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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-25812
PSINET INC.
(Exact name of Registrant as specified in its charter)
New York 16-1353600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 Huntmar Park Drive, Herndon, VA 20170
(Address of principal executive office) (Zip Code)
(703) 904-4100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report date)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---- ----
Common Stock, $.01 par value -- 39,930,980 shares as of August 1, 1996
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
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PSINet Inc.
Table of Contents
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996......................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 1995 and June 30, 1996............................................................ 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1995 and June 30, 1996............................................................ 5
Notes to Consolidated Financial Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders........................................... 15
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signatures.............................................................................................. 18
Exhibit Index........................................................................................... 19
</TABLE>
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PART I. FINANCIAL INFORMATION
PSINET INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
ASSETS
December 31, 1995 June 30, 1996
----------------- -------------
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash $102,710 $ 56,536
equivalents
Short-term investments and
marketable securities - 17,167
Accounts receivable, net 6,231 11,220
Notes receivable - 2,000
Inventories 1,149 1,123
Prepaid expenses 2,071 2,340
Other current assets 4,194 6,197
----------- -----------
Total current assets 116,355 96,583
Property and equipment, net 51,355 73,353
Goodwill and other intangibles, net 25,398 21,452
Software costs, net 6,133 5,318
Other assets and deferred charges 2,589 3,399
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$201,830 $200,105
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,012 $ 1,000
Current portion of long-term debt 13,631 22,518
Trade accounts payable 10,002 14,822
Accrued payroll and related expenses 2,184 2,763
Other accounts payable and accrued liabilities 654 1,491
Deferred revenue 3,245 5,620
----------- -----------
Total current liabilities 32,728 48,214
Long-term debt 24,130 33,112
Deferred taxes 635 555
Other liabilities 1,107 871
----------- -----------
Total liabilities 58,600 82,752
----------- -----------
Shareholders' equity:
Preferred stock - -
Common stock 379 398
Capital in excess of par value 206,035 206,532
Retained deficit (61,539) (87,346)
Treasury stock, at cost (2,054) (2,005)
Net unrealized gain on investments 813 -
Cumulative foreign currency translation
adjustment (404) (226)
----------- -----------
Total shareholders' equity 143,230 117,353
----------- -----------
$201,830 $200,105
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</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $ 7,703 $ 20,219 $ 13,590 $ 37,400
Other income, net - 2,400 - 2,400
----------- ----------- ----------- -----------
Total revenue and other income, net 7,703 22,619 13,590 39,800
----------- ----------- ----------- -----------
Operating costs and expenses:
Data communications and operations 6,732 16,529 11,035 30,471
Sales and marketing 3,526 7,021 5,366 14,865
General and administrative 2,401 4,228 3,582 9,703
Depreciation and amortization 2,162 7,026 3,828 13,208
----------- ----------- ----------- -----------
Total operating costs and expenses 14,821 34,804 23,811 68,247
----------- ----------- ----------- -----------
Loss from operations (7,118) (12,185) (10,221) (28,447)
Interest expense (378) (1,386) (632) (2,243)
Interest income 499 943 588 2,167
Other income - 1,776 - 2,844
Equity in loss of affiliate (39) (107) (51) (207)
----------- ----------- ----------- -----------
Loss before income taxes (7,036) (10,959) (10,316) (25,886)
Income tax (expense) benefit (65) 40 - 79
----------- ----------- ----------- -----------
Net loss $(7,101) $(10,919) $(10,316) $(25,807)
=========== =========== =========== ===========
Loss per share (pro forma in 1995) $(0.23) $(0.28) $(0.36) $(0.67)
=========== =========== =========== ===========
Shares used in computing loss per share 30,341 39,379 28,827 38,775
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1995 1996
------------------------------
(in thousands)
<S> <C> <C>
Net cash used in operating activities $ (7,063) $ (18,448)
--------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net (6,934) (2,278)
Purchases of short-term investments and
marketable securities - (17,135)
Proceeds from sale of investments - 3,219
Proceeds from sale of assets to MindSpring - 400
Capitalized software costs (77) (598)
Investment in subsidiary, net of cash acquired 267 -
Loan to affiliate - (302)
Investments in certain businesses (38) (104)
Increase in other intangibles - (73)
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Net cash used in investing activities (6,782) (16,871)
--------- ---------
Cash flows from financing activities:
Net payments on line of credit (1,500) (2,012)
Proceeds from issuance of notes payable 3,514 6,340
Repayments of notes payable (318) (1,765)
Principal payments under capital lease obligations (1,292) (13,915)
Proceeds from issuance of Series E redeemable preferred stock 12,238 -
Proceeds from initial public offering, net 47,876 -
Proceeds from issuance of common stock 52 -
Proceeds from exercise of common stock warrants 55 -
Proceeds from exercise of common stock options 166 652
Other - (155)
--------- ---------
Net cash provided by (used in) financing activities 60,791 (10,855)
--------- ---------
Net increase (decrease) in cash and cash equivalents 46,946 (46,174)
Cash and cash equivalents, beginning of year 3,358 102,710
--------- ---------
Cash and cash equivalents, end of period $ 50,304 $ 56,536
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note l - Basis of Presentation
These consolidated financial statements for the three and six months ended
June 30, 1996 and the related footnote information are unaudited and have been
prepared on a basis substantially consistent with the audited consolidated
financial statements of PSINet Inc. ("PSINet") and subsidiaries (collectively,
the "Company") as of December 31, 1995 incorporated by reference in the
Company's Annual Report on Form 10-K as filed with the Securities and Exchange
Commission (the "Annual Report"). These financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes to consolidated financial statements of the Company as of December 31,
1995 incorporated by reference in the Company's Annual Report and the unaudited
quarterly consolidated financial statements and related notes to consolidated
financial statements of the Company for the three months ended March 31, 1996
included in the Company's Form 10-Q for the quarter then ended, as filed with
the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
of normal recurring adjustments) which management considers necessary to present
fairly the consolidated financial position of the Company at June 30, 1996 and
the results of operations for the three and six month periods ended June 30,
1995 and 1996 and the consolidated cash flows for the six month periods ended
June 30, 1995 and 1996. The results of operations for the three and six month
periods ended June 30, 1996 may not be indicative of the results expected for
any succeeding quarter or for the entire year ending December 31, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates.
Note 2 - Loss per Share and Pro Forma Loss per Share
Loss per share is computed using the weighted average number of shares of
common stock, adjusted for the dilutive effect of common stock equivalent shares
of common stock options and warrants. Common stock equivalent shares are
calculated using the treasury stock method.
Pro forma loss per share is computed using the weighted average number of
shares of common stock, adjusted for the dilutive effect of common stock
equivalent shares of common stock options and warrants and assuming the
conversion of redeemable preferred and common stock as of the beginning of the
period presented. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock and common stock equivalent shares
issued by the Company at prices below its initial public offering price during
the twelve month period prior to the initial public offering date (using the
treasury stock method and an offering price of $12.00 per share) have been
included in the calculation of pro forma loss per share for the three and six
months ended June 30, 1995, as if they were outstanding for each period
regardless of whether they are dilutive.
Note 3 - Short-term Investments and Marketable Securities
The Company classifies its investment holdings in debt and equity securities
as either held-to-maturity securities, trading securities or available-for-sale
securities and reports the investments at amortized cost, fair value with
unrealized gains and losses included in earnings and fair value with unrealized
gains and losses included in shareholders' equity, respectively.
At June 30, 1996, short-term investments and marketable securities included
debt securities classified as held-to-maturity with original maturities of
greater than 90 days of approximately $14.0 million.
6
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Short-term Investments and Marketable Securities (continued)
In August 1995, the Company entered into an agreement to form a joint venture
with Hansol Paper Co. Ltd. ("Hansol Paper"), of Seoul, Korea for the purpose of
extending the PSINet network to provide Internet services in Korea. In March
1996, pursuant to these arrangements, the Company acquired a 10% interest in
Hansol Telecom Co., Ltd. ("Hansol"), an affiliate of Hansol Paper, for
approximately $3.1 million. This investment is reflected in short-term
investments and marketable securities.
Other income for the three and six months ended June 30, 1996 consists of
approximately $1.8 million and $2.8 million, respectively, of realized gains on
equity securities sold by the Company.
Note 4 - Long-term Debt
During the six months ended June 30, 1996, the Company incurred capital lease
obligations of approximately $27.2 million upon the execution of leases for new
data communications equipment and other fixed assets.
Effective June 30, 1996, the Company entered into an amendment to an amended
and restated borrowing facility obtained in November 1994, which increased the
Company's maximum borrowing availability under the facility from $8.5 million to
$13.5 million for the purchases of computer equipment and other fixed assets.
Borrowings under this facility are repayable in 36 monthly installments from the
dates of equipment purchases and are secured by a lien on the equipment
purchased. Interest is payable monthly at a rate of prime plus 2.5% (10.75% at
June 30, 1996). The borrowing facility contains certain restrictions which,
among other things, require the maintenance of certain financial ratios and
restrictions on the payment of dividends.
At June 30, 1996, the aggregate unused portion under the Company's various
financing arrangements for purchases of data communications equipment and other
fixed assets was $7.1 million.
Additionally, the Company has a secured revolving credit agreement with a bank
under which the Company may borrow up to a maximum principal amount of the
lesser of $5.0 million or 75% of qualified accounts receivable which secure the
loan less 20% of aggregate principal of certain term credit advances
(approximately $3.1 million at June 30, 1996). There was $1.0 million advanced
under this credit agreement at June 30, 1996. Interest is payable monthly at a
rate of prime plus 1.5% (9.75% at June 30, 1996).
Note 5 - Stock Option Repricing and Shareholder Rights Plan
Effective April 5, 1996, the Company's Board of Directors approved a repricing
of certain employee stock options. Options affected by the repricing were those
having an exercise price of greater than $9.375, the closing market price of the
Company's common stock on that date. All other terms and conditions of the
options remain the same. For employees that opted to participate in the
repricing, the original options were canceled and new options were granted.
On May 8, 1996, the Company's Board of Directors adopted a Shareholder Rights
Plan pursuant to which preferred stock purchase rights were to be distributed to
shareholders as a dividend on June 5, 1996, or as soon as reasonably practicable
thereafter, at the rate of one Right for each share of Common Stock held of
record as of the close of business on June 5, 1996. Each Right, when
exercisable, will entitle shareholders to buy one one-thousandth of a share of a
newly created Series A
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Stock Option Repricing and Shareholder Rights Plan (continued)
Junior Participating Preferred Stock of PSINet at an exercise price of $75 per
Right. The Plan was adopted to enable the Board of Directors to protect PSINet
against any takeover attempt that the Board considers abusive and not in the
best interests of shareholders.
Note 6 - Agreements with MindSpring Enterprises, Inc.
On June 28, 1996, the Company entered into agreements with MindSpring
Enterprises, Inc., an Atlanta, GA based Internet access provider ("MindSpring"),
pursuant to which the Company agreed to transfer to MindSpring certain of its
individual subscriber accounts and related tangible and intangible assets and
rights in connection with the consumer dial-up Internet access services operated
by the Company in the United States, including, without limitation, the lease
for, and certain assets located at the Company's customer service facility in
New Cumberland, Pennsylvania (collectively, the "Assets"). In connection with
the transfer, the parties also entered into a Network Services Agreement
pursuant to which the Company has agreed to service MindSpring's individual
subscribers through local dial-in POPs connected to the Company's network. As
part of these agreements, the Company also may, at its option, transfer to
MindSpring individual subscriber accounts generated in the future.
Under the terms of these agreements, the Company has transferred certain of
its individual subscriber accounts as of June 30, 1996 for $3.0 million,
consisting of $1.0 million cash and a $2.0 million Convertible Note (the
"Note"), which was included in revenue or other income, net in June 1996. The
Note bears interest at a rate of prime plus 3.0% (11.25% at June 30, 1996). If
the Note is not redeemed in full by June 28, 1997, the Company has the right to
convert, at the option of the Company, the total amount due under the Note into
common stock of MindSpring.
Upon transfer of the remaining Assets pursuant to these agreements, the
Company will receive additional consideration of up to $19.3 million in
additional convertible promissory notes, subject to adjustment based upon the
number of subscribers transferred to MindSpring who remain customers of
MindSpring and current in their payments for services at scheduled measurement
dates. The majority of the remaining consideration will be recognized in the
period that the Assets are transferred as other income, net of related asset
costs and other transfer expenses.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
unaudited Consolidated Financial Statements and associated Notes thereto and the
audited Consolidated Financial Statements, the Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company as of December 31, 1995 incorporated by reference to the Company's
Annual Report on Form 10-K and the unaudited quarterly consolidated financial
statements and related notes to consolidated financial statements of the Company
for the three months ended March 31, 1996 included in the Company's Form 10-Q
for the quarter then ended, as filed with the Securities and Exchange
Commission. This discussion includes certain forward-looking statements.
Actual results could differ materially from the forward-looking statements as a
result of a number of factors, including actions of actual and prospective
competitors and other competitive factors, risks associated with the Company's
growth and domestic and international expansion and the development of the
Internet market, risks associated with acquisitions, risks associated with the
market for individual customers, risks associated with system design and
operation, regulatory risks and the Company's dependence upon sole and limited
source suppliers. For a discussion of such factors and other factors that could
cause actual results to differ materially from the forward-looking statements,
see "Risk Factors" in Item 1 to the Company's Annual Report on Form 10-K, the
risk factors set forth in Exhibit 99.1 filed in the Company's Form 10-Q for the
quarterly period ended March 31, 1996 and the risk factors set forth in Exhibit
99.1 filed herewith and the Company's other filings with the Securities and
Exchange Commission.
General
The Company provides Internet access, services and products throughout the
United States and internationally. The Company offers a broad spectrum of
Internet access services ranging from dial-up services to continuous access
services using dedicated high-speed telephone circuits. In addition, the Company
offers Web site design and hosting services, training and consulting services,
Internet access security services and client software products. The Company also
began offering Internet access services to other Internet service providers
("ISPs") and entered into arrangements during the second quarter of 1996 with
another ISP for the transfer of certain of the Company's individual customer
accounts in connection with the implementation of a new strategy for servicing
individual subscribers. See "Consumer Wholesale Strategy". At June 30, 1996,
the Company had approximately 12,370 business subscribers and serviced 121,000
individual subscribers, consisting of approximately 40,000 professional and
81,000 consumer subscribers (approximately 15,000 were subscribers of other ISPs
), through more than 345 network local access points called Points-of-Presence
or "POPs."
Since the commencement of the Company's operations in 1989, the Company has
undertaken a program of developing and expanding its network. In connection with
this development and expansion, the Company made significant investments in
telecommunications circuits and equipment. These investments generally are made
significantly in advance of anticipated subscriber growth and resulting revenue.
The Company also increased its sales and marketing, customer support, network
operations and field services commitments in anticipation of the expansion of
its subscriber base. These expansion efforts have caused the Company to
experience increases in expenses from time to time, both in absolute terms and
as a percentage of revenue, in anticipation of potential future growth in the
Company's subscriber base. The nature and amount of these expenses may
fluctuate over time as the Company shifts its focus from network expansion
efforts to enhancement of its existing network.
The Company's operating results have fluctuated in the past and they may
continue to fluctuate significantly in the future as a result of a variety of
factors, some of which are beyond the Company's control. As of June 30, 1996,
the Company had an accumulated deficit of $87.3 million. The Company believes
that it will incur losses throughout 1996, and there can be no assurance that
the Company will achieve profitability in the future.
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Consumer Wholesale Strategy
In response to competitive considerations with respect to consumer dial-up
Internet access services, the Company has altered its strategy to include
providing wholesale access services to consumer-oriented ISPs in the United
States rather than providing the consumer access services directly. Pursuant to
network access agreements with other ISPs, the Company plans to provide Internet
connection services to other ISPs and their subscribers through the PSINet
network POPs. The Company does not currently anticipate that it will incur
significant capital expenditures in order to service its existing wholesaling
arrangements. It is anticipated that the agreements will call for the ISPs to
pay specified fees for each subscriber using the PSINet network.
In connection with the change in strategy relating to individual consumer dial-
up Internet access services, as indicated above, the Company restructured its
operations and as a result, eliminated certain positions relating to these
services. There were no significant restructuring charges relating to this
strategy change. The full impact of the reduction in costs and expenses
associated with this restructuring will occur in the periods after June 30,
1996.
On June 28, 1996, the Company entered into agreements with MindSpring
Enterprises, Inc., an Atlanta-based Internet access provider ("MindSpring"),
pursuant to which the Company agreed to transfer to MindSpring certain of its
individual subscriber accounts and related tangible and intangible assets and
rights in connection with the consumer dial-up Internet access services operated
by the Company in the United States, including, without limitation, the lease
for, and certain assets located at the Company's customer service facility in
New Cumberland, Pennsylvania. In connection with the transfer, the parties also
entered into a Network Services Agreement pursuant to which the Company has
agreed to service MindSpring's individual subscribers through local dial-in POPs
connected to the Company's network. As part of these agreements, the Company
also may, at its option, transfer to MindSpring individual subscriber accounts
generated in the future.
The Company anticipates that a decrease in its individual subscriber revenue
will result once the MindSpring agreements are fully consummated. However, this
decrease is expected to be partially offset by revenues from the provision of
access services under the Network Services Agreement and ongoing revenue from
the continuing sales of individual subscribers to MindSpring. Additionally, the
Company's expenses associated with the individual customer support function and
certain of the assets transferred will decline.
Three and Six Months Ended June 30, 1996 as Compared to the Three and Six Months
Ended June 30, 1995
Results of Operations
Revenue. Revenue is derived from the sale of Internet access and related
services to businesses and individuals and, as a result of the acquisitions of
InterCon Systems Corporation ("InterCon") and Software Ventures Corporation
("Software Ventures") in 1995, from the sale of connectivity software products.
Revenue increased by 162.5% from approximately $7.7 million for the three months
ended June 30, 1995 to approximately $20.2 million for the three months ended
June 30, 1996. Revenue increased by 175.2% from approximately $13.6 million for
the six months ended June 30, 1995 to approximately $37.4 million for the six
months ended June 30, 1996. The increase in revenue in comparison the same
three and six month periods in 1995 resulted principally from greater sales of
Internet services to businesses and individuals. The Company believes these
increases were facilitated by a number of factors including: an increase in the
number of subscribers driven by an increase in the number of POPs in operation;
an expansion of the Company's sales force; the Company's acquisition of The
Pipeline Network, Inc. (known as PSINet Pipeline New York, Inc.; "Pipeline")
during February 1995; and greater public awareness and acceptance of the
Internet. Included in revenue for the six months ended June 30, 1996, are one-
time license fees of approximately $1.7 million for the licensing of
intellectual property to Hansol Telecom Co., Ltd., an affiliated venture in
Seoul, Korea. The Company's business subscriber base increased by approximately
162.0% from approximately 4,700 business subscribers at June 30, 1995 to
approximately 12,370 business subscribers at June 30, 1996 and its individual
subscriber base increased from approximately 29,500
10
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individual subscribers at June 30, 1995 to approximately 121,000 individual
subscribers (approximately 15,000 were subscribers of other ISPs ) at June 30,
1996. The Company's network infrastructure increased from 135 POPs at June 30,
1995 to more than 345 POPs at June 30, 1996. Prior to the Company's acquisitions
of InterCon and Software Ventures in mid-1995, the Company did not recognize any
material revenues from the sale of connectivity software products. Revenues
attributable to the sale of software were approximately $1.3 million and $2.8
million for the three and six months ended June 30, 1996.
As a result of increased competition in the industry, the Company expects to
continue to encounter significant pricing pressure for its business Internet
access services, which in turn could result in reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors which are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or to offer Internet access as a standard component of their
overall service package, thereby significantly increasing price pressure on
PSINet. The Company has in the past reduced prices on certain of its Internet
access options and other services and products and may continue to do so in the
future. There can be no assurance that the Company will be able to offset the
effects of any such price reductions with an increase in the number of its
customers, higher revenue from enhanced services, cost reductions or otherwise.
In response to competitive considerations with respect to consumer dial-up
Internet access services, the Company has altered its strategy to include
providing of wholesale access services to consumer-oriented ISPs in the United
States rather than providing the consumer access services directly. There can be
no assurance that the Company will be able to offset the effects of any revenue
reductions with respect to this new consumer Internet service focus with revenue
from the number of customers serviced through the provisioning of wholesale
access services, higher revenue from enhanced services for business subscribers,
cost reductions or otherwise.
Other Income, Net. Other income, net consists of the income, net of
applicable expenses relating to the initial transfer to MindSpring of a portion
of the Company's individual consumer subscribers. Other income, net was
approximately $2.4 million for the three months ended June 30, 1996.
Data Communications and Operations. Data communications and operations costs
and expenses consist primarily of leased long distance circuit costs, local loop
costs, and expenses associated with network operations, customer support and
field service functions and software operations costs and expenses. Data
communications and operations costs and expenses were approximately $6.7 million
(87.4% of revenue and other income) and approximately $16.5 million (73.1% of
revenue and other income) during the three months ended June 30, 1995 and 1996,
respectively. Data communications and operations costs and expenses were
approximately $11.0 million (81.2% of revenue and other income) and
approximately $30.5 million (76.6% of revenue and other income) during the six
months ended June 30, 1995 and 1996, respectively. The $9.8 million increase for
the three months ended June 30, 1996 and the $19.4 million increase for the six
months ended June 30, 1996 in data communications and operations costs and
expenses as compared to the same period in 1995 related principally to increases
in (i) personnel costs resulting from the expansion of the Company's network
operations, customer support and field service staff from 242 persons (net of
the InterCon acquisition) at June 30, 1995 to 320 persons at June 30, 1996, (ii)
costs associated with providing dedicated circuits to the Company's InterFrame
and InterMan subscribers and (iii) circuit costs relating to the Company's new
POPs deployed throughout the last six months of 1995 and through June, 1996.
Circuit costs relating to the Company's new POPs generally are incurred by the
Company significantly in advance of anticipated expansion in the Company's
customer base. The Company expects that data communications and operations
costs and expenses, although it may vary as a percentage of revenue, will
continue to increase as the Company's customer base continues to grow.
Sales and Marketing. Sales and marketing expenses consist primarily of sales
and marketing personnel costs, advertising costs, fulfillment and distribution
costs and related occupancy costs. Sales and marketing expenses increased from
approximately $3.5 million (45.8% of revenue and other income) during the three
months ended June 30, 1995 to approximately $7.0 million (31.04% of
11
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revenue and other income) during the three months ended June 30, 1996. Sales and
marketing expenses increased from approximately $5.4 million (39.5% of revenue
and other income) during the six months ended June 30, 1995 to approximately
$14.9 million (37.4% of revenue and other income) during the six months ended
June 30, 1996. The $3.5 million increase in these expenses for the three months
ended June 30, 1996 and the $9.5 million increase for the six months ended June
30, 1996 resulted principally from the increase in the Company's sales and
marketing staff from 96 (net of the InterCon acquisition) at June 30, 1995 to
125 persons at June 30, 1996 and a significant increase in advertising costs.
All advertising costs are expensed in the period incurred. The Company expects
that, as a result of the implementation of its consumer wholesale strategy and
its refocused efforts on the more sophisticated individual business user, its
sales and marketing expenses with respect to the individual Internet service
market will decrease over time.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive,
accounting and finance personnel. General and administrative expenses were
approximately $2.4 million (31.2% of revenue and other income) during the three
months ended June 30, 1995 and approximately $4.2 million (31.0% of revenue and
other income) during the three months ended June 30, 1996. General and
administrative expenses were approximately $3.6 million (26.4% of revenue and
other income) during the six months ended June 30, 1995 and approximately $9.7
million (24.4% of revenue and other income) during the six months ended June 30,
1996. The increase in these costs for the three and six months ended June 30,
1996 resulted primarily from an increase in the Company's general and
administrative staff from 63 (net of the InterCon acquisition) at June 30, 1995
to 136 persons at June 30, 1996. The Company may from time to time increase its
general and administrative function in response to current business
developments.
Depreciation and Amortization. Depreciation and amortization expense consists
principally of expense associated with the costs of hardware and buildout that
support expansion and upgrade of the Company's POPs as well as the costs of
other fixed assets, software costs and other intangible assets. Depreciation and
amortization costs were approximately $2.2 million (28.1% of revenue and other
income) during the three months ended June 30, 1995 and approximately $7.0
million (31.1% of revenue and other income) during the three months ended June
30, 1996. Depreciation and amortization costs were approximately $3.8 million
(28.2% of revenue and other income) during the six months ended June 30, 1995
and approximately $13.2 million (33.2% of revenue and other income) during the
six months ended June 30, 1996. A significant portion of this increase
(approximately $1.5 million and $3.2 million for the three and six months ended
June 30, 1996, respectively) relates to the amortization of certain intangible
assets recorded in connection with certain acquisitions completed in 1995.
Additionally, POP expansion and existing POP equipment upgrades as well as
facility expansion required as a result of additional hiring in sales, marketing
and administration contributed to this increase. The Company anticipates that
its depreciation and amortization expense, although it may vary as a percentage
of revenue, will increase as the Company continues to incur capital expenditures
associated with network infrastructure enhancements.
Interest Expense. Interest expense increased from approximately $0.4 million
for the three months ended June 30, 1995 to approximately $1.4 million for the
three months ended June 30, 1996. Interest expense increased from approximately
$0.6 million during the six months ended June 30, 1995 to approximately $2.2
million during the six months ended June 30, 1996. The increase in interest
expense for the three and six months ended June 30, 1996 was principally due to
increased borrowings and capital lease obligations incurred by the Company to
finance network expansion, related sales and marketing, customer support,
network operations and field service staff expansion and to fund working capital
requirements. Although the Company expects that it will incur increased
borrowings and capital lease obligations in the near term in connection with its
network enhancements, the amount of the Company's interest expense will
fluctuate from time to time as a result of the Company entering into new
financing arrangements at varying rates.
Interest Income. Interest income increased from approximately $0.5 million for
the three months ended June 30, 1995 to approximately $0.9 million for the three
months ended June 30, 1996. Interest income increased from approximately $0.6
million during the six months ended June 30, 1995 to approximately $2.2 million
during the six months ended June 30, 1996. The increase in
12
<PAGE>
interest income for the three and six months ended June 30, 1996 was principally
due to the investment of proceeds from the Company's public offering in December
1995. These proceeds are currently invested in short-term, investment grade,
interest bearing securities.
Other income. Other income of approximately $1.8 million and $2.8 million for
the three and six months ended June 30, 1996, respectively, relates to the
recognition of realized gains on equity securities which were sold by the
Company.
Net Loss. Net loss was approximately $7.1 million and $10.9 million for the
three months ended June 30, 1995 and 1996, respectively. Net loss was
approximately $10.3 million and $25.8 million for the six months ended June 30,
1995 and 1996, respectively. These losses primarily reflect the ongoing costs
and expenses of PSINet's significant investment in expanding the PSINet network
and the administrative and operational infrastructure during 1995 and early
1996.
Liquidity and Capital Resources
The Company historically has satisfied its cash requirements through cash from
operations, through borrowings and capital lease financings from financial
institutions and other third parties and through the issuance of equity
securities.
