<PAGE>
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
SEPTEMBER 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 -- 40,069,726 SHARES AS OF NOVEMBER 1,
1996
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE)
The Index of Exhibits appears on page 17.
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PSINET INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and September 30, 1996..........................................3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1995 and September 30, 1996....4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and September 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 6. Exhibits and Reports on Form 8-K.................................14
Signatures..................................................................16
Exhibit Index...............................................................17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSINET INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31, 1995 September 30, 1996
----------------- ------------------
(Audited) (Unaudited)
Current assets:
Cash and cash equivalents $102,710 $ 45,700
Short-term investments and
marketable securities -- 14,653
Accounts receivable, net 6,231 15,857
Notes receivable -- 12,234
Inventories 1,149 1,494
Prepaid expenses 2,071 2,711
Other current assets 4,194 4,203
-------- ----------
Total current assets 116,355 96,852
Property and equipment, net 51,355 69,498
Goodwill and other intangibles, net 25,398 14,640
Software costs, net 6,133 3,457
Other assets and deferred charges 2,589 4,645
-------- ----------
$201,830 $189,092
-------- ----------
-------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,012 $ 2,000
Current portion of long-term debt 13,631 23,078
Trade accounts payable 10,002 15,443
Accrued payroll and related
expenses 2,184 3,816
Other accounts payable and
accrued liabilities 654 3,620
Deferred revenue 3,245 5,422
-------- ----------
Total current liabilities 32,728 53,379
Long-term debt 24,130 28,397
Deferred taxes 635 515
Other liabilities 1,107 816
-------- ----------
Total liabilities 58,600 83,107
-------- ----------
Shareholders' equity:
Preferred stock -- --
Common stock 379 401
Capital in excess of par value 206,035 207,635
Retained deficit (61,539) (99,839)
Treasury stock, at cost (2,054) (2,005)
Net unrealized gain on
investments 813 --
Cumulative foreign currency
translation adjustment (404) (207)
-------- ----------
Total shareholders' equity 143,230 105,985
-------- ----------
$201,830 $189,092
-------- ----------
-------- ----------
The accompanying notes are an integral part of these financial statements.
3
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PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
1995 1996 1995 1996
------ ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue $ 11,115 $ 24,147 $ 24,705 $ 61,547
Other income, net -- 3,017 -- 5,417
-------- -------- -------- --------
Total revenue and
other income, net 11,115 27,164 24,705 66,964
-------- -------- -------- --------
Operating costs and expenses:
Data communications and
operations 9,379 19,698 20,413 50,169
Sales and marketing 7,093 6,000 12,458 20,865
General and administrative 2,799 5,309 6,383 15,012
Depreciation and amortization 4,899 8,377 8,727 21,585
-------- -------- -------- --------
Total operating costs
and expenses 24,170 39,384 47,981 107,631
-------- -------- -------- --------
Loss from operations (13,055) (12,220) (23,276) (40,667)
Interest expense (484) (1,411) (1,116) (3,654)
Interest income 549 1,179 1,137 3,346
Other income -- 19 -- 2,863
Equity in loss of affiliate (60) (100) (111) (307)
-------- -------- -------- --------
Loss before income taxes (13,050) (12,533) (23,366) (38,419)
Income tax (expense) benefit -- 40 -- 119
-------- -------- -------- --------
Net loss $(13,050) $(12,493) $(23,366) $(38,300)
--------- -------- -------- --------
--------- -------- -------- --------
Loss per share (pro forma for
the nine months ended
September 30, 1995) $ (0.40) $ (0.31) $ (0.81) $ (0.98)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing loss
per share 32,328 39,888 28,683 39,143
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------
1995 1996
------- ------
(in thousands)
Net cash used in operating activities $(17,092) $(28,391)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (13,566) (508)
Purchases of short-term investments and
marketable securities -- (14,621)
Proceeds from sale of investments -- 3,219
Proceeds from sale of assets to MindSpring -- 400
Capitalized software costs (308) (702)
Investment in subsidiaries, net of
cash acquired (5,022) --
Loan to affiliate -- (307)
Investments in certain businesses (58) (29)
Other -- 28
-------- --------
Net cash used in investing activities (18,954) (12,520)
-------- --------
Cash flows from financing activities:
Net payments on lines of credit (492) (1,012)
Proceeds from issuance of notes payable 6,708 6,848
Repayments of notes payable (810) (3,368)
Principal payments under capital
lease obligations (2,281) (20,172)
Proceeds from issuance of Series E
redeemable preferred stock 12,238 --
Proceeds from initial public offering, net 47,350 --
Proceeds from issuance of common stock 52 --
Proceeds from exercise of common stock
warrants 55 --
Proceeds from exercise of common stock
options 166 1,770
Other -- (165)
-------- --------
Net cash provided by (used in)
financing activities 62,986 (16,099)
-------- --------
Net increase (decrease) in cash and cash
equivalents 26,940 (57,010)
Cash and cash equivalents, beginning of year 3,358 102,710
-------- --------
Cash and cash equivalents, end of period $ 30,298 $ 45,700
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
5
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note l -- Basis of Presentation
These consolidated financial statements for the three and nine months
ended September 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. and subsidiaries
(collectively, "PSINet" or 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 periods ended March 31, 1996 and June 30,
1996 included in the Company's Quarterly Reports on Form 10-Q, 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 September 30, 1996 and the results of operations for the three and
nine month periods ended September 30, 1995 and 1996 and the consolidated
cash flows for the nine month periods ended September 30, 1995 and 1996. The
results of operations for the three and nine month periods ended September
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.
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 September 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 $11.5 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 building an Internet network and providing Internet-related
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 nine months ended September 30, 1996 consists of
approximately $2.9 million of realized gains on equity securities sold by the
Company.
Note 4 -- Long-term Debt
During the nine months ended September 30, 1996, the Company incurred
capital lease obligations of approximately $30.4 million upon the execution
of leases for new data communications equipment and other fixed assets.
Effective August 13, 1996, the Company entered into an amendment to a
borrowing facility obtained in November 1994, which increased the Company's
maximum borrowing availability under the facility from $13.5 million to $18.5
million for 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 September 30, 1996). The borrowing facility contains certain restrictions
which, among other things, require the maintenance of certain financial
ratios and restrict the payment of dividends.
At September 30, 1996, the aggregate unused portion under the Company's
various financing arrangements for purchases of data communications equipment
and other fixed assets was $11.5 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 $4.1 million at September 30, 1996). There was $2.0
million advanced under this credit agreement at September 30, 1996. Interest
is payable monthly at a rate of prime plus 1.5% (9.75% at September 30, 1996).
Note 5 -- Agreements with MindSpring Enterprises, Inc.
On June 28, 1996, the Company entered into an agreement 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. In
connection with the transfer, the parties also entered into a Network
Services Agreement pursuant to which the Company agreed to
service certain of MindSpring's individual subscribers through local dial-in
POPs connected to the Company's network. As part of these agreements, the
Company also has the option to transfer to MindSpring individual subscriber
accounts generated in the future.
7
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 -- Agreements with MindSpring Enterprises, Inc. (continued)
Under the terms of these agreements, as amended, the Company transferred
certain of its individual subscriber accounts as of June 28, 1996 for $3.0
million, consisting of $1.0 million cash and a $2.0 million Convertible Note
(the "First Note"), which was included in revenue or other income, net in
June 1996. The First Note bears interest at a rate of prime plus 3.0%
(11.25% at September 30, 1996). In accordance with the terms of these
agreements, due to the fact that the First Note was not redeemed in full
before ninety days after the date of the First Note (September 28, 1996), the
principal amount of the First Note was increased by five percent.
Additionally, under the terms of these agreements, the Company transferred
substantially all of the remainder of its individual subscriber accounts and
certain assets located at the Company's customer service facility in New
Cumberland, Pennsylvania as of September 1, 1996 in exchange for a $9.9
million Convertible Note (the "Second Note"), which was included in revenue
or other income, net of related asset costs and transfer expenses in
September 1996. The Second Note bears interest at a rate of prime plus 3.0%
(11.25% at September 30, 1996). Until the Second Note is redeemed in full,
the outstanding principal amount thereof will increase by five percent each
ninety days commencing ninety days after the date of the Second Note. If
the Second Note is not redeemed in full by September 1, 1997, the Company has
the right to convert, at the option of the Company subject to certain
limitations, the total amount due under the Second Note into common stock of
MindSpring.
The total amount of consideration received for the transfer of subscribers
as of September 1, 1996 is 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 a scheduled measurement date.
