosed Liabilities. Except as disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (or in
any subsequently filed Company SEC Reports), as of the date hereof, neither the
Company nor any of its subsidiaries has any liabilities or any obligations of
any nature whether or not accrued, contingent or otherwise, except for
liabilities or obligations incurred in the ordinary course of business since
December 31, 1998 or which individually or in the aggregate are not material in
nature or amount. As of the date of this Agreement, no investigation or review
by any Governmental Entity with respect to the Company or any of its
subsidiaries is pending or threatened, nor has any such Governmental Entity
indicated an intention to conduct any such investigation or review.
Section 4.19 Environmental Matters. Except as would not reasonably be
expected to have a Company Material Adverse Effect: (i) to the knowledge of the
Company, no real property currently or formerly owned or operated by the
Company or any current subsidiary is contaminated with any Hazardous Substances
to an extent or in a manner or condition now requiring remediation under any
Environmental Law; (ii) no judicial or administrative proceeding is pending or
to the best knowledge of the Company threatened relating to liability for any
off-site disposal or contamination; and (iii) the Company and its subsidiaries
have not received any claims or notices alleging liability under any
Environmental Law, and the Company has no knowledge of any circumstances that
could result in such claims. "Environmental Law" means any applicable federal,
state or local law, regulation, order, decree, or judicial opinion or other
agency requirement having the force and effect of law and relating to noise,
odor, Hazardous Substance or the protection of the environment. "Hazardous
Substance" means any toxic or hazardous substance that is regulated by or under
authority of any Environmental Law, including any petroleum products, asbestos
or polychlorinated biphenyls.
Section 4.20 Restrictions on Business Activities. There is no Material
Agreement, judgment, injunction, order or decree binding upon the Company or
any of its subsidiaries or any of their properties which has had or could
reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of the Company or any of its subsidiaries or
the conduct of business by the Company or any of its Subsidiaries as currently
conducted or as proposed to be conducted by the Company.
Section 4.21 Certain Business Practices. Neither the Company nor any of its
subsidiaries nor any director, officer, employee or agent of the Company or any
of its subsidiaries has in any material respect (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful payments relating to
political activity, (ii) made any unlawful payment to any foreign or domestic
government official or employee or to any foreign or domestic political party
or campaign or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, (iii) consummated any transaction, made any payment, entered
into any agreement or arrangement or taken any other action in violation of
Section 1128B(b) of the Social Security Act, as amended, or (iv) made any other
unlawful payment.
Section 4.22 Brokers; Expenses. Except for Morgan Stanley & Co. Incorporated
(the "Company's Financial Advisor") whose fees shall be paid by the Company, no
agent, broker, finder, investment banker or other firm or Person is or will be
entitled to any broker's or finder's fee or other similar commission or fee in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. The Company has provided to
Parent a good faith estimate and description of the expenses of the Company and
its subsidiaries that the Company expects to incur or has incurred in
connection with the transactions contemplated by the Agreement.
Section 4.23 Board Approval. The Board of Directors of the Company by
resolutions duly adopted by unanimous vote of those voting at a meeting duly
called and held and not subsequently rescinded or modified in any way (the
"Company Board Approval"), has duly (i) determined that this Agreement and the
Merger are fair to and in the best interests of the Company and its
stockholders, (ii) approved this Agreement and the Merger and (iii) recommended
that the stockholders of the Company adopt this Agreement and approve the
Merger and directed that this Agreement and the transactions contemplated
hereby be submitted for consideration by the Company's stockholders at the
Company Special Meeting. The Company Board Approval constitutes approval of
this Agreement and the Merger for purposes of Section 203 of the Delaware Law.
To
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the knowledge of the Company, except for Section 203 of the Delaware Law (which
has been rendered inapplicable), no state takeover statute is applicable to the
Merger or the other transactions contemplated hereby. The Company's Board of
Directors or an appropriate committee thereof has determined (y) to accelerate
the "Option Termination Date" of the offering under the Company's 1994 Employee
Stock Purchase Plan so that all outstanding ESPP Options shall be exercisable
as of August 23, 1999, and (z) to suspend any further offerings under such plan
prior to the consummation of the Merger or termination of this Agreement in
accordance with its terms.
Section 4.24 Opinion of the Company's Financial Advisor. The Company has
received the opinion of the Company's Financial Advisor, dated the date of this
Agreement, to the effect that, as of such date, the Merger Consideration is
fair, from a financial point of view, to the Company's stockholders, a copy of
which opinion has been made available to Parent.
ARTICLE V
Representations and Warranties of Parent and Merger Subsidiary
Parent and Merger Subsidiary jointly and severally represent and warrant to
the Company that, except as disclosed in the Parent Disclosure Schedule which
has been delivered to the Company prior to the execution of this Agreement (the
"Parent Disclosure Schedule"):
Section 5.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York. Merger Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Each of Parent
and each of its Significant Subsidiaries has the requisite corporate power and
authority to carry on its business as it is now being conducted and is duly
qualified or licensed to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified will not, individually or in the aggregate, have
a Parent Material Adverse Effect.
Section 5.2 Ownership of Merger Subsidiary. Merger Subsidiary is a direct
wholly-owned subsidiary of Parent.
Section 5.3 Authority Relative to Agreement. Each of Parent and Merger
Subsidiary has the necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Parent and Merger Subsidiary have been duly
and validly authorized and approved by the respective Boards of Directors of
Parent and Merger Subsidiary and by Parent as the sole stockholder of Merger
Subsidiary and no other corporate proceedings on the part of Parent or Merger
Subsidiary are necessary to authorize and approve this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Parent and Merger Subsidiary, and assuming
the due authorization, execution and delivery by the Company, constitutes the
valid and binding obligation of Parent and Merger Subsidiary enforceable
against each of them in accordance with its terms.
Section 5.4 No Conflicts; Required Filings and Consents.
(a) None of the execution and delivery of this Agreement by Parent or Merger
Subsidiary, the consummation by Parent or Merger Subsidiary of the transactions
contemplated hereby or compliance by Parent or Merger Subsidiary with any of
the provisions hereof will (i) conflict with or violate the charter or By-laws
of Parent or Merger Subsidiary or the comparable organizational documents of
any of Parent's Significant Subsidiaries, (ii) subject to receipt or filing of
the required Consents, conflict with or Violate any statute, ordinance, rule,
regulation, order, judgment or decree applicable to Parent or Merger Subsidiary
or any of Parent's Significant Subsidiaries, or by which any of them or any of
their respective properties or assets may be
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bound or affected, or (iii) result in a Violation of, or result in the creation
of any Lien on any of the property or assets of Parent or Merger Subsidiary or
any of Parent's Significant Subsidiaries pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or Merger Subsidiary or any of
Parent's Significant Subsidiaries is a party or by which Parent or Merger
Subsidiary or any of Parent's Significant Subsidiaries or any of their
respective properties may be bound or affected except in the case of the
foregoing clause (ii) or (iii) for any such Violations which would not have a
Parent Material Adverse Effect.
(b) None of the execution and delivery of this Agreement by Parent or Merger
Subsidiary, the consummation by Parent or Merger Subsidiary of the transactions
contemplated hereby or compliance by Parent or Merger Subsidiary with any of
the provisions hereof will require any Consent of any Governmental Entity,
except for (i) compliance with any applicable requirements of the Securities
Act and the Exchange Act, (ii) the filing of the Certificate of Merger under
Delaware Law, (iii) certain state takeover, securities, "blue sky" and
environmental statutes, (iv) compliance with the HSR Act, (v) such filings as
may be required in connection with the taxes described in Section 7.8, and (vi)
Consents the failure of which to obtain or make would not have a Parent
Material Adverse Effect.
Section 5.5 Information. None of the information supplied or to be supplied
by Parent or Merger Subsidiary for inclusion in, or incorporation by reference
in, the definitive Prospectus/Proxy Statement required to be mailed to the
stockholders of the Company in connection with the Merger will, at the time of
filing with the SEC, at the time of the mailing of the Prospectus/Proxy
Statement' or any amendments or supplements thereto to the Company's
stockholders and at the time of the Company Special Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The portion of
the Prospectus/Proxy Statement based on information supplied by Parent for
inclusion or incorporation by reference therein will comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act and the rules and regulations thereunder.
Section 5.6 Litigation. As of the date hereof, there is no suit, action or
proceeding pending or, to the knowledge of Parent or Merger Subsidiary,
threatened against or affecting Parent, Merger Subsidiary or any of Parent's
Significant Subsidiaries that, individually or in the aggregate, is reasonably
expected to have a Parent Material Adverse Effect, nor is there any judgment,
decree, injunction or order of any Governmental Entity or arbitrator
outstanding against Parent, Merger Subsidiary or any of Parent's Significant
Subsidiaries having, or which is reasonably expected to have, individually or
in the aggregate, a Parent Material Adverse Effect which has not been disclosed
in Parent's SEC Reports.