Cash flow used in operating activities was approximately $7.1 million and $18.4
million for the six months ended June 30, 1995 and 1996, respectively. Cash flow
used in operating activities can vary significantly from period to period
depending upon the timing of operating cash receipts and payments, especially
accounts receivable, prepaid expenses and other assets, and accounts payable and
accrued liabilities.
Cash flow used in investing activities for the six months ended June 30, 1995
and 1996 was approximately $6.8 million and $16.9 million, respectively. The
expansion of the Company's network resulted in capital expenditures of
approximately $16.6 million and $29.4 million for the six months ended June 30,
1995 and 1996, respectively (which included capital expenditures financed under
equipment financing agreements aggregating approximately $9.7 million and $27.2
million for the six months ended June 30, 1995 and 1996, respectively).
Additionally, during the six months ended June 30, 1996, the Company invested
approximately $3.1 million in Hansol and approximately $14.1 million in debt
securities with original maturities of greater than 90 days.
Cash flow provided by financing activities for the six months ended June 30,
1995 was approximately $60.8 million while the cash flow used in financing
activities for the six months ended June 30, 1996 was approximately $10.9
million. The Company raised approximately $60.1 million of equity, net of
expenses in the six months ended June 30, 1995. During the six months ended
June 30, 1996, the Company made repayments of $2.0 million, $1.8 million and
$13.9 million on lines of credit, notes payable and capital lease obligations,
respectively.
As of June 30, 1996, the Company had approximately $56.5 million of cash and
cash equivalents, approximately $17.2 million of short-term investments and
marketable securities and approximately $7.1 million available under financing
facilities for the future financing of data communications equipment and other
fixed assets, and a $5.0 million working capital facility, subject to
availability under a borrowing base formula (at June 30, 1996 a maximum of
approximately $3.1 million was available under the facility), under which $1.0
million was outstanding as of June 30, 1996. The Company's financing
arrangements, which are secured by substantially all of the Company's assets,
require the Company to satisfy certain financial covenants and restrict the
payment of dividends.
13
<PAGE>
As of June 30, 1996, the Company had commitments to certain telecommunications
vendors totaling approximately $14.3 million. The commitments require minimum
monthly usage levels of data and voice communications over the next five years.
Additionally, the Company has various agreements to lease office space and
facilities, and as of June 30, 1996, the Company was obligated to make future
minimum lease payments of approximately $14.2 million on leases expiring in
various years through 2005. In addition, with respect to its obligation to
purchase an additional 10% interest in World Online B.V. ("World Online") the
Company may be required to pay cash (not to exceed $5.0 million) and/or
contribute shares of PSINet common stock at the end of 1996.
Based upon its present business plan, the Company believes that working capital,
funds from operations, existing credit facilities and additional borrowings
which the Company expects to be able to obtain when needed will be sufficient to
meet its presently anticipated working capital and capital expenditure
requirements of its existing operations.
14
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 18, 1996.
(c) The matters voted upon at the Annual Meeting and the results of the voting
as to each such matter are set forth below:
(i) The election of William H. Baumer, Harold Wills and Wade Woodson as
directors of the Company for terms expiring in 1998.
<TABLE>
<CAPTION>
<S> <C>
Votes for Mr. Baumer 27,650,707
Votes withheld from Mr. Baumer 1,954,548
Votes for Mr. Wills 27,698,001
Votes withheld from Mr. Wills 1,907,254
Votes for Mr. Woodson 27,704,327
Votes withheld from Mr. Woodson 1,900,928
</TABLE>
(ii) The ratification of the appointment by the Board of Directors of
Price Waterhouse LLP as independent accountants of the Company for
the year ending December 31, 1996.
<TABLE>
<CAPTION>
<S> <C>
Votes for 29,433,985
Votes against 143,274
Abstentions 27,996
</TABLE>
There were no broker non-votes in respect of the foregoing matters.
15
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 2 Asset Purchase Agreement dated as of June 28, 1996 between
the Company and MindSpring Enterprises, Inc.
Exhibit 3 Certificate of Amendment of Certificate of Incorporation
dated May 18, 1996
Exhibit 4 Forms of Rights Agreement, dated as of May 8, 1996,
between PSINet Inc. and First Chicago Trust Company of New
York, as Rights Agent, which includes as Exhibit A --
Certificate of Amendment; Exhibit B -- Form of Rights
Certificate; and Exhibit C -- Summary of Rights to Purchase
Shares of Preferred Stock.
Exhibit 10.1 Separation Agreement and General Release executed as of
May 14, 1996 between the Company and Daniel P. Cunningham
Exhibit 10.2 Employment Agreement dated April 3, 1996 between
the Company and Harold S. Wills
Exhibit 10.3 First Amendment dated as of August 13, 1996 to the Amended
and Restated Credit Agreement between the Company and Fleet
Bank of Massachusetts, N.A.
Exhibit 10.4 Convertible Note dated as of June 28, 1996 between
the Company and MindSpring Enterprises, Inc.
Exhibit 11.1 Calculation of Loss per Share and Weighted Average Shares
Used in Calculation for the Three Months
Ended June 30, 1996
Exhibit 11.2 Calculation of Loss per Share and Weighted Average Shares
Used in Calculation for the Six Months Ended June 30, 1996
Exhibit 27 Financial Data Schedule **
Exhibit 99.1 Risk Factors
** Not deemed filed for purposes of Section 11 of the Securities Act of
1933, Section 18 of the Securities Exchange Act of 1934 and Section
323 of the Trust Indenture Act of 1939 or otherwise subject to the
liabilities of such sections and not deemed part of any registration
statement to which such exhibit relates.
16
<PAGE>
(b) Reports on Form 8-K
On June 4, 1996, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission dated May 8, 1996 stating that it had
adopted a Shareholder Rights Plan pursuant to which preferred stock
purchase rights were to be distributed to shareholders as a dividend on
June 5, 1996, or as soon as reasonably practicable thereafter, at the
rate of one Right for each share of Common Stock held of record as of the
close of business on June 5, 1996.
On July 16, 1996, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission dated June 28, 1996 stating, among
other things, that it had entered into agreements with MindSpring
Enterprises, Inc., an Atlanta-based Internet access provider
("MindSpring"), pursuant to which the Company agreed to (i) transfer to
MindSpring certain of its individual subscriber accounts and related
tangible and intangible assets and rights in connection with the consumer
dial-up Internet access services operated by the Company in the United
States and (ii) service MindSpring's individual subscribers through local
dial-in POPs connected to the Company's network.
17
<PAGE>
PSINET INC.
FORM 10-Q
JUNE 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSINet Inc.
August 14, 1996 By: /s/ William L. Schrader
---------------- -------------------------------------------
Date William L. Schrader
Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)
August 14, 1996 By: /s/ Harold S. Wills
--------------- --------------------------------------------
Date Harold S. Wills
Executive Vice President, Chief Operating
Officer, Acting Chief Financial Officer and
Director
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item 6 (a) Exhibits:
Exhibit Exhibit Name Location
- ------- ------------ --------
<S> <C> <C>
2 Asset Purchase Agreement dated as of June 28, 1996 between
the Company and MindSpring Enterprises, Inc..................
3 Certificate of Amendment of Certificate of Incorporation
dated May 18, 1996...........................................
4 Forms of Rights Agreement, dated as of May 8, 1996, between
PSINet Inc. and First Chicago Trust Company of New York, as
Rights Agent, which includes as Exhibit A -- Certificate of
Amendment; Exhibit B -- Form of Rights Certificate; and
Exhibit -- Summary of Rights to Purchase Shares of Preferred
Stock........................................................ Incorporated by reference
from Exhibit 1 to PSINet's
Registration Statement on
Form 8-A dated June 3, 1996.
10.1 Separation Agreement and General Release executed as of
May 14, 1996 between the Company and Daniel P.
Cunningham...................................................
10.2 Employment Agreement dated April 3, 1996 between
the Company and Harold S. Wills..............................
10.3 First Amendment dated as of August 13, 1996 to the Amended
and Restated Credit Agreement between the Company and Fleet
Bank of Massachusetts, N.A...................................
10.4 Convertible Note dated as of June 28, 1996 between
the Company and MindSpring Enterprises, Inc..................
11.1 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the Three Months
Ended June 30, 1996..........................................
11.2 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the Six Months
Ended June 30, 1996..........................................
27 Financial Data Schedule......................................
99.1 Risk Factors.................................................
</TABLE>
19
<PAGE>
ASSET PURCHASE AGREEMENT
by and between
MINDSPRING ENTERPRISES, INC.
as Buyer
and
PSINET INC.
as Seller
June 28, 1996
At Hogan & Hartson
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
1. DEFINITIONS AND REFERENCES......................................................... 1
2. SALE AND PURCHASE OF ASSETS; PURCHASE PRICE; ASSUMPTION OF LIABILITIES............. 1
2.1. Asset Sale and Purchase of Assets...................................... 1
2.2. Purchase Price......................................................... 2
2.3. Payment of Purchase Price.............................................. 2
2.4. Assumption of Liabilities.............................................. 2
3. ADDITIONAL UNDERTAKINGS AND COVENANTS.............................................. 2
3.1. Billing and Collection Efforts......................................... 3
3.2. Discontinuance of Use of the Pipeline Name............................. 3
3.3. Transition Period and Other Transition Matters......................... 3
3.4. Securities Offering.................................................... 4
3.5. Sales Representation................................................... 5
3.6. Consents and Approvals................................................. 5
3.7. Transfer Tax........................................................... 6
3.8. Access; Investigations by Buyer........................................ 6
3.8.1. Access; Cooperation......................................... 6
3.8.2. Effect of Investigation..................................... 7
3.9. Operation of the Business.............................................. 7
3.9.1. Conduct Business in Ordinary Course......................... 7
3.9.2. Notice of Material Adverse Change........................... 8
3.10. News Releases; Securities Filings..................................... 8
3.11. Employees; WARN Act................................................... 9
3.12. Values of Assets...................................................... 9
3.13. Bulk Sales Laws....................................................... 9
3.14. Confidentiality....................................................... 9
3.15. Second Closing Subscribers............................................ 10
4. REPRESENTATIONS AND WARRANTIES BY SELLER........................................... 10
4.1. Organization and Standing.............................................. 10
4.2. Subsidiaries........................................................... 10
4.3. Certificate or Articles of Incorporation and Bylaws.................... 11
4.4. Employees.............................................................. 11
4.5. Financial Statements................................................... 11
4.6. No Liabilities......................................................... 12
4.7. Taxes.................................................................. 12
4.8. Conduct of Business; Absence of Material Adverse Change................ 12
4.9. Assets................................................................. 13
4.9.1. Title to the Assets......................................... 13
4.9.2. Condition of Tangible Assets................................ 13
4.9.3. GAAP Valuation of Assets.................................... 13
</TABLE>
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<TABLE>
<S> <C>
4.10. Real Property......................................................... 13
4.10.1. Leases..................................................... 13
4.10.2. Violation of Laws.......................................... 14
4.10.3. Condemnation............................................... 14
4.10.4. Location of Assets......................................... 14
4.11. Intellectual Property................................................. 14
4.12. Seller Customers and Contracts........................................ 15
4.13. Names of Certain Subscribers.......................................... 16
4.14. Books and Records..................................................... 16
4.15. Litigation; Disputes.................................................. 16
4.15.1. No Litigation; Compliance with Orders...................... 16
4.15.2. No Disputes................................................ 16
4.16. Labor Relations....................................................... 17
4.17. Pension and Benefit Plans............................................. 17
4.17.1. Schedule of Plans.......................................... 17
4.17.2. Copies of Documents........................................ 17
4.17.3. Multiemployer Plans........................................ 18
4.17.4. Delinquent Contributions................................... 18
4.17.5. Post-retirement Plans...................................... 18
4.18. Environmental......................................................... 18
4.18.1. Compliance with Law........................................ 18
4.18.2. Litigation................................................. 18
4.18.3. Permits.................................................... 19
4.18.4. Information................................................ 19
4.18.5. PCBs; Asbestos............................................. 19
4.19. Authorization......................................................... 19
4.20. Absence of Violation; Compliance with Laws............................ 20
4.21. Binding Obligation.................................................... 20
4.22. Disclosure............................................................ 20
4.23. Securities Matters.................................................... 20
5. REPRESENTATIONS AND WARRANTIES OF BUYER............................................ 21
5.1. Organization and Standing.............................................. 21
5.2. Authorization.......................................................... 21
5.3. Binding Obligation..................................................... 21
5.4. Litigation; Disputes................................................... 21
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE................................ 22
6.1. Representations and Covenants.......................................... 22
6.2. Delivery of Documents.................................................. 22
6.3. Legal Proceedings...................................................... 22
6.4. Material Adverse Change................................................ 23
6.5. Hart-Scott-Rodino...................................................... 23
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE............................... 23
7.1. Representations and Covenants.......................................... 23
7.2. Delivery of Buyer Documents............................................ 23
7.3. Legal Proceedings...................................................... 24
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
7.4. Hart-Scott-Rodino...................................................... 24
8. THE CLOSING........................................................................ 24
8.1. Closing................................................................ 24
8.2. Deliveries by Seller at the First Closing.............................. 24
8.2.1. Assignment Documents and Agreements......................... 24
8.2.2. Confidentiality and Non-competition Agreement............... 25
8.2.3. Certified Resolutions....................................... 25
8.2.4. Seller Officers' Certificates............................... 25
8.2.5. Other Documents............................................. 25
8.3. Deliveries by Seller at the Second Closing............................. 26
8.3.1. Assignment Documents and Agreements......................... 26
8.3.2. Confidentiality and Non-competition Agreement............... 26
8.3.3. Lease....................................................... 26
8.3.4. Certified Resolutions....................................... 26
8.3.5. Seller Officers' Certificates............................... 27
8.3.6. Other Documents............................................. 27
8.4. Deliveries by Buyer at the First Closing............................... 27
8.4.1. Purchase Price Payment...................................... 27
8.4.2. Agreements.................................................. 27
8.4.3. Certified Resolutions....................................... 28
8.4.4. Officers' Certificates...................................... 28
8.4.5. Other Documents............................................. 28
8.5. Deliveries by Buyer at the Second Closing.............................. 28
8.5.1. Purchase Price Payment...................................... 28
8.5.2. Agreements.................................................. 28
8.5.3. Certified Resolutions....................................... 29
8.5.4. Officers' Certificates...................................... 29
8.5.5. Other Documents............................................. 29
9. RISK OF LOSS....................................................................... 29
10. SURVIVAL; INDEMNIFICATION......................................................... 29
10.1. Survival of Representations and Warranties............................ 29
10.2. Indemnification by Seller............................................. 30
10.3. Indemnification by Buyer.............................................. 31
10.4. Conditions of Indemnification......................................... 31
10.4.1. Notice..................................................... 32
10.4.2. Counsel.................................................... 32
10.4.3. Right to Defend............................................ 32
10.4.4. Non-monetary Harm.......................................... 32
11. TERMINATION; CONVEYANCE OF ADDITIONAL SUBSCRIBERS................................. 33
11.1. Termination........................................................... 33
11.2. Effect of Termination................................................. 33
11.3. Conveyance of Additional Subscribers.................................. 34
12. GENERAL PROVISIONS................................................................ 34
12.1. Additional Actions, Documents and Information......................... 34
12.2. Brokers............................................................... 34
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
12.3. Expenses.............................................................. 35
12.4. Notices............................................................... 35
12.5. Waiver................................................................ 36
12.6. Benefit and Assignment................................................ 36
12.7. Entire Agreement; Amendment........................................... 37
12.8. Severability.......................................................... 37
12.9. Headings.............................................................. 37
12.10. Remedies Cumulative.................................................. 37
12.11. Governing Law........................................................ 37
12.12. Signature in Counterparts............................................ 38
12.13. No Partnership....................................................... 38
</TABLE>
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<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is entered into as of
June 28, 1996 by and between PSINET INC. ("Seller") and MINDSPRING ENTERPRISES,
INC. ("Buyer").
WHEREAS, Seller owns, holds, and uses certain tangible and intangible
assets and rights in connection with the consumer dial-up Internet access
business currently operated by Seller in the United States, except for Bulk
Customers (the "Business"); and
WHEREAS, Buyer desires to purchase the Assets (as defined in Annex I)
-------
from Seller and contract with Seller to service Continuing Subscribers through
PSI POPS, and Seller desires to sell the Assets to Buyer and contract with
Buyer to service Continuing Subscribers through PSI POPS, all in accordance with
and subject to the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:
1. DEFINITIONS AND REFERENCES
Unless the context otherwise specifies or requires, capitalized terms
used herein shall have the respective meanings specified in the text of this
Agreement or Annex 1 attached hereto and incorporated herein for all purposes of
-------
this Agreement, as the case may be (such definitions to be equally applicable to
both the singular and plural forms of the terms defined). Unless otherwise
specified, all references herein to "Articles" or "Sections" are to Articles or
Sections of this Agreement.
2. SALE AND PURCHASE OF ASSETS; PURCHASE PRICE; ASSUMPTION OF LIABILITIES
2.1. Asset Sale and Purchase of Assets.
In reliance upon the representations, warranties, covenants and
agreements contained herein, and subject to the terms and conditions hereof,
Seller agrees to sell, assign, transfer, convey and deliver to Buyer, and Buyer
agrees to purchase from Seller, the First Closing Assets at the First Closing
and the Second Closing Assets at the Second Closing.
<PAGE>
2.2. Purchase Price.
For and in consideration of the conveyances and assignments described in
Section 2.1 and in addition to the assumption of liabilities as set forth in
Section 2.4, Buyer agrees to pay to Seller, and Seller agrees to accept from
Buyer, an aggregate purchase price (the "Purchase Price") equal to the sum of:
(1) the product of (a) Two Hundred Dollars ($200.00) and (b) the number of
Continuing Subscribers (but in no event shall the number of Continuing
Subscribers be deemed to exceed 100,000) and (2) the net book value of the
Harrisburg Facility as determined in accordance with GAAP (but not in excess of
Two Million Three Hundred Thousand Dollars ($2,300,000)).
The Purchase Price shall be payable as described in Section 2.3. The
Purchase Price shall be allocated among the Assets in accordance with Section
3.12.
2.3. Payment of Purchase Price.
The Purchase Price shall be payable to Seller as follows:
(a) Buyer shall deliver to Seller at the First Closing the amount of
One Million Dollars ($1,000,000.00) in immediately available funds (the "Cash
Payment") and a fully executed copy of the First Note;
(b) Buyer shall deliver to Seller at the Second Closing a
fully-executed copy of the Second Note;
(c) Buyer shall deliver to Seller within ten (10) days following the
First Measurement Date a fully executed copy of the Third Note;
(d) Buyer shall deliver to Seller within ten (10) days after the Second
Measurement Date a fully executed copy of the Fourth Note.
2.4. Assumption of Liabilities.
At the First Closing, Buyer shall assume the First Closing Assumed
Liabilities. At the Second Closing, Buyer shall assume the Second Closing
Assumed Liabilities. Except for those liabilities and obligations expressly
assumed by Buyer pursuant to this Section 2.4, Buyer shall have no
responsibility for any liabilities or obligations of any kind or description of
Seller, whether connected with the Business, the Assets or otherwise.
3. ADDITIONAL UNDERTAKINGS AND COVENANTS
Buyer and Seller hereby represent, covenant and agree with each other as
follows:
- 2 -
<PAGE>
3.1. Billing and Collection Efforts.
Prior to the Second Closing Seller shall bill the First Closing
Subscribers and promptly forward fifty percent (50%) of collections relating
thereto to Buyer. Buyer shall bill the Subscribers within ten days following the
Second Closing and again within ten days following the end of the following
month, and shall use its commercially reasonable efforts to collect any amounts
owed to Buyer by the Continuing Subscribers during the 60 days following such
initial billing.
3.2. Discontinuance of Use of the Pipeline Name.
Seller shall discontinue the use of the Pipeline Name in the United
States following the Second Closing.
3.3. Transition Period and Other Transition Matters.
(a) During the period from the Second Closing to the First
Measurement Date (the "Transition Period"), Seller shall use its commercially
reasonable efforts to take all calls and inquiries regarding the Interramp and
Pipeline services, sign up callers as Buyer's customers and to cooperate with
Buyer to transfer all Affinity Programs, Bounty Programs and Retail Programs to
Buyer to the extent requested by Buyer.
(b) Between the First Closing Date and the Second Measurement Date,
Buyer shall produce and ship to the Subscribers Buyer's software to allow the
Subscribers to use Buyer's network. Buyer shall pay the costs of such
production and shipment initially, but on the Second Measurement Date Seller
shall pay to Buyer fifty percent (50%) of Buyer's costs actually incurred in
connection with such production and shipment. In the event that Seller does not
make the payment required by the immediately preceding sentence, Buyer may
offset the amount due from Seller under the immediately preceding sentence
against the payments otherwise due Seller under the Notes.
(c) Seller shall pay to Netscape the license fee payable under the
Netscape License in connection with providing all Subscribers with the Netscape
Navigator 2.X software.
(d) Seller shall contract with and pay Douglas Paolella and Philip Leu
to assist Buyer in the software writing, transition and conversion process
arising out of the transactions contemplated by this Agreement full time until
the First Measurement Date.
(e) Seller will contract with and pay Arcus, Inc. to assist Buyer in
writing software to upgrade Subscribers who were Seller's Pipeline customers and
- 3 -
<PAGE>
use Macintosh computers to make their software PPP-compatible with Buyer's
current application package included.
(f) Seller may deny access to the Pipeline service on and following
the First Measurement Date.
(g) Buyer shall continue to abide by those contractual terms
requiring that those Subscribers who are currently receiving service under
Seller's $5 per month and $9 per month price plans receive the same service on
the same terms and conditions until the end of 1996.
(h) Seller will forward e-mail to Subscribers who are Seller's
Interramp subscribers received at their e-mail addresses with Seller to their e-
mail addresses with Buyer for 365 days following the Second Closing Date.
(i) Subscribers who were Seller's Interramp customers in cities which
have both a PSI POP and a Buyer point-of-presence ("Buyer POP") shall be
entitled to use only one of the PSI POP and the Buyer POP after the First
Measurement Date and Buyer will choose which POP such Subscribers are entitled
to use, in Buyer's sole discretion. Buyer shall not be liable for payment of
any fees under the Network Services Agreement associated with Seller's
customers who may continue to use a PSI POP in a city in which Buyer has
chosen a Buyer POP.
3.4. Securities Offering.
Buyer shall use Best Efforts to complete a stock offering or other
financing in order to refinance the Notes. In the event that the Buyer is able
to raise funds through the sale of securities, Buyer shall apply the proceeds of
such an offering to pay down the Notes according to the following formula:
(a) if the net proceeds of any offering or other financing exceed
thirty million dollars ($30,000,000.00), Buyer shall pay the Notes in full
promptly following the closing of such offering or other financing;
(b) if the net proceeds of any offering or other financing are between
twenty and thirty million dollars ($20,000,000.00-30,000,000.00), Buyer shall
pay down seventy-five percent (75%) of all sums outstanding under the Notes
promptly following the closing of such offering or other financing;
(c) if the net proceeds of any offering or other financing are between
ten and twenty million dollars ($10,000,000.00-20,000,000.00), Buyer shall pay
down fifty percent (50%) of all sums outstanding under the Notes promptly
following the closing of such offering or other financing; and
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(d) if the net proceeds of any offering or other financing are between
one and ten million dollars ($1,000,000.00 - $10,000,000.00), Buyer shall pay
down thirty-three percent (33%) of all sums outstanding under the Notes.
3.5. Sales Representation.
(a) During the Sales Term, Seller shall act as sales representative
for Buyer handling incoming sales opportunities that become available due to
Seller's ongoing marketing efforts. Seller shall sign up new customers for
Buyer in accordance with procedures established by Buyer, in its reasonable
discretion, and shall not hold itself out as being able to bind Buyer except as
specifically set forth in this Section 3.5.
(b) Seller shall represent Buyer and its services in a fashion that is
consistent with the Core Values and Beliefs detailed in Exhibit 3.5. If Buyer
determines that Seller has not represented Buyer in a manner consistent with the
Core Values and Beliefs detailed in Exhibit 3.5. Buyer may cancel the
provisions of this Section 3.5 upon thirty (30) days' prior written notice to
Seller.
(c) Except as specifically set forth in this Section 3.5, Seller is
not authorized to act as an agent of Buyer in any way related to Buyer's
business nor to sell or resell Buyer's products or services.
(d) All trademarks, service marks and tradenames identifying Buyer or
Buyer's products or services (the "Marks") are the exclusive property of Buyer.
Seller shall take no action which jeopardizes the Marks. Seller shall not use a
Mark or the name of Buyer in any advertising, promotional material or public
announcement without the prior written approval of Buyer.
(e) Within twenty (20) days after the end of each calendar month,
Buyer shall pay to Seller Fifty Dollars ($50) for each new customer signed
pursuant to this Section 3.5 who remains current on its payments to Buyer for
sixty (60) days following the date on which such customer representative first
logs in. The provisions of this Section 3.5 may be canceled by Buyer upon
ninety (90) days' prior written notice to Seller.
3.6. Consents and Approvals.
Seller shall obtain and deliver to Buyer, prior to the First Closing,
all waivers, consents and approvals that are required in order to transfer the
Assets and the Assumed Liabilities to Buyer, each of which shall be in form and
substance reasonably acceptable to Buyer; provided, however, that all waivers,
-----------------
consents and approvals that are required in order to transfer the Lease for the
Harrisburg Facility, and all equipment leases which form part of the Assets, to
Buyer shall be delivered by Seller to Buyer prior to the Second Closing. Buyer
shall use its
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commercially reasonable efforts to assist Seller in Seller's
efforts to obtain such waivers, consents and approvals. In addition, Buyer and
Seller further agree to use their commercially reasonable efforts to obtain all
other waivers, consents and approvals of all governmental authorities that are
required in order for them to consummate the transactions contemplated by this
Agreement or to perform the other obligations of such parties hereunder
including without limitation any of the same required by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR"). Buyer and Seller shall:
(i) cooperate in the filing of all forms, notifications, reports and
information, if any, required or reasonably deemed advisable pursuant to
applicable statutes, rules, regulations or orders of any governmental or supra-
governmental authority in connection with the transactions contemplated by this
Agreement; and (ii) use commercially reasonable efforts to cause any applicable
waiting periods thereunder to expire and any objections to the transactions
contemplated hereby to be withdrawn before the First Closing or the Second
Closing, as applicable.
3.7. Transfer Tax.
Seller shall pay all stamp, sales, income, transfer or other taxes,
Federal, state or local, imposed on it, and Buyer shall pay all such taxes
imposed on it, in respect of any and all transfers pursuant to the terms of
this Agreement.
All property taxes, ad valorem taxes and special taxes or assessments
attributable to the Assets (including, without limitation, real estate taxes and
special taxes and assessments required to be paid under the Leases, whether
required to be paid directly to the taxing authorities or the lessors under the
Leases) for the fiscal year during which the Second Closing Date occurs shall be
prorated and adjusted as of the Second Closing Date. If the real property
taxes, personal property or ad valorem taxes for the fiscal year during which
the Second Closing Date occurs are not finally determined as of the Second
Closing Date, then such taxes for the immediately preceding fiscal year shall be
used for purposes of prorating taxes on the Second Closing Date, with a further
adjustment to be made after such taxes or assessments are finalized.