Additional individual subscriber accounts generated (up to an
aggregate of 100,000 including those previously transferred) through November
30, 1996 may be transferred for additional consideration, subject to
adjustment as described above.
Under the terms of these agreements, in October 1996, the Company received
$9.2 million in cash from MindSpring as payment in full on the First Note and
partial payment on the Second Note.
Note 6 -- Agreements with Chatterjee Management Company
On September 19, 1996, the Company entered into an agreement with
Chatterjee Management Company (doing business as The Chatterjee Group), a
Delaware corporation ("Chatterjee"), pursuant to which the Company and an
investment group led by Chatterjee (the "Chatterjee Investor Group") would
establish a joint venture to be known as PSINet Europe (the "Joint Venture")
for the purpose of building an Internet network across Europe and providing
Internet-related services in Europe.
Under the agreement, expected contributions of up to $5.98 million cash
and up to 100% of the stock of PSINet's UK subsidiary, PSINet UK Limited, by
the Company, and up to $41.1 million cash by the Chatterjee Investor Group,
are to be made from time to time in exchange for equity interests in the
Joint Venture, which will be adjusted at the times of such contributions.
Under certain circumstances, the Chatterjee Investor Group has the right to
exchange its interest in the Joint Venture for shares of the Company's common
stock. The Company and Chatterjee have entered into a registration rights
agreement with respect to such shares.
It also is contemplated that the Company and the Joint Venture will enter
into agreements whereby the Company will, among other things, license certain
intellectual property to the Joint Venture and provide operational support
and assistance to the Joint Venture. The Company and Chatterjee are in the
process of negotiating terms and conditions for these transactions.
8
<PAGE>
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 periods ended March 31, 1996 and June 30,
1996 included in the Company's Quarterly Reports on Form 10-Q for such
periods, 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. For a discussion of the risk factors that could cause actual
results to differ materially from the forward-looking statements, see "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 substantially all 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 September 30, 1996, the Company had approximately
15,100 business subscribers, approximately 11,700 professional subscribers
and serviced approximately 170,900 consumer wholesale subscribers, 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 has 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 in the future as a result of a variety of factors, some
of which are beyond the Company's control. As of September 30, 1996, the
Company had an accumulated deficit of $99.8 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.
9
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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 providers of
Internet access and services in the United States, rather than providing the
consumer access services directly. Pursuant to network access agreements
with other providers, the Company provides Internet connection services to
other providers 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. The
agreements call for the other providers to pay specified fees for each
subscriber using the PSINet network.
In connection with the introduction of its new strategy relating to consumer
dial-up Internet access services, as indicated above, the Company
restructured its operations and eliminated certain positions relating to
these services. There were no significant restructuring charges relating to
this new strategy. The impact of the reduction in costs and expenses
associated with this restructuring is expected to occur in periods after
September 30, 1996.
On June 28, 1996, the Company entered into an agreement with MindSpring
Enterprises, Inc., an Atlanta-based Internet access provider ("MindSpring"),
pursuant to which the Company agreed to transfer to MindSpring substantially
all 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. In connection with
the transfer, the parties also entered into a Network Services Agreement
pursuant to which the Company agreed to service certain of MindSpring's
individual subscribers through local dial-in POPs connected to the Company's
network. As part of these agreements, the Company has the option to transfer
to MindSpring additional individual subscriber accounts generated in the
future.
The Company anticipates that the decrease in its individual subscriber
revenue resulting from consummation of MindSpring agreements will be
partially offset by revenues from the provision of access services under the
Network Services Agreement and ongoing revenue from the sales of individual
subscribers generated in the future, if any, to MindSpring. Additionally,
the Company's expenses associated with the individual customer support function
and depreciation and amortization from certain of the assets transferred are
expected to decline.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
REVENUE. Revenue is derived from the sale of Internet access and related
services to businesses and individuals and from the sale of connectivity
software products. Revenue increased by 117.3% from approximately $11.1
million for the three months ended September 30, 1995 to approximately $24.1
million for the three months ended September 30, 1996. Revenue increased by
149.1% from approximately $24.7 million for the nine months ended September
30, 1995 to approximately $61.5 million for the nine months ended September
30, 1996. The increase in revenue in comparison to the same three and nine
month periods in 1995 resulted principally from greater sales of Internet
services to businesses and individuals during 1996. The Company believes
these increases were attributable to a number of factors including: an
increase in the number of subscribers facilitated by an increase in the
number of POPs in operation; an expansion of the Company's sales force; and
greater public awareness and acceptance of the Internet. The Company's
business subscriber base increased by approximately 142.9% from approximately
6,200 business subscribers at September 30, 1995 to approximately 15,100
business subscribers at September 30, 1996. The Company had approximately
40,000 individual subscribers at September 30, 1995. Under the Company's new
consumer wholesale strategy, the Company serviced approximately 170,900
consumer wholesale subscribers at September 30, 1996. Additionally, the
Company had approximately 11,700 professional subscribers at September 30,
1996. The Company's network infrastructure increased from 159 POPs at
September 30, 1995 to more than 345 POPs at September 30, 1996.
10
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OTHER INCOME, NET. Other income, net consists of the income, net of
related asset costs and transfer expenses relating to the transfer to
MindSpring of substantially all of the Company's individual consumer
subscribers. Other income, net was approximately $3.0 million and $5.4
million for the three and nine months ended September 30, 1996, respectively.
DATA COMMUNICATIONS AND OPERATIONS. Data communications and operations
costs and expenses consist primarily of leased long distance circuit costs,
local loop costs, 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 $9.4 million (84.4% of revenue) and approximately $19.7 million
(81.6% of revenue) during the three months ended September 30, 1995 and 1996,
respectively. Data communications and operations costs and expenses were
approximately $20.4 million (82.6% of revenue) and approximately $50.2
million (81.5% of revenue) during the nine months ended September 30, 1995
and 1996, respectively. The $10.3 million increase for the three months ended
September 30, 1996 and the $29.8 million increase for the nine months ended
September 30, 1996 in data communications and operations costs and expenses
as compared to the same periods in 1995 related principally to increases in
(i) costs associated with providing dedicated circuits to the Company's
InterFrame and InterMan subscribers and (ii) circuit costs relating to the
Company's new POPs deployed through September 1996. The increase also was
due, to a lesser extent, to an increase in personnel costs resulting from the
expansion of the Company's network operations, customer support and field
service staff concentrated in late 1995 and early 1996, notwithstanding an
overall decrease in the number of such persons employed by the Company at
September 30, 1996 due to the transfer of approximately 75 persons to
MindSpring as of September 1, 1996. Circuit costs relating to the Company's
new POPs generally are incurred by the Company in advance of anticipated
expansion in the Company's customer base and consumer wholesale capacity.
Although the Company expects that data communications and operations costs
and expenses will continue to increase as the Company's customer base
continues to grow, it anticipates that such costs and expenses will decrease
as a percentage of revenue.
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
decreased from approximately $7.1 million (63.8% of revenue) during the three
months ended September 30, 1995 to approximately $6.0 million (24.9% of
revenue) during the three months ended September 30, 1996. Sales and
marketing expenses increased from approximately $12.5 million (50.4% of
revenue) during the nine months ended September 30, 1995 to approximately
$20.9 million (33.9% of revenue) during the nine months ended September 30,
1996. The $8.4 million increase for the nine months ended September 30, 1996
resulted principally from a significant increase in advertising costs. The
$1.1 million decrease for the three months ended September 30, 1996 resulted
principally from a decrease in advertising costs compared to the same three
month period in 1995. All advertising and marketing costs are expensed in
the period incurred. The Company expects that, as a result of the
implementation of its consumer wholesale strategy and its continued efforts
to focus on businesses, its sales and marketing expenses will decrease as a
percentage of revenue 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 $2.8 million (25.2% of revenue) during the three months ended
September 30, 1995 and approximately $5.3 million (22.0% of revenue) during
the three months ended September 30, 1996. General and administrative
expenses were approximately $6.4 million (25.8% of revenue) during the nine
months ended September 30, 1995 and approximately $15.0 million (24.4% of
revenue) during the nine months ended September 30, 1996. The Company's
general and administrative staff increased from 109 at September 30, 1995 to
120 persons at September 30, 1996. The Company may from time to time adjust
its general and administrative function in response to current business
developments.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists principally of expenses 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 $4.9 million (44.1% of
revenue)
11
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during the three months ended September 30, 1995 and approximately $8.4
million (34.7% of revenue) during the three months ended September 30, 1996.