Section 5.7 Voting Requirements. No vote of the holders of any class or
series of the capital stock of Parent is necessary to approve this Agreement or
the transactions contemplated hereby.
Section 5.8 Brokers. Except for Donaldson Lufkin & Jenrette Securities
Corporation and Wasserstein Perella & Co., Inc. whose fees shall be paid by
Parent, no agent, broker, finder, investment banker or other firm or Person is
or will be entitled to any broker's or finder's fee or other similar commission
or fee in connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of Parent or the Merger Subsidiary.
Section 5.9 Capitalization. The authorized capital stock of Parent as of the
date of this Agreement consists of 250 million shares of Parent Common Stock
and 30 million shares of Parent preferred stock, of which 1,000,000 shares are
designated as Series A Junior Participating Preferred Stock and 9,200,000
shares are designated as 6 3/4% Series C Cumulative Convertible Preferred Stock
("Series C Stock"). Parent has scheduled a special meeting of its shareholders
at which it is seeking authorization to, among other things, increase the
number of authorized shares of Parent Common Stock to 500 million. As of August
18, 1999, 64,864,145 shares of Parent Common Stock were validly issued and
outstanding, fully paid and nonassessable, subject to Section 630 of the NYBCL;
99,556 shares of Parent Common Stock in its treasury; and 9,200,000
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shares of the Series C Stock were validly issued and outstanding, fully paid
and nonassessable subject to Section 630 of the NYBCL. There are no bonds,
debentures, notes or other indebtedness issued or outstanding having general
voting rights with respect to Parent. As of the date hereof, except for the
Series C Stock, Parent's Rights Agreement, dated as of May 8, 1996, as amended,
and securities issued or issuable thereunder, stock options to acquire an
aggregate of 13,737,764 shares of Parent Common Stock ("Parent Stock Options")
and options issued or to be issued pursuant to Parent's employee stock purchase
plan from time to time and other rights and commitments described in the
Parent's SEC Reports (as defined in Section 5.10 below), there are no options,
warrants, calls or other rights, agreements or commitments presently
outstanding obligating Parent to issue, deliver or sell shares of its capital
stock, or obligating Parent to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
Section 5.10 Reports and Financial Statements.
(a) Parent has filed with the SEC all forms, reports, schedules,
registration statements and definitive proxy statements (the "Parent SEC
Reports") required to be filed by it with the SEC since January 1, 1996. As of
their respective dates, the Parent SEC Reports complied as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Parent SEC Reports. As of their respective dates and as of
the date any information from such Parent SEC Reports has been incorporated by
reference, the Parent SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Parent has filed all material contracts,
agreements and other documents or instruments required to be filed as exhibits
to the Parent SEC Reports.
(b) The consolidated balance sheets of Parent as of December 31, 1998 and
1997 and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998 (including the related notes and schedules thereto) contained in Parent's
Form 10-K for the year ended December 31, 1998 present fairly, in all material
respects, the consolidated financial position and the consolidated results of
operations and cash flows of Parent and its consolidated subsidiaries as of the
dates or for the periods presented therein in conformity with GAAP applied on a
consistent basis during the periods involved except as otherwise noted therein,
including in the related notes.
(c) The consolidated balance sheets and the related statements of earnings
and cash flows (including, in each case, the related notes thereto) of Parent
contained in the Form 10-Q for the quarterly period ended June 30, 1999 (the
"Parent Quarterly Financial Statements") have been prepared in accordance with
the requirements for interim financial statements contained in Regulation S-X,
which do not require all the information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with GAAP. The Parent Quarterly Financial Statements reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the consolidated financial position,
results of operations and cash flows of Parent for all periods presented
therein.
Section 5.11 Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports, since June 30, 1999, there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Parent's
capital stock, or, any redemption, purchase or other acquisition of any of its
capital stock, (ii) any split, combination or reclassification of any of the
Parent's capital stock or, except with respect to Parent Stock Options, any
issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for shares of the Parent's capital
stock, or (iii) any material change in accounting methods, principles or
practices by Parent, except insofar as may have been concurred in by the
Parent's independent public accountants or required by a change in GAAP.
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ARTICLE VI
Conduct of Business Pending the Merger
Section 6.1 Conduct of the Business Pending the Merger
(a) From and after the date hereof, prior to the Effective Time, except as
contemplated by this Agreement or unless Parent shall otherwise agree in
writing, the Company shall, and shall cause its subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and to use reasonable
efforts to conduct their business in a manner consistent with the budgets and
plans heretofore made available to Parent, and shall cause its subsidiaries to,
use reasonable efforts to preserve intact their present business organizations,
keep available the services of their employees and preserve their relationships
with customers, suppliers, licensors, licensees, distributors and others having
business dealings with them to the end that their goodwill and on-going
businesses shall not be impaired in any material respect at the Effective Time.
Unless Parent shall otherwise agree in writing, prior to the Effective Time,
the Company shall not and shall not permit its subsidiaries to:
(i) declare, set aside, or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by any direct or indirect subsidiary of the Company to
its parent(s), split, combine or reclassify any of its capital stock or,
other than pursuant to the exercise of Company Stock Options or ESPP
Options outstanding on the date of this Agreement, issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock, or except as permitted by
clause (ii) below, purchase, redeem or otherwise acquire, other than
pursuant to the exercise of Company Stock Options or ESPP Options
outstanding on the date of this Agreement, any shares of capital stock of
the Company or any of its subsidiaries or any other equity securities
thereof or any rights, warrants, or options to acquire any such shares or
other securities other than purchases, redemptions or acquisitions of
equity securities of wholly-owned subsidiaries of the Company or rights,
warrants or options to acquire such securities;
(ii) except for issuances of capital stock of the Company's subsidiaries
to the Company or a wholly-owned subsidiary of the Company, issue, deliver,
sell, pledge or otherwise encumber any shares of its capital stock
including any Company Options other than 12,000 options at fair market
value on the date of issuance to the prospective employee listed on
Schedule 6.1(a) or any ESPP Options, any other voting securities of the
Company or any securities convertible into, or any rights, warrants or
options to acquire, any such shares or voting securities (other than the
issuance of Company Common Stock upon the exercise of Company Stock Options
or ESPP Options outstanding on the date of this Agreement) or amend the
terms of any such securities, rights, warrants or options;
(iii) amend its Certificate of Incorporation or By-Laws or
comparable organizational documents of any of its subsidiaries or
Ventures;
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division
thereof, or any assets that are material, individually or in the
aggregate, to the Company and its subsidiaries taken as a whole,
except, in any such case, in the ordinary course of business, and
except transactions between a wholly-owned subsidiary of the Company
and the Company or another wholly-owned subsidiary of the Company;
(v) subject to a Lien or sell, lease or otherwise dispose of any of
its material properties or assets, including the Ventures and Other
Investments, except in the ordinary course of business and except
transactions between a wholly-owned subsidiary of the Company and the
Company or another wholly-owned subsidiary of the Company;
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(vi) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities of
the Company or any of its subsidiaries, guarantee any debt securities
of another person (other than indebtedness to, guarantees of, or
issuances or sales to the Company or a wholly-owned subsidiary of the
Company), or enter into any "keep well" or other agreement to maintain
any financial condition of another person, except, in any such case,
for borrowings or other transactions incurred in the ordinary course of
business including to repay existing indebtedness pursuant to the terms
thereof, or except in the ordinary course of business, make any loans,
advances or capital contributions to, or investments in, any other
person, other than to the Company or any direct or indirect subsidiary
of the Company or settle or compromise any material claims or
litigation;
(vii) authorize any of, or commit or agree to take any of, the foregoing
actions.
(b) The Company shall promptly provide the Parent copies of all filings made
by the Company with any Governmental Entity in connection with this Agreement
and the transactions contemplated hereby. The Company shall, before settling or
compromising any material income tax liability of the Company or any of its
subsidiaries, consult with Parent and its advisors as to the positions and
elections that will be taken or made with respect to such matter.
ARTICLE VII
Additional Agreements
Section 7.1 Access to Information.