3.8. Access; Investigations by Buyer.
3.8.1. Access; Cooperation.
Seller shall, through the Second Closing Date, provide to
representatives of Buyer reasonable access to the offices, books, contracts,
agreements, records, officers, employees, consultants and contractors of or
related to Seller with respect to the Business and will furnish representatives
of Buyer such financial and operating data and other information with respect
to the Business and Assets as Buyer or such representatives may reasonably
request, including, without limitation, agreements with clients, customers,
vendors, lessors, licensors
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and suppliers of Seller (collectively, the "Seller Information"). Seller shall
cause its employees and agents to, cooperate with Buyer and Buyer's auditors in
the production of Buyer's audited financial statements and shall make (a)
Seller's records with respect to the Business, and (b) Seller's employees and
agents, available to Buyer and Buyer's auditors during normal business hours for
such purposes.
3.8.2. Effect of Investigation.
Buyer's investigation of the financial and operating data, the Business,
the Assets, and other information with respect to Seller shall in no way affect
the obligations of Seller with respect to the agreements, representations,
warranties, covenants and indemnification provisions set forth in this
Agreement.
3.9. Operation of the Business.
3.9.1. Conduct Business in Ordinary Course.
Seller shall, through the Second Closing Date: (a) use its commercially
reasonable efforts to preserve the Business and maintain its existing franchises
and licenses and to preserve Seller's present relationships with customers,
suppliers, consultants, employees and any other persons having business
relations therewith; and (b) maintain the Assets in the same working order and
condition as the Assets are in on the date of this Agreement, reasonable wear
and tear excepted. Except as contemplated by this Agreement or as reasonably
required to carry out its obligations hereunder, Seller shall, through the
Second Closing Date, conduct the Business only in the Ordinary Course of
Business and, in addition, shall not (except to the extent that Buyer has
consented in writing thereto or that such action or inaction would not
reasonably be expected to affect or be binding upon any part of the Business or
the Assets): (i) grant any increase in the compensation payable or to become
payable by Seller to officers or employees of the Business other than in the
Ordinary Course of Business, or enter into any bonus, insurance, pension, profit
sharing, incentive, deferred compensation, severance pay, retirement,
hospitalization, employee benefit or other similar plan, payment or arrangement
for or with any of such officers or employees other than in the Ordinary Course
of Business; (ii) enter into any agreement in connection with the Business that
may not be terminated on less than 31 days' notice or that may reasonably be
expected to have a material adverse effect on the Business or the Assets; (iii)
make any capital purchases or commitments relating to the Business that exceed,
individually or in the aggregate, $50,000; (iv) place, or allow to be placed, an
Encumbrance on any of the Assets; (v) sell, assign, lease or otherwise transfer
or dispose of any interest in any Asset (other than in the Ordinary Course of
Business); (vi) commit any act or omit to do any act, or engage in any activity
or transaction or incur any obligation (by conduct or otherwise), that
(individually or in the aggregate) reasonably could be expected to have a
material adverse effect on the Business or
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Assets; (vii) except for actions taken or not taken in compliance with this
Section 3.9, do or omit to do any act (or permit such action or omission) which
reasonably could be expected to cause a material breach of any Seller Contract;
or (viii) take any action or fail to take any action that would reasonably be
expected to cause any of the representations, warranties or covenants contained
herein to be untrue or incorrect in any material respect or incapable of being
performed or satisfied on the both the First Closing Date and the Second Closing
Date. Notwithstanding the foregoing, however, except as set forth in Sections
3.3 or 3.5 Seller shall not be obligated to solicit new subscribers or open
accounts for new subscribers. Prior to the Second Closing Date, Seller shall
maintain in full force and effect all of its existing casualty, liability, and
other insurance relating to the Business through the day following the Second
Closing Date in amounts not less than those in effect on the date hereof, except
for changes in such insurance that are made in the Ordinary Course of Business.
3.9.2. Notice of Material Adverse Change.
Promptly after Seller has knowledge thereof, Seller shall, through the
Second Closing Date, notify Buyer of any material adverse change in the
operations, prospects, condition (financial or otherwise), Assets or liabilities
of the Business, and shall provide Buyer with all information (including,
without limitation, copies of all documents relating thereto) reasonably
requested by Buyer concerning any Claims instituted, threatened or asserted
against or affecting the Business or Assets at law or in equity before or by any
Governmental Authority.
Promptly after Seller has knowledge thereof, Seller shall, through the
Second Closing Date, also notify Buyer in writing of the occurrence of any
event, or the failure of any event to occur, prior to the Second Closing that
results in a breach of any of the covenants, representations or warranties made
by or on behalf of Seller in this Agreement or any other Seller Document
furnished in connection with or pursuant to this Agreement, but such
notification shall not excuse breaches of representations, warranties, covenants
or agreements disclosed in such notification.
Promptly after Buyer has knowledge thereof, Buyer shall, through the
Second Closing Date, notify Seller in writing of the occurrence of any event, or
the failure of any event to occur, prior to the Second Closing that results in a
breach of any of the covenants, representations or warranties made by or on
behalf of Buyer in this Agreement or any other Buyer Document furnished in
connection with or pursuant to this Agreement, but such notification shall not
excuse breaches of representations, warranties, covenants or agreements
disclosed in such notification.
3.10. News Releases; Securities Filings.
Except as may be otherwise required for compliance with applicable Laws
or Nasdaq or stock exchange requirements, neither Buyer nor Seller shall issue
or approve any news release or other public announcement concerning the
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transactions contemplated by this Agreement without the prior approval of the
other party hereto (which approval shall not be unreasonably delayed or
withheld). Buyer and Seller shall cooperate to request confidential treatment
with respect to the economic terms of the transactions contemplated by this
Agreement in any filing with a securities regulatory Governmental Authority.
3.11. Employees; WARN Act.
Buyer shall be permitted, but not obligated to make offers of employment
effective following the Second Closing Date to the employees listed on Schedule
3.11, but in no event prior to the expiration of any WARN Act notice period.
Buyer shall not be liable to any person for any severance pay obligation arising
as a result of the transactions contemplated herein. Seller shall provide any
required notifications to the employees listed on Schedule 3.11 as may be
required by the WARN Act and shall bear any applicable WARN Act Losses with
respect to the Employees. Buyer shall give all notices required by the WARN Act
promptly following the date of this Agreement.
3.12. Values of Assets.
Buyer and Seller shall determine reasonably and in good faith the
allocation of the Purchase Price among the Assets and the Confidentiality and
Non-competition Agreement by mutual written agreement and will finalize the
allocation within fifteen (15) days after the First Closing. Seller and Buyer
agree, pursuant to Section 1060 of the Code, that the Purchase Price shall be
allocated in accordance with such agreed-upon allocation, and that all income
tax returns and reports shall be filed consistent with such allocation.
3.13. Bulk Sales Laws.
Buyer and Seller agree to waive compliance with all bulk transfer or
similar laws that may be applicable to the transactions contemplated by this
Agreement.
3.14. Confidentiality.
Each party to this Agreement hereby acknowledges that it has obtained
and may continue to obtain knowledge of and access to confidential and valuable
business information relating to the other party to this Agreement not generally
known by or available to the general public. Each party to this Agreement agrees
at all times to use reasonable efforts, at least as stringent as those employed
by it with respect to its own confidential information, (a) to keep confidential
all such information that is identified as being of a confidential nature, (b)
not to use such confidential information on its own behalf, except in connection
with the transactions contemplated hereby, or on behalf of any other person,
firm or entity
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and (c) not to disclose such confidential information to any third party (other
than to such party's counsel, accountants and other consultants in connection
with the transactions contemplated hereby) without the other party's advance
written authorization; provided, however, that each party to this Agreement
shall have no such obligations with respect to confidential information that (A)
was lawfully obtained by it and not subject to restrictions of confidentiality;
(B) is a matter of public knowledge; or (C) has been or is hereafter publicly
disclosed other than by or through such party. In the event this Agreement is
terminated, each party to this Agreement shall return to the other party to this
Agreement all documents, work papers and other materials furnished to the first
party relating to the transactions contemplated hereunder, whether obtained
before or after the execution of the Agreement. In the event of a breach or
threatened breach by any party to this Agreement of the provisions of this
Section, and in addition to other remedies that may be available, the other
party shall be entitled to an injunction restraining the first party from
disclosing in whole or in part, such information.
3.15. Second Closing Subscribers.
At least ten (10) days prior to the Second Closing Date, Seller shall
deliver a list of the Second Closing Subscribers to Buyer, which list shall be
acceptable to Buyer in its reasonable discretion and shall include the user
login name, current credit card number and the Subscriber billing name.
4. REPRESENTATIONS AND WARRANTIES BY SELLER
Seller hereby represents and warrants to Buyer as follows:
4.1. Organization and Standing.
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. Seller has the full and
unrestricted corporate power and authority to own, operate, lease and otherwise
to hold the Assets, to carry on the Business as currently conducted, to execute
and deliver this Agreement and each Seller Document and to carry out the
transactions contemplated hereby and thereby. Seller is duly qualified to
conduct business as a foreign corporation and is in good standing in the states
set forth on Schedule 4.1.
4.2. Subsidiaries.
Seller has no subsidiaries, and no equity investment or other interest
in any corporation, association, partnership, joint venture or other entity,
that own or hold any interest in the Assets or the Business other than PSInet
Pipeline New York, Inc. which owns certain of the Pipeline Software, which shall
be conveyed from PSInet Pipeline New York, Inc. to Seller prior to the Second
Closing.
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4.3. Certificate or Articles of Incorporation and Bylaws.
Seller has furnished to Buyer a true and complete copy of the
certificate or articles of incorporation of Seller, as currently in effect, and
a true and complete copy of the bylaws of Seller, as currently in effect.
4.4. Employees.
Seller has no written employment contract with any person with respect
to the Business except any employment contracts as are set forth on Schedule
4.4. Schedule 4.4 lists all current employees of Seller with respect to the
Business (collectively, the "Employees"), showing each such person's name,
position, initial employment date, and weekly base rate remuneration (without
exclusions for deduction pursuant to Code Sections 125 or 401(k)), plus actual
bonus or incentive compensation paid year to date and the total taxable
compensation for the current fiscal year. Except as set forth on Schedule 4.4 or
otherwise entered into in the Ordinary Course of Business, other than general
understandings which may exist for employment at will, no oral understandings
currently exist between any executive officer or other representative of Seller
authorized to enter into such understandings on behalf of Seller and any
Employee of the Business regarding changes in compensation, promotion or any
other change in status. Except as specified on Schedule 4.4, as of the date of
this Agreement other than in the Ordinary Course of Business no Employee has
advised any executive officer, manager or supervisor of Seller, orally or in
writing, that he or she intends to terminate such employment or to refuse
employment by Buyer after the Second Closing, if Buyer offers such employment.
4.5. Financial Statements.
Seller has furnished to Buyer, and there are attached hereto as Schedule
4.5, true and complete copies of the following: (i) an unaudited balance sheet
and statement of income of the Business as of the end of the fiscal year ending
in 1995, (ii) an unaudited balance sheet of the Business as of March 31, 1996,
and an unaudited statement of income for the three-month period then ended and
accompanying notes for both, (iii) listing of the book value of the Assets, (iv)
receivables aging, (v) summary of bad debt write-offs, (vi) details of major
expense categories, (vii) schedule of gross margin analysis for the most recent
twelve-month period, (viii) current customer counts for each PSI POP, (ix)
customer counts by pricing plan and (x) monthly churn rate. The financial
statements present fairly, in all material respects, the financial position of
the Business as of the dates indicated and the results of operations for the
periods indicated and have been prepared in accordance with the accounting
principles used by Seller in preparing financial statements for the Business,
which principles are summarized on Schedule 4.5 hereto.
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4.6. No Liabilities.
Except as described in Schedule 4.6, Seller has no material liabilities
(whether contingent or absolute, matured or unmatured, known or unknown,
including, without limitation, unasserted claims relating to the Assets of
Seller), except for liabilities and obligations which were incurred in the
Ordinary Course of Business since March 31, 1996.
4.7. Taxes.
Seller, either in its own right or as a transferee, has no liability for
Taxes that (a) are payable for or with respect to any periods prior to and
including the date of this Agreement and the Second Closing Date in excess of
the amounts actually paid prior to such dates or reserved for in financial
statements of Seller, and (b) if not paid, could become the legal liability of
Buyer or could adversely affect the Buyer's ownership or use of the Assets or
the Business following the Second Closing.
4.8. Conduct of Business; Absence of Material Adverse Change.
Other than as set forth in Schedule 4.8, since March 31, 1996, there has
been no material adverse change in the Business (financial or otherwise) or the
Assets. Except as set forth in Schedule 4.8, since March 31, 1996, Seller has
conducted the Business diligently and substantially in the manner heretofore
conducted and only in the Ordinary Course of Business. Except as set forth in
Schedule 4.8 or except to the extent that such action or inaction could not
reasonably be expected to materially and adversely affect the Business or the
Assets, since March 31, 1996 Seller has not: (a) incurred a material loss of, or
significant injury to, any material part of the Business or the Assets as the
result of any fire, explosion, flood, windstorm, earthquake, labor trouble,
riot, accident, act of God or public enemy or armed forces, or other casualty;
(b) mortgaged, pledged or subjected to any Encumbrance any of the Assets; (c)
sold, exchanged, transferred or otherwise disposed of any of the Assets, or
canceled any debts or claims, except in each case in the Ordinary Course of
Business; (d) written down the value of any Assets except write-downs in the
Ordinary Course of Business, none of which, individually or in the aggregate,
are material to the Business; (e) made or permitted any renewal, extension,
amendment or termination of any material Seller Contract or Lease other than in
the Ordinary Course of Business; (f) through negotiation or otherwise made any
commitment or incurred any liability to any labor organization with respect to
employees of the Business; (g) made any accrual or arrangement for or payment of
bonuses or special compensation of any kind to any director, officer or employee
of the Business, other than in the Ordinary Course of Business; (h) made capital
expenditures, or entered into commitments therefor, aggregating more than
$50,000; (i) made any material change in any method of accounting or accounting
practice; or (j) entered into any agreement to do any of the foregoing.
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4.9. Assets.
4.9.1. Title to the Assets.
Seller is the sole and exclusive legal and equitable owner of, and has
good title to, the Assets free and clear of any Encumbrances, except as set
forth in Schedule 4.9.1. The Assets include all furniture, fixtures and
equipment located in the Harrisburg Facility. On the First Closing Date and the
Second Closing Date, Buyer shall acquire good title to or a valid leasehold
interest in, as applicable, and all right, title and interest in, the Assets, to
be transferred to Buyer at the First Closing or the Second Closing, as the case
may be, free and clear of all Encumbrances
4.9.2. Condition of Tangible Assets.
The tangible Assets are in good operating condition and repair,
reasonable wear and tear excepted, and are suitable, adequate and fit for the
uses for which they are currently being used.
4.9.3. GAAP Valuation of Assets
Seller has furnished to Buyer, and there is attached hereto as Schedule
4.9.3, a true and complete copy of an inventory of fixed assets being acquired
by Buyer hereunder showing, among other things, the net book value (as such term
is defined by GAAP) of such assets, which net book value has been determined in
accordance with GAAP.
4.10. Real Property.
4.10.1. Leases.
Schedule 4.10 lists all leases and subleases of real property occupied
for use by Seller in connection with the operation of the Business and under
which Seller is a lessor or lessee (collectively, "Leases"). Seller is the owner
and holder of all the leasehold interests purported to be granted by such
Leases, in each case free and clear of all Encumbrances, except as set forth on
Schedule 4.10. Each Lease is valid and binding obligation of Seller, and to
Seller's knowledge of the other parties thereto, is in full force and effect and
is legally enforceable in accordance with the terms thereof, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, applicable equitable principles or similar laws from time to time in
effect affecting the enforcement of creditors' rights generally. Except as set
forth on Schedule 4.10, no Lease has been modified or amended, nor any material
provision thereof waived, and each Lease constitutes the entire agreement
between the landlord and tenant thereunder with respect to the premises demised
thereunder. The lessors under the Leases are holding security deposits in the
amounts set forth on Schedule 4.10. Seller is not in default under
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any such Lease, nor does any condition exist that, with notice or lapse of time
or both would constitute a default thereunder by Seller. To the knowledge of
Seller, no other party to any such Lease (i) is in default thereunder in any
material respect, nor does any condition exist that with notice or lapse of time
or both would constitute a material default thereunder by any party other than
Seller or (ii) has threatened in writing to cancel or otherwise terminate any
such Lease. The premises leased under the Leases are in sufficient condition and
repair, reasonable wear and tear excepted, to operate the Business therein in
the manner in which it its currently being operated. True and complete copies of
all Leases have been furnished to Buyer.
4.10.2. Violation of Laws.
To Seller's knowledge, the premises leased pursuant to the Leases and
the fixtures and improvements located therein currently comply with all
applicable material contractual requirements and building, zoning, subdivision,
land-use, fire and other Laws pertaining to or affecting such premises.
4.10.3. Condemnation.
To Seller's knowledge, no portion of any property leased pursuant to the
Leases or any fixture or improvement thereon is the subject of any condemnation,
eminent domain or inverse condemnation proceeding currently instituted or
pending, or are, or will be, the subject of any such proceeding.
4.10.4. Location of Assets.
On the Second Closing Date, the tangible Assets will be located on the
properties identified on Schedule 4.10.
4.11. Intellectual Property.
(a) Seller has provided to the Buyer a true, correct and complete list
of all Intellectual Property which is attached as Schedule 4.11. Such list
identifies Seller as either the owner, joint owner or licensee of each piece of
the Intellectual Property and in the cases where any such entity is a licensee,
identifies the attendant licensor(s) and license agreement(s) for such
Intellectual Property. Seller either owns, owns jointly or has the right to use
as a licensee all of the Intellectual Property, free and clear of adverse
claims, liens, mortgages, charges, security interests and encumbrances,
including without limitation any exclusive rights, however described, granted to
parties other than Seller with respect to the Intellectual Property other than
set forth in Schedule 4.11. All federal trademark and service mark
registrations owned by Seller and all applications owned by Seller to register
any trademarks or service marks on any trademark register maintained by the
United States government or any state government are based on truthful
affidavits or declarations of use or a bona fide intention to use.
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(b) Except as set forth on Schedule 4.11, with respect to each piece
of Intellectual Property required to be identified herein,
(i) the piece of Intellectual Property is not subject to any
outstanding injunction, judgment, order, decree, ruling or charge;
(ii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand is pending or, to the knowledge of Seller, is
threatened which challenges the legality, validity, enforceability, use or
ownership of the piece of Intellectual Property; and
(iii) Seller has not licensed or permitted any third party to use any
such piece of Intellectual Property other than in the ordinary course of
business.
(c) Seller has not received notice, orally or in writing, that any
other person or entity claims any interest in any Intellectual Property of
Seller, and to the best knowledge of Seller no such other person or entity has,
or has made, such a claim. Seller has the right to bring action for the
infringement of all Intellectual Property.
(d) Seller has taken all reasonably necessary measures to protect and
maintain the rights of Seller in the Intellectual Property. Each piece of
Intellectual Property used by Seller is used with the authorization of every
other claimant thereto and the execution, delivery and performance of this
Agreement by Seller will not impair such use.
(e) Seller has not sent or otherwise communicated to any other person
any notice, charge, claim or assertion of, or has any knowledge of, any present,
impending or threatened infringement by such other person of any piece of
Intellectual Property of Seller, and to the knowledge of Seller, no third party
has interfered with, infringed upon, misappropriated or otherwise come into
conflict with any Intellectual Property of Seller.
4.12. Seller Customers and Contracts.
Schedule 4.12 sets forth a true and complete list of all other
contracts, agreements, leases, commitments, arrangements or understandings (both
written and oral) relating to the Assets and to the Business and operations
thereof to which Seller is a party, except for (i) any Leases and (ii) any
employment or other agreements terminable at will.
Except as set forth on Schedule 4.12, Seller has not entered into any
binding agreement with respect to any Seller Contract that could adversely
affect Seller's ability to enforce its rights under such Seller Contract. Seller
has delivered true and complete copies of all written Seller Contracts listed on
Schedule 4.12
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(and all amendments and modifications thereto) to Buyer prior to the execution
of this Agreement.
Each Seller Contract is in full force and effect, and constitutes a
valid and binding obligation of Seller, and, to Seller's knowledge, the other
party thereto, and is legally enforceable in accordance with its terms. Seller
is not in default under any Seller Contract and, to its knowledge, there does
not exist any event that (whether with or without notice, lapse of time, or the
happening or occurrence of any other event) would constitute such a default. To
Seller's knowledge, there exists no default by any other party to any Seller
Contract. Within the last year, Seller has not received any written notice from
any other party to a Seller Contract pursuant to which such other party
threatened cancellation or revocation of such Seller Contract.
4.13. Names of Certain Subscribers.
As of the date of this Agreement, the names of the First Closing
Subscribers are as set forth on Schedule 4.13.
4.14. Books and Records.
Seller has maintained adequate business records with respect to the
operation of the Business, and Seller is not aware of any material deficiencies
in such business records.
4.15. Litigation; Disputes.
4.15.1. No Litigation; Compliance with Orders.
There are no actions, suits, claims, arbitrations, proceedings or
investigations pending, or to Seller's knowledge threatened or reasonably
anticipated against, or involving the Business or the Assets, or the
transactions contemplated by this Agreement or any other Seller Document, at law
or in equity, or before or by any arbitrator or Governmental Authority, domestic
or foreign which would materially adversely affect the Business. Seller is not
operating under, subject to or in default with respect to any order, award,
writ, injunction, decree or judgment of any arbitrator or Governmental Authority
relating to the Business or the Assets.
4.15.2. No Disputes.
Except as disclosed on Schedule 4.15.2, Seller is not currently involved
in, and does not reasonably anticipate, any dispute relating to the Business or
the Assets with any current or former employee, customer, broker, vendor or
business consultant or any other person, where the amount in controversy, or
reasonably
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expected to be in controversy, individually or in the aggregate is in
excess of $5,000.00.
4.16. Labor Relations.
Seller does not know of any basis for and does not reasonably
anticipate, and is not currently involved in, any disputes, strikes, work
stoppages, grievance proceedings, union organization efforts or other similar
controversies between Seller and any union or other collective bargaining unit
representing the Employees. There are no collective bargaining agreements,
employment agreements between Seller and any of its Employees, or professional
service agreements not terminable at will relating to the Business or any of the
Assets. The sale of the Assets and the Business to Buyer pursuant to the terms
of this Agreement will not cause Buyer to incur or suffer any liability relating
to, or obligation to pay, severance, termination or other similar payments to
any current or former employee or independent contractor of Seller, except as
expressly contemplated in Section 3.11.
4.17. Pension and Benefit Plans.
4.17.1. Schedule of Plans.
Except as set forth in Schedule 4.17.1, neither Seller nor any Common
Control Entity (a) currently sponsors or maintains or has ever sponsored or
maintained since July 1, 1990, any Plan or Other Arrangement with respect to the
Business or the Employees, (b) is or has been since July 1, 1990 a party to any
Plan or Other Arrangement with respect to the Business or the Employees, or (c)
has any obligations under any Plan or Other Arrangement with respect to the
Business or the Employees.
4.17.2. Copies of Documents.
Seller has furnished to Buyer true and complete copies of: (1) summary
plan descriptions, as they currently exist, for each of the Plans with respect
to the Business or the Employees; (2) the complete plan document and most recent
Form 5500 for each Plan with respect to the Business or the Employees in
existence as of January 1, 1996, that is a Qualified Plan; (3) a list of all
Employees who participate in a Plan that is a cash or deferred arrangement
described in Section 401(k) of the Code, and the percentage of compensation
currently contributed by each such person; and (4) a list of all Employees who
participate in a Plan providing medical benefits, the sex and date of birth of
each such Employee and whether said participation is on the basis of single,
single plus one dependent or family coverage.
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4.17.3. Multiemployer Plans.
No Plan with respect to the Business or the Employees is a
Multiemployer Plan.
4.17.4. Delinquent Contributions.
Seller has no liability for any delinquent contributions within the
meaning of Section 515 of ERISA (including, without limitation, related
attorneys' fees, costs, liquidated damages and interest), or for any arrearages
of wages, on account of or on behalf of any Employee.
4.17.5. Post-retirement Plans.
Schedule 4.17 identifies all post-retirement medical, life insurance or
other post-retirement programs promised, provided or otherwise due now or in the
future under any Plan to current, former or retired Employees of Seller. Buyer
shall have no liability to any current, former or retired Employee of Seller
under any such benefit program.
4.18. Environmental.
4.18.1. Compliance with Law.
Seller has, to its knowledge, complied, and is in compliance with, all
Environmental Laws, including, but not limited to, those Environmental Laws
relating to employment or the Harrisburg Facility, and Seller has no knowledge
that any property or any building, structure, fixture, appurtenance or other
improvement thereon used in connection with the Business are not in compliance
with, all Environmental Laws.
4.18.2. Litigation.
Except as set forth on Schedule 4.18.2, neither Seller nor any officer
or director of Seller has received any formal or informal notice of any
complaint, order, directive, citation, notice of responsibility, notice of
potential responsibility, or information request from any Governmental Authority
or any other person or entity relating to Seller or the Business with respect to
Environmental Laws, or knows of any fact(s) which might reasonably form the
basis for any such actions or notices arising out of or attributable to, nor to
Seller's knowledge, are there any pending or threatened actions, suits, orders,
claims, legal proceedings or other proceedings based on any of the following:
(i) the current or past presence, Release, or threatened Release of Hazardous
Materials on or from the Harrisburg Facility; (ii) the off-site disposal of
Hazardous Materials originating from the Harrisburg Facility or the Business or
Assets of Seller; or (iii) any material violation of Environmental Laws at the
Harrisburg Facility or otherwise arising from Seller's
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activities, operations, procedures or designs (or those of Seller's predecessors
in interest) involving Hazardous Materials.
4.18.3. Permits.
Seller has been duly issued, and currently has and will maintain through
the Second Closing Date, all permits, licenses, certificates and approvals
required under any Environmental Law with respect to the Assets and/or the
Business. A true and complete list of such permits, licenses, certificates and
approvals that relate to the Business or any of the Assets, all of which are
valid and in full force and effect, is set forth on Schedule 4.18.3. To the
knowledge of Seller, except in accordance with such permits, licenses,
certificates and approvals, there has been no Release of material regulated by
such permits, licenses, certificates or approvals.
4.18.4. Information.
Seller has provided Purchaser with true and complete copies of all
written environmental audits, assessments, inspections or occupational health
studies relating to the Assets or the conduct of the Business that Seller has in
its possession or control, if any, and that was undertaken by, or at the
direction of, any Governmental Authority, Seller, any predecessor in interest,
or any prior potential purchaser.
4.18.5. PCBs; Asbestos.
To the knowledge of Seller, neither PCBs nor asbestos-containing
materials are present on or in any of the Assets or any property used in
connection with the Business.