Depreciation and amortization costs were approximately $8.7 million (35.3% of
revenue) during the nine months ended September 30, 1995 and approximately
$21.6 million (35.1% of revenue) during the nine months ended September 30,
1996. A significant portion of these increases relates to the amortization of
certain intangible assets recorded in connection with acquisitions completed
in 1995. In addition, approximately $1.6 million of the amortization for the
three and nine months ended September 30, 1996 relates to the accelerated
amortization of software products near the end of their product life cycle.
POP expansion and existing POP equipment upgrades as well as facility
expansion required as a result of additional hiring in sales, marketing and
administration also contributed to this increase. The Company anticipates
that, based upon its present business plan, its depreciation and amortization
expense will decrease due to the transfer of certain tangible and intangible
assets to MindSpring which will be partially offset by increases in
depreciation as the Company continues to incur capital expenditures
associated with network infrastructure enhancements.
INTEREST EXPENSE. Interest expense increased from approximately $0.5
million for the three months ended September 30, 1995 to approximately $1.4
million for the three months ended September 30, 1996. Interest expense
increased from approximately $1.1 million during the nine months ended
September 30, 1995 to approximately $3.7 million during the nine months ended
September 30, 1996. The increase in interest expense for the three and nine
months ended September 30, 1996 was principally due to increased borrowings
and capital lease obligations incurred by the Company to finance network
expansion and to fund working capital requirements. The Company may incur
increased borrowings and capital lease obligations in the near term in
connection with its network enhancements which would impact the amount of the
Company's interest expense.
INTEREST INCOME. Interest income increased from approximately $0.5 million
for the three months ended September 30, 1995 to approximately $1.2 million
for the three months ended September 30, 1996. Interest income increased from
approximately $1.1 million during the nine months ended September 30, 1995 to
approximately $3.3 million during the nine months ended September 30, 1996.
The increase in interest income for the three and nine months ended September
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 $2.9 million for the nine
months ended September 30, 1996 relates to the recognition of realized gains
on equity securities which were sold by the Company.
NET LOSS. As a result of the factors discussed above, the Company's net
loss was approximately $13.1 million and $12.5 million for the three months
ended September 30, 1995 and 1996, respectively, and approximately $23.4
million and $38.3 million for the nine months ended September 30, 1995 and
1996, respectively.
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 $17.1 million and
$28.4 million for the nine months ended September 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 nine months ended September
30, 1995 and 1996 was approximately $19.0 million and $12.5 million,
respectively. The expansion of the Company's
12
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network resulted in capital expenditures of approximately $28.7 million and
$30.9 million for the nine months ended September 30, 1995 and 1996,
respectively (which included capital expenditures financed under equipment
financing agreements aggregating approximately $15.1 million and $30.4
million during such respective periods). Additionally, during the nine
months ended September 30, 1996, the Company invested approximately $14.6
million in equity and debt securities with original maturities of greater
than 90 days.
Cash flow provided by financing activities for the nine months ended
September 30, 1995 was approximately $63.0 million while the cash flow used
in financing activities for the nine months ended September 30, 1996 was
approximately $16.1 million. The Company raised approximately $59.6 million
of equity, net of expenses, in the nine months ended September 30, 1995.
During the nine months ended September 30, 1996, the Company made repayments
aggregating $24.6 million on its financing facilities. Additionally, during
the nine months ended September 30, 1996, the Company received proceeds from
the issuance of $6.8 million of notes payable.
As of September 30, 1996, the Company had approximately $45.7 million of cash
and cash equivalents, approximately $14.7 million of short-term investments
and marketable securities and approximately $11.5 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
September 30, 1996 a maximum availability of approximately $4.1 million),
under which $2.0 million was outstanding as of September 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. As of September 30, 1996,
the Company had commitments to certain telecommunications vendors totaling
approximately $14.0 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 September 30, 1996, the Company was obligated to make
future minimum lease payments of approximately $13.4 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.
Additionally, under its agreement with Chatterjee Management Company, the
Company expects to contribute up to $5.98 million in cash in exchange for its
interest in the joint venture.
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 the presently anticipated working capital and capital
expenditure requirements of its existing operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed herewith:
<TABLE>
<S> <C>
Exhibit 2 Joint Venture Agreement dated as of September 19,
1996 between the Company and Chatterjee Management Company *
Exhibit 10.1 Registration Rights Agreement made as of September 19, 1996 by
and between the Company and The Chatterjee Management Company
Exhibit 10.2 Employment Agreement dated October 1, 1996 between
the Company and Edward D. Postal
Exhibit 10.3 Employment Agreement dated October 9, 1996 between
the Company and Richard R. Frizalone
Exhibit 10.4 Master Software/Equipment Lease Agreement dated as of
September 20, 1996 between the Company and LPI Software
Funding Group, Inc.
Exhibit 10.5 Amendment No. 1 to Asset Purchase Agreement and Network
Services Agreement entered into as of June 28, 1996 by and between
the Company and MindSpring Enterprises, Inc.
Exhibit 10.6 Amended and Restated Convertible Note of MindSpring Enterprises,
Inc. in the principal amount of $2,000,000 due June 28, 1997
Exhibit 10.7 Convertible Note of MindSpring Enterprises, Inc. in the principal
amount of $9,929,000 due September 1, 1997
Exhibit 10.8 Amendment No. 2 to Asset Purchase Agreement entered into as of
September 1, 1996 by and 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 September 30, 1996
Exhibit 11.2 Calculation of Loss per Share and Weighted Average Shares
Used in Calculation for the Nine Months Ended September 30, 1996
Exhibit 27 Financial Data Schedule **
Exhibit 99.1 Risk Factors
</TABLE>
* This Exhibit has been filed in redacted form pursuant to a
request for confidential treatment filed separately with
the Commission pursuant to Rule 24b-2.
** 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.
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(b) Reports on Form 8-K
On October 30, 1996, the Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission dated
September 19, 1996 stating, among other things, that it had
entered into an agreement with Chatterjee Management Company
(doing business as The Chatterjee Group), a Delaware corporation
"Chatterjee"), pursuant to which the Company and an investment
group led by Chatterjee would establish a joint venture to be
known as PSINet Europe for the purpose of building an Internet
network across Europe and providing Internet-related services
in Europe.
15
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PSINET INC.
FORM 10-Q
SEPTEMBER 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.
November 14, 1996 By: /s/ Harold S. Wills
- ----------------- ----------------------
Date Harold S. Wills
Executive Vice President, Chief Operating
Officer and Director
November 14, 1996 By: /s/ Edward D. Postal
- ----------------- ----------------------
Date Edward D. Postal
Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting
Officer)
16
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EXHIBIT INDEX
Item 6 (a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Exhibit Name Location
<S> <C> <C>
2 Joint Venture Agreement dated as of September 19, 1996 between
the Company and Chatterjee Management Company.....................
10.1 Registration Rights Agreement made as of September 19, 1996
by and between the Company and The Chatterjee Management
Company...........................................................
10.2 Employment Agreement dated October 1, 1996 between the Company
and Edward D. Postal...............................................
10.3 Employment Agreement dated October 1, 1996 between the Company
and Richard R. Frizalone...........................................
10.4 Master Software/Equipment Lease Agreement dated as of
September 20, 1996 between the Company and LPI Software Funding
Group, Inc. .......................................................
10.5 Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement entered into as of June 28, 1996 by and between the
Company and MindSpring Enterprises, Inc. ..........................
10.6 Amended and Restated Convertible Note of MindSpring Enterprises,
Inc. in the principal amount of $2,000,000 due June 28, 1997.......
10.7 Convertible Note of MindSpring Enterprises, Inc. in the principal
amount of $9,929,000 due September 1, 1997.........................
10.8 Amendment No. 2 to Asset Purchase Agreement entered into as
of September 1, 1996 by and 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 September 30, 1996.......
11.2 Calculation of Loss per Share and Weighted Average Shares Used
in Calculation for the Nine Months Ended September 30, 1996........
27 Financial Data Schedule............................................
99.1 Risk Factors........................................................
</TABLE>
17
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
JOINT VENTURE AGREEMENT
THIS AGREEMENT, made and entered into as of this 19th day of September,
1996 by and between PSINet Inc., a corporation organized and existing under the
laws of the state of New York and having its principal place of business at 510
Huntmar Park Drive, Herndon, Virginia 22070 ("PSI"), and Chatterjee Management
Company (doing business as The Chatterjee Group), a corporation organized and
existing under the laws of the state of Delaware and having its principal place
of business at 888 7th Avenue, Suite 3000, New York, New York 10106 ("TCG")
(together, the "Parties").