(a) From the date hereof through the Effective Time or earlier termination
of this Agreement in accordance with its terms, the Company and its
subsidiaries shall afford to Parent and Parent's accountants, counsel and other
representatives full and reasonable access during normal business hours (and at
such other times as the parties may mutually agree) to its properties, books,
contracts, commitments, records and personnel and, during such period, shall
furnish promptly to Parent (i) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, and (ii) all other information concerning its business,
properties and personnel as Parent may reasonably request. Parent shall hold,
and shall cause its employees, agents and representatives to hold, in
confidence all "Confidential Information" in accordance with the terms of the
Mutual Nondisclosure Agreement, dated May 24, 1999 between Parent and the
Company ("Confidentiality Agreement"), which shall remain in full force and
effect in accordance with the terms thereof, including, without limitation, in
the event of termination of this Agreement. No investigation pursuant to this
Section 7.1(a) shall limit any representation or warranty of the Company.
(b) From the date hereof through the Effective Time or earlier termination
of this Agreement in accordance with its terms, Parent shall afford to the
Company and the Company's accountants, counsel and other representatives full
and reasonable access during normal business hours (and at such other times as
the parties may mutually agree) to its properties, books, contracts,
commitments, records and personnel and, during such period, shall furnish
promptly to the Company (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities
laws, and (ii) all other information concerning its business, properties and
personnel as the Company may reasonably request. The Company shall hold, and
shall cause its employees, agents and representatives to hold, in confidence
all "Confidential Information" in accordance with the terms of the
Confidentiality Agreement, which shall remain in full force and effect in
accordance with the terms thereof, including, without limitation, in the event
of termination of this Agreement. No investigation pursuant to this Section
7.1(b) shall limit any representation or warranty of Parent.
(c) As soon as practicable after the date hereof, the Company shall use its
best efforts to cooperate and assist Parent and Parent's independent public
accountants in the compilation and preparation of all financial statements and
financial statement schedules of the Company prepared in accordance with GAAP
and reports and consents of the Company's independent public accountants as may
be necessary or deemed advisable by
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Parent to comply with SEC reporting and disclosure requirements. The Company
shall deliver to Parent's independent public accountants and/or the Company's
independent public accountants all engagement letters and management
representation letters as may be reasonably requested by Parent or such
accountants. The Company shall use its best efforts to cause its independent
public accountants to cooperate with and assist Parent and its independent
public accountants in the preparation of the financial statements contemplated
by this Section 7.1(c).
Section 7.2 Company Special Meeting. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene the Company Special Meeting as promptly
as reasonably practicable after the date on which the definitive
Prospectus/Proxy Statement' has been mailed to the Company's stockholders for
the purpose of considering and taking action upon the Merger and this
Agreement.
Section 7.3 Revolving Credit Facility. Parent and Merger Subsidiary will
cooperate with the Company to provide for the payment of the Company's $75
million revolving credit facility (the "Credit Facility") at or prior to
Closing.
Section 7.4 Public Announcements. On or before the Closing Date, Parent and
the Company shall not (nor shall they permit any of their respective Affiliates
to), without prior consultation with the other party and such other party's
review of and consent to any public announcement concerning the transactions
contemplated by this Agreement, issue any press release or make any public
announcement with respect to such transactions during such period, and Parent
and the Company shall, to the extent practicable, allow the other party
reasonable time to review and comment on such release or announcement in
advance of its issuance and use reasonable efforts in good faith to reflect the
reasonable and good faith comments of such other party, provided, however, no
party shall be prevented from making any disclosure required by law at the time
so required because of any delay on the part of the other party. The parties
intend that the initial announcement of the terms of the transactions
contemplated by this Agreement shall be made by joint press release of Parent
and the Company.
Section 7.5 Indemnification of the Company's Directors and Officers and
Insurance. Parent agrees that all rights to indemnification existing as of the
date of this Agreement in favor of any director, officer, employee or agent of
the Company and its subsidiaries (the "Indemnified Parties") as provided in
their respective Certificate of Incorporation, By-laws or comparable
organizational documents or in indemnification agreements with the Company or
any of its subsidiaries, or otherwise in effect as of the date hereof, shall
survive the Merger and shall continue in full force and effect for a period of
not less than six years from the Effective Time, provided that, in the event
any claim or claims are asserted or made within such six-year period, all
rights to indemnification in respect of any such claim or claims, shall
continue until final disposition of any and all such claims. Without limiting
the generality of the foregoing, in the event any such Indemnified Party is or
becomes involved in any capacity in any action, proceeding or investigation in
connection with any matter, including, without limitation, the transactions
contemplated by this Agreement, occurring prior to or at the Effective Time,
Parent shall cause the Surviving Corporation to pay as incurred such
Indemnified Party's legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith. The Surviving
Corporation shall cause to be maintained in effect for a period of three years,
the current policies of directors' and officers' liability insurance and
fiduciary liability insurance maintained by the Company (provided that the
Surviving Corporation may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are, in the
aggregate, no less advantageous to the insured) with respect to claims arising
from facts or events that occurred on or before the Effective Time; provided,
however, that in no event shall the Surviving Corporation be required to expend
in any one year an amount in excess of 200% of the annual premiums currently
paid by the Company for such insurance; and, provided, further, that if the
annual premiums of such insurance coverage exceed such amount, the Surviving
Corporation shall be obligated to obtain a policy with the greatest coverage
available for a cost not exceeding such amount.
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Section 7.6 Efforts; Consents.
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use its reasonable commercial efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and the Merger and
to cooperate with each other in connection with the foregoing. Without limiting
the generality of the foregoing, each of the Company, Merger Subsidiary and
Parent shall make or cause to be made all required filings with or applications
to Governmental Entities (including under the Securities Act, the Exchange Act
and the HSR Act and to state and local Governmental Entities with respect to
any transfers of Company Permits), and use its best efforts to (i) obtain all
necessary consents of all Governmental Entities and other third parties,
necessary for the parties to consummate the transactions contemplated hereby,
(ii) oppose, lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby, and (iii) fulfill all conditions to this Agreement.
(b) Without limiting the foregoing, the Company and Parent shall use their
best efforts and cooperate in promptly preparing and filing as soon as
practicable, and in any event within five business days of executing this
Agreement, (i) notifications under the HSR Act, (ii) notifications or other
filings under the merger control statutes of any other applicable jurisdictions
in connection with the Merger and the other transactions contemplated hereby,
and to respond as promptly as practicable to any inquiries or requests received
from the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, the other Governmental Entities for additional
information or documentation and to respond as promptly as practicable to all
inquiries and requests received from any Governmental Entity in connection with
antitrust matters or matters relating to the Company Permits. Each of Parent,
Merger Subsidiary and the Company, to the extent applicable, further agrees to
file contemporaneously with the filing of the applications any requests for
waivers of applicable FCC rules or rules or regulations of other Governmental
Entities as may be required to expeditiously prosecute such waiver requests and
to diligently submit any additional information or amendments for which the FCC
or any other relevant Governmental Entity may ask with respect to such waiver
requests.
Section 7.7 Notice of Breaches. The Company shall give prompt notice to
Parent, and Parent or Merger Subsidiary shall give prompt notice to the
Company, of (i) any representation or warranty made by it contained in this
Agreement which has become untrue or inaccurate in any material respect, or
(ii) the failure by it to comply with or satisfy in any material respect any
covenant, condition, or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that such notification shall not excuse or
otherwise affect the representations, warranties, covenants or agreements of
the parties or the conditions to the obligations of the parties under this
Agreement.
Section 7.8 Transfer and Gains Taxes and Certain Other Taxes and
Expenses. Parent and Merger Subsidiary agree that the Surviving Corporation
will pay all real property transfer, gains and other similar taxes and all
documentary stamps, filing fees, recording fees and sales and use taxes, if
any, and any penalties or interest with respect thereto, payable in connection
with consummation of the Merger without any offset, deduction, counterclaim or
deferment of the payment of the Merger Consideration.
Section 7.9 Acquisition Proposals.