4.19. Authorization.
The execution, delivery and performance by Seller of this Agreement, and
each Seller Document, the fulfillment of and compliance with the respective
terms and provisions hereof and thereof, and the consummation by Seller of the
transactions contemplated hereby and thereby have been duly authorized by its
Board of Directors (which authorization has not been modified or rescinded and
is in full force and effect), and do not and will not: (a) conflict with, or
violate any term or provision of (i) any Law having applicability to Seller, any
of the Assets or the Business, the effect of which would have an adverse
material effect on the Assets or the Business, or (ii) any provision of the
certificate or articles of incorporation or bylaws of Seller; (b) except for the
consents required as set forth on Schedule 4.19, conflict with, or result in any
material breach of, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, any material agreement to
which Seller is a party or by which it, the Business or any of the Assets are
bound; or (c) except for the consents required as
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set forth on Schedule 4.19, result in or require the creation or imposition of
or result in the acceleration of any indebtedness, or of any Encumbrance of any
nature upon, or with respect to, Seller, any of the Assets or the Business. No
other corporate action on the part of Seller or its Affiliates is necessary for
Seller to enter into this Agreement and all other Seller Documents and to
consummate the transactions contemplated hereby and thereby.
4.20. Absence of Violation; Compliance with Laws.
Seller has complied and is in compliance in all material respects with
all Laws applicable to the Business and the Assets and the Plans and Other
Arrangements and other employee or employment-related benefits.
Except for business licenses and qualifications necessary to transact
business as a foreign corporation, Seller is not required to hold or obtain any
permit, license, approval or similar authorization from any Governmental
Authority in any jurisdiction in order to conduct the operations of the Business
as presently conducted and to own, use and maintain the Assets, except where the
failure to do so would not have a material adverse effect on the Assets or the
Business.
4.21. Binding Obligation.
This Agreement and each Seller Document constitutes a valid and binding
obligation of Seller, enforceable against Seller in accordance with its terms.
4.22. Disclosure.
Neither this Agreement nor any schedule or exhibit hereto nor any
certificate or other document referenced herein or therein and furnished to
Buyer by Seller contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein or herein, in light of the circumstances under which they were made, not
misleading. There is no material fact known to Seller relating to the
operations, condition or prospects of the Business or the Assets that materially
adversely affects the same and that has not been disclosed to Buyer by Seller on
Schedule 4.22.
4.23. Securities Matters.
Seller represents that Seller is an "accredited investor" within the
meaning of Regulation D under the Securities Act, is acquiring the Notes and
will acquire any securities issuable upon conversion of the Notes, for Seller's
own account for investment and not with the view to the distribution thereof,
except in accordance with applicable federal and state securities laws. Upon
conversion of a Note, this representation and covenant shall be deemed to have
been given with respect to the securities of Seller received. Seller recognizes
that, in view of the matters set forth
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in this Section 4.23, Seller must bear the economic risk of the investment
represented by Seller's receipt of the Notes for an indefinite period.
5. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1. Organization and Standing.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the full and
unrestricted corporate power and authority to carry on its business as currently
conducted, to execute and deliver this Agreement and each Buyer Document and to
carry out the transactions contemplated hereby and thereby.
5.2. Authorization.
The execution, delivery and performance by Buyer of this Agreement and
each Buyer Document, the fulfillment of and compliance with the respective terms
and provisions hereof and thereof, and the consummation by Buyer of the
transactions contemplated hereby and thereby have been duly authorized by its
Board of Directors (which authorization has not been modified or rescinded and
is in full force and effect), and do not and will not: (a) conflict with, or
violate any term or provision of (i) any Law having applicability to Buyer, the
effect of which would have a material adverse effect on Buyer, or (ii) any
provision of the certificate of incorporation or bylaws of Buyer, or (b)
conflict with, or result in any material breach of, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, any material agreement to which Buyer is a party or by which Buyer is
bound. No other corporate action is necessary on the part of Buyer for Buyer to
enter into this Agreement and all other Buyer Documents and to consummate the
transactions contemplated hereby and thereby.
5.3. Binding Obligation.
This Agreement and each Buyer Document constitutes a valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
5.4. Litigation; Disputes.
There are no actions or proceedings pending, or to Buyer's knowledge
threatened or reasonably anticipated seeking to restrain, prohibit or invalidate
any
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of the transactions contemplated by this Agreement or any Buyer Document, at
law or in equity, or before or by any Governmental Authority.
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
The obligations of Buyer to purchase the Assets and to proceed with the
First Closing and the Second Closing are subject to the satisfaction (or waiver
in writing by Buyer) at or prior to each of the First Closing and the Second
Closing of each of the following conditions:
6.1. Representations and Covenants.
(a) The representations and warranties of Seller made in this Agreement
or in any other Seller Document shall have been true and correct in all material
respects when made, and shall be true and correct in all material respects on
the First Closing Date or the Second Closing Date, as the case may be, as though
such representations and warranties were made on and as of First Closing Date or
the Second Closing Date, as the case may be (except for any such representations
or warranties which expressly relate to a prior date); and (b) Seller shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement or any other Seller Document to be
performed or complied with by Seller prior to the First Closing Date or the
Second Closing Date, as the case may be.
6.2. Delivery of Documents.
Seller shall have delivered to Buyer on or before the First Closing Date
or the Second Closing Date, as the case may be, the First Seller Documents and
all other agreements, instruments, and documents required to be delivered by
Seller to Buyer pursuant to Section 8.2, or the Second Seller Documents and all
other agreements, instruments, and documents required to be delivered by Seller
to Buyer pursuant to Section 8.3, as the case may be.
6.3. Legal Proceedings.
No action or proceeding by or before any Governmental Authority shall
have been instituted or threatened (and not subsequently dismissed, settled or
otherwise terminated) to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or any other Seller Document, or which could
reasonably be expected to prevent, limit, restrict or impair the ownership, use,
operation or enjoyment of the Assets or the Business by Buyer, other than an
action or proceeding instituted or threatened by Buyer or its Affiliates.
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6.4. Material Adverse Change.
There shall have been no material adverse changes since March 31, 1996
in the business, operations, prospects, or condition (financial or otherwise),
of Seller, the Business or the Assets (regardless of whether or not such events
or changes are consistent with the representations and warranties given herein
by Seller), except (i) changes contemplated by this Agreement, (ii) changes in
the number of subscribers to the Business, and (iii) changes in the Ordinary
Course of Business that are not (either individually or in the aggregate)
materially adverse.
6.5. Hart-Scott-Rodino.
All waiting periods, if any, required by HSR shall have expired or been
terminated.
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
The obligations of Seller to sell, transfer, convey and deliver the
Assets and to proceed with the First Closing and the Second Closing are subject
to the satisfaction (or waiver in writing by Seller) at or prior to the First
Closing or the Second Closing, as the case may be, of each of the following
conditions:
7.1. Representations and Covenants.
The representations and warranties of Buyer made in this Agreement or in
any other Buyer Document shall have been true and correct in all material
respects when made, and shall be true and correct in all material respects on
First Closing Date or the Second Closing Date, as the case may be, as though
such representations and warranties were made on and as of the First Closing
Date or the Second Closing Date, as the case may be; and Buyer shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement or any other Buyer Document to be
performed or complied with by Buyer prior to the First Closing or the Second
Closing, as the case may be.
7.2. Delivery of Buyer Documents.
Buyer shall have delivered to Seller on or before the First Closing Date
or the Second Closing Date, as the case may be, that portion of the Purchase
Price required to be delivered at the First Closing or the Second Closing, as
the case may be, pursuant to Section 2.3, the Buyer Documents, and all other
agreements, instruments and documents required to be delivered by Buyer to
Seller pursuant to Section 8.3 or 8.5 as the case may be.
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7.3. Legal Proceedings.
No action or proceeding by or before any Governmental Authority shall
have been instituted or threatened (and not subsequently dismissed, settled, or
otherwise terminated) to restrain, prohibit, or invalidate the transactions
contemplated by this Agreement or any other Buyer Document, other than an action
or proceeding instituted or threatened by Seller or any of its Affiliates.
7.4. Hart-Scott-Rodino.
All waiting periods, if any, required by HSR shall have expired or been
terminated.
8. THE CLOSING
8.1. Closing.
The First Closing hereunder shall be held on June 28,1996 at the
following time and location: 6:30 pm at Hogan & Hartson L.L.P., 8300 Greensboro
Drive, McLean, VA 22102. The Second Closing hereunder shall be held on a date to
be agreed upon by Buyer and Seller, but in no event later than August 31, 1996
at the following location: Hogan & Hartson L.L.P., 8300 Greensboro Drive,
McLean, VA 22102
8.2. Deliveries by Seller at the First Closing.
At or before the First Closing, Seller shall deliver to Buyer the
following:
8.2.1. Assignment Documents and Agreements.
The following bills of sale, statements, assignments and other
instruments of transfer, dated as of the First Closing Date and duly executed by
Seller, in form and substance sufficient to transfer and convey to Buyer all of
Seller's right, title and interest (of the quality required in this Agreement)
in and to the First Closing Assets and reasonably satisfactory to counsel to
Buyer:
(i) the Bill of Sale substantially in the form attached hereto as
Exhibit 8.2.1(a);
(ii) the Assignment and Assumption of Contracts and Leases
substantially in the form attached hereto as Exhibit 8.2.1(b);
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(iii) the Assumption Agreement substantially in the form
attached hereto as Exhibit 8.2.1(c);
(iv) the Network Services Agreement substantially in the form
attached hereto as Exhibit 8.2.1(d); and
(v) all such other general instruments of transfer, assignment and
conveyance, assignments, evidences of consent or waiver, and other instruments
or documents in form and substance reasonably satisfactory to Buyer, as shall be
necessary to evidence or perfect the sale, assignment, transfer and conveyance
of the First Closing Assets to Buyer and effectively vest in Buyer all right,
title and interest in the First Closing Assets free and clear of any and all
Encumbrances, together with possession (or constructive possession, in the case
of intangibles) thereof, all in accordance with the terms and conditions of this
Agreement.
8.2.2. Confidentiality and Non-competition Agreement.
The Confidentiality and Non-competition Agreement, substantially in
the form attached hereto as Exhibit 8.2.2, dated as of the First Closing Date
and duly executed by Seller.
8.2.3. Certified Resolutions.
Copies of the resolutions of the board of directors of Seller, certified
by the Secretary of Seller as being correct and complete and then in full force
and effect, authorizing the execution, delivery and performance of this
Agreement and of the other Seller Documents, and the consummation of the
transactions contemplated hereby and thereby.
8.2.4. Seller Officers' Certificates.
(i) A certificate of Seller signed by the President or a Vice-President
and the Secretary or an Assistant Secretary of Seller certifying to the
fulfillment of the conditions identified in Section 6.1; and
(ii) A certificate signed by the Secretary or an Assistant Secretary
of Seller as to the incumbency of the officers of Seller executing this
Agreement or any of the First Seller Documents on behalf of Seller.
8.2.5. Other Documents.
Such other certificates, instruments, opinions or documents as Buyer may
reasonably request in order to effect and document the transactions contemplated
hereby.
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8.3. Deliveries by Seller at the Second Closing.
At or before the Second Closing, Seller shall deliver to Buyer the
following:
8.3.1. Assignment Documents and Agreements.
The following bills of sale, statements, assignments and other
instruments of transfer, dated as of the Second Closing Date and duly executed
by Seller, in form and substance sufficient to transfer and convey to Buyer all
of Seller's right, title and interest (of the quality required in this
Agreement) in and to the Second Closing Assets and reasonably satisfactory to
counsel to Buyer:
(i) the Bill of Sale substantially in the form attached hereto as
Exhibit 8.3.1(a);
(ii) the Assignment and Assumption of Contracts and Leases
substantially in the form attached hereto as Exhibit 8.3.1(b);
(iii) the Assumption Agreement substantially in the form
attached hereto as Exhibit 8.3.1(c); and
(iv) all such other general instruments of transfer, assignment and
conveyance, assignments, evidences of consent or waiver, and other instruments
or documents in form and substance reasonably satisfactory to Buyer, as shall be
necessary to evidence or perfect the sale, assignment, transfer and conveyance
of the Second Closing Assets to Buyer and effectively vest in Buyer all right,
title and interest in the Second Closing Assets free and clear of any and all
Encumbrances, together with possession (or constructive possession, in the case
of intangibles) thereof, all in accordance with the terms and conditions of this
Agreement.
8.3.2. Confidentiality and Non-competition Agreement.
The Confidentiality and Non-competition Agreement, substantially in
the form attached hereto as Exhibit 8.3.2, dated as of the Second Closing Date
and duly executed by Seller.
8.3.3. Lease.
The original copies of all Leases.
8.3.4. Certified Resolutions.
Copies of the resolutions of the board of directors of Seller,
certified by the Secretary of Seller as being correct and complete and then in
full force and
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effect, authorizing the execution, delivery and performance of this Agreement
and of the other Seller Documents, and the consummation of the transactions
contemplated hereby and thereby.
8.3.5. Seller Officers' Certificates.
(i) A certificate of Seller signed by the President or a Vice-President
and the Secretary or an Assistant Secretary of Seller certifying to the
fulfillment of the conditions identified in Section 6.1; and
(ii) A certificate signed by the Secretary or an Assistant Secretary
of Seller as to the incumbency of the officers of Seller executing this
Agreement or any of the Second Seller Documents on behalf of Seller.
8.3.6. Other Documents.
Such other certificates, instruments, opinions or documents as Buyer may
reasonably request in order to effect and document the transactions contemplated
hereby.
8.4. Deliveries by Buyer at the First Closing.
At or before the First Closing, Buyer shall deliver to Seller the
following:
8.4.1. Purchase Price Payment.
That portion of the Purchase Price payable at the First Closing in the
amount and manner set forth in Section 2.3.
8.4.2. Agreements.
The following agreements, dated as of the First Closing Date and duly
executed by Buyer:
(a) the Assignment and Assumption of Contracts and Leases
substantially in the form attached hereto as Exhibit 8.2.1(b);
(b) the Assumption Agreement substantially in the form
attached hereto as Exhibit 8.2.1(c);
(c) the Network Services Agreement substantially in the
form attached hereto as Exhibit 8.2.1(d); and
(d) the Confidentiality and Non-competition Agreement
substantially in the form attached hereto as Exhibit 8.2.2.
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8.4.3. Certified Resolutions.
Copies of the resolutions of the board of directors of Buyer, certified
as being correct and complete and then in full force and effect, authorizing the
execution, delivery and performance of this Agreement and of the other Buyer
Documents, and the consummation of the transactions contemplated hereby and
thereby.
8.4.4. Officers' Certificates.
(i) A certificate of Buyer signed by the Chairman, President or a Vice
President and the Secretary or an Assistant Secretary of Buyer certifying to the
fulfillment of the conditions identified in Section 7.1; and
(ii) a certificate signed by the Secretary or an Assistant Secretary of
Buyer as to the incumbency of the officers of the Buyer executing this Agreement
or any of the other First Buyer Documents on behalf of Buyer.
8.4.5. Other Documents.
Such other certificates, instruments, opinions or documents as Seller
may reasonably request in order to effect and document the transactions
contemplated hereby.
8.5. Deliveries by Buyer at the Second Closing.
At or before the Second Closing, Buyer shall deliver to Seller the
following:
8.5.1. Purchase Price Payment.
That portion of the Purchase Price payable at the Second Closing in the
amount and manner set forth in Section 2.3.
8.5.2. Agreements.
The following agreements, dated as of the Second Closing Date and duly
executed by Buyer:
(a) the Assignment and Assumption of Contracts and Leases
substantially in the form attached hereto as Exhibit 8.3.1(b);
(b) the Assumption Agreement substantially in the form
attached hereto as Exhibit 8.3.1(c); and
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(c) the Confidentiality and Non-competition Agreement
substantially in the form attached hereto as Exhibit 8.3.2.
8.5.3. Certified Resolutions.
Copies of the resolutions of the board of directors of Buyer, certified
as being correct and complete and then in full force and effect, authorizing the
execution, delivery and performance of this Agreement and of the other Buyer
Documents, and the consummation of the transactions contemplated hereby and
thereby.
8.5.4. Officers' Certificates.
(i) A certificate of Buyer signed by the Chairman, President or a Vice
President and the Secretary or an Assistant Secretary of Buyer certifying to the
fulfillment of the conditions identified in Section 7.1; and
(ii) a certificate signed by the Secretary or an Assistant Secretary of
Buyer as to the incumbency of the officers of the Buyer executing this Agreement
or any of the other Second Buyer Documents on behalf of Buyer.
8.5.5. Other Documents.
Such other certificates, instruments, opinions or documents as Seller
may reasonably request in order to effect and document the transactions
contemplated hereby.
9. RISK OF LOSS
The risk of loss or damage by fire or other casualty or cause to the
Assets or the Business prior to the date on which they are to be conveyed to
Buyer shall be upon Seller. In the event of such loss or damage prior to such
date, Seller shall promptly restore, replace or repair the damaged Assets to
their previous condition at the sole cost and expense of Seller. Buyer shall
have any and all remedies to enforce such obligations as may be available at law
or in equity or otherwise (including, without limitation, specific performance).
10. SURVIVAL; INDEMNIFICATION
10.1. Survival of Representations and Warranties.
The representations, warranties and covenants contained in this
Agreement and the indemnification obligations set forth in this Article 10 shall
survive for a period of two years following the Second Closing Date and shall be
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unaffected by (and shall not be deemed waived by) any investigation, audit,
appraisal, or inspection at any time made by or on behalf of Buyer; provided,
however, that the representations and warranties set forth in Section 4.7 or
Section 4.17 and Section 4.18 shall each survive until the expiration of any
applicable statute of limitations period.
Notwithstanding the foregoing, if written notice of a claim for
indemnification has been given to the Indemnifying Party by the Indemnified
Party pursuant to Section 10.4 prior to the expiration of the applicable
representations, warranties and covenants, all relevant representations,
warranties and covenants and the obligation to indemnify therefor shall survive
for the purposes of such claim until such claim has been finally resolved.
10.2. Indemnification by Seller.
Subject to the conditions and provisions of this Article 10, Seller
agrees to indemnify, defend and hold harmless Buyer from, against and with
respect to any and all Losses, asserted against, resulting to, imposed upon or
incurred by the Buyer, directly or indirectly, by reason of or resulting from
(a) any liability or obligation of or claim against Buyer (whether absolute,
accrued, contingent or otherwise and whether a contractual, Tax or any other
type of liability or obligation or claim) not expressly assumed by Buyer
pursuant to Section 2.4, arising out of, relating to or resulting from the
Business, or relating to or resulting from the Assets or the operation of the
Business during the period prior to the date on which they are conveyed to
Buyer; (b) any misrepresentation or breach of the representations and warranties
of Seller contained in this Agreement or in any Seller Document or in any
officers' certificate delivered pursuant to Section 8.2.4 or Section 8.3.5
hereof; (c) any noncompliance by Seller with any covenants, agreements or
undertakings of Seller contained in or made pursuant to this Agreement or any
Seller Document; (d) the alleged exposure of any person or property to Hazardous
Materials generated, produced, leaked, released, spilled, or disposed of on or
from any of the Assets on, or during the period prior to, the date on which they
are conveyed to Buyer, regardless of whether such exposure resulted from
activities of Seller or of the predecessors in interest of Seller or any
combination thereof; (e) any liability or obligation of or claim against Buyer
or any of the Assets by virtue of the application of bulk sales or other similar
laws to the sale and transfer of the Assets to Buyer; or failure to comply with
any applicable bulk sales laws. Notwithstanding the other provisions of this
Section 10.2, Seller shall have no liability under this Section 10.2 to the
extent that the aggregate amount of Losses indemnified against under this
Section 10.2 do not exceed Two Hundred Thirty Thousand Dollars ($230,000);
provided, however, that if such Losses indemnified against under this Section
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10.2 exceed $230,000, then the indemnification provided for hereunder shall
apply to all Losses indemnified
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against under this Section 10.2 without regard to the $230,000 threshold
provided for above.
10.3. Indemnification by Buyer.
Subject to the conditions and provisions of this Article 10, Buyer
hereby agrees to indemnify, defend and hold harmless Seller from, against and
with respect to any and all Losses, asserted against, resulting to, imposed upon
or incurred by Seller, directly or indirectly, by reason of or resulting from
(a) any liability or obligation of or claims against Seller (whether absolute,
accrued, contingent or otherwise and whether contractual, Tax or any other type
of liability or obligation or claim) expressly assumed by Buyer pursuant to
Section 2.4 or relating to or resulting from the Assets or the operation of the
Business during the period from and after the date on which they are conveyed to
Buyer; (b) any misrepresentation or breach of the representations and warranties
of Buyer contained in or made pursuant to this Agreement or any Buyer Document
or in any officers' certificate delivered pursuant to Section 8.4.4 or Section
8.5.4; (c) any noncompliance by Buyer with any covenants, agreements or
undertakings of Buyer contained in or made pursuant to this Agreement or any
Buyer Document; or (d) the alleged exposure of any person or property to
Hazardous Materials generated, produced, leaked, released, spilled or disposed
of on or from any of the Assets during the period from and after the date on
which they are conveyed to Buyer, regardless of whether such exposure resulted
from activities of Buyer or the successors of interest of Buyer or any
combination thereof. Notwithstanding the foregoing, in no event shall Buyer have
any indemnification obligation to Seller pursuant to this Section 10.3 for any
Losses otherwise indemnifiable hereunder to the extent that such Losses directly
relate to a liability, obligation or claim with regard to the failure to obtain
any waiver, consent or approval from any party to any Seller Contract or Lease
that is required in order to assign any such Seller Contract or Lease to Buyer;
provided, however, that Buyer shall remain liable for any other Losses
indemnifiable pursuant to this Section 10.3 not directly relating to such a
liability, obligation or claim. Notwithstanding the other provisions of this
Section 10.3, Buyer shall have no liability under this Section 10.3 to the
extent that the aggregate amount of Losses indemnified against under this
Section 10.3 do not exceed Two Hundred Thirty Thousand Dollars ($230,000);
provided, however, that if such Losses indemnified against under this Section
10.3 exceed $230,000, then the indemnification provided for hereunder shall
apply to all Losses indemnified against under this Section 10.3 without regard
to the $230,000 threshold provided for above.
10.4. Conditions of Indemnification.
The obligations and liabilities of Seller, on the one hand, and of
Buyer, on the other hand, hereunder with respect to their respective
indemnities pursuant
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to this Article 10, resulting from any Losses, shall be subject to the following
terms and conditions:
10.4.1. Notice.
The party seeking indemnification (the "Indemnified Party") must give
the other party or parties, as the case may be (the "Indemnifying Party"),
written notice of any such Losses specifically identifying the matters which
have given rise to such losses promptly after the Indemnified Party receives
notice thereof; provided that the failure to give such notice shall not affect
the rights of the Indemnified Party hereunder except to the extent that the
Indemnifying Party shall have suffered actual damage by reason of such failure
or such failure prejudices the Indemnifying Party's ability to settle or defend
such claim.
10.4.2. Counsel.
The Indemnifying Party shall have the right to undertake, by counsel or
other representatives of its own choosing and reasonably acceptable to the
Indemnified Party, the defense of all such Losses at the Indemnifying Party's
risk and expense. In the event the Indemnifying Party elects to undertake such
defense, the Indemnified Party shall cooperate with and furnish reasonable
assistance to the Indemnifying Party in defense of such Losses.
10.4.3. Right to Defend.
In the event that the Indemnifying Party shall elect not to undertake
such defense, or, within a reasonable period of time after notice from the
Indemnified Party of any such Losses, shall fail to defend, the Indemnified
Party (upon further written notice to the Indemnifying Party) shall have the
right to undertake the defense, compromise or settlement of such Losses, by
counsel or other representatives of its own choosing and reasonably acceptable
to the Indemnifying Party, on behalf of and for the account and risk of the
Indemnifying Party (subject to the right of the Indemnifying Party to assume
defense of such Losses at any time prior to settlement, compromise or final
determination thereof). In such event (i) the Indemnifying Party shall pay to
the Indemnified Party, in addition to the other sums required to be paid
hereunder, the reasonable costs and expenses of third parties incurred by the
Indemnified Party in connection with such defense, compromise or settlement as
and when such costs and expenses are so incurred, and (ii) the Indemnifying
Party shall cooperate with and furnish reasonable assistance to the Indemnified
Party in defense of such Losses.
10.4.4. Non-monetary Harm.
Anything in this Section 10.4 to the contrary notwithstanding, (i) if
there is a reasonable probability that Losses may materially and adversely
affect the Indemnified Party other than as a result of money damages or other
money
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<PAGE>
payments, the Indemnified Party shall have the right, at its own cost and
expense, to participate with the Indemnifying Party in the defense, compromise
or settlement of the Losses, (ii) the Indemnifying Party shall not, without the
Indemnified Party's written consent, settle or compromise any Losses or consent
to entry of any judgment which does not include as an unconditional term thereof
the giving by the claimant or the plaintiff to the Indemnified Party of a
release from all liability in respect of such Losses in form and substance
reasonably satisfactory to the Indemnified Party, (iii) in the event that the
Indemnifying Party undertakes defense of any Losses, the Indemnified Party, by
counsel or other representative of its own choosing and at its sole cost and
expense, shall have the right to consult with the Indemnifying Party and its
counsel or other representatives concerning such Losses, and the Indemnifying
Party and the Indemnified Party and their respective counsel or other
representatives shall cooperate with respect to the defense of such Losses and
use their reasonable efforts in light of the prevailing circumstances to
incorporate suggested modifications if such modifications would not adversely
affect the Indemnifying Party, and (iv) in the event that the Indemnifying Party
undertakes defense of any Losses, the Indemnifying Party shall have an
obligation to keep the Indemnified Party informed of the status of the defense
of such Losses and furnish the Indemnified Party with all documents, instruments
and information that the Indemnified Party shall reasonably request in
connection therewith.
11. TERMINATION; CONVEYANCE OF ADDITIONAL SUBSCRIBERS
11.1. Termination.
Subject to the provisions of Section 11.2 hereof, this Agreement may, by
written notice given at or prior to the Second Closing in the manner hereinafter
provided, be terminated at any time prior to the Second Closing:
(a) by mutual written consent of the parties hereto; or
(b) by Seller, on the one hand, or by Buyer, on the other hand, if
the Second Closing shall not have occurred on or before September 15, 1996;
provided, that such failure to close is not a result of a breach of this
Agreement by the party or parties seeking to terminate the Agreement.
11.2. Effect of Termination.
In the event this Agreement is terminated as provided in Section 11.1,
this Agreement shall be deemed null, void and of no further force or effect, and
the parties hereto shall be released from all future obligations hereunder,
provided, however, that the obligations of Buyer and Seller set forth in
Sections 11.3, 12.2, 12.3 and 3.14 shall survive such termination. The parties
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hereto shall have any and all remedies to enforce such obligations provided at
law or in equity or otherwise (including, without limitation, specific
performance).
11.3. Conveyance of Additional Subscribers.
In the event that the Second Closing shall not occur on or prior to the
Second Closing Date for any reason and any First Closing Subscribers shall not
remain Buyer's customers and current in their payments to Buyer for services as
of the sixtieth (60th) day following the First Closing (those First Closing
Subscribers who do remain Buyer's customers and current being referred to herein
as the "First Closing Continuing Subscribers"), Seller shall, upon demand by
Buyer, convey to Buyer Seller Contracts for additional Pipeline and/or Interramp
subscribers of Seller who are not Bulk Customers equal to the excess, if any, of
fifteen thousand (15,000) over the number of First Closing Continuing
Subscribers, and those subscribers so conveyed who remain Buyer's customers and
current in their payments to Buyer for services as of the sixtieth (60th) day
following the date that their Seller Contract is conveyed to Buyer shall be
deemed First Closing Continuing Subscribers. Seller shall continue conveying to
Buyer Seller Contracts for Pipeline and/or Interramp subscribers of Seller who
are not Bulk Customers upon demand by Buyer until the number of First Closing
Continuing Subscribers at least equals fifteen thousand (15,000). All
Subscribers of Seller whose Seller Contracts are conveyed to Buyer pursuant to
this Section 11.3 shall be substantially similar in terms of Seller pricing
plans and geographic dispersion to the First Closing Subscribers.