WITNESSETH THAT:
WHEREAS, PSI is an Internet service provider offering a wide range of
Internet access services to organizations and individuals worldwide by means of
the PSINet (as defined below);
WHEREAS, TCG is an experienced investor with European connections and
interests, including, through its Affiliates (as defined below), investments in
the construction of facilities in Europe over which Internet-access services may
be provided; and
WHEREAS, the Parties desire to establish PSINet Europe (the "EJV"), a joint
venture to be formed by PSI, together with the TCG Designee (as defined below).
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
Article 1. Definitions
1.1. Terms defined in this Article 1 and elsewhere, in this Agreement shall
have the same meaning throughout this Agreement. Defined terms may be used in
the singular or the plural. All references to periods of days are to periods of
calendar days.
1.2. "Affiliate" of a Person means any Person which directly or indirectly
controls, is under common control with, or is controlled by, such Person, where
"control" means the power and ability to direct the management and policies of
the controlled Person through ownership of voting shares of the controlled
Person or by contract or otherwise. With respect to TCG, the term "Affiliate"
shall include one or more of Purnendu Chatterjee, George Soros or Soros Fund
Management or Affiliates
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
thereof, and any Person for which any such Person acts as investment advisor
or investment manager.
1.3. "Board" means the Board of Directors or a comparable body of the EJV.
1.4. "Buildout Funding Date" means the date on which the EJV has identified
the initial markets for buildout of the Network, approved an initial business
plan and has a reasonable business need to have access to the Software, the
Technical Information and the Trademarks.
1.5. "Controlling Interest" means an interest conferring on the party
holding such interest the power and ability to direct the management and
policies of the controlled enterprise through ownership of voting shares of the
controlled enterprise or by contract or otherwise. For purposes hereof, no such
interest of 5% or less shall be deemed to be a Controlling Interest.
1.6. "Government Approval" of any action to be taken by either Party means
such approval of or confirmation or consent to such action, together with such
licenses, permits or other permissions reasonably required for such action, all
as the statutes, decrees, regulations and rulings of governmental authority
(collectively, "Legal Authority") within the European Union, any sovereign
European country or the United States, as the case may be, may require to be
obtained in connection with said action from such governmental authority or from
political subdivisions thereof. Whenever any form of "Government Approval" is
used herein, it shall be interpreted and construed to include the requirement
that such approval be in form and substance acceptable to the Parties.
1.7. "Internet" means the open global network of interconnected commercial,
educational and governmental computer networks that utilize TCP/IP.
1.8. "Licensed Intellectual Property" means the Technical Information and
the Trademarks.
1.9. "Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, deed of trust, charge, security interest, encumbrance or other
adverse claim of any kind with respect to such property or asset.
1.10. "On-line Services" means commercial information services that
offer a computer user access through a modem to a specified slate of
information, entertainment and communications menus. On-line Services may or
may not utilize the PSINet or the Software.
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CONFIDENTIAL TREATMENT REQUESTED
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The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
1.11. "Person" means any individual, corporation, partnership, firm,
joint venture, association, limited liability company, trust, unincorporated
organization or other entity.
1.12. "POP" means an interlinked group of modems, routers and other
computer equipment referred to as a "point of presence," located in a particular
city or metropolitan area, that allows a nearby subscriber to access the
Internet through a local telephone call.
1.13. "Protocol" means a formal description of message formats and the
rules two or more machines must follow to exchange messages.
1.14. "PSINet" means the high-performance computer network operated by
PSI that utilizes an advanced TCP/IP-based, Asynchronous Transfer Mode,
Integrated Services Digital Network and Switched Multi-megabit Data Service
compatible frame relay network comprised of POPs that are networked through
advanced frame relay technology to create a network that allows local access to
the Internet in the localities where POPs are located.
1.15. "PSI UK" means PSINet UK Limited, a corporation organized under
the laws of the United Kingdom.
1.16. "Securityholder" means a holder of equity interests in the EJV.
1.17. "Software" means any commercially available end user software
marketed by PSI now or in the future that may be necessary, useful or
appropriate for distribution in connection with the operation of the Network and
any related software products and network services in Europe, together with all
error corrections, updates, upgrades, enhancements, new versions, derivatives,
add-ons and replacements made commercially available with respect to such
software.
1.18. "TCG Designee" means an Affiliate of TCG that is managed and
controlled by TCG--------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------.
1.19. "TCP/IP" means the Transmission Control Protocol/Internet
Protocol, a compilation of network- and transport-level Protocols that allow
computers with different architectures and operating system software to
communicate with other computers on the Internet, and any successor Protocol
serving similar functions.
1.20. "Technical Information" means the proprietary processes,
improvements, trade secrets, designs, data, plans, specifications, know-how,
network
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
or operating software, operating experience and other information,
whether patented or unpatented, copyrighted or uncopyrighted that is presently
owned or may be developed by PSI relating to the design, configuration and
technical specifications of the Internet network, which are necessary, useful or
appropriate for the establishment and operation of the Network in Europe;
provided, however, that the Technical Information shall not include the
Software.
1.21. "Trademarks" means (a) "PSI," "PSINet," "InterFrame," "PSILink,"
"UUPSI" and all other registered trademarks now owned or subsequently acquired
or developed by PSI that are used in connection with the marketing, distribution
and sale of Internet-access and related services and (b) "Internet Inside!,"
"InternetWarehouse," "InterTainment," "PSICable," "InterRamp," "LAN-dial,"
"LAN-ISDN," "LAN On Demand," "InterMAN," "SecureStream," "Pipeline," "PSIWeb,"
"Internaut," "Instant InterRamp," "PSI IntrAnet" and all other service marks now
owned or subsequently acquired or developed by PSI that are used in marketing,
distributing and selling Internet-access and related services.
1.22. The following terms are defined in the Articles or Sections set
forth below:
"Appreciated Value" - Section 4.4
"Customers" - Section 2.2(b)
"Disclosing Party" - Section 21.1
"EJV" - Recitals
"Force Majeure" - Section 6.1
"Initial Funding" - Section 4.1
"Investments" - Section 4.5
"Legal Authority" - Section 1.5
"License Agreement" - Section 4.1(a)
"License" - Section 12.2(c)
"LJV" - Section 5.2
"Measurement Date" - Section 4.4
4
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
"Network" - Section 2.2(a)
"NJV" - Section 4.6
"Offer" - Section 6.2
"Offered Securities" - Section 6.2
"PSI Filing" - Section 12.2(a)
"Qualifying IPO" - Section 3.2
"Receiving Party" - Section 21.1
"Registration Rights Agreement" - Section 5.4.
"Securities" - Section 6.1
"Selling Securityholder" - Section 6.2
"Services Agreement" - Article 9
"Significant Securityholder" - Section 6.2
"Subsidiary Business" - Section 12.2(c)
"Subsidiary Financial Statements" - Section 12.2(e)
"Subsidiary Quarterly Financial Statements" - Section 12.2(e)
"Subsidiary Securities" - Section 12.2(d)
"TCG Designee" - Recitals
"Transfer" - Section 6.1
Article 2. Purpose
2.1. The purpose of this Agreement is to provide for the establishment,
ownership and operation of the EJV by PSI and the TCG Designee.
2.2. The purpose of the EJV will be to engage in the following business
activities:
5
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
(a) acquiring and importing network components such as equipment and
circuits and building a network in Europe (the "Network") to constitute a
segment of the PSINet global network;
(b) connecting the Network to the global PSINet infrastructure so as
to support unlimited carriage of outbound and inbound Internet traffic within a
particular European country, from country to country in Europe and to the rest
of the world for businesses, schools and other organizations and individuals
wishing to purchase Internet services (collectively, "Customers"), and operating
the Network;
(c) establishing POPs throughout Europe;
(d) providing sales, marketing, customer support, customer service,
and billings and collections for dialup and circuit-based services to Customers;
(e) selling PSINet services (i) in Europe as the EJV's primary
business area and (ii) outside Europe to the extent permitted under the Services
Agreement (for example, but not by way of limitation, for the purposes of
selling PSINet services outside Europe to multinational companies based in
Europe) under the terms and conditions to be set forth in detail in the Services
Agreement;
(f) providing services (including, without limitation, Internet,
intranet, other PVC-based services and any other services offered from time to
time by PSI), World Wide Web hosting services, network security services,
electronic commerce and all related services to Customers;
(g) engaging in any other lawful business activity that is approved
in advance by the Board in accordance with this Agreement; and
(h) engaging in any and all acts, things, businesses and activities
that are related, incidental or conducive directly or indirectly to the
attainment of the foregoing objectives.