(a) The Company agrees that it shall not nor shall any of its subsidiaries
or any of the officers and directors of the Company or its subsidiaries nor any
of its or its subsidiaries' employees, agents and representatives (including
any investment banker, attorney or accountant retained by it or any of its
subsidiaries), directly or indirectly, initiate, solicit, encourage or
knowingly facilitate (including by way of furnishing information) any inquiries
or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or
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similar transaction involving, or any purchase or sale of all or any
significant portion of the assets or more than 10% of the Company Common Stock
or the assets or capital stock of any of its subsidiaries (any such proposal or
offer (other than a proposal or offer made by Parent or an affiliate thereof)
being hereinafter referred to as an "Acquisition Proposal"). The Company
further agrees that neither it nor any of its subsidiaries nor any of the
officers and directors of it or its subsidiaries shall, and that it shall
direct and use its best efforts to cause its and its subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it or any of its subsidiaries) not to, directly or
indirectly, have any discussion with or provide any confidential information or
data to any Person relating to an Acquisition Proposal, or engage in any
negotiations concerning an Acquisition Proposal, or knowingly facilitate any
effort or attempt to make or implement an Acquisition Proposal or accept an
Acquisition Proposal. Notwithstanding the foregoing, the Company or its Board
of Directors shall be permitted, in response to an unsolicited bona fide
written Acquisition Proposal by any Person, to engage in any discussions or
negotiations with, or provide any information to, any Person in response to an
unsolicited bona fide written Acquisition Proposal by any such Person, if and
only to the extent that: (i) the Company Special Meeting shall not have
occurred; (ii) the Board of Directors of the Company concludes in good faith
that such Acquisition Proposal could reasonably be expected to constitute a
Superior Proposal (as defined in Section 10.8(a) below); (iii) prior to
providing any information or data to any Person in connection with an
Acquisition Proposal by any such Person, the Company Board of Directors
receives from such Person an executed confidentiality agreement on terms
substantially similar to those contained in the Confidentiality Agreement; and
(iv) at least two days prior to providing any information or data to any Person
or entering into discussions or negotiations with any Person, the Board of
Directors of the Company notifies Parent promptly of such inquiries, proposals
or offers received by, any such information requested from, or any such
discussions or negotiations sought to be initiated or continued with, any of
its representatives indicating, in connection with such notice, the name of
such Person and the material terms and conditions of any proposals or offers.
The Company agrees that it will keep Parent informed, on a current basis, of
the status and terms of any such proposals or offers and the status of any such
discussions or negotiations. The Company agrees that it will immediately cease
and cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any Acquisition Proposal.
The Company agrees that it will take the necessary steps to promptly inform the
individuals or entities referred to in the first sentence of this Section 7.9
of the obligations undertaken in this Section 7.9 and that any breach of the
provisions of this Section 7.9 by any officer or director of the Company or its
subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative of the Company or its subsidiaries will be deemed a
breach by the Company.
(b) Except as permitted in this Section 7.9, neither the Board of Directors
of the Company nor any committee thereof shall (i) withdraw or modify, or
propose publicly to withdraw or modify, in a manner adverse to Parent, or take
any action not explicitly permitted by this Agreement that would be
inconsistent with, the approval or recommendation by such Board of Directors or
such committee of the transactions contemplated by this Agreement, (ii) approve
or recommend, or propose publicly to approve or recommend, any Acquisition
Proposal, or (iii) cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement (each,
an "Acquisition Agreement") related to any Acquisition Proposal.
Notwithstanding the foregoing, in the event that prior to the vote on the
transactions at the Company Special Meeting, the Board of Directors of the
Company determines in good faith, that an Acquisition Proposal constitutes a
Superior Proposal, the Board of Directors of the Company may (x) withdraw or
modify its approval or recommendation of the Transactions in connection with
the Company Special Meeting, (y) approve or recommend a Superior Proposal and
(z) if it so chooses, cause the Company to enter into an Acquisition Agreement
with respect to such Superior Proposal but, in each of the case, only at a time
that is after: (A) the fifth (5th) day following Parent's receipt of written
notice from the Company advising Parent that the Board of Directors of the
Company has received a Superior Proposal, specifying the material terms and
conditions of such Superior Proposal, identifying the person making such
Superior Proposal, and advising Parent that the Board of Directors, of the
Company has determined that it will no longer recommend approval of the
Transactions; (B) the Company has paid the Termination Fee (as defined in
Section 9.3(b)) to Parent; and (C) the Company has terminated this Agreement in
accordance with its terms.
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Section 7.10 Related Agreements. Simultaneously with the execution and
delivery of this Agreement, or as otherwise provided in this Section 7.10, and
as material consideration for the execution and delivery of this Agreement by
Parent and Merger Subsidiary, each of the executive officers and the other
Persons listed on Schedule 7.10(a) to this Agreement is entering into a
stockholders' voting and proxy agreement pursuant to which such Persons agree
to vote the shares of the Company Common Stock owned by them in favor of the
Company Proposal at the Company Special Meeting and provide the proxies named
therein with such Person's irrevocable proxy with respect to such vote
(collectively, the "Related Agreements").
Section 7.11 Employee Benefits.
(a) Parent shall cause the employees of the Company and its subsidiaries
(collectively, the "Company Employees") to be covered under the Parent's
"employee benefit plans" as defined in ERISA ("Parent Benefit Plans") and for
at least two years after the Effective Time, Parent shall, or shall cause the
Surviving Corporation to, provide benefits, in the aggregate, that are no less
favorable than the benefits provided, in the aggregate, under such Parent
Benefit Plans immediately prior to the Effective Time to the Company Employees.
Notwithstanding the foregoing, nothing herein shall require: (A) the
continuation of any Company Benefit Plan or prevent the amendment or
termination thereof (subject to the maintenance, in the aggregate, of the
benefits as provided in the preceding sentence); or (B) require Parent or the
Surviving Corporation to continue or maintain any stock purchase or other
equity plan related to the equity of the Company or the Surviving Corporation
or to change the eligibility requirements of any stock or other equity plan of
Parent; or (C) constitute any obligation on the part of Parent, the Surviving
Corporation or any of their Affiliates to change the employment status of any
of the Company Employees to other than "at will."
(b) With respect to any Parent Benefit Plans in which the Company Employees
participate effective as of the Closing Date, Parent shall, or shall cause the
Surviving Corporation to, to the extent permitted under the Parent Benefits
Plans: (A) not impose any limitations more onerous than those currently in
effect as to pre-existing conditions, exclusions and waiting periods with
respect to participation and coverage requirements applicable to the Company
Employees under which any welfare benefit plan in which such employees may be
eligible to participate after the Effective Time, (B) provide each Company
Employee with credit for any co-payments and deductibles paid prior to the
Effective Time in satisfying any applicable deductible or out-of-pocket
requirements under any welfare benefit plan in which such employees may be
eligible to participate after the Effective Time, and (C) recognize all service
of the Company Employees with the Company for all purposes (including, without
limitation, purposes of eligibility to participate, vesting credit, entitlement
for benefits, and benefit accrual) in any benefit plan in which such employees
may be eligible to participate after the Effective Time, to the same extent
taken into account under a comparable Company Benefit Plan immediately prior to
the Closing Date.
Section 7.12 Nasdaq Listing. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger and the shares of
Parent Common Stock to be reserved for issuance upon exercise of the Company
Stock Options to be approved for quotation, upon official notice of issuance on
the Nasdaq National Market.
ARTICLE VIII
Conditions Precedent
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the holders of the
Company Common Stock at the Company Special Meeting;
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and any other
material Consents from Governmental Entities and other third parties which
in any case are required to be received prior to the Effective Time with
respect to the transactions contemplated hereby shall have been received;
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(c) The shares of Parent Common Stock to be issued in the Merger and
such other shares to be reserved for issuance in connection with the Merger
shall have been approved for listing on the Nasdaq National Market upon
official notice of issuance;
(d) The Registration Statement shall have been declared effective by the
SEC under the Securities Act, no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC, and no
proceedings for that purpose shall have been initiated or threatened by the
SEC; and
(e) The consummation of the Merger shall not be restrained, enjoined or
prohibited by any order, judgment, decree, injunction or ruling of a court
of competent jurisdiction; provided, however, that the parties shall comply
with the provisions of Section 7.6 and shall further use their best efforts
to cause any such order, judgment, decree, injunction or ruling to be
vacated or lifted.
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following additional
conditions, unless waived by the Company, that:
(a) The representations and warranties of Parent and Merger Subsidiary
contained in this Agreement that are modified by materiality or Parent
Material Adverse Effect shall be true and correct in all respects, and
those that are not so modified shall be true and correct in all material
respects, on the date hereof and as of the Effective Time as if made at the
Effective Time (except such representations and warranties made as of a
specific date which need only be true as written as of such date). The
Company shall have received a certificate of an authorized officer of
Parent and Merger Subsidiary, on behalf of Parent and Merger Subsidiary, to
such effect.
(b) Parent and Merger Subsidiary shall have performed or complied with
all agreements and covenants required to be performed by each of them under
this Agreement at or prior to the Effective Time in all material respects,
and the Company shall have received a certificate of an authorized officer
of Parent and Merger Subsidiary, on behalf of Parent and Merger Subsidiary,
to such effect.
(c) The Company shall have received from Arent Fox Kintner Plotkin &
Kahn, PLLC, or other counsel reasonably acceptable to the Company, on the
Closing Date, a written opinion dated as of such date that the Merger
qualifies as a reorganization within the meaning of Section 368(a)(2)(D) of
the Code.