12. GENERAL PROVISIONS
12.1. Additional Actions, Documents and Information.
Each of the parties hereto agrees that it will, at any time, prior to,
at or after the Second Closing Date, take or cause to be taken such further
actions, and execute, deliver and file or cause to be executed, delivered and
filed such further documents and instruments and obtain such consents, as may be
reasonably requested in connection with the consummation of the purchase and
sale contemplated by this Agreement or in order to fully effectuate the
purposes, terms and conditions of this Agreement.
12.2. Brokers.
Neither Seller nor Buyer have engaged or incurred any liability (for any
brokerage fees, finders' fees, commissions or otherwise) to, any broker, finder
or agent in connection with the transactions contemplated by this Agreement.
Seller agrees to indemnify Buyer, and Buyer agrees to indemnify Seller, against
any claims asserted against the other party(ies) for any brokerage fees,
finders' fees,
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commissions or similar liabilities incurred by the indemnified party with
respect to any person purporting to act or to have acted for or on behalf of the
indemnifying party in connection with the transactions contemplated by this
Agreement.
12.3. Expenses.
Each party hereto shall pay its own legal, accounting, broker and other
professional fees and expenses incurred in connection with this Agreement and in
the preparation for and consummation of the transactions provided for herein.
12.4. Notices.
All notices, demands, requests, or other communications which may be or
are required to be given or made by any party to any other party pursuant to
this Agreement shall be in writing and shall be hand delivered, mailed by first-
class registered or certified mail, return receipt requested, postage prepaid,
or delivered by overnight courier, addressed as follows:
(i) If to Buyer:
MindSpring Enterprises, Inc.
1430 W. Peachtree, Suite 400
Atlanta, GA 30309
Attention: Mr. Charles Brewer
Chairman and Chief Executive Officer
with a copy (which shall not constitute notice) to:
Anthony S. Harrington, Esq.
Hogan & Hartson L.L.P.
555-13th Street, NW
Washington, DC 20004
(ii) If to Seller:
PsiNet Inc.
510 Huntmar Park Drive
Herndon, VA 22070
Attention: Mr. Harold S. Wills
Executive Vice President and Chief
Operating Officer
with a copy (which shall not constitute notice) to:
PsiNet Inc.
510 Huntmar Park Drive
Herndon, VA 22070
Attention: David N. Kunkel, Esq.
Vice President and General Counsel
or such other address as the addressee may indicate by written notice to the
other parties.
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<PAGE>
Each notice, demand, request, or communication which shall be given or
made in the manner described above shall be deemed sufficiently given or made
for all purposes at such time as it is delivered to the addressee (with the
return receipt, the delivery receipt, or the affidavit of messenger being deemed
conclusive but not exclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
12.5. Waiver.
No delay or failure on the part of any party hereto in exercising any
right, power or privilege under this Agreement or under any other instrument or
document given in connection with or pursuant to this Agreement shall impair any
such right, power or privilege or be construed as a waiver of any default or any
acquiescence therein. No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of such right, power or privilege,
or the exercise of any other right, power or privilege. No waiver shall be valid
against any party hereto unless made in writing and signed by the party against
whom enforcement of such waiver is sought and then only to the extent expressly
specified therein.
12.6. Benefit and Assignment.
No party hereto shall assign this Agreement, in whole or in part,
whether by operation of law or otherwise, without the prior written consent of
the other parties hereto, except that Buyer may assign this Agreement to any
entity or person that acquires substantially all of the Assets or Business from
Buyer and any purported assignment in violation of the foregoing shall be void.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns as permitted
hereunder. No person or entity other than the parties hereto is or shall be
entitled to bring any action to enforce any provision of this Agreement against
any of the parties hereto, and the covenants and agreements set forth in this
Agreement shall be solely for the benefit of, and shall be enforceable only by,
the parties hereto or their respective successors and assigns as permitted
hereunder.
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<PAGE>
12.7. Entire Agreement; Amendment.
This Agreement, including the Schedules and Exhibits hereto and the
other instruments and documents referred to herein or delivered pursuant hereto,
contains the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior oral or written agreements, commitments
or understandings with respect to such matters. No amendment, modification or
discharge of this Agreement shall be valid or binding unless set forth in
writing and duly executed by the party or parties against whom enforcement of
the amendment, modification or discharge is sought.
12.8. Severability.
If any part of any provision of this Agreement or any other contract,
agreement, document or writing given pursuant to or in connection with this
Agreement shall be invalid or unenforceable under applicable law, such part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provisions or the
remaining provisions of said contract, agreement, document or writing.
12.9. Headings.
The headings of the articles, sections and subsections contained in this
Agreement are inserted for convenience only and do not form a part or affect the
meaning, construction or scope thereof.
12.10. Remedies Cumulative.
The remedies provided herein shall be cumulative, and shall not preclude
any party from asserting any other rights or seeking any other remedies against
the other party or such other party successors or permitted assigns, pursuant to
this Agreement, as provided under other agreements, and as provided by
applicable law. Nothing contained herein shall preclude a party from seeking
equitable relief, where appropriate.
12.11. Governing Law.
This Agreement, the rights and obligations of the parties hereto, and
any claims or disputes relating thereto, shall be governed by and construed
under and in accordance with the laws of the State of New York excluding the
choice of law rules thereof.
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<PAGE>
12.12. Signature in Counterparts.
This Agreement may be executed in separate counterparts, none of which
need contain the signatures of all parties, each of which shall be deemed to be
an original, and all of which taken together constitute one and the same
instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
12.13. No Partnership.
This Agreement creates no relationship of joint venture, partnership or
agency between Seller and Buyer. Except as contemplated by Sections 3.3 or 3.5,
neither party will represent itself as a representative or agent of the other
party for any purpose.
IN WITNESS WHEREOF, each of the parties hereto has executed this Asset
Purchase Agreement, or has caused this Asset Purchase Agreement to be duly
executed and delivered in its name on its behalf, all as of the day and year
first above written.
BUYER
-----
MINDSPRING ENTERPRISES, INC.
By: /s/ Charles M. Brewer (SEAL)
-------------------------
Name: Charles M. Brewer
--------------------------------
Title: CFO
-------------------------------
SELLER
PSINET INC.
-----------
By: /s/ Harold S. Wills (SEAL)
-------------------------
Name: Harold S. Wills
---------------------------------
Title: COO
--------------------------------
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ANNEX 1
SCHEDULE OF DEFINITIONS
AFFILIATE shall mean, with respect to an entity, any person or entity
which directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such entity. For purposes of this
definition, "control" means possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of voting securities, by agreement or otherwise).
AFFINITY PROGRAMS shall mean all types of marketing relationships with
respect to the Business other than Bounty Programs and Retail Programs,
including but not limited to, publishers, modem or other types of computer
equipment manufacturers, and organizations representing groups of potential
customers.
AGREEMENT shall mean the Asset Purchase Agreement entered into as of the
date hereof and between Buyer and Seller.
ASSETS shall mean, collectively, all right, title, benefit and interest
of Seller in and to the following assets, rights, benefits and privileges, both
tangible and intangible (including without limitation the Business as a "going
concern" and customer relationships and reputation of Seller ("Goodwill")),
wherever situated or located, owned, leased, used, held for use or otherwise
held by Seller in connection with the Business, and shall include all such
assets existing on the date of this Agreement and all such assets acquired
between that date and the Second Closing Date:
(a) All Seller Contracts with Subscribers (excluding Bulk Customers);
(b) All Leases, including without limitation the Lease for the
Harrisburg Facility (described in Schedule 4.10 attached hereto);
(c) All of the benefits of all preexisting marketing programs (including
Retail, Affinity and Bounty Programs);
(d) All of the ownership rights to the Pipeline Software (including
auto registration software), including, but not limited to, all
work currently being undertaken to upgrade and/or improve such
software;
(e) Rights to the Local Content published by the Pipeline
--------------
Group;
<PAGE>
(f) All engineering, business and other books, papers, files and
records directly relating to the Business, including, but not
limited to, customer lists;
(g) All manufacturer's warranties with respect to the Assets, to the
extent assignable;
(h) All Intellectual Property; and
(i) a paid up non-exclusive license to use and modify (but not to
sublicense) the software described in Schedule Annex 1.
ASSUMED LIABILITIES shall mean, collectively, the First Closing Assumed
Liabilities and the Second Closing Assumed Liabilities.
BEST EFFORTS shall mean, as to a party hereto, an undertaking by such
party to perform or satisfy an obligation or duty or otherwise act in a manner
reasonably calculated to obtain the intended result by action or expenditure not
disproportionate or unduly burdensome in the circumstances, which means, among
other things, that such party shall not be required to (i) expend funds other
than for payment of the reasonable and customary fees and expenses of employees,
counsel, consultants, representatives or agents of such party in connection with
the performance or satisfaction of such obligation or duty or other action,
provided that the foregoing shall not require a party to institute litigation or
arbitration as part of its best efforts, or (ii) suffer any material economic
disadvantage or detriment as a condition of achieving a satisfactory result.
BOUNTY PROGRAMS shall mean Seller's relationships with individuals or
organizations that shall receive a commission or other form of payment for the
signing-up of subscribers with respect to the Business and for the referral of
subscribers by such individuals or organizations to Seller.
BULK CUSTOMERS shall mean organizations purchasing Internet access
services for five or more users through a single billing account.
BUSINESS shall have the meaning specified in the recitals.
BUYER shall mean MindSpring Enterprises, Inc.
BUYER DOCUMENTS shall mean, individually and collectively, the First
Buyer Documents and the Second Buyer Documents.
CLAIMS shall mean any claim or other assertion of liability by a third
party.
CODE shall mean the Internal Revenue Code of 1986, as amended, and all
Laws promulgated pursuant thereto or in connection therewith.
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COMMON CONTROL ENTITY shall mean any trade or business under common
control (as such term is defined in Section 4.14(b) or 4.14(c) of the Code) with
Seller.
CONTINUING EMPLOYEES shall mean Employees who become employees of Buyer.
CONTINUING SUBSCRIBERS shall mean those Subscribers who remain Buyer's
customers and current in their payments to Buyer for services as of the First
Measurement Date, as well as those customers of Buyer signed up by Seller
pursuant to Section 3.3 who remain Buyer's customers and current in their
payments to Buyer for services as of the Second Measurement Date.
DEFINED BENEFIT PLAN shall mean a Plan that is or was a "defined benefit
plan" as such term is defined in Section 3(35) of ERISA.
EMPLOYEES shall have the meaning specified in Section 4.4.
ENCUMBRANCES shall mean any mortgages, pledges, liens, claims, security
interests, agreements, restrictions, defects in title, easements, restrictions,
encumbrances, or charges; provided, however, "Encumbrances" shall not include
any (i) liens for current taxes and assessments not yet due and payable,
including but not limited to, liens for nondelinquent ad valorem taxes and
nondelinquent statutory liens arising other than by reason of any default on the
part of Seller or its Affiliates, (ii) such liens, minor imperfections of title,
or easements on real property, leasehold estates, or personality as do not in
any material respect detract from the value thereof and do not in any material
respect interfere with the present use of the property subject thereto, (iii)
materialmen's, mechanics', workmen's, repairmen's, employees', carriers',
warehousemen's and other like liens arising in the Ordinary Course of Business
or relating to any construction, rebuilding or repair of any property leased
pursuant to the Leases or of the Assets, so long as any such lien does not
materially impair the value of such leased property or the Assets, and (iv)
rights of the other parties under the Leases and the other leases and agreements
included in the Seller Contracts (other than such rights arising in connection
with a default thereunder by Seller or an event, which with notice or the
passage of time, would constitute a default thereof by Seller) except for any
such rights relating to any failure to obtain a consent required to assign such
Leases and Seller Contracts to Buyer, which failure is in accordance with the
terms of this Agreement.
ENVIRONMENTAL LAWS shall mean any laws (including, without limitation,
the Comprehensive Environmental Response, Compensation, and Liability Act),
including any plans, other criteria, or guidelines promulgated pursuant to such
laws, now in effect relating to pollution, protection of the environment or
public health and safety, including laws relating to the generation,
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production, use, storage, treatment, transportation or disposal of Hazardous
Materials.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
FIRST BUYER DOCUMENTS shall mean, collectively, the documents described
in Section 8.4.2.
FIRST CLOSING shall mean the closing of the purchase, assignment and
sale of the First Closing Assets contemplated hereunder.
FIRST CLOSING ASSETS shall mean the First Closing Subscribers.
FIRST CLOSING ASSUMED LIABILITIES shall mean each of the liabilities and
obligations of Seller identified on Schedule 2.4.1; provided, however, that in
no event shall Buyer assume any of Seller's liabilities or obligations relating
to (a) the payment of Taxes with respect to any period prior to the First
Closing Date, (b) any of Seller's Plans or Other Arrangements, which liabilities
or obligations are due to any of Seller's current (active or non-active), former
or retired employees for any period prior to the First Closing Date, or (c) any
liabilities under any Seller Contract or any Lease with respect to services
rendered, or events occurring prior to the First Closing Date.
FIRST CLOSING DATE shall mean the time and date on which the First
Closing takes place, as established by Section 8.1.
FIRST CLOSING SUBSCRIBERS shall mean those persons identified on
Schedule 4.13.
FIRST MEASUREMENT DATE shall mean the date which is sixty (60) days
after the Second Closing.
FIRST NOTE shall mean the promissory note in the form attached hereto as
Exhibit 2.3(a).
FIRST SELLER DOCUMENTS shall mean, collectively, the documents described
in Sections 8.2.1(i), (ii), (iii), and (iv) and 8.2.2.
FOURTH NOTE shall mean the promissory note in the form attached hereto
as Exhibit 2.3(d) in an original principal amount equal to the excess, if any,
of the Purchase Price determined as of the Second Measurement Date over the sum
of the Cash Payment and the original amounts of the First Note, Second Note and
Third Note.
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GAAP shall mean generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board which are applicable
to the circumstances at the time or for the period in question.
GOODWILL shall have the meaning specified in the definition of "Assets".
GOVERNMENTAL AUTHORITY shall mean any agency, board, bureau, court,
commission, department, instrumentality or administration of the United States
government, any state government or any local or other governmental body in a
state, territory or possession of the United States or the District of Columbia.
HARRISBURG FACILITY shall mean the customer service facility and all
telephone switches, other equipment and approximately 75 employees, which is
currently located at the following address: 23 Old Depot Road, New Cumberland,
PA 17070.
HAZARDOUS MATERIALS shall mean any wastes, substances or materials
(whether solids, liquids or gases) that are deemed hazardous, toxic, pollutants
or contaminants, including, without limitation, substances defined as "hazardous
wastes," "hazardous substances," "toxic substances," "radioactive materials," or
other similar designations in, or otherwise subject to regulation under, any
Environmental Laws. "Hazardous Materials" includes polychlorinated biphenyls
(PCBs), asbestos, lead-based paints, and petroleum and petroleum products
(including, without limitation, crude oil or any fraction thereof).
INDEMNIFIED PARTY and INDEMNIFYING PARTY shall have the respective
meanings specified in Section 10.4.1.
INTELLECTUAL PROPERTY shall mean all intellectual property of Seller,
used or useful in connection with the Assets and the Business including, without
limitation, (i) all inventions (whether patentable or unpatentable and whether
or not reduced to practice) used or useful in connection with the Assets and the
Business, all improvements thereto and all patents, patent applications and
patent disclosures, (ii) all trademarks, service marks, trade dress, logos,
trade names, and corporate names (including without limitation the Pipeline
domain name and the Pipeline Name) used or useful in connection with the Assets
and the Business, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (iii) all
copyrightable works, all copyrights and maskworks and all applications,
registrations and renewals in connection therewith used or useful in connection
with the Assets and the Business, (iv) all trade secrets and confidential
information used or useful in connection with the Assets and the Business
(including, without limitation, all ideas, research and development, know-how,
formulas, compositions, manufacturing and production
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processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, business and
marketing plans and proposals and other information or material within the
definition of a "trade secret" as set forth in (S) 1(4) of the Uniform Trade
Secrets Act (1995), (v) all computer programs (including, without limitation,
data and related documentation) used or useful in connection with the Assets and
the Business including without limitation the Pipeline Software, (vi) all other
intellectual property used or useful in connection with the Assets and the
Business, (vii) all rights as a licensee or authorized user of the intellectual
property of any third party and (ix) all copies and tangible embodiments of the
foregoing in whatever form or medium.
IRS shall mean the Internal Revenue Service.
LAWS shall mean all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, orders, determinations, writs, injunctions,
awards (including, without limitation, awards of any arbitrator), judgments and
decrees applicable to the specified persons or entities and to the businesses
and assets thereof (including, without limitation, Laws relating to the sale,
leasing, ownership or management of real property; employment practices, terms
and conditions, and wages and hours; building standards, land use and zoning;
and safety, health and fire prevention), but specifically excluding
Environmental Laws.
LEASES shall mean the leases described on Schedule 4.10.
LOCAL CONTENT shall mean information produced by the Pipeline Group
related to the local communities served by PSI POPs.
LOSSES shall mean any and all demands, actions or causes of action,
suits, proceedings, investigations, arbitrations, assessments, losses, damages
(including diminution in value), liabilities, obligations (including those
arising out of any action, such as any settlement or compromise thereof or
judgment or award therein) and the reasonable costs and expenses of an
Indemnified Party associated therewith, including, without limitation, interest,
penalties and reasonable attorneys' fees and disbursements.
MARCH 31, 1996 BALANCE SHEET shall mean the unaudited balance sheet of
Seller attached hereto as a part of Schedule 4.5.
MULTIEMPLOYER PLAN shall mean a Plan that is a "multiemployer plan" as
such term is defined in Section 3(37) of ERISA.
NETSCAPE shall mean Netscape Communications, Inc.
NOTES shall mean, collectively, the First Note, the Second Note, the
Third Note and the Fourth Note.
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ORDINARY COURSE OF BUSINESS shall mean, with respect to Seller (i) with
respect to any period prior to the date of this Agreement, the ordinary course
of business consistent with past practices of Seller, and (ii) with respect to
any period from and after the date of this Agreement up to and including the
Second Closing Date, the ordinary course of business consistent with past
practices of Seller and the practices of a reasonable business person in similar
situations.
OTHER ARRANGEMENT shall mean a benefit program or practice providing for
bonuses, incentive compensation, vacation pay, insurance, restricted stock,
stock options, employee discounts, company cars, tuition reimbursement or any
other prerequisite or benefit (including, without limitation, any fringe benefit
under Section 132 of the Code) to employees, officers or independent contractors
of Seller that is not a Plan.
PCBs shall mean polychlorinated biphenyls.
PBGC shall mean the Pension Benefit Guaranty Corporation or its
successor.
PPP shall mean point to point protocol.
PENSION PLAN shall mean a Plan that is an "employee pension benefit
plan" as such term is defined in Section 3(2) of ERISA.
PIPELINE GROUP shall mean that portion of the Business which is
dedicated to servicing Subscribers using the Pipeline Software.
PIPELINE NAME shall mean the various names used to describe Seller
services which include the word "pipeline."
PIPELINE SOFTWARE shall mean the software used by subscribers to
Seller's Pipeline service including both the client and service component which
allows Pipeline subscribers to access the Internet.
PLAN shall mean any plan, program or arrangement, whether or not
written, that is or was (a) an "employee benefit plan" as such term is defined
in Section 3(3) of ERISA, and (b)(i) which was or is established or maintained
by Seller or a Common Control Entity at least in part for the benefit of
employees of Seller, or (b)(ii) to which Seller or a Common Control Entity
contributed or was obligated to contribute or to fund or provide benefits at
least in part for the benefit of employees of Seller.
PSI NETSCAPE LICENSE shall mean Seller's license to use Netscape's
Navigator 2.X Internet Browser.
- 7 -
<PAGE>
PSI POPs shall mean local dial-in points of presence connected to the
PSINet network.
PURCHASE PRICE shall have the meaning specified in Section 2.2.
QUALIFIED PLAN shall mean a Plan that is a Pension Plan and that
satisfies, or is intended by Seller or a Common Control Entity to satisfy, the
requirements for tax qualification described in Section 401 of the Code.
RELEASE shall mean any emission, spill, seepage, leak, escape, leaching,
discharge, injection, pumping, pouring, emptying, dumping, disposal, or release
of Hazardous Materials from any source (including, without limitation, the
Harrisburg Facility and property adjacent to the Harrisburg Facility) into or
upon the environment, including the air, soil, improvements, surface water,
groundwater, sewer, septic system, or waste treatment, storage, or disposal
systems at, on, above, or under the Harrisburg Facility.
RETAIL PROGRAMS shall mean Seller's relationship with retail outlets to
distribute, sell or promote Internet access service.
SALES TERM shall mean the period of five (5) years after the First
Measurement Date.
SECOND BUYER DOCUMENTS shall mean, collectively, the documents described
in Section 8.5.2.
SECOND CLOSING shall mean the closing of the purchase, assignment and
sale of the Second Closing Assets contemplated hereunder.
SECOND CLOSING ASSETS shall mean all Assets other than the First Closing
Assets.
SECOND CLOSING ASSUMED LIABILITIES shall mean each of the liabilities
and obligations of Seller identified on Schedule 2.4.2; provided, however, that
in no event shall Buyer assume any of Seller's liabilities or obligations
relating to (a) the payment of Taxes with respect to any period prior to the
Second Closing Date, (b) any of Seller's Plans or Other Arrangements, which
liabilities or obligations are due to any of Seller's current (active or non-
active), former or retired employees for any period prior to the Second Closing
Date, or (d) any liabilities under any Seller Contract or any Lease with respect
to services rendered, or events occurring, prior to the Second Closing Date.
SECOND CLOSING DATE shall mean the time and date on which the Second
Closing takes place, as established by Section 8.1.
- 8 -
<PAGE>
SECOND CLOSING SUBSCRIBERS shall mean a number of subscribers to
Seller's Interramp and/or Pipeline services which, when added to the number of
First Closing Subscribers, is not less than one hundred thousand (100,000).
SECOND MEASUREMENT DATE shall mean the date sixty (60) days after the
First Measurement Date.
SECOND NOTE shall mean the promissory note in the form attached hereto
as Exhibit 2.3(b) in original principal amount equal to Eight Million Eight
Hundred Thousand Dollars ($8,800,000.00) plus the net book value of the
Harrisburg Facility determined in accordance with GAAP as of the First Closing
Date.
SECOND SELLER DOCUMENTS shall mean, collectively, the documents
described in Section 8.3.1(i), (ii) and (iii).
SECURITIES ACT shall mean the Securities Act of 1933, as amended, and
all Laws promulgated pursuant thereto or in connection therewith or as a
successor thereto.
SELLER shall mean PSINet Inc.
SELLER CONTRACTS shall mean the contracts to which Seller is a party
relating to the Assets or Business that are specified on Schedule 4.12.
SELLER DOCUMENTS shall mean, individually and collectively the First
Seller Documents and the Second Seller Documents.
SELLER INFORMATION shall have the meaning specified in Section 3.7.1.
SUBSCRIBERS shall mean collectively, the Second Closing Subscribers and
the First Closing Subscribers.
TAXES shall mean all federal, state, local and foreign taxes (including,
without limitation, income, profit, franchise, sales, use, real property,
personal property, ad valorem, excise, employment, social security and wage
withholding taxes) and installments of estimated taxes, assessments,
deficiencies, levies, imports, duties, license fees, registration fees,
withholdings, or other similar charges of every kind, character or description
imposed by any Governmental Authorities, and any interest, penalties or
additions to tax imposed thereon or in connection therewith.
THIRD NOTE shall mean the promissory note in the form attached hereto as
Exhibit 2.3(c) in an original principal amount equal to the excess, if any, of
the Purchase Price determined as of the First Measurement Date over the sum of
- 9 -
<PAGE>
the Cash Payment and the original principal amounts of the First Note and the
Second Note.
WARN ACT shall mean the Worker Adjustment and Retraining Notification
Act, 29 U.S.C. Sec. 2101, et. seq.
WARN ACT LOSSES shall mean any Losses suffered or incurred by Buyer
under the WARN Act as a result of the transactions contemplated by this
Agreement.
WELFARE PLAN shall mean a Plan that is or was an "employee welfare
benefit plan" as such term is defined in Section 3(l) of ERISA
- 10 -
<PAGE>
Exhibits and Schedules to the Purchase Agreement have been omitted.
The following is a list of the omitted Exhibits and Schedules which the Company
agrees to furnish supplementally to the Commission upon request:
<TABLE>
<CAPTION>
Exhibits:
--------
<S> <C>
Exhibit 2.3(a) Form of Convertible Note (First Closing)
Exhibit 2.3(b) Form of Convertible Note (Second Closing)
Exhibit 2.3(c) Form of Convertible Note (First Measurement Date)
Exhibit 2.3(d) Form of Convertible Note (Second Measurement Date)
Exhibit 3.5 MindSpring Core Values and Beliefs
Exhibit 8.2.1(a) Form of Bill of Sale and Assignment of Assets
(First Closing)
Exhibit 8.2.1(b) Form of Assignment and Assumption of Contracts
and Leases (First Closing)
Exhibit 8.2.1(c) Form of Assumption Agreement (First Closing)
Exhibit 8.2.1(d) Form of Network Services Agreement
Exhibit 8.2.2 Form of Confidentiality and Non-Competition
Agreement (First Closing)
Exhibit 8.3.1(a) Form of Bill of Sale and Assignment of Assets
(Second Closing)
Exhibit 8.3.1(b) Form of Assignment and Assumption of Contracts
and Leases (Second Closing)
Exhibit 8.3.1(c) Form of Assumption Agreement (Second Closing)
Exhibit 8.3.2 Form of Confidentiality and Non-Competition
Agreement (Second Closing)
</TABLE>
<TABLE>
<CAPTION>
Schedules:
---------
<S> <C>
Schedule 2.4.1 First Closing Liabilities
Schedule 2.4.2 Second Closing Liabilities
Schedule 3.11 Employees
Schedule 4.1 Foreign Qualifications
Schedule 4.4 Employee Contracts
Schedule 4.5 Financial Information
Schedule 4.6 Material Liabilities
Schedule 4.8 Statement of Absence of Material Adverse Change
Schedule 4.9.1 Assets with Encumbrances
Schedule 4.9.3 Inventory of Fixed Assets
Schedule 4.10.1 Leases and Subleases of Real Property
Schedule 4.11 Intellectual Property
Schedule 4.12 Contracts, Agreements, Leases and Commitments
Schedule 4.13 Subscribers Included in the First Closing
Schedule 4.15.2 Disputes
Schedule 4.17.1 Post-Retirement Medical, Life Insurance or Other
Post-Retirement Plans
Schedule 4.18.2 Notices
Schedule 4.18.3 Permits, Licenses, Certificates and Approvals
Schedule 4.19 Consents
Schedule 4.22 Disclosure of Negative Material Conditions
Schedule Annex I Licensed Software
</TABLE>
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINET INC.