Article 3. The Joint Venture
3.1. As soon as reasonably practicable after the effective date of this
Agreement, PSI and the TCG Designee shall cooperate to establish the EJV in such
jurisdiction and in such form as they may deem appropriate for the purposes of
the EJV, PSI and the TCG Designee, and in accordance with such jurisdiction's
applicable law.
3.2. The organizational documents of the EJV shall be as agreed by PSI and
the TCG Designee, and PSI and the TCG Designee shall cause such documents to be
6
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
amended from time to time as may be required to ensure that they at all times
conform with the terms and conditions of this Agreement and any amendments
hereto. The Board shall consist of five members, with PSI and the TCG Designee
each designating two members and the fifth member being chosen by mutual
agreement of PSI and the TCG Designee. Certain major actions relating to the
EJV and PSI UK, as set forth in Exhibit A, will not be taken without the
approval of the TCG directors or the TCG Designee, as the case may be,
- -------------------------------------------------------------------------------
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- ------------------
3.3. The duration of the EJV shall be perpetual, subject to the provisions
of applicable law, the EJV's organizational documents and this Agreement.
Article 4. Capitalization of the EJV
4.1. Initial Funding. At the initial capitalization of the EJV (the
"Initial Funding"):
(a) PSI shall contribute ------------------- to the EJV in exchange
for ----------- of the EJV's initial equity.
(b) The TCG Designee shall contribute ------------------ to the EJV
in exchange for --------- of the EJV's initial equity.
4.2. Initial Buildout Funding. Upon the Buildout Funding Date:
(a) PSI shall contribute ------------------ to the EJV. The EJV
shall use such contribution, together with -------------- from the Initial
Funding, within 10 days from the Buildout Funding Date to purchase from PSI a
license to use the Software, Technical Information and Trademarks in Europe
pursuant to a license agreement (the "License Agreement") containing
substantially the terms and conditions set forth in Exhibit C attached hereto.
(b) The TCG Designee shall contribute ------------------ to the EJV.
(c) Following the contributions set forth in this Section 4.2, PSI
and TCG will own -------- and -----------, respectively, of the equity interests
in the EJV.
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
4.3. PSI UK Call/Put. At the Initial Funding, PSI and the EJV shall enter
into a call/put agreement granting the EJV the right to purchase from PSI up to
100% of the outstanding capital stock of PSI UK in exchange for newly issued
equity interests in the EJV. The aggregate amount of PSI UK's capital stock
shall be valued at -------------------, regardless of the date of exercise.
Such call right may be exercised by the EJV Board from time to time in whole or
in part at any time after the Initial Funding; provided, however, that the EJV
Board will not exercise such call until the earliest of the following to occur:
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- -------
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- -------------
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Pursuant to the call/put agreement, PSI shall also have the right to put at any
time all or any portion of the outstanding capital stock of PSI UK it then holds
to the EJV, at the same times and on the same terms and conditions; provided,
however, that upon any exercise of such put by PSI, TCG will have the right to
require PSI to put all PSI's remaining interest in PSI UK to the EJV if TCG, on
or prior to the completion of such put, has made the full amount of all capital
contributions required under Section 4.4. The equity interests in the EJV held
by PSI as a result of the exercise of the call/put right shall at no time be
equal to or greater than the equity interests in the EJV held by TCG and its
Affiliates without the consent of PSI.
4.4. TCG Designee Capital Contributions. The TCG Designee, through TCG,
hereby irrevocably commits to make additional capital contributions to the EJV
in an aggregate amount of up to -------------------, as determined from time to
time by the Board, and as provided in the annual budgets and plans approved by
the Board. Notwithstanding the foregoing, TCG or the TCG Designee shall have
the right (that
8
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
is, without any call for capital by the Board, the EJV or PSI)
to accelerate at any time after the signing of this Agreement any capital
contributions to the EJV (or if the EJV has not yet been organized, payments to
PSI), so long as the aggregate amount of investments made pursuant to this
Agreement (including without limitation pursuant to Sections 4.1(b), 4.2(b) and
this Section 4.4) does not exceed --------------------. The parties acknowledge
that upon such investment, they will treat those amounts as invested for all
purposes under this Agreement, including Section 5.3.
4.5. Adjustment to PSI Funding. -------------------------------------------
- --------------------------------------------------------------------------------
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Within 15 days of the earlier of (i) the sale, transfer or exchange
of the TCG Designee's interests in the EJV in connection with the acquisition
(whether through merger or acquisition of the Securities) by a third party of
the EJV (ii) ----- years from the Initial Funding and (iii) any dissolution of
the EJV (in any such case, the "measurement date"), the EJV shall engage, at its
expense, an investment banking firm of nationally recognized standing or another
appraiser mutually acceptable to PSI and the TCG Designee to appraise the fair
market value of the equity interest in the EJV held by the TCG Designee and its
Affiliates as of the measurement date. Such appraisal shall not take into
account any control premium.
4.6. -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------
4.7. Valuation of Contributions. Following the capital contributions
described in Sections 4.1 and 4.2, any contributions to the capital of the EJV
by PSI or TCG will be valued for the purposes of allocation of equity interests
on the same basis as the contributions set forth in such sections (i.e., the
contribution of the equity
9
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
in PSI UK will be valued as set forth in Section 4.3, and monetary
contributions will be treated at face value).
Article 5. Puts and Calls
5.1. PSI EJV Buyout Call. If any Person or group of Persons acquires all
or substantially all the common stock of PSI, PSI shall have the right to
purchase the TCG Designee's equity interest in the EJV. PSI may exercise such
right upon notice to the TCG at least 15 days and not more than 30 days prior to
the closing of such acquisition. At or prior to the closing of such
acquisition, PSI shall pay the TCG Designee in securities (or such other
consideration as is payable to PSI shareholders) and/or cash, at the TCG
Designee's option, for such equity interest in an amount equal to (a) the price
paid per share by the acquiring Person or group for the PSI common stock,
divided by the volume-weighted average trading price per share of the PSI common
stock, as shown on the Bloombergs historical price screen, during the 30-day
period beginning 40 days prior to announcement of such acquisition, multiplied
by (b) the appraised fair market value of the TCG Designee's equity interest in
the EJV, as determined in accordance with Section 4.4; provided that the
aggregate value of the consideration paid to the TCG Designee shall be at least
equal to the sum of the Appreciated Value and a ------- per annum return
thereon, based on a minimum of ---- ------- from the Initial Funding (regardless
of when such acquisition actually occurs).
5.2. PSI LJV Control Option. The Parties agree to implement as soon as
practicable a structure that would allow PSI the right to a call on the majority
interest in any of the local joint venture ("LJV") companies which may be
acquired by the EJV as part of the pan-European Network; provided, however, that
such structure is tax neutral to the EJV and the TCG Designee and its
Affiliates. Any such call would be subject to a similar call back, valued at
PSI's cost basis in the LJV, prior to a change of control in the EJV, including
an acquisition or an initial public offering.
5.3. TCG Downside Put. TCG or the TCG Designee shall have the right to
require PSI to issue to TCG or the TCG Designee in exchange for the Investments
a number of shares of PSI common stock calculated by dividing the amount of the
Investments by the closing price of PSI common stock on the trading day
- -------------- --------------------------------------------. TCG or the TCG
Designee, as the case may be, may exercise such right at any time upon written
notice to PSI, except (a) between the Initial Funding and October 1, 1997 and
(b) after the organizational meeting relating to a proposed initial public
offering of equity interests in the EJV and prior to the earlier of a decision
of the Board not to proceed with such an offering or consummation of such an
offering; provided, however, that notwithstanding such exceptions and anything
else contained in this Agreement (including, without limitation, any notice of
exercise by PSI of the purchase rights described in Section
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5.1), the TCG Designee may exercise such right (i) at any time immediately
prior to the closing of the acquisition of all or substantially all the
assets or common stock of PSI or (b) upon any material adverse change in the
EJV or its business. The closing of the exchange of TCG's or the TCG
Designee's and its Affiliates' equity interests in the EJV for PSI common
stock shall take place within 10 days of delivery of written notice to PSI of
TCG's or the TCG Designee's exercise of its put right under this Section 5.3.
5.4. Registration Rights. PSI and TCG will enter into a registration
rights agreement (the "Registration Rights Agreement") substantially in the form
attached as Exhibit D hereto.