(d) The Credit Facility shall have been paid.
Section 8.3 Conditions to Obligations of Parent and Merger Subsidiary to
Effect the Merger. The obligations of Parent and Merger Subsidiary to effect
the Merger shall be subject to the fulfillment at or prior to the Effective
Time of the following additional conditions, unless waived by Parent:
(a) The representations and warranties of the Company contained in this
Agreement that are modified by materiality or Company Material Adverse
Effect shall be true and correct in all respects, and those that are not so
modified shall be true and correct in all material respects, on the date
hereof and as of the Effective Time as if made at the Effective Time
(except such representations and warranties made as of a specific date
which need only be true as written as of such date and except that the
representations set forth in Section 4.2 shall be true and correct in all
respects). Parent shall have received a certificate of an authorized
officer of the Company, on behalf of the Company, to such effect.
(b) The Company shall have performed or complied with all agreements and
covenants required to be performed by it under this Agreement at or prior
to the Effective Time in all material respects, other than the covenants
with respect to issuance of shares of Company capital stock, Company
Options and ESPP Options which shall be complied with as set forth in
Section 6.1(a)(i) and (ii), and Parent shall have received a certificate of
an authorized officer of the Company, on behalf of the Company, to such
effect.
(c) Parent shall have received from Nixon Peabody LLP, on the Closing
Date, a written opinion dated as of such date that the Merger qualifies as
a reorganization within the meaning of Section 368(a)(2)(D) of the Code.
(d) The Related Agreements have been executed and delivered by the
respective parties thereto and continue in full force and effect.
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ARTICLE IX
Termination, Amendment and Waiver
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval by the stockholders of
the Company:
(a) by mutual written consent of Parent and the Company;
(b) by the Company, upon a material breach of this Agreement on the part
of Parent or Merger Subsidiary which has not been cured and which would
cause the condition set forth in Section 8.2 to be incapable of being
satisfied by February 29, 2000;
(c) by Parent, upon a material breach of this Agreement on the part of
the Company set forth in this Agreement which has not been cured and which
would cause the conditions set forth in Section 8.3 to be incapable of
being satisfied by February 29, 2000;
(d) by Parent or the Company if any court of competent jurisdiction
shall have issued, enacted, entered, promulgated or enforced any order,
judgment, decree, injunction or ruling, after reasonable efforts on the
part of Parent and the Company to resist, resolve or lift, which
permanently restrains, enjoins or otherwise prohibits the Merger and such
order, judgment, decree, injunction or ruling shall have become final and
nonappealable;
(e) by either Parent or the Company if the Merger shall not have been
consummated on or before February 29, 2000 (the "Upset Date") provided the
terminating party is not otherwise in material breach of its
representations, warranties or obligations under this Agreement;
(f) by either Parent or the Company if the Company Special Meeting
(including as it may be adjourned from time to time) shall have concluded
without the Company having obtained the required stockholder approval of
this Agreement and the transactions contemplated hereby;
(g) by Parent if the Board of Directors of the Company, prior to the
Company Special Meeting (i) shall withdraw or modify in any adverse manner
the Company Board Approval, (ii) shall approve or recommend a Superior
Proposal pursuant to Section 7.9 or (iii) shall resolve to take any of the
actions specified in clauses (i) or (ii) above; or
(h) by the Company at any time prior to the Company Special Meeting,
upon five business days' prior notice to Parent, if the Board of Directors
of the Company shall approve a Superior Proposal; provided, however, that
(i) the Company shall have complied with Section 7.9, (ii) the Board of
Directors of the Company shall have concluded in good faith, after giving
effect to all concessions which may be offered by Parent pursuant to clause
(iii) below, on the basis of the advice of its financial advisors and
outside counsel, that such proposal is a Superior Proposal and (iii) prior
to any such termination, the Company shall, and shall cause its financial
and legal advisors to, negotiate with Parent to make such adjustments in
the terms and conditions of this Agreement as would enable Parent to
proceed with the transactions contemplated hereby; provided, however, that
it shall be a condition to termination by the Company pursuant to this
Section 9.l(h) that the Company shall have made the payment of the
Termination Fee to Parent required by Section 9.3(b).
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company, as provided in Section 9.1, this
Agreement shall forthwith terminate and there shall be no liability hereunder
on the part of any of the Company, Parent or Merger Subsidiary or their
respective officers or directors; provided that Sections 4.22 (Brokers); 5.8
(Brokers); the second sentence of 7.1(a) (Confidentiality), the second sentence
of 7.1(b) (Confidentiality); Section 7.9 to the extent the Company is required
to pay the
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Termination Fee until such Fee is paid; this Section 9.2, 9.3 (Fees and
Expenses); and 10.6 (Governing Law) shall survive the termination and remain in
full force and effect and; provided, further, that (i) each party shall remain
liable for any willful breaches of such party's covenants hereunder or
intentional or willful breaches of such party's representations and warranties
hereunder prior to its termination, and (ii) Parent and the Company shall share
equally the fees and expenses incurred in connection with the filing and
printing of the Proxy Statement/Prospectus (including any preliminary proxy
statement/ prospectus) and the filing fees under the HSR Act.
Section 9.3. Fees and Expenses.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses, except as
otherwise provided in Section 7.8 and Section 9.2.
(b) Parent and the Company agree that the Company shall pay to Parent the
sum of $15,000,000 (the "Termination Fee") solely as follows: (i) if Parent
shall terminate this Agreement pursuant to Section 9.1(g)(ii) or if the Company
shall terminate this Agreement pursuant to Section 9.1(h), (ii) if (A) the
Company or Parent shall terminate this Agreement pursuant to Section 9.1(f) due
to the failure of the Company's stockholders to approve and adopt this
Agreement, (B) at any time after the date of this Agreement and at or before
the time of the event giving rise to such termination there shall exist an
Acquisition Proposal with respect to the Company and (C) within 12 months of
the termination of this Agreement, the Company enters into a definitive
agreement with any third party with respect to an Acquisition Proposal or an
Acquisition Proposal is consummated, or (iii) if (A) Parent shall terminate
this Agreement pursuant to Section 9.1(c) or 9.1(e) or Section 9.1(g)(i) or
9.1(g)(iii) or the Company or Parent shall terminate this Agreement pursuant to
Section 9.1(d), (B) at any time after the date of this Agreement and at or
before the time of the event giving rise to such termination there shall exist
an Acquisition Proposal, (C) following the existence of such Acquisition
Proposal and prior to any such termination, the Company shall have
intentionally breached (and not cured after notice thereof) any of its material
covenants or agreements set forth in this Agreement in any material respect,
and (D) within 12 months of any such termination of this Agreement, the Company
shall enter into a definitive agreement with any third party with respect to an
Acquisition Proposal or an Acquisition Proposal is consummated.
(c) The Termination Fee required to be paid pursuant to Section 9.3(b) shall
be made prior to, and shall be a pre-condition to the effectiveness of
termination of this Agreement by the Company pursuant to Section 9.1(h). Any
other payment required to be made shall be made to Parent not later than two
business days after the entering into of a definitive agreement with respect
to, or the consummation of, an Acquisition Proposal, as applicable. All
payments under this Section 9.3 shall be made by wire transfer of immediately
available funds to an account designated by Parent.
Section 9.4 Amendment. This Agreement may be amended by the parties hereto
at any time before or after approval hereof by the stockholders of the Company,
but, after such approval, no amendment shall be made which (i) changes the form
or decreases the amount of the Merger Consideration, (ii) in any way materially
adversely affects the rights of the Company's stockholders or (iii) under
applicable law would require approval of the Company's stockholders, in any
such case referred to in clauses (i), (ii) and (iii), without the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, the parties
hereto may, to the extent permitted by applicable law, (i) extend the time for
the performance of any of the obligations or other acts of any other party
hereto, (ii) waive any inaccuracies in the representations and warranties by
any other party contained herein or in any documents delivered by any other
party pursuant hereto and (iii) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations contained herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party.
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ARTICLE X
General Provisions
Section 10.1 Non-Survival of Representations, Warranties and Agreements. The
representations and warranties in this Agreement shall not survive the Merger.
Section 10.2 Notices. All notices or other communications under this
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by telecopy (with
confirmation of receipt), or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
If to the Company:
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, VA 20191
Attention: John J. McDonnell, III,
General Counsel and Secretary
Telecopy No.: (703) 453-8397
With copies to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5339
Attention: Jeffrey E. Jordan, Esq.