Under Section 805 of the Business Corporation Law
The undersigned, being the President and Secretary of PSINet Inc. (the
"Corporation"), respectively, in order to amend the Corporation's Certificate of
Incorporation, do hereby certify that:
FIRST: The name of the Corporation is PSINet Inc.
-----
SECOND: The Certificate of Incorporation of the Corporation was filed by
------
the Department of State of the State of New York on October 21, 1988 under the
name Graphic Specialty Finishers, Inc.
THIRD: The Certificate of Incorporation is hereby amended to add a
-----
provision to Paragraph FOURTH stating the number, designation, relative rights,
preferences and limitations of the Series A Junior Participating Preferred Stock
as fixed by the Board of Directors of the Corporation and to set forth in full
the text of such provision.
FOURTH: To effect the foregoing, Paragraph FOURTH of the Certificate of
------
Incorporation is amended to add the following at the end of such Paragraph
FOURTH:
Series A Junior Participating Preferred Stock
- ---------------------------------------------
The Corporation is hereby authorized to establish a series of Preferred
Stock of the Corporation of the designation and number of shares, and having the
relative rights, preferences
<PAGE>
and limitations thereof (in addition to the provisions set forth in this
Certificate of Incorporation which are applicable to the Preferred Stock of all
classes and series) as follows:
Section 1. Designation of Series of Preferred Stock and Amount. There
---------------------------------------------------------------
shall be a series of Preferred Stock, par value $.01 per share, of the
Corporation which shall be designated as "Series A Junior Participating
Preferred Stock," par value $.01 per share, and the number of shares
constituting such series shall be one million (1,000,000). Such number of shares
may be increased or decreased by resolution of the Board of Directors; provided
that no decrease shall reduce the number of shares of Series A Junior
Participating Preferred Stock to a number less than that of the shares then
outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
Section 2. Dividends and Distributions.
---------------------------------------
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the Series
A Junior Participating Preferred Stock with respect to dividends, the holders of
shares of Series A Junior Participating Preferred Stock, in preference to the
holders of shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Corporation and any other stock of the Corporation ranking
junior to the Series A Junior Participating Preferred Stock, shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
first day of January, April, July and October in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Stock in an
amount per share (rounded to the nearest cent) equal to, subject to the
provision for adjustment hereinafter set forth, 1,000 times the aggregate per
share amount of all cash dividends and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend or distribution payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Junior Participating Preferred Stock. In the event the
Corporation shall at any time after May 8, 1996 (the "Rights Declaration Date")
(i) declare or pay any dividend on the Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
2
<PAGE>
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
concurrently with any declaration by it of a dividend or distribution on the
Common Stock (other than a dividend or distribution payable in shares of Common
Stock) and in no event shall the Corporation declare a dividend or distribution
on the Common Stock (other than a dividend or distribution payable in shares of
Common Stock) without concurrently declaring such a dividend or distribution on
the Series A Junior Participating Preferred Stock.
(C) Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Junior Participating Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 50 days prior to the
date fixed for the payment thereof.
Section 3. Liquidation, Dissolution or Winding Up.
--------------------------------------------------
(A) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, no distribution shall be made (i)
to the holders of Common Stock or of shares of any other stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the holders
of shares of Series A Junior Participating Preferred Stock shall have received
per share, the amount of $1,000, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 1,000 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock (the "Series A Liquidation Preference"), or (ii) to the holders of shares
of stock ranking on a parity upon liquidation, dissolution or winding up with
the Series A Participating Preferred Stock, except distributions made ratably on
the Series A Participating Preferred Stock and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. Following the payment
of the full amount of the Series A Liquidation Preference, holders of Series A
Junior Participating Preferred Stock and holders of shares of Common Stock shall
share pari passu on a per share basis in the remaining assets of the
Corporation.
(B) In the event the Corporation shall at any time (i) declare or pay
any dividend on the Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares of
Series A Participating Preferred Stock were entitled immediately prior to such
event under the proviso in clause (i) of paragraph (A) of this Section 3 shall
be adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of
3
<PAGE>
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(C) In the event there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series A Junior Participating Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares (including the Series A Junior Participating Preferred Stock) in
proportion to their respective liquidation preferences.
Section 4. Voting Rights. The holders of shares of Series A Junior
-------------------------
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth and
except as otherwise provided herein or in the Certificate of Incorporation or as
required by law, each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to 1,000 votes on all matters submitted to a
vote of the shareholders of the Corporation. In the event the Corporation shall
at any time after the Rights Declaration Date (i) declare or pay any dividend on
the Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the number
of votes per share to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or in the Certificate of
Incorporation or in any other Certificate of Amendment creating a new series of
Preferred Stock or any similar stock, and except as otherwise required by law,
the holders of shares of Series A Junior Participating Preferred Stock and the
holders of shares of Common Stock shall vote together as one class on all
matters submitted to a vote of shareholders of the Corporation.
(C) Except as set forth herein or as otherwise provided by law, holders
of Series A Junior Participating Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for taking
any corporate action.
Section 5. Certain Restrictions and Limitations.
- ------------------------------------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares
4
<PAGE>
of Series A Junior Participating Preferred Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series
A Junior Participating Preferred Stock, and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior (either
as to dividends or upon dissolution, liquidation or winding up) to the
Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 5,
purchase or otherwise acquire such shares at such time and in such manner.
Section 6. Reacquired Shares. Any shares of Series A Junior
----------------------------
Participating Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
5
<PAGE>
Section 7. Consolidation, Merger, etc. If the Corporation shall enter
--------------------------------------
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are converted into, exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such event the
shares of Series A Junior Participating Preferred Stock shall at the same time
be similarly converted into, exchanged for or changed into an amount per share
(subject to the provision for adjustment hereinafter set forth) equal to 1,000
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is converted, changed or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount set forth in the preceding
sentence with respect to the conversion, exchange or change of shares of Series
A Junior Participating Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that are outstanding immediately prior to
such event.
Section 8. No Redemption. The shares of Series A Junior Participating
-------------------------
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Stock
-------------------
shall rank senior to the Common Stock and junior to all other series of the
Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, unless the terms of any such series shall provide otherwise.
Section 10. Fractional Shares. Series A Junior Participating Preferred
------------------------------
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
Section 11. Amendment. The Certificate of Incorporation of the
----------------------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of not less than a majority of the then
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
6
<PAGE>
FIFTH: The foregoing amendment to the Certificate of Incorporation was
-----
authorized by the unanimous affirmative vote of the members of the Board of
Directors of the Corporation at a meeting held duly called and held on May 8,
1996.
IN WITNESS WHEREOF, we have made and subscribed this certificate and
hereby affirm under the penalties of perjury that its contents are true this
18th day of May, 1996.
/s/ William L. Schrader
------------------------------
William L. Schrader, President
/s/ David N. Kunkel
------------------------------
David N. Kunkel, Secretary
7
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINET INC.
(Under Section 805 of the Business Corporation Law)
- --------------------------------------------------------------------------------
FILED BY:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022
<PAGE>
SEPARATION AGREEMENT AND GENERAL RELEASE
----------------------------------------
SEPARATION AGREEMENT AND GENERAL RELEASE made and executed as of May
14, 1996 between DANIEL P. CUNNINGHAM ("Mr. Cunningham") and PSINET INC., a New
York corporation (the "Company"), relating to Mr. Cunningham's separation from
employment with the Company.
WHEREAS, the Company and Mr. Cunningham entered into a certain
employment agreement dated February 21, 1996 (the "Prior Agreement"); and
WHEREAS, the Company agreed to indemnify Mr. Cunningham by agreement
dated November 28, 1994 (the "Indemnification Agreement");
WHEREAS, the Company has issued certain stock option grants dated
December 25, 1994, February 2, 1995, and February 21, 1996 to Mr. Cunningham;
and
WHEREAS, pursuant to a certain stock option exercise on February 2,
1995, Mr. Cunningham made a promissory note payable to the Company in the face
amount of $50,000.00 (the "Note"); and
WHEREAS, the Company and Mr. Cunningham desire to amicably settle and
sever their employment relationship on July 22, 1996 and do by this Agreement
wish to reach a mutual accord and satisfaction and that by these presents Mr.
Cunningham does intend to forever release and discharge the Company from all
claims subject to the terms set forth herein;
NOW, THEREFORE, for good and valuable consideration and the mutual
promises contained herein, the receipt and sufficiency of which the parties
hereby acknowledge, Mr. Cunningham and the Company, each intending to be legally
bound, agree as follows:
1. Mr. Cunningham hereby resigns his position as Vice President-
Finance and Treasurer of the Company and each other office or position held by
him with the Company, and as a director or officer of any subsidiary of the
Company, effective July 22, 1996. Effective as of April 17, 1996, Mr.
Cunningham hereby resigns as Chief Financial Officer and CIO of the Company.
Mr. Cunningham's last day of employment with the Company and its subsidiaries
will be July 22, 1996. Mr. Cunningham's benefits, insurance coverages and
benefit coverages existing as of the date hereof shall continue through July 22,
1996, except as otherwise provided in Paragraph 6 of this Agreement.
- 1 -
<PAGE>
2. Mr. Cunningham hereby resigns his position as Director of the
Company effective the close of business on May 17, 1996. The Board of Directors
of the Company shall deliver to Mr. Cunningham its resolution accepting such
resignation as director. The parties agree that Mr. Cunningham will continue to
be indemnified in full under existing Company By-laws covering its executives,
and under the Indemnification Agreement (which shall, to the extent provided
therein, survive the execution of this Agreement), for any actions, events or
occurrences within the scope of his employment duties through July 22, 1996 and
his service as director through May 17, 1996.
3. The Company agrees to pay Mr. Cunningham as severance, the sum of
$180,000, minus all required withholding for income taxes, social security,
unemployment and other normal payroll deductions (collectively, "Required
Withholdings"). Such amount will be paid by the Company to Mr. Cunningham bi-
weekly commencing on or about August 2, 1996 at such times in accordance with
the Company's usual payroll practices for its executives. Said sum will be
divided into 36 equal installments.
4. In addition to the severance payment provided for under Paragraph
3 hereof, Mr. Cunningham shall be entitled to:
A. Payment of a lump sum in the amount of $40,000 with respect
of the year ending December 31, 1996 referred to in Section 3(b) of the Prior
Agreement and shall be deemed earned by Mr. Cunningham on July 22, 1996 provided
that (i) Mr. Cunningham acts in the best interests of, and not in a manner
detrimental to, the Company and (ii) subject to the immediately preceding clause
(i), payment of such amount shall be paid on or before December 31, 1996. Such
lump sum payment shall be paid to Mr. Cunningham minus all Required
Withholdings. No bonus shall be payable to Mr. Cunningham, provided, however
that the Company shall be obligated to make the lump sum payment as provided in
and subject to the terms of this Paragraph 4.A.
B. In addition to the other existing options in which Mr.
Cunningham is vested as of July 22, 1996, to the extent permitted under
applicable option plans and agreements of the Company and applicable tax laws
and regulations, there shall be vested in Mr. Cunningham effective July 22, 1996
(i) 37,500 of the 100,000 options issued pursuant to Section 3(c) of the Prior
Agreement to the extent that at least 37,500 of such options have not vested by
July 22, 1996 and (ii) all of the options granted to Mr. Cunningham on December
25, 1994 and February 2, 1995, which have not fully vested as of July 22, 1996
(collectively, the "Accelerated Options"). Mr. Cunningham acknowledges and
agrees that the Company has not made any representation or warranty as to the
effect, if any, of the accelerated vesting of the Accelerated Options, as
provided above, under applicable laws and regulations (including, without
limitation, applicable tax and securities laws and regulations) and has
consulted with his
- 2 -
<PAGE>
own counsel concerning such matters. The Company hereby waives, effective July
22, 1996, any competition restriction contained in applicable option plans and
agreements of the Company relating to the Accelerated Options and other Company
stock options held by Mr. Cunningham provided that, during the period from the
date hereof through July 22, 1996, Mr. Cunningham acts in the best interest of,
and not detrimental to, the Company.
5. Mr. Cunningham agrees to repay, on or prior to December 31, 1996,
to the Company all outstanding loans and advances made to him (including,
without limitation, the Note) together with all interest accrued thereon.
6. Except as otherwise expressly provided in this Agreement, all
existing benefit and insurance coverages for Mr. Cunningham will cease on July
22, 1996. The Company will offer Mr. Cunningham the opportunity to elect
continued coverage beyond July 22, 1996 under the Company health plans covering
Mr. Cunningham as of such date as more fully set forth in the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), and, if Mr. Cunningham so
elects, will reimburse Mr. Cunningham, upon the submission of appropriate
supporting documentation, an amount, after Required Withholdings, if any, are
deducted, of his out-of-pocket costs of such coverage.
7. Effective July 22, 1996, provided that, during the period from
the date hereof through July 22, 1996, Mr. Cunningham acts in the best interests
of, and not detrimental to, the Company, the Company releases Mr. Cunningham
from his obligations under Section 6 of the Prior Agreement.
8. Except as specifically provided in this Agreement,
notwithstanding any written agreement to the contrary, Mr. Cunningham
understands he is not entitled to any other payments for salary, bonuses,
options, severance, notice, vacations, holidays or other benefits or to any
other form or kind of payment, allowances or compensation.
9. On or before July 22, 1996, Mr. Cunningham will surrender any and
all corporate credit cards in his name, the Company equipment or other property,
keys, passes, identification cards or badges which are in his possession or
under his control except to the extent that he has already surrendered same.
10. A. Mr. Cunningham acknowledges that, in connection with his
employment with the Company, he has been privy to and has acquired certain
proprietary or business information relating to the Company and/or its
subsidiaries or affiliates, including confidential information and trade or
business secrets not readily available in the market place or to the public.
Such information may include, but is not limited to, information relating to the
Company operations, business plans, financial and accounting matters, sales,
marketing research, data
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<PAGE>
and strategies, patents, copyrighted materials, engineering specifications,
customized software and programs, design guides, systems analyses, calculation
forms, products and services, proposed products and services, customer lists and
files, and all other know-how, whether patentable or entitled to trademark,
copyright or other protection, developed or used in connection with the
Company's business, as well as other information regarding the Company's
customers. Mr. Cunningham agrees he will not disclose to any third parties,
directly or indirectly, any such confidential or proprietary information. The
only exceptions to the foregoing shall be disclosures authorized in writing by
the Company and information which (a) is in the public domain, (b) becomes
public knowledge through no fault of Mr. Cunningham, or (c) is required to be
disclosed by court order or other government process.
B. Mr. Cunningham further agrees he will not remove or cause to
be removed from the Company's premises any information as set forth in Paragraph
10.A above, equipment or other property, or copies thereof, belonging to the
Company, its employees, customers or others doing business with it. Furthermore,
Mr. Cunningham agrees that, on or before July 22, 1996, he will return all such
information, equipment or other property in his possession or control, including
copies of such information or other property.
C. Notwithstanding any provision of this Agreement to the
contrary, Mr. Cunningham's obligations under Section 7 of the Prior Agreement
shall remain in effect after July 22, 1996.
11. The parties acknowledge that the terms of this Agreement and the
circumstances, events and occurrences preceding Mr. Cunningham's separation from
employment are and must remain strictly confidential. Accordingly, except as
required by applicable law or stock exchange or Nasdaq rules, neither Mr.
Cunningham nor the Company will in any manner divulge, publish or publicize, or
cause to be divulged, published or publicized, any such confidential information
to any third parties, to the media or to any current or former employee,
customer or client of the Company. The sole and exclusive exceptions to the
foregoing mutual commitment shall be Mr. Cunningham's immediate family and Mr.
Cunningham's and the Company's tax and legal advisors. In conformance
therewith, the Company agrees it will refrain from disparaging Mr. Cunningham
and Mr. Cunningham agrees he will refrain from disparaging the Company, its
business principals or other employees.
12. A. Upon reasonable advance request by the Company, Mr.
Cunningham will cooperate fully and make himself available, as needed by the
Company, to meet with the Company and/or its subsidiaries and affiliates and
its/their counsel in connection with any investigation, administrative
proceeding or
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<PAGE>
litigation relating to any matter in which he was involved or has knowledge
except for any investigation, administrative proceeding or litigation relating
principally to the enforcement of this Agreement. The Company agrees (a) that
Mr. Cunningham need not make himself available at times which would materially
and adversely interfere with his other business, professional or employment
activities and (b) that Mr. Cunningham will be reimbursed by the Company, in
accordance with its normal practices, for any reasonable out-of-pocket business
expenses actually incurred by Mr. Cunningham in the performance of duties
required by the Company under this Paragraph 12.
B. In the event Mr. Cunningham is subpoenaed by any person or
entity (including, but not limited to, any government agency) to give testimony
(in a deposition, court proceeding or otherwise) or to produce documents or
answers to written questions which in any way relate to his employment with the
Company, he will give the Company prompt notice of such request or demand and
will make no disclosure until the Company has had a reasonable opportunity,
should it so desire, to contest the right of the requesting person or entity to
obtain such disclosure.
13. A. As consideration for the payments and other benefits and
promises provided in this Agreement to which Mr. Cunningham would not otherwise
be entitled, Mr. Cunningham, with the intention of binding himself, his heirs,
personal representatives, executors, administrators and assigns, hereby releases
and forever discharges the Company, its affiliates, subsidiaries and predecessor
corporations and their past and present employees, officers, directors,
shareholders, agents, attorneys, representatives and trustees and administrators
under any Company employee benefit plans (collectively referred to herein as
RELEASEES), jointly and individually, from any and all claims, demands, damages,
remedies, contracts (express or implied) and causes of action of any kind or
nature whatsoever, whether known or unknown, which Mr. Cunningham had, now has
or in the future may or could have, against RELEASEES arising out of or relating
to any matter up to the date of the execution of this Agreement, including, but
not limited to, any and all claims in connection with his employment with the
Company (or with any of the corporations released herein) and his separation
therefrom, excluding any claims to enforce his rights under this Agreement.
Without limiting the generality of the foregoing, Mr. Cunningham knowingly and
voluntarily waives all rights he (or anyone on his behalf) has or may have to
commence or prosecute any legal proceeding or action under the Age
Discrimination in Employment Act of 1967, as amended, the Older Workers Benefit
Protection Act of 1990, Title VII of the Civil Rights Act of 1964, as amended,
the Americans with Disabilities Act, the Employee Retirement Income Security Act
of 1974, as amended, and any and all other federal, state and local equal
employment, fair employment, wage payment and civil, human or employee rights
laws (whether
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<PAGE>
statutory, decisional or regulatory), regulatory, statutory or common law of any
jurisdiction including, but not limited to, any and all tort claims (e.g.,
defamation, intentional infliction of emotional distress, negligent hiring,
retention or referral, conversion, interference with contract, abusive
discharge) and any and all federal, state or local laws relating to benefits,
labor or employment standards or retaliation (e.g., whistleblowing); provided,
however, that the foregoing shall not release any rights of Mr. Cunningham (i)
under COBRA or (ii) pursuant to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to an accounting or receipt of his 401(K) plan
account assets or any other retirement benefits in which he is vested as of July
22, 1996. In addition to, and without limitation of the foregoing, except to the
extent permitted by law, Mr. Cunningham will not voluntarily participate or
assist others in any suit or proceeding against RELEASEES, or any of them,
involving claims of the kind waived herein. If, prior to July 22, 1996, Mr.
Cunningham has filed any charge, complaint or action against any of the
RELEASEES related to any matter released or waived herein, he will, as a
condition to the Company's obligations under this Agreement, withdraw and
discontinue all such charges, complaints or actions and execute all documents
necessary to effectuate such withdrawals or discontinuances.
B. Should any proceeding be instituted either by or on behalf of
Mr. Cunningham with respect to matters here settled, released or waived or by or
on behalf of the Company with respect to any such matter, this Agreement shall
be deemed full and complete accord, satisfaction and settlement of any such
claim and sufficient basis for its immediate dismissal.
C. Mr. Cunningham further agrees that he will not institute a
claim or charge relating to any matter released or waived herein or sue the
Company or any RELEASEE concerning such claim or charge. If he should violate
this covenant by suing the Company or any RELEASEE, Mr. Cunningham agrees that
he will pay all costs and expenses of defending against such suit incurred by
the Company or by any RELEASEE, including reasonable attorneys' fees, and
further agrees that this Agreement shall be sufficient basis for the immediate
dismissal of any such suit .
14. Mr. Cunningham represents and acknowledges by his signature
hereon that he carefully has read and understands the provisions of this
Agreement, that, except for a letter of resignation from the Company's Board of
Directors of even date herewith, it contains the entire understanding between
him and the Company and that he is not relying upon any representations or
statements, written or oral, made by or on behalf of the Company not set forth
herein. Except as expressly provided herein, the Prior Agreement is hereby
terminated. Mr. Cunningham and the Company both acknowledge that this Agreement
may not be
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<PAGE>
modified except in a writing that is signed by both parties and that
specifically refers to this Agreement.
15. Mr. Cunningham acknowledges that the Company specifically urged
and encouraged him to consult with a legal counsel or representative of his
choice for the purpose of determining whether to sign this Agreement and that he
in fact consulted with Peterson & Basha, P.C. for such purpose. Mr. Cunningham
further acknowledges that he was afforded a reasonable and sufficient period of
time of at least twenty-one (21) days to review, for deliberation thereon, for
negotiation of the terms thereof and to consider whether to execute it.
16. This Agreement may be revoked in writing by Mr. Cunningham at any
time during the period of seven (7) calendar days following the date on which
both parties have signed this Agreement. The provisions of this Agreement shall
not become effective and no payment will be made hereunder until such seven-day
revocation period has expired without Mr. Cunningham exercising this revocation
right.
17. This Agreement is not intended, and should not be construed, as
evidence of any wrongdoing on the part of either Mr. Cunningham or of the
Company, its subsidiaries, affiliates, successors, assigns, officers, directors,
shareholders, executors, administrators, attorneys, trustees, employees, agents
or other representatives or as any admission of liability (or of the validity of
any claim settled or released hereunder) either by Mr. Cunningham or by the
Company or other such persons or entities, under any federal, state of local law
or regulation of any nature whatsoever.
18. Except for disputes or claimed breaches concerning Paragraph 10
above, the parties agree that any dispute under this Agreement or the breach
thereof will be submitted to arbitration in Washington, D.C. before three (3)
arbitrators, one (1) arbitrator selected by the Company, one (1) arbitrator
selected by Mr. Cunningham, and the third arbitrator selected by the parties in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association then pertaining. The costs of such third arbitrator and
arbitration proceeding, as well as the reasonable attorneys' fees of the party
prevailing in the outcome of such proceeding, will be borne by the party which
does not prevail in the outcome of such proceeding. Such arbitration shall be
governed in all respects by the law of the State of New York. The arbitrators'
decision shall be in writing and shall be final, binding and enforceable in any
court of competent jurisdiction.
19. This Agreement shall at all times be construed with and governed
by the laws of the State of New York applicable to contracts entered into and
performed entirely within the State of New York and without reference to its
conflict of laws rules.
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<PAGE>
20. If any provision of this Agreement shall be held by a court of
competent jurisdiction to be illegal, void or unenforceable, such provision
shall be of no force or effect and shall not impair the enforceability and
continued validity of any other provision of this Agreement. Notwithstanding
the foregoing, upon any final determination that the release set forth in
Paragraph 13.A above is in whole or in part illegal, void or unenforceable, the
Company's obligations to make any remaining payments or contributions hereunder
will cease immediately and Mr. Cunningham will be required to repay all monies
paid to him hereunder. Furthermore, such return of monies will not affect the
Company's rights under the remaining provisions of this Agreement.
21. This Agreement is binding upon, and will inure to the benefit of,
the parties and each of their heirs, executors, administrators, trustees,
representatives, successors or assigns. Mr. Cunningham further agrees this
Agreement is made for the benefit of the Company's subsidiaries, affiliates and
all other existing, succeeding or predecessor corporations.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
DANIEL P. CUNNINGHAM PSINET INC.
/s/ Daniel P. Cunningham By: /s/ William L. Schrader
- ------------------------------- -----------------------
(Signature) William L. Schrader
Chairman, President and CEO
Date of Mr. Cunningham's
Execution and Delivery:
May 14, 1996
APPROVED by the Compensation Committee
of the Board of Directors, PSINet Inc.
/s/ William L. Schrader 5/14/96
- ------------------------- ------------------
William L. Schrader Date
/s/ William H. Baumer as of May 14, 1996
- ------------------------- ------------------
William H. Baumer Date
/s/ Wade Woodson as of May 14, 1996
- ------------------------- ------------------
Wade Woodson Date
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<PAGE>
COMMONWEALTH OF VIRGINIA )
) ss.:
COUNTY OF FAIRFAX )
On May 14, 1996, before me personally came Daniel P. Cunningham, to
me known and known to me to the individual described in, and who executed, the
foregoing SEPARATION AGREEMENT AND GENERAL RELEASES and who duly acknowledged to
me that he executed the same.
/s/ Maud Gale
--------------------------------
NOTARY PUBLIC
COMMONWEALTH OF VIRGINIA )
) ss.:
COUNTY OF FAIRFAX )
On May 14, 1996, before me personally came William L. Schrader, to
me known and known to me to be an officer of PSINET INC., to wit its Chairman,
President and CEO, who executed the foregoing SEPARATION AGREEMENT AND GENERAL
RELEASES and who duly acknowledged to me that he executed the same having been
duly authorized to do so.
/s/ Maud Gale
--------------------------------
NOTARY PUBLIC
<PAGE>
[LETTERHEAD OF PSINET APPEARS HERE]
April 3, 1996
Mr. Harold Wills
Chalks, Christchurch Road
Virginia Water, GU25 4RW
England
Dear Pete:
This letter confirms our offer of employment by PSINet Inc. (the "Company"), and
sets forth the terms and conditions which shall govern such employment as
outlined below. This offer is subject to satisfactory completion of reference
checks and approval by the Company's board of directors, but otherwise shall
remain open until noon on April 8, 1996.
1. EMPLOYMENT:
a) The Company hereby employs you as Executive Vice President and Chief
Operating Officer reporting to the President and Chief Executive Officer of the
Company. This is a corporate officer position and as an officer of the Company
you must stand for election by the Board of Directors each year. You accept the
employment and agree to begin work on or about April 8, and remain in the employ
of the Company, and, except during vacation periods and sickness, to provide
during standard business hours a minimum of forty hours per week of management
services to the Company, as determined by and under the direction of the
President.
b) In connection with your employment by the Company, your principal place of
employment shall be the greater Washington, D.C. area and you shall not be
required permanently to relocate to a principal place of business outside such
area during the term of your employment hereunder.
c) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
<PAGE>
2. TERM OF EMPLOYMENT. The term of the employment shall commence on the date
hereof and shall continue for a period of three (3) years.