5.5. Reservation of Shares. PSI shall at all times have reserved a
sufficient number of shares of its common stock to satisfy its obligations under
this Agreement.
Article 6. Transfer of Shares
6.1. Restrictions on Transfer. Except as otherwise specifically set forth
herein, no Securityholder may sell, assign, transfer, pledge, hypothecate,
mortgage, encumber or dispose of (collectively, "Transfer") all or any part of
any securities of the EJV (collectively, the "Securities") unless such
Securityholder has complied with the provisions of this Article 6; provided,
however, that TCG may transfer any such securities to any of its Affiliates.
6.2. Right of First Offer. If a Securityholder (a "Selling
Securityholder") desires to Transfer any or all of its Securities (the "Offered
Securities"), it shall first make a written offer to sell the Offered Securities
(the "Offer") to all Securityholders (other than the Selling Securityholder)
then holding more than 5% of the equity securities of the EJV (a "Significant
Securityholder"). A statement attached to the Offer shall set forth a full
disclosure of the Offer, including (a) a statement of intention to Transfer,
(b) the number of Offered Securities, and (c) the terms and conditions of the
proposed Transfer, including the purchase price for the Offered Securities.
6.3. Election to Purchase; Closing. Within 30 days after delivery of the
Offer, the Significant Securityholders may elect to purchase, at the price and
on the terms specified in the Offer, the Offered Securities by giving written
notice to the Selling Securityholder. The closing of such purchase shall occur
on a date mutually acceptable to the parties thereto within 30 days after such
acceptance. At such closing, the Significant Securityholders having elected to
purchase shall pay the Selling Securityholder the purchase price as specified in
accordance with Section 6.2(c), and the Selling Securityholder shall
simultaneously deliver the
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certificates representing the Securities being transferred and all other
evidence of transfer as may reasonably be requested by the purchasing
Securityholder.
6.4. Transfer to Third Parties. If any of the Offered Securities remain
unpurchased following the time periods specified above, the Selling
Securityholder may Transfer such remaining Offered Securities to any third
party; provided, however, that the other Party shall have first consented to the
transfer to such third party, which consent shall not be unreasonably withheld.
Such transfer shall be made only in strict accordance with the terms set forth
in the Offer and shall be completed within 90 days following the expiration of
the time provided for the purchase of the Offered Securities by the purchasing
Securityholders, after which time any such Transfer shall again become subject
to all the restrictions of this Agreement and the organization documents of the
EJV. The transferee shall agree in writing to be bound by the terms of this
Agreement.
6.5. Ineffective Transfers. No Transfer of any right, title or interest in
any of the Securities shall be effective, and the EJV shall not record or
recognize any such Transfer, until there has been compliance with the provisions
of this Agreement and the organization documents of the EJV. If no Offer is
made as herein required, the EJV and the Securityholders may nevertheless
exercise their rights hereunder as to the Offered Securities, and they may do so
at any time, even after the purported Transfer of the Securities.
6.6. Termination. The restrictions contained in this Article 6 shall
terminate upon consummation of a Qualifying IPO.
6.7. Legends. During the term of this Article 6, each certificate
representing interests in the EJV shall bear the following or similar legend:
"Transfer of the interests represented by this certificate is
restricted pursuant to the Joint Venture Agreement dated September __,
1996, between PSINet Inc. and The Chatterjee Management Company, a
copy of which is on file at the principal office of the Company in
__________."
Article 7. Meetings and Resolutions of Securityholders
The Board shall decide the time and place for convening all meetings of the
Securityholders, except where the law of the jurisdiction of organization of the
EJV provides otherwise, and notice thereof shall be given as set forth in the
EJV's organization documents.
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Article 8. Basic Corporate and Operating Policies
8.1. The Parties agree to vote their shares and to cause their
representatives to effectuate the policies set forth below during the term of
this Agreement.
8.2. The books and records of the EJV and PSI UK shall be maintained in
accordance with U.S. and U.K. generally accepted accounting principles,
respectively, and shall accurately reflect the EJV's financial position. Such
records and supporting documents shall be available for inspection by the
Parties, or their designees, at all reasonable times. Each of the EJV and PSI
UK shall send an English version of its quarterly and annual audited (solely as
to the EJV) financial statements to the Parties as soon as practicable after
such financial statements become available (and in no event more than 45 days
after the end of the quarter and 90 days after the year end). The EJV and PSI
UK shall also send the Parties monthly unaudited financial reports in English.
8.3. The EJV's fiscal year shall begin on the first day of January and end
on the last day of December of each year; provided, however, that the first
fiscal year shall begin on the date on which the EJV is incorporated and shall
end on the last day of December immediately following.
8.4. Only directors who are not employees of the Parties (e.g., independent
directors or directors serving in a management capacity with the EJV) will be
compensated by the EJV; provided, however, that all directors may be reimbursed
for such travel and other expenses as may reasonably be incurred by them in
performing their duties to the EJV.
8.5. After an initial start-up phase, the EJV shall be operated as a
stand-alone company with its own administrative, technical, sales, marketing and
engineering staff and professional management working on a full-time basis.
Article 9. Services Agreement
PSI will provide resources to the EJV pursuant to a Services Agreement (the
"Services Agreement") to be entered into with the EJV at the Initial Funding
containing substantially the terms and conditions set forth in Exhibit B
attached hereto. The Parties may provide the EJV with additional assistance on
a transitional basis as requested by the Board.
Article 10. Noncompete
Except as specifically agreed to in writing by the Parties, PSI agrees, and
will cause its Affiliates, and TCG agrees, and will cause the Affiliates that it
Controls, not
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to compete with, or own directly or indirectly a Controlling
Interest in any Person that competes with, the Internet-related activities of
the EJV in Europe (except for those countries in which the Board determines not
to pursue doing business) during the term of this Agreement and for a period of
two years from the earlier of (i) the expiration or termination hereof and
(ii) the divestiture by such party of its entire interest in the EJV.
Notwithstanding the foregoing, TCG and its Affiliates may own equity interests
in any such competitor so long as no employees of either TCG or any of its
Affiliates are also employees of such competitor; provided that this sentence
will not diminish any fiduciary obligation that TCG or its Affiliates may have
to the EJV under applicable law. For purposes of this Article 10, "Affiliate"
shall not include the EJV, PSI UK or, solely with respect to business in the
Netherlands, the NJV.
Article 11. Conditions to Investment
The obligations of the Parties and the EJV to proceed with any investment
under Sections 4.1, 4.2 or 4.3 pursuant to this Agreement are subject to the
satisfaction on or prior to the date of such investment of all the following
conditions, any one or more of which may be waived in whole or in part by the
Party entitled to the benefit of such conditions:
(a) The representations and warranties contained in Article 12 shall
have been true and accurate as of the date of signing of this Agreement and
shall be true and accurate in all material respects on and as of the date of
such investment with the same effect as though made on and as of such date,
except for such changes, if any, as may be agreed to in writing by the Parties.
(b) Each of the Parties shall have obtained all Government Approvals
required to be obtained by it for or in connection with the transactions
contemplated hereby, and all consents and approvals, if any, of third parties,
and no such Government Approval or third-party approval shall have been
withdrawn or suspended.
(c) On the date of such investment, there shall be no effective
injunction, writ, restraining order or any other order of any nature issued by a
court or Legal Authority of competent jurisdiction directing that any of the
transactions provided for in this Agreement or any of the agreements
contemplated by this Agreement not be consummated as herein or therein provided.
(d) On the date of such investment, there shall be no action or
proceeding pending or threatened by or before any court or other judicial,
administrative or regulatory body to restrain or prohibit the transactions
contemplated by this Agreement or any of the agreements contemplated by this
Agreement.
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(e) Since the date of execution of this Agreement, there shall not
have occurred as of the date of such investment any material adverse change in
the ownership of the Licensed Intellectual Property, or any material adverse
change in the key personnel responsible for the engineering, design and
construction of the Network.
(f) Each Party shall have executed and delivered or caused to be
executed and delivered any agreements or instruments required by this Agreement
(including, without limitation, the Registration Rights Agreement, the License
Agreement and the Services Agreement) or appropriate in order to consummate the
transactions contemplated hereby, in each case on terms substantially consistent
with those set forth in this Agreement, and such agreements shall remain in
effect.