Telecopy: (202) 8576395
If to Parent or Merger Subsidiary:
PSINet Inc. Courier:
510 Huntmar Park Drive 11180 Sunrise Valley Drive
Herdon, VA 22070 Reston, VA 20191
Attention: David N. Kunkel
Executive Vice President, General Counsel
Telecopy: (703) 904-9527
With a copy to:
Nixon Peabody LLC
437 Madison Avenue
New York, NY 10022
Attention: Richard F. Langan, Jr., Esq.
Telecopy: (212) 940-3111
or to such other address as any party may have furnished to the other parties
in writing in accordance with this Section.
Section 10.3 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, the parties further agree that each party shall be
entitled to an injunction or restraining order to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other right or remedy to which such party may be entitled under
this Agreement, at law or in equity.
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Section 10.4 Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof.
Section 10.5 Assignments; Parties in Interest. Neither this Agreement nor
any of the rights, interests or obligations hereunder may be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any person
not a party hereto any right, benefit or remedy of any nature whatsoever under
or by reason of this Agreement, including to confer third party beneficiary
rights, except for the provisions of Article III and Section 7.5.
Section 10.6 Governing Law. This Agreement, except to the extent that
provisions of Delaware Law (with respect to the Merger only) are mandatorily
applicable to the Merger and the rights of the stockholders of the Company,
shall be governed in all respects by the laws of the State of New York (without
giving effect to the provisions thereof relating to conflicts of law). The
exclusive venue for the adjudication of any dispute or proceeding arising out
of this Agreement or the performance thereof shall be the courts located in the
County of New York, State of New York and the parties hereto and their
affiliates each consents to and hereby submits to the jurisdiction of any court
located in the County of New York, State of New York or Federal courts in the
Southern District of New York.
Section 10.7 Headings; Disclosure. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement. Any disclosure by
the Company or Parent in any portion of its respective Disclosure Schedule
shall be deemed disclosure in each other portion of such Disclosure Schedule.
Section 10.8 Certain Definitions and Rules of Construction.
(a) As used in this Agreement:
"Affiliate," as applied to any person, shall mean any other person directly
or indirectly controlling, controlled by, or under common control with, that
person; for purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that person, whether through the ownership of voting securities, by contract or
otherwise.
"Acquisition Agreement" has the meaning set forth in Section 7.9(b).
"Acquisition Proposal" has the meaning set forth in Section 7.9(a).
"Agreement" has the meaning set forth in the preamble to this Agreement.
"Business Combination" has the meaning set forth in Section 3.1(m).
"Cash Consideration" has the meaning set forth in Section 3.1(c).
"Cash Election" has the meaning set forth in Section 3.1(d).
"Cash Election Number" has the meaning set forth in Section 3.1(d).
"Cash Election Shares" has the meaning set forth in Section 3.1(e).
"Cash Fraction" has the meaning set forth in Section 3.1(e).
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"Certificate of Merger" has the meaning set forth in Section 1.3.
"Certificates" has the meaning set forth in Section 3.2.
"Closing Date" has the meaning set forth in Section 1.2.
"Code" has the meaning set forth in Section 3.6.
"Company" has the meaning set forth in the preamble to this Agreement.
"Company Benefit Plans" has the meaning set forth in Section 4.9.
"Company Board Approval" has the meaning set forth in Section 4.23.
"Company Common Stock" has the meaning set forth in Section 3.1(b).
"Company Disclosure Schedule" has the meaning set forth in Article IV,
Introduction.
"Company Employees" has the meaning set forth in Section 7.11.
"Company Intellectual Property Rights" has the meaning set forth in Section
4.16(a).
"Company Financial Statements" has the meaning set forth in Section 4.5(b).
"Company Material Adverse Effect" shall be an event or occurrence or series
of events or occurrences which individually or in the aggregate with all other
events or occurrences would be reasonably likely to have a material adverse
effect on the business, operations, financial condition or results of
operations of the Company and its subsidiaries taken as a whole, other than any
change, circumstances or effect relating to (i) the economy or securities
markets in general or (ii) the industries in which the Company operates in
general and not specifically relating to the Company.
"Company Material Contract" has the meaning set forth in Section 4.14.
"Company Permits" has the meaning set forth in Section 4.12.
"Company Proposal" has the meaning set forth in Section 3.5(a).
"Company Real Property Rights" has the meaning set forth in Section 4.15.
"Company Quarterly Financial Statements" has the meaning set forth in
Section 4.5(c).
"Company SEC Reports" has the meaning set forth in Section 4.5(a).
"Company Special Meeting" has the meaning set forth in Section 3.5(a).
"Company Stock Options" has the meaning set forth in Section 4.2(a).
"Company's Financial Advisor" has the meaning set forth in Section 4.2.3.
"Confidentiality Agreement" has the meaning set forth in Section 7.1(a).
"Consent" has the meaning set forth in Section 4.4(b).
"Credit Facility" has the meaning set forth in Section 7.3.
"Delaware Law" has the meaning set forth in Section 1.3.
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"Dissenting Shares" has the meaning set forth in Section 3.1(n).
"Effective Time" has the meaning set forth in Section 1.3.
"Election" has the meaning set forth in Section 3.1(h).
"Election Deadline" has the meaning set forth in Section 3.1(k).
"Environmental Law" has the meaning set forth in Section 4.19.
"ERISA" shall have the meaning set forth in Section 4.9(a).
"ERISA Affiliate" has the meaning set forth in Section 4.9(a).
"ESPP Options" has the meaning set forth in Section 4.2(a).
"Exchange Act" has the meaning set forth in Section 3.5(c).
"Exchange Ratio" has the meaning set forth in Section 3.1(a).
"Form of Election" has the meaning set forth in Section 3.1(d).
"GAAP" has the meaning set forth in Section 4.5(b).
"Governmental Entity" has the meaning set forth in Section 5.4(b)
"HSR Act" has the meaning set forth in Section 4.4(b).
"Hazardous Substance" has the meaning set forth in Section 4.19.
"Indemnified Parties" has the meaning set forth in Section 7.5.
"Information Technology" has the meaning set forth in Section 4.16(c).
"IRS" has the meaning set forth in Section 4.9.
"Knowledge" or any other formulation of "knowledge" shall mean, the
knowledge of the Company's senior executive officers with respect to the
Company, and with respect to Parent and Merger Subsidiary, the knowledge of
Parent's senior executive officers.
"Lien" has the meaning set forth in Section 4.4(a).
"Merger" has the meaning set forth in the preamble to this Agreement.
"Merger Consideration" has the meaning set forth in Section 3.1(a).
"Merger Subsidiary" has the meaning set forth in the preamble to this
Agreement.
"Merger Subsidiary Common Stock" has the meaning set forth in Section
3.1(a).
"Mixed Consideration" has the meaning set forth in Section 3.1(c).
"Mixed Election" has the meaning set forth in Section 3.1(h).
"NYBCL" has the meaning set forth in Section 3.1(c).
"No Election Shares" has the meaning set forth in Section 3.1(j).
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"Non-U.S. Benefit Plans" has the meaning set forth in Section 4.9(l).
"Other Investments" has the meaning set forth in Section 4.2(c).
"Parent" has the meaning set forth in the preamble to this Agreement.
"Parent Benefit Plans" has the meaning set forth in Section 7.11.
"Parent Common Stock" has the meaning set forth in Section 3.1(c).
"Parent Disclosure Schedule" has the meaning set forth in Article V,
Introduction.
"Parent Material Adverse Effect" shall be an event or occurrence or series
of events or occurrences which individually or in the aggregate with all other
events or occurrences would be reasonably likely to have a material adverse
effect on the business, operations, financial condition or results of
operations of Parent and its subsidiaries taken as a whole, other than any
change, circumstances or effect relating to (i) the economy or securities
markets in general or (ii) the industries in which Parent operates in general
and not specifically relating to Parent.
"Parent Quarterly Financial Statements" has the meaning set forth in Section
5.10(c).
"Parent SEC Reports" has the meaning set forth in Section 5.10(a).
"Paying Agent" has the meaning set forth in Section 3.1(i).
"Person" shall include individuals, corporations, partnerships, limited
liability companies, trusts, other entities and groups (which term shall
include a "group" as such term is defined in Section 13(d)(3) of the Exchange
Act).
"Prospectus/Proxy Statement" has the meaning set forth in Section 3.5(a).
"Qualified Plans" has the meaning set forth in Section 4.9.
"Registration Statement" has the meaning set forth in Section 3.5(a).
"Related Agreements" has the meaning set forth in Section 7.10.
"Representative" has the meaning set forth in Section 3.1(d).
"SEC" has meaning set forth in Section 3.5(a).
"Securities Act" has the meaning set forth in Section 3.5(a).
"Series C Stock" has the meaning set forth in Section 5.9.