3. COMPENSATION:
a) BASE SALARY. The Company shall pay you a base salary at the rate of
$200,000 per annum. Beginning on January 2, 1997, and on January 2nd of each
year during the term of this Agreement, your base salary shall be increased at a
minimum by an amount equal to 5% of your then current base salary. Your base
salary shall be subject to additional increases at the discretion of the
Company's Board of Directors. Your base salary shall be payable in such
installments as the Company regularly pays its other salaried employees, subject
to such deductions and withholdings as may be required by law or by further
agreement with you.
b) PERFORMANCE BONUS. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance for the applicable
year. The performance criteria will be issued separately by the Chairman of the
Company's Board, at the beginning of each year, and may be changed, with mutual
fairness, from time to time as situations develop. The performance bonus for the
period ending December 31, 1996 will be a total of $75,000, in two tiers, the
first being $40,000, and the second $35,000. Separate criteria will be
established for your entitlement to each tier's bonus money. For the year
starting January 1, 1997, your performance bonus shall not be less than $75,000.
c) INCENTIVE STOCK OPTIONS. Effective upon your acceptance of this letter,
PSINet Inc. shall grant you options to purchase One Hundred Fifty Thousand
(150,000) shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan. Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and provisions
prescribed by the Plan, the option agreement shall provide that (a) the exercise
price of the Options shall be the price per share of the Company's common stock
as reported by the NASDAQ Stock Market on the day of the signing of this
Agreement, (b) the Options shall not be exerciseable after the expiration of ten
years from the date such Options are granted, and (c) the stock shall vest
ratably, monthly, over forty-eight months, provided that for each month's
vesting purposes you continue to be employed full time by the Company or one of
its subsidiaries during such month, and provided that the Company's Board of
Directors ratifies, no less often than annually, that you have met the
performance standards and criteria set for you for the preceding period.
In the event of a Change of Control, as defined in Section 9 below,
or upon the occasion of your death during the term of this Agreement while
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<PAGE>
you are in compliance with the requirements hereof, the Company shall vest all
unvested stock options immediately.
4. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), revenue bonus plan participation, four weeks' paid
vacation, a monthly company car allowance (maximum amount to be determined), and
life, health, accident and disability insurance under the Company's plans,
policies and programs available to employees in accordance with the provisions
of such plans, policies, and programs.
5. RELOCATION PACKAGE. Your "target" date for completing your relocation to
the Greater Washington, D.C. area shall be as soon as practicable. Prior to that
time, but ending when you complete your relocation, the Company shall pay for
airfare for your twice per month travel from London to Washington, D.C.
(business class fare rate). The Company will provide you with a corporate
apartment in the Herndon, VA area. In addition, the Company will reimburse you
up to three (3) "points" financing charges on your purchase of a new home in
this area. The Company shall also reimburse you for your reasonable household
moving expenses here.
6. TERMINATION:
a) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 5(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 6(a) hereof. In addition, your
employment may be terminated by you at any time for any reason, provided you
shall have given the Company at least thirty (30) days' prior written notice of
such termination. By the 30th day the Company must notify you in writing
whether it has elected to use the non-Competition restriction. Such decision
may not be rescinded. Failure of the Company to so notify you shall result in
the non-Competition restriction not being in place.
b) Subject to your compliance with your obligations under Section 6 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twenty-four (24)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 3; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the
3
<PAGE>
Company during such 24-month period. The Company shall make up the difference in
cash payments directly to you to the extent that applicable law would not permit
it to make such contributions.
c) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 6
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
7. AGREEMENT NOT TO COMPETE.
a) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twenty-
four (24) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
b) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 6(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 6(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of any of the provisions
in Section 6(a) above cannot be remedied by the recovery of damages, and agree
that in the event of any such breach or threatened breach which is not cured
with such 30-day period, the Company may pursue
4
<PAGE>
injunctive relief for any such breach or threatened breach. If a court of
competent jurisdiction determines that you breached any of such provisions, you
shall not be entitled to any Termination Payments from and after date of the
breach. In such event, you shall promptly repay any Termination Payments
previously made plus interest thereon from the date of such payment(s) at 12%
per annum. If, however, the Company has suspended making such Termination
Payments and a court of competent jurisdiction finally determines that you did
not breach such provision or determines such provision to be unenforceable as
applied to your conduct, you shall be entitled to receive any suspended
Termination Payment, plus interest thereon from the date when due at 12% per
annum. The Company may elect (once) to continue paying the Termination Payments
before a final decision has been made by the court.
8. INTELLECTUAL PROPERTY Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
9. TRANSFERABILITY.
a) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
b) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
c) As used in this Agreement, "Change in Control" shall mean: (i) the
shareholders of the Company approve an agreement for the sale of all or
5
<PAGE>
substantially all of the assets of the Company; or (ii) the shareholders of the
Company approve a merger or consolidation of the Company with any other
corporation (and the Company implements it), other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent more than 80% of
the combined voting power of the voting securities of the Company, or such
surviving entity, outstanding immediately after such merger or consolidation, or
(B) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as defined below)
acquires more than 30% of the combined voting power of the Company's then-
outstanding securities; or (iii) any "person," as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than (A) the Company, (B) any corporation owned, directly
or indirectly, by the Company or the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding securities.
10. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5b.
11. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the
entire agreement of the parties concerning the subject matter hereof and
supersedes and cancels all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written. No waiver or
modification of any provision of this Agreement shall be effective unless in
writing and signed by both parties.
12. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
13. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
6
<PAGE>
14. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
7
<PAGE>
Wills EMPLOYMENT AGREEMENT SIGNATURE PAGE
Please confirm your agreement with the forgoing by signing and
returning one copy of this letter Agreement to the undersigned, whereupon this
letter agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ William L. Schrader
------------------------------------------------
William L. Schrader, Chairman, President and CEO
Accepted and Agreed to as of
the day first above written:
By: /s/ Harold Wills
---------------------------------------------------
Harold Wills
8
<PAGE>
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
This First Amendment to Amended and Restated Credit Agreement ("Agreement")
is made as of this 13th day of August, 1996 by and between PSINet Inc. (f/k/a
Performance Systems International, Inc.), a New York corporation ("PSI"), and
InterCon Systems Corporation, a Delaware corporation ("InterCon"), as borrowers
(PSI and InterCon hereinafter sometimes referred to individually as a "Borrower"
and collectively as the "Borrowers"), and Fleet National Bank, formerly known as
Fleet National Bank of Connecticut, successor by merger to Fleet Bank of
Massachusetts, N.A. (hereinafter referred to as the "Bank"), as lender.
WHEREAS, as of November 30, 1994, PSI and the Bank entered into a Credit
Agreement (the "Original Credit Agreement");
WHEREAS, as of March 24, 1995, PSI and the Bank entered into an amendment
to the Original Credit Agreement (the "First Amendment to Credit Agreement") to
(i) increase the term credit from $2,000,000 to $8,500,000, (ii) add the then
newly-acquired PSINet Pipeline New York, Inc. (formerly known as The Pipeline
Network Inc.), as a guarantor (the "Guarantor") and (iii) otherwise amend the
Original Credit Agreement, all as set forth in the First Amendment to Credit
Agreement;
WHEREAS, as of November 10, 1995, the Borrowers and the Bank entered into
an Amended and Restated Credit Agreement (the "Amended and Restated Credit
Agreement") which amended and restated the terms of the Original Credit
Agreement as amended by the First Amendment to Credit Agreement to (i) increase
the revolving credit from $1,500,000 to $5,000,000, (ii) add Software Ventures
Corporation ("Software") and InterCon as borrowers under the revolving credit
(to the extent provided therein), (iii) increase the term credit from $8,500,000
to $13,500,000 and (iv) make certain other changes, all as set forth in the
Amended and Restated Credit Agreement;
WHEREAS, on April 8, l996, Software merged with and into InterCon, with
InterCon as the surviving entity;
WHEREAS, the Borrowers and the Bank now desire to amend the Amended and
Restated Credit Agreement by (i) increasing the term credit from $13,500,000 to
$18,500,000, (ii) extending the Term Credit Expiration Date to June 30, 1997,
and (iii) making certain other changes, all as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. The terms "Borrower" and "Borrowers" as used in the Amended and
Restated Credit Agreement, as amended by this Agreement, shall, for all
purposes, from and after the date hereof have the meaning set forth in the first
paragraph of this Agreement; prior to the date hereof such terms shall have the
meaning ascribed to them in the Amended and Restated Credit Agreement. All
references in the Amended and Restated Credit Agreement to "Agreement" shall
from and after the date hereof mean the Amended and Restated Credit Agreement as
amended by this Agreement.
2. Sections 1.01, 1.02(a), 1.03, 1.06, 4.12, 4.15, 4.19(e), 4.22, 4.23,
4.24, 4.25, 4.26, 4.28, 5.01(k) and 6.02 of the Amended and Restated Credit
Agreement are hereby amended, as of the effective date of this
<PAGE>
Agreement, by deleting said Sections in their entirety and substituting
therefore the following:
Section 1.01. The Credit.
------------ ----------
Subject to the terms and conditions hereof, and in reliance on the
representations and warranties contained herein, the Bank hereby establishes a
credit facility in favor of the Borrowers in the aggregate principal amount of
$23,500,000, as set forth below (the "Credit"). The Credit shall consist of (a)
a secured equipment term credit in favor of PSI in the maximum principal amount
of $18,500,000 (the "Term Credit"), and (b) a secured revolving line of credit
jointly in favor of the Borrowers in the maximum principal amount of $5,000,000
(the "Revolving Credit").
Section 1.02. The Term Credit.
------------ ---------------
(a) Terms of Term Credit. Subject to the terms and conditions
--------------------
hereof, and provided no Event of Default, or event which with the passage of
time or giving of notice or both would become an Event of Default, has occurred
PSI may, from time to time from the date hereof until up to June 30, 1997 (the
"Term Credit Expiration Date") borrow (but not reborrow) from the Bank, and the
Bank shall advance funds to PSI as requested pursuant to Section 1.02(e) hereof
(each, a "Term Credit Advance" and collectively, the "Term Credit Advances");
provided, however, that:
(i) the aggregate of all Term Credit Advances shall not
exceed $18,500,000 (the "Maximum Term Credit");
(ii) the maximum amount of any Term Credit Advance shall
not exceed (a) on or prior to November 10, 1995 eighty percent (80%) (90% in
cases of purchases from Ascend Communications and Cascade Communications only)
or (b) after November 10, 1995 one hundred percent (100%), of the invoice (net
of all purchase discounts and all soft costs including shipping, taxes and
installation) of the Approved Equipment (as hereinafter defined) to be financed
thereby; and
(iii)no Term Credit Advance shall be made unless (x) ten
------
(10) business days prior to the date of any such Term Credit Advance, PSI shall
have delivered to the Bank (1) a copy of the invoice for the equipment to be
financed by the Term Credit Advance, (2) a written schedule of the address(es)
at which the Approved Equipment to be financed by such Term Credit Advance will
be located upon PSI's purchase thereof, together with the uniform commercial
code financing statements executed by PSI necessary to perfect the Bank's first
priority security interest therein, (3) if requested by the Bank, appropriate
UCC-11 lien searches with respect to the locations scheduled pursuant to clause
(2) above, and (4) a completed Equipment Borrowing Certificate in the form of
Exhibit 1.02(a) to this Agreement signed by PSI's president or chief financial
- ---------------
officer, and (y) the Bank, in its sole discretion, shall have approved the
financing of such equipment ("Approved Equipment").
Section 1.03. The Revolving Credit.
------------ --------------------
(a) Terms of the Revolving Credit. Subject to the terms and
-----------------------------
conditions hereof and provided no Event of Default, or event which with the
passage of time or the giving of notice or both would become an Event of
Default, has occurred, the Borrowers may, jointly and severally, from time to
<PAGE>
time from the date hereof up to June 30, 1997 (the "Revolving Credit Maturity
Date") borrow and reborrow from the Bank, and the Bank shall advance funds to
the Borrowers (an "Advance" or the "Advances"); provided that
(A) the aggregate of all Advances outstanding at any time
during the term of the Revolving Credit shall not exceed the lesser at such time
(the "Availability") of (i) the Maximum Revolving Credit, or (ii) an amount
equal to the "Borrowing Base," each as defined below;
(B) the aggregate of all Advances outstanding at any time
during the Revolving Credit in favor of PSI shall not exceed the lesser at such
time (the "PSI Availability") of (i) the Maximum Revolving Credit or (ii) an
amount equal to the PSI Borrowing Base, each as defined below; and
(C) the aggregate of all Advances outstanding at any time
during the Revolving Credit in favor of InterCon shall not exceed the lesser at
such time (the "InterCon Availability") of (i) $1,000,000 or (ii) an amount
equal to the InterCon Borrowing Base, as defined below.
(b) Maximum Revolving Credit and Borrowing Base. The "Maximum
-------------------------------------------
Revolving Credit" at any time shall equal $5,000,000 less the aggregate undrawn
face amount of all L/Cs outstanding at such time.
The Borrowing Base shall be equal from time to time to the sum of the
PSI Borrowing Base and the InterCon Borrowing Base.
The PSI Borrowing Base shall be equal from time to time to 75% of PSI's
Qualified Accounts less the sum of (i) 100% of the maximum outstanding liability
----
under any L/Cs issued pursuant to Section 1.05 of this Agreement and (ii) (A)
twenty percent (20%) of the aggregate outstanding principal amount of Term
Credit Advances made after November 10, 1995 minus (B) the amount of cash
collateral maintained by PSI at the Bank on terms satisfactory to the Bank.
The InterCon Borrowing Base shall be equal from time to time to 75% of
InterCon's Qualified Accounts.
"Qualified Accounts" shall mean accounts receivable owed to a Borrower
which (a) arise from the sale of goods or the provision of services by such
Borrower (but only to the extent such goods or services have actually been
delivered or provided to the account debtor), (b) are not outstanding for more
than ninety (90) days after the original invoice date, (c) are due from an
account debtor located in the United States, (d) are subject to a perfected
first priority security interest in favor of the Bank, (e) are not represented
by a note or other negotiable instrument, (e) are not subject to any setoff,
dispute, credit, allowance or adjustment by the account debtor, and (f) have not
been deemed unsatisfactory by the Bank in the exercise of its reasonable
judgment.
PSI shall furnish to the Bank not later than fifteen (15) days
following the end of each monthly accounting period a Borrowing Base Certificate
in the form of Exhibit 1.03(b) attached hereto, completed and signed by PSI's
---------------
chief financial officer. The Borrowing Base shown on such certificate shall be
as of the last day of said monthly accounting period. The Bank shall be under no
obligation to make any further advance if a Borrowing Base Certificate is not
delivered within the specified period.
<PAGE>
In calculating the Borrowing Base hereunder, there shall be excluded
from all Qualified Accounts the full amount of any deposit which an account
debtor may have paid with respect to the goods to which such account receivable
relates.
(c) Limit on Advances Outstanding. The aggregate Advances
-----------------------------
outstanding at any time during any monthly period shall not exceed the lesser of
the Borrowing Base or the Maximum Revolving Credit. The aggregate Advances
outstanding at any time during any monthly period in favor of PSI shall not
exceed the lesser of the PSI Borrowing Base or the Maximum Revolving Credit. The
aggregate Advances outstanding at any time during any monthly period in favor of
InterCon shall not exceed the lesser of the InterCon Borrowing Base or
$1,000,000. If the aggregate Advances outstanding at any time exceed the amounts
set forth in this Section 1.03(c), then the Borrowers shall forthwith pay such
excess, and the Bank may, without prior notice to the Borrowers, charge the
Borrowers' accounts with the Bank in order to effect such payment.
(d) The Revolving Credit Note. All amounts owed by the
-------------------------
Borrowers with respect to Advances made by the Bank shall be evidenced by a
promissory note in the principal amount of $5,000,000 in the form attached to
this Agreement as Exhibit 1.03(d) (the "Revolving Credit Note"). The unpaid
---------------
principal balance of the Revolving Credit Note may be voluntarily prepaid in
whole or in part at any time without premium or penalty. Payment of such excess
on account of a Borrower may be made by a borrowing by another Borrower, subject
to the limits set forth in this Agreement.
(e) Interest. Advances made by the Bank shall bear interest
--------
prior to maturity or the occurrence of an Event of Default (computed on the
basis of actual number of days elapsed over a 360-day year) on the unpaid
principal balances outstanding from time to time at a rate per annum equal to
the Prime Rate plus one and one-half percent (1.5%). Interest shall be payable
monthly in arrears on the last day of each month commencing in the month in
which the Revolving Credit Note is issued. After maturity, or after the
occurrence of an Event of Default and until said Event of Default shall have
been cured or waived in writing by the Bank, amounts outstanding under the
Revolving Credit Note shall bear interest at the Prime Rate plus four and one-
half percent (4.5%).
(f) Requests for Advances. Subject to the terms and conditions
---------------------
contained in this Agreement, each Advance shall be made on the Banking Day on
which the Bank receives notice from PSI, if such notice is received prior to
11:00 a.m. on such Banking Day, and otherwise on the next Banking Day. Each
request for an Advance shall be made to the Bank in writing or by telephone by a
duly authorized representative of PSI, and the Bank may rely upon any telephone
request which it believes is made by such a representative. Each Borrower agrees
and holds the Bank harmless for any action, including the making of Advances
hereunder, or loss or expense, taken or incurred by the Bank in good faith
reliance upon such telephone request. At the time of the initial request for an
Advance made under this Section 1.03, PSI shall have provided the Bank with a
Compliance Certificate (as defined in Section 4.07(a)). Each of the Borrowers
hereby agrees (i) that the Bank shall be entitled to rely upon the most recent
Compliance Certificate in the Bank's possession until it is superseded by
another certificate, and (ii) that each request for an Advance, whether by
telephone or in writing or otherwise, shall constitute a confirmation that the
representations and
<PAGE>
warranties contained in the most recent Compliance Certificate then in the
Bank's possession continue to be true and correct in all respects.
(g) Expiration. The Revolving Credit shall expire on the
----------
Revolving Credit Maturity Date and all then outstanding Advances shall be due
and payable on such date together with all accrued and unpaid interest thereon
and any other amounts then due.
Section 1.06. Term Credit Fee.
------------ ---------------
In addition to the facility fees previously paid by PSI, PSI shall pay
to the Bank 2_% of $5,000,000 or $125,000, payable as follows: (i) a one-time
non-refundable facility fee equal to 1_% of $5,000,000 or $62,500 to be paid on
the date hereof and (ii) at such time, if any, that the aggregate principal
amount of all Term Credit Advances made by the Bank to the Borrowers and
Software since the date of the Original Credit Agreement (including the advance
causing such amount to be exceeded) exceeds $13,500,000, a one-time non-
refundable facility fee equal to 1_% of $5,000,000 or $62,500.
Section 4.12. Limitation on Liability for Obligations of Others.
------------ -------------------------------------------------
The Borrower will not assume, guarantee, endorse or otherwise be or
become liable, contingently or otherwise, for the obligations of any Subsidiary,
other corporation, firm or entity or other person, except for (i) the
endorsement of negotiable instruments for deposit or collection in the normal
course of its business (ii) guarantees of obligations of wholly-owned
Subsidiaries under leases in an amount not to exceed $5,000,000 in the aggregate
at any time for all of the Borrowers and their Subsidiaries taken together (iii)
guarantees or contingent obligations to the extent permitted by Section 4.15(e),
and (iv) guarantees approved in writing by the Bank prior to or after the date
hereof.
Section 4.15. Loans and Investments.
------------ ---------------------
Except as set forth on Schedule 4.15, neither the Borrower nor any
-------------
Subsidiary will purchase or otherwise acquire or retain any stock or obligations
of, or make any loans or advances to, or investments in, any corporation or
other entity or person, other than:
(a) obligations of the United States of America, or any agency
thereof, maturing not more than one (1) year from the date of issue thereof, or
mutual funds comprised of the same, provided that the Bank shall acquire a
perfected first-priority security interest in such obligations simultaneously
with such purchase or acquisition;
(b) certificates of deposit or other deposit obligations
maturing not more than one (1) year from the date of issue thereof issued by any
bank within the United States of America having total combined capital and
surplus in excess of $100,000,000;
(c) short-term investment grade debt securities;
(d) by PSI in wholly-owned Subsidiaries, provided that the
aggregate amount of all such amounts during this Agreement shall not exceed
$20,000,000, excluding any amounts previously advanced to Pipeline, it being
understood that no future amounts shall be advanced to Pipeline, without the
prior written consent of the Bank; and
<PAGE>
(e) loans, advances and guarantees to employees of the Borrower
and its Subsidiaries in an aggregate amount for all of the Borrowers and their
Subsidiaries taken together not to exceed $500,000.
Section 4.19. Restricted Payments.
------------ -------------------
(e) cash payments in respect of fractional shares upon (i)
conversion of shares of Preferred Stock into common stock, (ii) the exercise of
stock options, (iii) the conversion of stock options or (iv) the conversion of
capital stock in connection with stock acquisitions, mergers or consolidations.
Section 4.22. Quick Ratio.
------------ -----------
The ratio of Quick Assets to Total Liabilities (excluding any
liabilities of the Borrowers recorded as deferred revenue as a result of the
accounting treatment by Borrower (as in effect on the date hereof) of service
contract revenues) shall at all times, equal or exceed the ratios set forth
opposite such periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
March 31, 1996 through June 30, 1996 1.0 : 1.0
July 1, 1996 through September 30, 1996 0.9 : 1.0
As of October 1, 1996 and thereafter 1.0 : 1.0
</TABLE>
"Quick Assets" shall mean the sum of all cash, cash equivalents,
accounts receivable, short-term investments (as defined by generally accepted
accounting principles), and marketable securities (as defined by generally
accepted accounting principles) of the Borrowers and their Subsidiaries on a
Consolidated basis.
"Total Liabilities" shall mean all liabilities of the Borrowers and
their Subsidiaries on a Consolidated basis that are treated as liabilities under
generally accepted accounting principles, including the Revolving Credit and the
Term Credit.
Section 4.23. Tangible Net Worth.
------------ ------------------
The Tangible Net Worth shall as of the last day of each fiscal quarter
commencing with the fiscal quarter ending June 30, 1996 equal or exceed the sum
of $67,500,000, plus (X) 80% of all positive Net Income earned during each
----
fiscal quarter commencing with the fiscal quarter ended September 30, 1996, plus
----
(Y) 50% of the net tangible proceeds received from the sale by PSI of any shares
of its capital stock during each fiscal quarter commencing with the fiscal
quarter ended September 30, 1996.
"Tangible Net Worth" shall mean an amount determined in accordance with
generally accepted accounting principles equal to the difference between (a) the
Stockholders' Equity of the Borrowers and their Subsidiaries on a Consolidated
basis, minus (b) the total book value of all assets of the Borrowers and their
-----
Subsidiaries on a Consolidated basis which would be treated as intangible
assets.
"Net Income" shall mean, with respect to any period, the net income (or
net loss) of the Borrowers and their Subsidiaries on a Consolidated
<PAGE>
basis, after deduction of all expenses, taxes and other proper charges
determined in accordance with generally accepted accounting principles.
"Stockholders' Equity" shall mean an amount determined in accordance
with generally accepted accounting principles equal to the difference between
(a) the assets of the Borrowers and their Subsidiaries on a Consolidated basis
minus (b) the liabilities of the Borrowers and their Subsidiaries on a
- -----
Consolidated basis.
Section 4.24. Profitability.
------------ -------------
(a) Subject to Section 4.24(c), as of the last day of each
fiscal quarter commencing with the fiscal quarter ended June 30, 1997, the
Borrowers shall have a positive Net Income with respect to each such fiscal
quarter.
(b) Subject to Section 4.24(c), as of the last day of each
fiscal year commencing with the fiscal year ended December 31, 1997, the
Borrowers' Net Income shall equal or exceed $2,500,000 with respect to each such
fiscal year.
(c) Notwithstanding anything contained in this Section 4.24 to
the contrary, the requirements of Sections 4.24(a) and (b) shall not be required
to be met as of the end of any fiscal quarter or fiscal year, as the case may
be, if as of such fiscal quarter or fiscal year (i) the quick ratio calculated
in accordance with Section 4.22 is greater than 1.50 to 1.00 and (ii) the
leverage ratio calculated in accordance with Section 4.25 is less than 1.00 to
1.00.
Section 4.25. Leverage Ratio. The ratio of the Borrowers' and their
------------ --------------
Subsidiaries' total liabilities (excluding any liabilities of the Borrowers
recorded as deferred revenue as a result of the accounting treatment by the
Borrowers of service contract revenues) on a Consolidated basis to Tangible Net
Worth shall not exceed 1.25:1.0.
Section 4.26. Debt Service Ratio. The ratio of Adjusted Net Income
------------ ------------------
to Debt Service shall, as of the last day of (i) the fiscal quarter ended
December 31, 1996, equal or exceed 1.0:1.0 and (ii) as of the last day of each
fiscal quarter commencing with the fiscal quarter ended March 31, 1997 equal or
exceed 1.25:1.0; provided that the foregoing shall be determined on the basis of
--------
(a) with respect to the fiscal quarter ended December 31, 1996, solely with
respect to such fiscal quarter, (b) with respect to the fiscal quarter ended
March 31, 1997, the immediately preceding two fiscal quarters, (c) with respect
to the fiscal quarter ended June 30, 1997, the immediately preceding three
fiscal quarters, and (d) with respect to each fiscal quarter ended on or after
September 30, 1997, the immediately preceding four fiscal quarters.
Notwithstanding anything contained in this Section 4.26 to the contrary, the
requirements of this Section 4.26 shall not be required to be met as of the end
of any fiscal quarter if as of such fiscal quarter (i) the quick ratio
calculated in accordance with Section 4.22 is greater than 1.50 to 1.00 and (ii)
the leverage ratio calculated in accordance with Section 4.25 is less than 1.00
to 1.00.
"Adjusted Net Income" shall mean, with respect to any period, the total
of (a) Net Income with respect to such period, plus (b) to the extent deducted
----
in determining Net Income, taxes, depreciation and amortization
<PAGE>
expenses of the Borrowers and their Subsidiaries on a Consolidated basis for
such period.
"Debt Service" shall mean, with respect to any period, all payments of
principal or interest by the Borrowers and their Subsidiaries on a Consolidated
basis on account of indebtedness for borrowed money including, without
limitation, payment of principal and interest on account of the Credit.
Section 4.28. Continuance of Key Employee and Key-Man Life Insurance.
------------ ------------------------------------------------------
PSI will use its best efforts to cause William Schrader to at all
times maintain his position as an officer of PSI and to continue to perform his
duties and responsibilities with respect to PSI as of the Closing Date. PSI
will at all times maintain in full force and effect key-man life insurance in
the amount described in Section 3.01(l) on William Schrader. Such policy will
be payable to PSI and will not be assigned to a third party. Certificates
relating to such insurance will be furnished by PSI to the Bank upon demand by
the Bank.
Section 5.01. Events of Default
------------ -----------------
(k) William Schrader shall cease for any reason to be a principal
officer of PSI.
Section 6.02. Notices.
------------ -------
All notices hereunder shall be deemed to have been given when
delivered in person, telefaxed to the number set forth below (with receipt
acknowledged) or, if mailed, when actually received by the party to whom
addressed; provided, however, that any written notice given pursuant to Article
V hereof shall be deemed to be effective when mailed, so long as such notice is
mailed by registered mail, postage prepaid. Such actual receipt shall be
conclusively presumed if such notice shall be mailed by registered or certified
mail, addressed to any party at its address set forth below or at any other
address notified in writing to the other parties hereto, and if the sender shall
have received back a return receipt, or if telefaxed to the number set forth
below and receipt acknowledged.