Article 12. Representations and Warranties
12.1. Each Party hereto represents and warrants to the other Party as
follows: (a) it is duly organized and validly existing under the laws of its
place of incorporation; (b) it has full corporate power and authority and has
taken all corporate action necessary to enter into and perform this Agreement;
(c) the execution and performance by it of its obligations hereunder will not
constitute a breach of, or conflict with, any other material agreement or
arrangement, whether written or oral, by which it is bound; (d) to the best of
its knowledge, it has complied in all material respects with all laws,
regulations, orders, judgments or decrees of any domestic or foreign court or
Legal Authority applicable to it; (e) no representation or warranty made in this
Agreement, or in any exhibit, schedule, certificate, list or other instrument
furnished or to be furnished pursuant to this Agreement, or in connection with
the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements contained herein or therein not false
or misleading; and (f) this Agreement is its legal, valid and binding
obligation, enforceable in accordance with the terms and conditions hereof
(subject to applicable laws of bankruptcy and moratorium); and (g) no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
in connection with this Agreement or the transactions contemplated hereby based
on arrangements made by it or on its behalf.
12.2. PSI represents and warrants as follows:
(a) PSI Filings; No Material Adverse Change. No filing by PSI with
the U.S. Securities and Exchange Commission (a "PSI Filing"), contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained herein or
therein not false or misleading as of the respective dates thereof, and there
has been no material adverse
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CONFIDENTIAL TREATMENT REQUESTED
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change to the business, results of operations, financial condition or
prospects of PSI since the date of the most recent PSI Filing prior to the
date hereof.
(b) Organization, Good Standing, Etc. of PSI UK. (i) PSI UK is a
corporation duly organized and validly existing under the laws of the United
Kingdom; (ii) PSI UK has full corporate power and authority and has taken all
corporate action necessary to own and operate its properties and carry on its
intended business; (iii) the execution and performance by PSI of its obligations
hereunder will not constitute a breach of, or conflict with, any other material
agreement or arrangement, whether written or oral, by which PSI or the PSI UK is
bound; and (iv) to the best of PSI's knowledge, PSI UK has complied in all
material respects with all laws, regulations, orders, judgments or decrees of
any domestic or foreign court or Legal Authority applicable to it if the failure
to comply would have a material adverse effect on the current or planned
business of PSI UK.
(c) Licenses, Permits, Authorizations, Etc. of PSI UK. PSI UK has
received all currently required governmental approvals, authorizations,
consents, licenses, orders, registrations and permits of all agencies, whether
local or national (the "Licenses"), in each case necessary for the conduct of
its (the "Subsidiary Business"), if the failure to obtain any such License would
have a material adverse effect on the current or planned business of PSI UK.
(d) Capitalization of PSI UK. As of the date hereof, PSI UK has
authorized capital stock of 1,000 ordinary shares, of which 2 shares are issued
and outstanding. All outstanding ordinary shares of PSI UK have been duly
authorized and validly issued, are fully paid and nonassessable (except any
assessment that is required by the laws of the United Kingdom and is not
material), and are owned by PSI. Except as described in this Section 12.2(d),
there are no outstanding (i) shares of capital stock or voting securities of PSI
UK, (ii) securities of PSI UK convertible into or exchangeable for shares of
capital stock or voting securities of PSI UK or (iii) options or other rights to
acquire from PSI UK, or other obligation of PSI UK to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of PSI UK (the items in clauses (i), (ii) and (iii)
being referred to collectively as the "Subsidiary Securities"). There are no
outstanding obligations of PSI or any of its Affiliates to acquire any
Subsidiary Securities.
(e) Financial Statements of PSI UK. PSI has previously delivered to
TCG financial statements of PSI UK for the fiscal year ended December 31, 1995
(the "Subsidiary Financial Statements"). The Subsidiary Financial Statements
are accurate and present fairly in all material respects the financial position
and results of
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CONFIDENTIAL TREATMENT REQUESTED
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operations of PSI UK as of December 31, 1995 in accordance with U.K.
generally applied accounting principles consistently applied.
PSI has furnished to TCG quarterly financial statements of PSI UK for
the quarter ended June 30, 1996 (the "Subsidiary Quarterly Financial
Statements"). The Subsidiary Quarterly Financial Statements are accurate and
present fairly in all material respects the financial position of PSI UK as of
June 30, 1996 in accordance with U.K. generally accepted accounting principles
consistently applied.
Since December 31, 1995, except as contemplated by this Agreement, the
Subsidiary Business has been conducted in the ordinary course consistent with
past practices and there has not been any event, occurrence, development or
state of circumstances or facts relating to PSI UK that has had or could
reasonably be expected to have a material adverse effect on the Subsidiary
Business.
(f) No Undisclosed Material Liabilities of PSI UK. There are no
liabilities of PSI UK of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, and there is no existing
condition, situation or set of circumstances that could reasonably be expected
to result in such a liability, other than liabilities provided for in the
Subsidiary Financial Statements and other than liabilities that, individually or
in the aggregate, will not have a material adverse effect on PSI UK.
(g) Contracts of PSI UK. PSI shall have made available for the
review of TCG prior to the Initial Funding true and complete originals or
photocopies of all material contracts, oral or written, to which PSI UK is a
party, including, without limitation, all agreements, contracts or
understandings between PSI and PSI UK. All such contracts are valid and in full
force and effect, PSI UK has performed all material obligations imposed on it
thereunder, and there are not, under any of such contracts, any defaults or
events of default on the part of PSI UK or, to the knowledge of PSI, any other
party thereto that would materially adversely affect the business, assets or
financial condition of PSI UK, or that could reasonably be expected to
materially adversely affect the business prospects of PSI UK. PSI UK has not
received notice, and PSI is not otherwise aware, that any party to any such
material contract intends to cancel, terminate or refuse to renew such material
contract or to exercise or decline to exercise any option or right thereunder.
(h) Claims and Legal Proceedings Against PSI UK. There are no
material claims, actions, suits, arbitrations, proceedings or investigations
pending or, to the knowledge of PSI, threatened against PSI or PSI UK with
respect to the Subsidiary Business before or by any Legal Authority or other
Person. There are no outstanding or unsatisfied judgments, orders, decrees or
stipulations to which PSI or
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PSI UK is a party that involve the transactions contemplated herein or that
would individually or in the aggregate have a material adverse effect on the
business, assets or financial condition of PSI UK or that could reasonably be
expected to have a material adverse effect on the business prospects of PSI
UK.
(i) Patents, Trademarks, Etc. PSI UK owns or has all necessary
licenses or rights within its jurisdiction to use:
(i) all trademarks, trade names, copyrights, patents, patent
applications, technology and other intellectual property rights now used by PSI
UK and
(ii) all formulae, franchises, processes, techniques and
manufacturing know-how and all trademarks, trade names, copyrights, patents,
patent applications, technology and other intellectual property rights used in
connection with services now being or intended to be offered and sold by PSI UK.
Article 13. Term and Termination
13.1. This Agreement shall continue in effect until terminated pursuant
to this Article 13 or by mutual agreement of the Parties.
13.2. This Agreement shall be terminable forthwith upon the sending of
notice in writing upon the occurrence of one or more of the following events:
(a) by either Party, if any required Government Approval has not been
obtained within six months of the date hereof or if any subsequent enactment of
law or regulation or any subsequent act of a Legal Authority in the European
Union or the United States shall, in the reasonable opinion of the adversely
affected Party, (i) make performance of this Agreement impossible or
unreasonably expensive or unreasonably difficult for said Party, (ii) alter the
rights and obligations of the Parties from those agreed and contemplated by this
Agreement, or (iii) interfere with the benefits contemplated herein to be
received by such Party;
(b) by either Party, if the other Party commits a material breach of
any of its obligations under this Agreement, which shall not have been remedied
within 60 days from the giving of written notice requiring such breach to be
remedied;
(c) by either Party, if the other Party becomes incapable, for a
period of 60 days of performing any of its obligations under this Agreement
because of Force Majeure (as defined below);
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(d) by either Party, if the other Party commences a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or similar official of it or of any substantial
part of its property, or shall consent to any such relief or to the appointment
of or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing;
(e) by either Party, if the other Party has an involuntary case or
other proceeding commenced against it seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
remains undismissed and unstayed for a period of 90 days; or an order for relief
is entered against such Party under applicable bankruptcy laws as now or
hereafter in effect;
(f) by either Party, if the other Party is unable to pay its debts as
they become due, has explicitly or implicitly suspended payment of any debts as
they become due (except debts contested in good faith), or if the creditors of
such Party have taken over its management;
(g) by any Party, in the event of a material breach of the License
Agreement or the Services Agreement by the other Party, and the continuance
thereof after the lapse of all relevant cure periods; or
(h) by TCG, if PSI UK experiences any of the events described in
Section 13.2(d), (e) or (f) while under the control of PSI or its Affiliates
(other than the EJV).