"Significant Subsidiaries" means subsidiaries within the meaning of
Regulation S-X under the Exchange Act, which in the case of references to the
Significant Subsidiaries of Parent, shall include Merger Subsidiary.
"Stock Consideration" has the meaning set forth in Section 3.1(c).
"Stock Election" has the meaning set forth in Section 3.1(f).
"Stock Election Number" has the meaning set forth in Section 3.1(f).
"Stock Election Shares" has the meaning set forth in Section 3.1(g).
"Stock Fraction" has the meaning set forth in Section 3.1(g).
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<PAGE>
"Subsidiary" or "Subsidiaries" means, with respect to Parent, the Company
or any other person, any corporation, partnership, joint venture or other
legal entity of which Parent, the Company or such other person, as the case
may be (either alone or through or together with any other subsidiary), owns,
directly or indirectly, stock or other equity interests the holders of which
are generally entitled to more than 50% of the vote for the election of the
board of directors or other governing body of such corporation or other legal
entity.
"Superior Proposal" means a bona fide unsolicited written Acquisition
Proposal to acquire more than 50% of the voting power of the shares of the
Company Common Stock then outstanding or all or substantially all the assets
of the Company for consideration consisting of cash and/or securities which
the Board of Directors of the Company concludes in good faith (after
consultation with its financial advisors and legal counsel), taking into
account all legal, financial, regulatory and other aspects of the proposal and
the Person making the proposal, (i) would, if consummated, result in a
transaction that is materially more favorable to the Company's stockholders
(in their capacities as stockholders), from a financial point of view, than
the transactions contemplated by this Agreement and (ii) is reasonably capable
of being completed, including, without limitation, a conclusion that its
financing, to the extent required, is then committed or is in the good faith
judgment of the Board of Directors of the Company, reasonably capable of being
financed by such third party.
"Surviving Corporation" has the meaning set forth in Section 1.1.
"Tax" shall mean any federal, state, local, foreign or provincial income,
gross receipts, property, sales, service, use, license, lease, excise,
franchise, employment, payroll, withholding, employment, unemployment
insurance, workers' compensation, social security, alternative or added
minimum, ad valorem, value added, stamp, business license, occupation,
premium, environmental, windfall profit, customs, duties, estimated, transfer
or excise tax, or any other tax, custom, duty, premium, governmental fee or
other assessment or charge of any kind whatsoever, together with any interest
or penalty imposed by any Governmental Entity.
"Termination Fee" has the meaning set forth in Section 9.3(b).
"Upset Date" has the meaning set forth in Section 9.1(e).
"Ventures" has the meaning set forth in Section 4.2(c).
"Violation" has the meaning set forth in Section 4.4(a) and "Violate" shall
have a correlative meaning.
"Year 2000 Ready" has the meaning set forth in Section 4.16(c).
(b) Other Rules of Construction.
(i) References in this Agreement to any gender shall include references
to all genders. Unless the context otherwise requires, references in the
singular include references in the plural and vice versa. References to a
party to this Agreement or to other agreements described herein means those
Persons executing such agreements.
(ii) The words "include", "including" or "includes" shall be deemed to
be followed by the phrase "without limitation" or the phrase "but not
limited to" in all places where such words appear in this Agreement.
(iii) This Agreement is the joint drafting product of Parent and the
Company and each provision has been subject to negotiation and agreement
and shall not be construed for or against either party as drafter thereof.
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(iv) Each case in this Agreement where a contract or agreement is
represented or warranted to be enforceable will be deemed to include as a
limitation to the extent that enforceability may be subject to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
or similar Laws affecting the enforcement of creditors' rights generally
and to general equitable principles, whether applied in equity or at law.
(v) All references in the Agreement to financial terms shall be deemed
to refer to such terms as they are defined under GAAP, consistently
applied.
Section 10.9 Counterparts. This Agreement may be executed in two or more
counterparts which together shall constitute a single agreement.
Section 10.10 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economics or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon determination that any term or
other provision hereof is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
IN WITNESS WHEREOF, Parent, Merger Subsidiary and the Company have caused
this Agreement to be signed by their respective officers thereunder duly
authorized all as of the date first written above.
Parent
Psinet Inc.
By /s/ William L. Schrader
-----------------------------------
William L. Schrader
Chairman and Chief Executive
Officer
Merger Subsidiary
Psinet Shelf I, Inc
By /s/ William L. Schrader
-----------------------------------
William L. Schrader
Chairman
Company
Transaction Network Services, Inc.
By /s/ John J. McDonnell, Jr.
-----------------------------------
Title: John J. McDonnell, Jr.
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Amendment No. 1 to Agreement and Plan of Merger
This Amendment No.1 to Agreement and Plan of Merger ("Amendment Agreement"),
is made this 14th day of October, 1999 by and among PSINET INC. ("Parent"), a
New York corporation, PSINET SHELF I INC. ("Merger Subsidiary"), a Delaware
corporation and a wholly-owned subsidiary of Parent, and TRANSACTION NETWORK
SERVICES, INC. ("Company"), a Delaware corporation.
WHEREAS, Parent, Merger Subsidiary and Company entered into an Agreement and
Plan of Merger ("Merger Agreement") dated as of August 22, 1999 pursuant to
which, among other things, the Company shall be merged with and into the Merger
Subsidiary and all outstanding shares of Company Common Stock shall
automatically be converted into the right to receive Merger Consideration;
WHEREAS, Section 4.2(a) of the Merger Agreement states that, as of the date
thereof, 13,172,942 shares of Company Common Stock were validly issued and
outstanding;
WHEREAS, subsequent to the date of execution of the Merger Agreement, the
Company has informed Parent that the number of shares of Company Common Stock
outstanding set forth in Section 4.2(a) of the Merger Agreement was understated
by 16,646 shares;
WHEREAS, the calculation of the aggregate amount of Merger Consideration to
be paid to stockholders of the Company in respect of the outstanding shares of
Company Common Stock to be converted into the right to receive Cash
Consideration and/or Stock Consideration was based upon 13,172,942 shares of
Company Common Stock outstanding, as reported; and
WHEREAS, the parties desire to amend the Merger Agreement, including the
Stock Consideration and Cash Consideration portions of the Merger
Consideration, to reflect the additional 16,646 outstanding shares of Company
Common Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
1. Amendment of Section 3. Section 3.1(c) of the Merger Agreement is hereby
amended by (i) deleting therefrom the Stock Consideration number "7,796,223"
and substituting therefor the number "7,804,546" and (ii) deleting therefrom
the Cash Consideration amount of "$350,830,015" and substituting therefor the
amount "$351,204,570."
2. Amendment of Section 4. Section 4.2(a) of the Merger Agreement is hereby
amended by deleting therefrom the number "13,172,942" and substituting therefor
the number "13,189,588."
3. No Other Amendments. Except as expressly set forth herein, all terms and
provisions of the Merger Agreement shall remain unchanged and in full force and
effect.
4. Defined Terms. Capitalized terms used in this Amendment Agreement but not
otherwise defined herein shall have the respective meanings ascribed to them in
the Merger Agreement.
5. Governing Law. This Amendment Agreement, except to the extent that
provisions of Delaware Law (with respect to the Merger only) are mandatorily
applicable to the Merger and the rights of the stockholders of the Company,
shall be governed in all respects by the laws of the State of New York (without
giving effect to the provisions thereof relating to conflicts of law). The
exclusive venue for the adjudication of any dispute or proceeding arising out
of this Amendment Agreement or the performance thereof shall be the courts
located in the County of New York, State of New York and the parties hereto and
their affiliates each consents to and hereby submits to the jurisdiction of any
court located in the County of New York, State of New York or Federal courts in
the Southern District of New York.
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IN WITNESS WHEREOF, Parent, Merger Subsidiary and the Company have caused
this Amendment Agreement to be signed by their respective officers thereunder
duly authorized all as of the date first written above.
Parent
PSINet Inc.
/s/ William L. Schrader
By: _________________________________
Name: William L. Schrader
Title:Chairman and Chief
Executive Officer
Merger Subsidiary
PSINet Shelf I Inc.
/s/ William L. Schrader
By: _________________________________
Name: William L. Schrader
Title:Chairman and Chief
Executive Officer
Company
Transaction Network Services, Inc.
/s/ John J. McDonnell, Jr.
By: _________________________________
Name: John J. McDonnell, Jr.