To the Bank: Fleet National Bank
75 State Street - 4th Floor
Boston, MA 02109
Attention: Thomas W. Davies
Vice President
Telefax No.: (617) 346-1633
<PAGE>
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109-2881
Attention: H. David Henken, Esq.
Telefax No.: (617) 523-1231
To each of the Borrowers: PSINet Inc.
InterCon Systems Corporation
510 Huntmar Park Drive
Herndon, VA 22070
Attention: Mr. Harold Wills
Telefax No.: (703) 904-4200
PSINet Inc.
InterCon Systems Corporation
510 Huntmar Park Drive
Herndon, VA 22070
Attention: General Counsel
Telefax No.: (703) 904-9527
With a copy to: Nixon, Hargrave, Devans & Doyle, LLP
437 Madison Avenue
New York, NY 10022
Attention: Richard F. Langan, Jr., Esq.
Telefax No.: (212) 940-3111
Notwithstanding anything contained in this Agreement to the contrary,
notice to PSI shall be deemed to constitute notice to each Borrower.
3. Exhibits 1.02(a), 1.02(b), 1.03(b) and 4.07(a) of the Amended and
----------------------------------------------
Restated Credit Agreement are hereby deleted and replaced in their entirety with
the forms of such exhibits attached to this Agreement. In addition, Schedules
---------
2.02, 2.17, and 4.15 to the Amended and Restated Credit Agreement are hereby
- --------------------
amended as provided on Schedule I attached hereto. Furthermore, the Amended and
----------
Restated Credit Agreement and the Security Documents are hereby amended as
provided on Schedule II attached hereto.
-----------
4. PSI acknowledges that the documents evidencing the obligations of
Mindspring Enterprises, Inc. in favor of PSI (the "Mindspring Notes") are part
of the Bank's collateral and accordingly agrees to pledge the Mindspring Notes
to the Bank. PSI agrees to immediately deliver the Mindspring Notes to the Bank
as security for PSI's obligations to the Bank.
5. The Borrowers represent that no Subsidiary other than InterCon,
Pipeline and those Subsidiaries indicated on Schedule I (Schedule 2.02) hereto
----------
have annual revenues of over $500,000 or assets of over $1,000,000. As soon as
practicable and in any event within sixty (60) days after the date of this
Agreement, the Borrowers shall take all actions reasonably necessary to cause
the Subsidiaries listed on Schedule I hereto with annual revenues of over
----------
$500,000 or assets (as defined by generally accepted accounting principles)
greater than $1,000,000 to pledge the maximum amount of stock of such Subsidiary
permitted to be pledged in accordance with applicable laws to the Bank. If in
the future any other Subsidiary exceeds annual revenues of $500,000 or has
assets (as defined by generally accepted accounting principles) greater than
$1,000,000, as soon as practicable and in any event within sixty (60) days of
the occurrence of such event the Borrowers shall
<PAGE>
take all actions reasonably necessary to cause such Subsidiary to pledge the
maximum amount of stock of such Subsidiary permitted to be pledged in
accordance with applicable laws to the Bank.
6. After giving effect to this Agreement (including Schedules I and II
------------------
hereto), all representations and warranties made by the Borrowers in the Amended
and Restated Credit Agreement and the Security Documents are true and correct as
of the date hereof (except for those representations which relate to a specific
date which are true and correct on such date and except that the references in
Section 2.04 of the Amended and Restated Credit Agreement to the Financial
Statements are deemed to refer to the most recent annual financial statements
furnished to the Bank pursuant to Section 4.07 thereof).
7. The Borrowers covenant that they will take whatever actions the Bank
reasonably requests in order to permit the Bank to perfect its security interest
in the new patents, trademarks and applications therefor listed on Schedule I
----------
(Schedule 2.17) attached hereto.
- ---------------
8. The Borrowers represent, on behalf of themselves and each of their
Subsidiaries, that they have performed and complied with all covenants and
agreements required to be performed and complied with by them under the Amended
and Restated Credit Agreement as amended by this Agreement and the Security
Documents as amended by this Agreement except to the extent performance or
compliance has been waived in writing by the Bank.
9. Except as amended by this Agreement and any other written agreements
of the Bank, all provisions of the Amended and Restated Credit Agreement, the
Security Documents and all other documents referred to therein shall remain in
full force and effect after giving effect to this Agreement.
10. The Obligations (as defined in the Security Documents executed and
delivered by the Borrowers and the Guarantor) of each Borrower and the Guarantor
to the Bank secured by its respective Security Documents shall be deemed to
include any additional obligations of the respective parties created by the
terms of this Agreement.
11. All references to Fleet Bank of Massachusetts, N.A. in any and all
documents executed pursuant to the Amended and Restated Credit Agreement shall
now be deemed to refer to Fleet National Bank.
12. The execution of this Agreement does not (i) waive any breaches or
defaults or (ii) relieve the Borrowers or Software from any liability caused by
any breaches or defaults prior to the date hereof of any representations,
warranties and covenants (including any financial covenants) contained in the
Amended and Restated Credit Agreement, except for any breach or default which
would not have occurred if this Agreement (including Schedules I and II hereto)
------------------
had been in effect and except as disclosed on Schedules I and II hereto, or as
------------------
previously agreed to in writing by the Bank.
13. The amendments set forth in this Agreement shall not be effective, and
the Bank shall not be obligated to make a Term Credit Advance or Advance
hereunder, or otherwise amend, modify or alter the Amended and Restated Credit
Agreement unless and until all of the following conditions shall have been
fulfilled or waived by the Bank:
(a) Term Credit Note. In the event there is to occur a Term
----------------
Credit Advance on the Closing Date, PSI shall have executed and delivered
<PAGE>
to the Bank a Term Credit Note as well as provided such other documentation,
certificates and information as is required by Section 1.02 in connection with
a Term Credit Advance.
(b) Legal Opinion of Counsel to the Borrowers. The Bank shall
-----------------------------------------
have received the written opinion of Nixon, Hargrave, Devans & Doyle, L.L.P.,
counsel to the Borrowers, in form and substance reasonably satisfactory to the
Bank and Bank Counsel covering such matters as the Bank and Bank Counsel may
reasonably request.
(c) No Default. No Event of Default specified in Article V and
----------
no event which, under Article V with the giving of notice or the lapse of time,
or both, would become an Event of Default, shall have occurred and be
continuing.
(d) Officer's Certificate for Borrowers. Each of the Borrowers
-----------------------------------
shall have delivered to the Bank a certificate substantially in the form of
attached hereto with attached corporate resolutions authorizing the transactions
contemplated by this Agreement.
(e) Receipt of Mindspring Notes. The Mindspring Notes in favor
---------------------------
of PSI shall have been received by the Bank.
14. This Agreement represents the entire agreement among the parties
thereto relating to the amendment to the Amended and Restated Credit Agreement
effected hereby, and supersedes all prior understandings and agreements among
the parties relating to the subject matter of this amendment to the Amended and
Restated Credit Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.
PSINET INC.
By: /s/ William L. Schrader
-----------------------
Name: William L. Schrader
Title: Chairman & President
INTERCON SYSTEMS CORPORATION
By: /s/ William L. Schrader
-----------------------
Name: William L. Schrader
Title: Chairman
PSINET PIPELINE NEW YORK, INC.*
By: /s/ William L. Schrader
-----------------------
Name: William L. Schrader
Title: President
FLEET NATIONAL BANK
By: /s/ Thomas W. Davies
--------------------
Name: Thomas W. Davies
Title: Vice President
By: /s/ William E. Rurode Jr.
-------------------------
Name: William E. Rurode Jr.
Title: Senior Vice President
*PSINet Pipeline New York, Inc. executes this Agreement for the sole purpose of
acknowledging and confirming that the Obligations under the Security Documents
shall be deemed to include any additional Obligations created by this Agreement.
<PAGE>
Exhibits and Schedules to the Amendment Agreement have been omitted.
The following is a list of the omitted Exhibits and Schedules which the Company
agrees to furnish supplementally to the Commission upon request:
<TABLE>
<CAPTION>
Exhibits:
--------
<S> <C>
Exhibit 1.02(a) Form of Equipment Borrowing Certificate
Exhibit 1.02(b) Form of Term Credit Note
Exhibit 1.03(b) Form of Borrowing Base Certificate
Exhibit 4.07(a) Form of Compliance Certificate
</TABLE>
<TABLE>
<CAPTION>
Schedules:
---------
<S> <C>
Schedule I Certain Amendments to Amended and Restated
Credit Agreement
Schedule II Certain Amendments to Amended and Restated
Credit Agreement and Security Documents
</TABLE>
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION OR
QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE, OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
OR QUALIFICATION IS NOT REQUIRED.
MINDSPRING ENTERPRISES, INC.
Convertible Note,
Due June 28, 1997
$2,000,000.00 June 28, 1996
FOR VALUE RECEIVED, the undersigned, MINDSPRING ENTERPRISES, INC., a
Delaware corporation (herein called the "Company"), hereby promises to pay to
PSINET, INC., a New York corporation, or registered assigns (hereinafter called
the "Payee"), the principal sum of Two Million Dollars ($2,000,000.00) (the
"Principal", which shall be subject to increase or decrease as set forth below),
together with interest on the unpaid principal amount hereof from the date
hereof, until paid in full, said interest to be due and payable on the first
anniversary of the date of this Note, when the entire balance of this Note shall
be due and payable in full, equal to the interest rate published as the "prime
rate" in the "Money Rates" section of The Wall Street Journal (the "PRIME RATE")
-----------------------
plus three percent (3%). In no event, however, shall this Note bear interest in
excess of the maximum rate of interest permitted by applicable law. All
payments hereunder shall be made in lawful money of the United States of
America, and shall be subject to the offset and deduction provisions described
herein.
In the event of a change in the Prime Rate, interest on the
outstanding principal balance hereof will be adjusted accordingly, it being the
intent hereof that the rate of said interest shall increase or decrease
simultaneously with and to the same extent as an increase or decrease in the
Prime Rate. Should The Wall Street Journal during the term hereof abolish or
-----------------------
abandon the practice of publishing the Prime Rate, then the Prime Rate used
during the remainder of said term shall be the rate from time to time announced
by Citibank, N.A. as its "prime rate".
<PAGE>
In the event that this Note is not redeemed in full within ninety (90)
days after the date of this Note, the Principal shall increase by five percent
(5%) of the Principal then outstanding. The Principal shall increase in a like
manner each ninety (90) days thereafter that this Note is note redeemed in full.
Late Charges
- ------------
If the entire amount of any principal payment and/or interest is not
paid in full within five (5) days after the date when due, the Company shall pay
to the Payee a late fee equal to two percent (2%) of the amount not paid.
Sale of Note; Transfer of Securities
- ------------------------------------
Neither this Note nor the shares of Common Stock issuable upon
exercise of the conversion rights herein have been registered under the
Securities Act of 1933, as amended (the "1933 Act") or under the securities laws
of any state. Neither this Note nor any such shares, when issued, may be sold,
transferred, pledged or hypothecated in the absence of (1) an effective
registration statement for this Note, or the shares, as the case may be, under
the 1933 Act, and such registration or qualification as may be necessary under
the securities laws of any state, or (2) an opinion of counsel in form and
substance reasonably satisfactory to the Company that such registration or
qualification is not required. The Company may cause the certificate or
certificates evidencing all or any of the shares issued upon exercise of the
conversion rights contained in this Note before such registration and
qualification of such shares to bear the following legend:
"The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws
of any state. The shares may not be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under
the Securities Act of 1933, as amended, and such registration or
qualification as may be necessary under the securities laws of any state,
or an opinion of counsel reasonably satisfactory to the Company that such
registration or qualification is not required."
This Note shall be registered on books of the Company that shall be kept at
its principal office for that purpose, and shall be transferable only on such
books by the registered owner hereof in person or by duly authorized attorney
upon surrender of this Note properly endorsed, and only in compliance with the
next preceding paragraph hereof.
2
<PAGE>
Redemption
- ----------
The Company may redeem this Note, by payment, in the case of full
redemption, in full of the entire principal amount thereof then outstanding,
together with all interest accrued thereon until the date of redemption. In the
case of any partial redemption hereof, payments shall be applied first to
payment of any accrued interest owing hereunder, and then against principal
owing hereunder.
Conversion
- ----------
In the event that this Note is not redeemed in full by the first
anniversary of the date of this Note, the registered owner of this Note is
hereby given the right to convert all, but not less than all, of the total
amount due under this Note into fully paid and nonassessable shares of the
common stock, $0.01 par value per share, of the Company (the "Common Stock") as
follows:
(1) Conversion Price. The registered owner of this Note shall receive
----------------
one share of Common Stock for a price equal to the closing price of the common
stock of the Company traded on the Nasdaq Stock Market as of the end of the
trading day on the Second Closing Date, provided, however, that if the Second
-------- -------
Closing Date has not occurred, then as of the end of the trading day on the
First Closing Date (as defined in the Purchase Agreement).
(2) Procedure for Conversion. In order to exercise the conversion
------------------------
privilege, the registered owner shall surrender this Note to the Company at its
main office, accompanied by written notice to the Company that such owner elects
to convert the total amount due under this Note and an opinion of counsel in
form and substance satisfactory to the Company that the issuance of shares of
Common Stock upon such conversion has been registered under the 1933 Act and
registered or qualified as necessary under applicable state securities laws, or
that such registration and qualification are not required. As promptly as
practicable after the receipt of such notice and opinion and surrender of this
Note as aforesaid, the Company shall issue and deliver to the registered owner a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of this Note (or specified portion hereof). Such
conversion shall be deemed to have been effected at the close of business on the
date on which such notice shall have been received by the Company and this Note
shall have been surrendered as aforesaid. If this Note is converted in part
only, upon such conversion the Company shall execute and deliver to the Payee,
at the expense of the Company, a new Note in principal amount equal to the
unconverted portion of this Note. No fractional shares shall be issued upon
conversion of this Note and any portion of the principal or interest hereof that
would otherwise be convertible into a fractional share shall be paid in cash.
3
<PAGE>
The Company shall at all times reserve and keep available a number of its
authorized but unissued shares of Common Stock sufficient to permit the exercise
in full by the registered owner of this Note of its conversion rights hereunder.
Default
- -------
In case of the failure to pay, when due, the principal, any interest, or
any other sum payable hereunder, and continuance of such failure for five (5)
business days after the date on which such principal, interest or other sum is
due (whether upon maturity hereof, upon any installment payment date, upon any
prepayment date, upon acceleration, or otherwise), the Payee may declare this
Note to be due and payable in full.
Miscellaneous
- -------------
Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of this Note, and (in case of loss, theft or
destruction) of indemnity reasonably satisfactory to it, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of this Note, if mutilated, the Company will make and deliver a
new Note of like tenor in the principal amount of this Note then outstanding in
lieu of such Note. Any Note so made and delivered shall be dated as of the date
to which interest has been paid on the Note lost, stolen, destroyed or
mutilated.
The Company shall have the right to offset and/or deduct, from time to time
and at any time, any amounts of principal or interest payable under this Note
against Losses (as defined in the Asset Purchase Agreement by and between the
Company and Payee, dated as of June 28, 1996 ("Purchase Agreement")) asserted
against, resulting to, imposed upon or incurred by the Company for which the
Company has a right or claim for indemnification pursuant to Article 10 of the
Purchase Agreement
The Company hereby waives presentment, demand, notice, protest and other
demands and notices in connection with the delivery, acceptance or enforcement
of this Note.
No delay or omission on the part of the Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note, and a waiver, delay or omission on any one occasion shall not be
construed as a bar to or waiver of any such right on any future occasion.
The Company hereby agrees to pay on demand all costs and expenses,
including, without limitation, reasonable attorneys' fees and legal expenses,
incurred or paid by Payee in enforcing this Note.
4
<PAGE>
The terms of this Note shall be governed by and construed in accordance
with the laws of the State of New York (but not including the choice of law
rules thereof).
This Note shall not be valid or obligatory for any purpose until
authenticated by the execution hereof by the Chairman, President or a Vice
President of the Company and registered upon the books of the Company as
hereinabove provided.
IN WITNESS WHEREOF, MINDSPRING ENTERPRISES, INC., a Delaware corporation,
has caused this Note to be signed in its corporate name by its President or a
Vice President, by authority duly given, all as of the day and year first above
written.
MINDSPRING ENTERPRISES, INC.
By: /s/ Charles M. Brewer
--------------------------
Title: Chief Executive Officer
-----------------------
5
<PAGE>
Exhibit 11.1
PSINet Inc.
and Subsidiaries
Calculation of Loss per Share (Unaudited) (1)
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1996
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period........................................ 38,989,459
Weighted average shares issued during the three months ended June 30, 1996
(712,698 shares)................................................................. 389,877
-------------
39,379,336
=============
Net Loss.............................................................................. $ (10,919,000)
=============
Loss per share (unaudited)............................................................ $ (0.28)
=============
</TABLE>
===============================================================================
(1) For a description of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
<PAGE>
Exhibit 11.2
PSINet Inc.
and Subsidiaries
Calculation of Loss per Share (Unaudited) (1)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year.......................................... 37,914,932
Weighted average shares issued during the six months ended June 30, 1996
(1,787,225 shares)............................................................... 859,726
-------------
38,774,658
=============
Net Loss.............................................................................. $ (25,807,000)
=============
Loss per share (unaudited)............................................................ $ (0.67)
=============
</TABLE>
===============================================================================
(1) For a description of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 56,536
<SECURITIES> 17,167
<RECEIVABLES> 11,920
<ALLOWANCES> 700
<INVENTORY> 1,123
<CURRENT-ASSETS> 96,583
<PP&E> 95,173
<DEPRECIATION> 21,820
<TOTAL-ASSETS> 200,105
<CURRENT-LIABILITIES> 48,214
<BONDS> 33,112
0
0
<COMMON> 398
<OTHER-SE> 116,955
<TOTAL-LIABILITY-AND-EQUITY> 200,105
<SALES> 37,400
<TOTAL-REVENUES> 37,400
<CGS> 30,471
<TOTAL-COSTS> 30,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,243
<INCOME-PRETAX> (25,886)
<INCOME-TAX> 79
<INCOME-CONTINUING> (25,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,807)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
<PAGE>
Exhibit 99.1
RISK FACTORS
The following Risk Factors are substituted for those set forth under like
headings in the Company's Annual Report on Form 10-K ("Form 10-K") for the
fiscal year ended December 31, 1995 and the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 (the "Form 10-Q") and should be
considered in addition to the other Risk Factors in the Form 10-K and the Form
10-Q in evaluating the Company and its business.
Limited History of Operations; Operating Deficit; Continuing Losses;
Potential Fluctuations in Operating Results
The Company began offering its services in 1990. Although the Company has
experienced revenue growth on an annual basis, it has incurred losses and
experienced negative cash flow from operations during each of its last three
fiscal years including a loss of $53.2 million and negative cash flow from
operations of $30.1 million for 1995 and a loss of $25.8 million and negative
cash flow from operations of $18.4 million for the six months ended June 30,
1996. At June 30, 1996, the Company had a retained deficit of $87.3 million.
There can be no assurance that revenue growth will continue or that the Company
will achieve profitability or positive cash flow from operations in the future.
The Company expects to focus in the near term on continuing to increase its
corporate subscriber base and expanding its consumer wholesaling strategy which
will require it to continue to incur expenses for marketing, network
infrastructure, personnel and the development of new services and software, and
thereby may adversely impact cash flow and operating performance. The Company
also plans to continue to enhance the PSINet network and the administrative and
operational infrastructure necessary to support its Internet access service
domestically and internationally. As a result, the Company believes that it will
continue to incur losses throughout 1996, and there can be no assurance that the
Company will achieve profitability in the future.
The Company'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 of the Company's control, including general economic conditions,
specific economic conditions in the Internet access industry, user demand for
the Internet, capital expenditures and other costs relating to the expansion of
operations, the timing of customer subscriptions, the introduction of new
services by the Company 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 the Company and its competitors and delays in obtaining
sole or limited source equipment. As a strategic response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on the Company's business, results of operations and
cash flow. In addition, due to changing market conditions, substantial
amortization expenses may be accelerated in accordance with generally accepted
accounting principles to recognize changes in the expected life of acquisitions
and related long-lived assets.
Competition
The market for data communications services, including Internet access and on-
line services, is highly competitive. The industry has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a high
average churn (customer turnover) rate as individual customers frequently change
Internet access providers in response to the offering of lower rates or
promotional incentives by competitors. PSINet expects that competition will
continue to intensify. The Company believes that the primary competitive factors
for the provision of Internet services are price, quality of service,
reliability, technical expertise, ease of use, variety of value-added services,
quality and availability of customer support, experience of the supplier,
geographic coverage and name recognition. PSINet's success in this market will
depend heavily upon its ability to provide high quality Internet connectivity
and value-added Internet services at competitive prices.
<PAGE>
The Company's current and prospective competitors generally may be divided
into the following four groups: (1) other Internet access providers, such as
NETCOM On-Line Communications Services, Inc. ("NETCOM"), UUNET Technologies,
Inc. ("UUNET"), Bolt, Beranek & Newman Inc., and other national and regional
providers; (2) telecommunications companies, such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI"), MFS Communications Co., Inc. ("MFS"),
Sprint, Inc., regional Bell operating companies ("RBOCs") and various cable
television companies; (3) on-line services providers, such as America Online,
Inc. ("America Online"), CompuServe Incorporated ("CompuServe"), Delphi Internet
Services (a division of News Corp.), GEnie (a division of General Electric
Information Services), the Microsoft Network ("MSN"), a service of Microsoft
Corp. ("Microsoft"), and Prodigy; and (4) Internet software providers, such as
Netscape Communications Corp. ("Netscape"), Spyglass, Inc. ("Spyglass"),
NetManage, Inc. ("NetManage"), FTP Software, Inc. ("FTP") and others. Many of
these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to PSINet. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than can PSINet.
In addition, the ability of some of the Company's competitors to bundle other
services and products with Internet access services could place PSINet at a
competitive disadvantage.
PSINet believes that competition will intensify as new competitors, including
large computer hardware, software, media and other technology and
telecommunications companies, enter the Internet services market and as existing
competitors form alliances with or acquire other companies. The pending MFS and
UUNET merger may create the possibility for network expense reductions which
could result in a competitive advantage for the combined entity. Additionally,
AT&T and MCI each have announced plans to offer Internet access to their
customers. Such acquisitions, alliances and expanded service offerings may
permit the Company's competitors to devote greater resources to the development
and marketing of new competitive products and services and the marketing of
existing competitive products and services.
In licensing its software products, the Company currently competes with
connectivity and networking companies, other Internet access providers, on-line
service companies and operating system vendors. The Company competes most
frequently with connectivity and networking software vendors including Netscape,
Spyglass, FTP, NetManage, Frontier, Firefox, Novell and others. In addition,
certain on-line service companies and Internet access providers such as NETCOM,
Prodigy, America Online, UUNET and CompuServe have developed or acquired Web
browsers to include with their services. The Company also competes with
operating system vendors such as Novell, International Business Machines
Corporation and Microsoft, that incorporate Web browsing capabilities within
their products.
As PSINet expands its operations outside the United States, it will encounter
new competitors and competitive environments. In some cases, the Company will
be forced to compete with and buy services from government owned or subsidized
telecommunications providers, some of which may enjoy a monopoly on
telecommunications services essential to the Company's business. There can be no
assurance that the Company will be able to purchase such services at a
reasonable price or at all. In addition to the risks associated with the
Company's previously described competitors, foreign competitors may possess a
better understanding of their local markets and better working relationships
with local infrastructure providers. There can be no assurance that the Company
can obtain similar levels of local knowledge, and failure to obtain that
knowledge could place the Company at a significant competitive disadvantage.
As a result of increased competition in the industry, the Company expects to
encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of the Company's services.
For example, certain of the Company's competitors which are telecommunications
companies, including AT&T and MCI, may be able to provide customers with reduced
or free communications costs in connection with their Internet access services
or offer Internet access as a standard component of their overall service
package, thereby significantly increasing price pressure on PSINet. The Company
has in the past reduced prices on certain of its
<PAGE>
Internet access options and may continue to do so in the future. There can be no
assurance that the Company will be able to offset the effects of any such price
reductions with an increase in the number of its customers, higher revenue from
enhanced services, cost reductions or otherwise. In addition, as is exemplified
by the pending merger between MFS and UUNET, PSINet believes that the data
communications business, and in particular Internet access and on-line services
businesses, are likely to encounter consolidation in the near future, which
could result in increased price and other competition in the industry. Increased
price or other competition could result in erosion of the Company's market share
and could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
Need for Additional Capital to Finance Growth and Capital Requirements
The Company expects to continue to enhance its network in order to maintain
its competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing. As of June 30, 1996, the
Company's network was comprised of more than 345 POPs. Based upon its present
business plan, the Company believes that working capital, funds from operations,
existing credit facilities and additional borrowings which the Company expects
to be able to obtain when needed will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements of its existing
operations. The Company may seek to raise additional funds in order to take
advantage of unanticipated opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies, or to
develop new products or otherwise respond to unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise
such funds on favorable terms or at all. In the event that the Company is
unable to obtain such additional funds or is unable to obtain such additional
funds on acceptable terms, the Company may determine not to enter into various
expansion opportunities.
Risks Associated with Industry Consolidation
The Company expects significant consolidation among Internet service providers
to occur in the near future. As part of its business strategy, the Company may
acquire additional Internet service providers and, perhaps, complementary
businesses and technologies. If the Company is unable to acquire additional
Internet service providers on favorable terms, or at all, or if a competitor of
the Company acquires one or more of such businesses, the Company could be at a
competitive disadvantage and its business, financial condition and results of
operations could be materially adversely affected. See "Competition."
Although the Company currently anticipates that its available working capital,
funds from operations, existing credit facilities and additional borrowings
which the Company expects to be able to obtain when needed will be sufficient to
meet its presently anticipated working capital and capital expenditure
requirements of its existing operations, the Company may seek to raise
additional funds through public or private debt or equity financings in order to
accelerate domestic and international expansion, acquire other Internet service
providers or complementary businesses or technologies, develop new products or
otherwise respond to unanticipated competitive pressures. There can be no
assurance that additional financing will be available on terms favorable to the
Company, or at all. If adequate funds are not available on acceptable terms, or
at all, the Company may determine not to undertake various expansion
opportunities.
<PAGE>
Emerging Strategies for Individual Customers
Historically, the Company provided its Internet access services primarily to
organizations. The Company began offering Internet access services developed
for sophisticated individual users with the introduction of its InterRamp
service in June 1994, and expanded its service offerings for individual users
with its acquisition of Pipeline in February 1995. Prior to the introduction of
InterRamp, the Company had limited experience in marketing its services to
individual customers. The market for individual customers is intensely
competitive and any failure on the part of the Company to develop effective
business strategies for this market could inhibit the growth of the Company's
customer base and have a material adverse effect on its business, operating
results and financial condition. In response to competitive considerations, the
Company has determined to focus its efforts in the individual customer market on
the high-end business user and has altered its strategy to include the provision
of wholesale services to consumer-oriented Internet service providers in the
United States rather than providing the consumer services directly. There can
be no assurance that the Company will be successful in implementing this
strategy change or marketing to high-end business users or other Internet
service providers or that the Company will be able to offset the effects of any
revenue reductions with respect to its new consumer Internet service focus with
an increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise.