Title:President and Chief
Executive Officer
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Annex 2
Morgan Stanley Dean Witter
1585 Broadway
New York, New York 10036
(212)761-4000
August 22, 1999
Board of Directors
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, VA 20191
Members of the Board:
We understand that Transaction Network Services, Inc. (the "Company"),
PSINet Inc. (the "Acquiror") and Patriots Subsidiary, Inc., a wholly owned
subsidiary of the Acquiror ("Merger Subsidiary"), have entered into an
Agreement and Plan of Merger dated August 22, 1999 (the "Merger Agreement"),
which provides, among other things, for the merger (the "Merger") of the
Company with and into Merger Subsidiary. Pursuant to the Merger, the Company
will become a wholly-owned subsidiary of the Acquiror, and each outstanding
share of Company common stock, par value $0.01 per share ("Company Common
Stock"), of the Company, other than shares held in treasury or held by the
Acquiror or any affiliate of the Acquiror or as to which dissenters' rights
have been perfected, will be converted into the right to receive (i) $45.00 in
cash; (ii) one share of Acquiror common stock, par value $0.01 per share
("Acquiror Common Stock"); or (iii) a combination of cash and Acquiror Common
Stock, all as determined pursuant to the terms of the Merger Agreement
(collectively, the "Consideration"). The terms and conditions the Merger are
more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Consideration to be
received by the holders of shares of Company Common Stock pursuant to the
Merger Agreement is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and the Acquiror;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company and the Acquiror prepared by the
respective managements of such companies;
(iii) reviewed certain financial projections of the Company and the
Acquiror prepared by the respective managements of such companies;
(iv) discussed the past and current operations and financial conditions
and the prospects of the Company and the Acquiror with the respective
managements of such companies;
(v) analyzed the estimated pro forma impact of the Merger on the
Acquiror's revenues and cash flow;
(vi) reviewed the reported prices and trading activity for the Company
Common Stock and the Acquiror Common Stock;
(vii) compared the financial performance of the Company and the Acquiror
and the prices and trading activity of the Company Common Stock and the
Acquiror Common Stock with those of certain other comparable publicly
traded companies and their securities;
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(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(ix) participated in discussions and negotiations among representatives
of the Company and the Acquiror and their financial and legal advisors;
(x) reviewed the Merger Agreement and certain related documents;
(xi) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, economic, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement
without waiver of any condition contained therein and will be treated as a
tax-free reorganization and/or exchange, for purposes of the Internal Revenue
Code of 1986.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the
Company or any of its assets.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services.
In the past, Morgan Stanley & Co. Incorporated and its affiliates have
provided financial advisory and/or financing services for the Acquiror and
have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by the Company in respect of the Merger with the
Securities and Exchange Commission. In addition, this opinion does not in any
manner address the prices at which the Acquiror Common Stock will trade
following announcement or consummation of the Merger, and we express no
opinion or recommendation as to how the holders of Company Common Stock should
vote at the stockholders' meeting held in connection with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be received by the holders of shares of
Company Common Stock pursuant to the Merger Agreement is fair from a financial
point of view to such holders.
Very truly yours,
Morgan Stanley & Co.
Incorporated
/s/ Jeffrey N. Hogan
By: _____________________________
Jeffrey N. Hogan
Principal
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Annex 3
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S)228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock , which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the
shares of any class or series of its stock as a result of an amendment
to its certificate of incorporation, any merger or consolidation in
which the corporation is a constituent corporation or the sale of all
or substantially all of the assets of the corporation. If the
certificate of incorporation contains such a provision, the procedures
of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting with
respect to shares for which appraisal rights are available pursuant
to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of such stockholder's
shares shall deliver to the corporation, before the taking of the
vote on the merger or consolidation, a written demand for appraisal
of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and
has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to
(S)228 or (S)253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within
ten days thereafter, shall notify each of the holders of any class
or series of stock of such constituent corporation who are entitled
to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of
such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that,
if the notice is given on or after the effective date of the merger
or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders or any class or series of
stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such
stockholders or the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective
date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such
holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need
only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the
3-2
<PAGE>
absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in
advance, a record date that shall not be more than 10 days prior to
the date the notice is given, provided, that if the notice is given
on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed
and the notice is given prior to the effective date, the record date
shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon
the merger or consolidation. Within 120 days after the effective date
of the merger or consolidation, any stockholder who has complied with
the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by
the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the
list at the addresses therein stated. Such notice shall also be given
by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable.
The forms of the notices by mail and by publication shall be approved
by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive
of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with a fair rate of interest,
if any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court
may consider all relevant factors, including the rate of interest which
the surviving or resulting corporation would have had to pay to borrow
money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to
participate in
3-3
<PAGE>
the appraisal proceeding, the Court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required,
may participate fully in all proceedings until it is finally determined
that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of
experts, the be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights as
provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided
in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the
right of such stockholder to an appraisal shall cease. Notwithstanding
the foregoing, no appraisal proceeding in the Court of Chancery shall
be dismissed as to any stockholder without the approval of the Court,
and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
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<PAGE>
[LOGO]
[1299 - TRANSACTION NETWORK SERVICES, INC.] [FILE NAME: TNS14B.ELX] [VERSION -
2] [10/18/99] [orig. 10/18/99]
TNS14B DETACH HERE
- --------------------------------------------------------------------------------
PROXY
TRANSACTION NETWORK SERVICES, INC.
Proxy for Special Meeting of Stockholders to be held November 23, 1999
This Proxy is Solicited on Behalf of the Board of Directors
The stockholder and recipient of the enclosed Proxy Voting Card (the "Card
Recipient"), having received the Notice of Special Meeting and the Board of
Directors' Proxy Statement, hereby appoint(s) John J. McDonnell, Jr. and John J.
McDonnell III, and each of them, proxies (the "Proxies") of the Card Recipient
(with full power of substitution) to attend the above Special Meeting and all
adjournments thereof (the "Meeting") and there to vote all shares of Common
Stock of Transaction Network Services, Inc. that the Card Recipient would be
entitled to vote, if personally present, in regard to all matters which may come
before the Meeting, and especially to consider and vote upon a proposal to adopt
the agreement and plan of merger among PSINet Inc., PSINet Shelf I Inc.
(a wholly-owned subsidiary of PSINet Inc.) and Transaction Network Services,
Inc., and to approve the transactions contemplated in that agreement.
In their discretion the Proxies are authorized to vote upon such other business
as may properly come before the meeting.
[SEE REVERSE] [SEE REVERSE]
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE>
-2-
- -----------------
Vote by Telephone
- -----------------
It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
1-800-867-9084.
- --------------------------------------------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement/Prospectus and Proxy Card.
2. Call the toll-free number 1-800-867-9084.
3. Enter your social security or tax I.D. number, followed by the four
highlighted digits of the account number located just below the
perforation below.
4. Follow the recorded instructions.
If you make a mistake or wish to change your vote, just press the star
key (*) at any time. You'll be returned to the beginning of the prompt
and you may start over again.
If you need further instructions or have any questions, please
contact Karen Kazmark, Director of Investor Relations, by calling (703)
453-8406 from 9 a.m. to 6 p.m. EST, Monday through Friday.
Your Vote is important!
Call 1-800-867-9084 anytime!
- --------------------------------------------------------------------------------
- ----------------
Vote by Internet
- ----------------
It's fast, convenient, and your vote is immediately confirmed and posted.
- --------------------------------------------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement/Prospectus and Proxy Card.
2. Go to the Website
http://www.eproxyvote.com/tni
3. Enter your 14-digit Voter Control Number located on your Proxy Card
above your name.
4. Follow the instructions provided.
- --------------------------------------------------------------------------------
Your vote is important!
Go to http://www.eproxyvote.com/tni anytime!
Do not return your Proxy Card if you are voting by Telephone or Internet
[1299- TRANSACTION NETWORK SERVES, INC.] [FILE NAME: TNS14A.ELX] [VERSION - 3]
[10/18/99] [orig. 10/18/88]
TNS 14A DETACH HERE
- -------------------------------------------------------------------------------
Please mark
[X] votes as in
this example.
This Proxy when properly executed will be voted in the same manner specified
herein. If no direction is made, the Proxies intend to and are authorized to
vote for the proposal.
FOR AGAINST ABSTAIN
1. To adopt the agreement and plan of merger among [ ] [ ] [ ]
PSINet Inc., PSINet Shelf I Inc. (a wholly-owned
subsidiary of PSINet Inc.) and Transaction
Network Services, Inc. and to approve the
transactions contemplated in that agreement.
2. In their discretion the Proxies are authorized to vote upon other business as
may properly come before the meeting.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as your name(s) appear(s) hereon.
All holders must sign. When signing in a fiduciary
capacity, please indicate full title as such. If a
corporation or partnership, please sign in full
corporate or partnership name by authorized person.
Signature: Date: Signature: Date:
---------------- ------ ----------------- ------