13.3. If this Agreement is terminated pursuant to Section 13.2, then
the License Agreement and the Services Agreement shall terminate at the option
of the EJV.
Article 14. Consequences of Termination
14.1. Termination of this Agreement shall be without prejudice to the
accrued rights and liabilities of the Parties at the date of termination, unless
waived in writing by mutual agreement of the Parties.
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CONFIDENTIAL TREATMENT REQUESTED
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14.2. Upon termination of the License Agreement, each Party shall (at
the request of the other Party) take all steps necessary to ensure that the name
of the EJV is immediately changed so that it no longer contains any reference to
any trade name, trademark, service name or service mark then owned by the other
Party or any of its Affiliates (other than the EJV).
14.3. If this Agreement is terminated by a Party in accordance with
Section 13.2, the terminating Party shall have the right to require the other
Party to join with the terminating Party to cause the liquidation or winding up
of the EJV.
Article 15. Nature and Survival of Representations; Indemnification
15.1. All representations, warranties and covenants made by the Parties
in this Agreement and in any exhibit, schedule, certificate, list or other
instrument delivered in connection with the transactions contemplated hereby
shall survive the Initial Funding and any investigation at any time made or any
knowledge received by or on behalf of a Party (unless, with respect to a
material breach of a representation under Article 12, such Party had, as of the
date of this Agreement, actual knowledge of such material breach and all
necessary information to conclude that such material breach existed and, Section
15.2 will not apply to the extent of any claims in connection with such a
material breach); provided, however, that in the case of a claim for
indemnification arising under only Section 15.2(a), no Party shall have any
liability unless it receives notice on or before the first anniversary of the
date of the Initial Funding asserting a claim with respect thereto and
specifying the factual basis of such claim in reasonable detail, to the extent
known.
15.2. Each Party shall indemnify and hold harmless the other and the
EJV against all damage, loss, liability, diminution of value or expense,
including, without limitation, reasonable attorneys' fees and costs relating
thereto, suffered or incurred by the other Party or the EJV arising from or in
connection with:
(a) any misrepresentation or breach of representation or warranty by
the indemnifying Party of any representation or warranty set forth in this
Agreement or in any exhibit, schedule, certificate, list or other instrument
delivered pursuant hereto;
(b) any breach or nonfulfillment by the indemnifying Party of any
covenant, agreement or other obligation set forth in this Agreement or in any
exhibit, schedule, certificate, list or other instrument delivered pursuant
hereto; and
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(c) any claim, lawsuit or proceeding that arises out of, or is
attributable or relates to, the business conducted by the indemnifying Party on
or prior to the Initial Funding.
15.3. Each Party shall indemnify and hold harmless the other from and
against all loss, liability, damage or expense (including reasonable attorneys'
fees) in connection with any claim by any Person for brokers' or finders' fees
or commissions or similar payments and related expenses based on any agreement
or understanding alleged to have been made with respect to the transactions
contemplated hereby by such Person with the indemnifying Party.
15.4. PSI shall indemnify TCG and its Affiliates and representatives
against any liabilities or expenses arising out of any claim or action
instituted by or on behalf of any shareholder of PSI with respect to the
transactions contemplated by this Agreement, except to the extent arising out of
a breach by TCG of this Agreement or due to its bad faith, gross negligence or
willful misconduct.
15.5. The Party seeking indemnification shall notify the Party against
whom indemnification is sought promptly of any claim by any third party coming
to its attention that may result in any liability hereunder on the other Party's
part, and the indemnifying Party shall be entitled at its own expense to conduct
the defense of any such third-party claim with counsel of its own choosing,
subject to approval by the Party seeking indemnification which approval shall
not be unreasonably withheld, and shall be entitled to participate in such
defense with counsel of its own choosing and at its own expense; provided,
however, that control of the defense will remain with counsel for the
indemnifying Party if the indemnifying Party has acknowledged unequivocally in
writing its obligation to indemnify the other Party in regard to the claims to
be defended against. Failure to give notice as provided herein shall not
relieve the indemnifying Party of its obligations hereunder, except to the
extent that the defense of any claim is prejudiced by such failure to give
notice. The indemnifying Party shall have the right to compromise or settle for
money damages only any claim giving rise to an obligation for indemnification
hereunder; any claim compromised or settled by the indemnified Party shall not
be subject to indemnification hereunder.
Article 16. Force Majeure
16.1. The failure or delay of either Party hereto to perform any
obligation under this Agreement solely by reason of acts of God, acts of
government (except as otherwise enumerated herein), riots, wars, embargoes,
strikes, lockouts, accidents in transportation, port congestion or other causes
beyond its control ("Force Majeure") shall not be deemed to be a breach of this
Agreement; provided, however, that the
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Party so prevented from complying herewith shall have used reasonable
diligence to avoid such event of Force Majeure and mitigate its effects, and
shall continue to take all actions within its power to comply as fully as
possible with the terms of this Agreement.
16.2. Except where the nature of the event shall prevent it from doing
so, the Party suffering such Force Majeure shall notify the other Party in
writing within 14 days after the occurrence of such event of Force Majeure and
shall in every instance, to the extent reasonable and lawful under the
circumstances, use its best efforts to remove or remedy such cause with all
reasonable dispatch.
Article 17. Disclaimer of Agency and Partnership
This Agreement shall not be deemed to constitute any Party the agent or
partner of the other Party, nor shall it constitute the EJV an agent of either
Party, and no Party shall have the right to bind the other.
Article 18. Dispute Resolution and Governing Law
18.1. If any controversy or claim arises out of or relates to this
Agreement or with respect to an alleged breach of the terms hereof, the Parties
shall seek to solve the matter amicably through discussions between themselves.
The Parties shall attempt to resolve all controversies, claims or breaches at
the operational level, and in the event a resolution cannot be reached, such
controversy, claim or breach will be referred progressively to higher levels
within each Party, to their respective boards of directors, and finally to the
chairpersons of PSI and TCG. If the Parties fail to resolve such controversy,
claim or breach within thirty (30) days by amicable arrangement and compromise,
either Party may seek arbitration as set forth below.
18.2. Any controversy or claim arising out of or in relation to this
Agreement, or breach of this Agreement, shall be finally settled by arbitration
in London, England.
(a) The arbitration shall be conducted in the English language before
a single arbitrator in accordance with the Rules of Arbitration and Conciliation
of the International Chamber of Commerce then in effect.
(b) The Parties shall appoint the arbitrator by mutual agreement. If
the parties cannot agree on the appointment of the arbitrator within thirty (30)
days after receipt of a demand for arbitration, the arbitrator shall be
appointed by the International Chamber of Commerce.
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The symbol "--" indicates that a confidential portion has been omitted and
filed separately with the Securities and Exchange Commission
(c) All arbitration rulings and awards shall be final and binding on
the parties and shall be enforceable in accordance with the convention on the
Recognition and Enforcement of Foreign Arbitral Awards.
(d) Notwithstanding any other provision of this Agreement, either
party shall be entitled to seek preliminary injunctive relief from any court of
competent jurisdiction pending the final decision or award of the arbitrators..
18.3. The validity, performance, construction and effect of this
Agreement shall be governed by the laws of the state of New York, without regard
to principles of conflicts of law.
Article 19. Amendment; Assignment
No modification or alteration of any term or condition of this Agreement
will be valid unless in writing signed by each Party. This Agreement and each
and every covenant, term and condition hereof shall be binding upon and inure to
the benefit of the Parties and their successors and permitted assigns. Subject
to Article 6, neither Party shall directly or indirectly assign its rights or
delegate its obligations hereunder without the prior written consent of the
other Party; provided, however, that PSI may assign its rights but not its
obligations hereunder to any wholly owned subsidiary of PSI reasonably
acceptable to TCG, and either Party may assign its rights and delegate its
obligations hereunder to any of its Affiliates, with the consent of the other
Party (which consent will not unreasonably be withheld) in each case so long as
such transferee agrees to be bound by the terms and conditions of this Agreement
and any related agreements, including but not limited to the License Agreement
and the Services Agreement.
Article 20. Costs
The Parties shall each pay their own legal and other costs incurred in
documenting and executing this Agreement----------------------------------------
- --------------------------------------------------------------------------------
- ------------------ The EJV will reimburse each Party for any legal fees and
expenses incurred in preparing the documentation, registrations and formation of
the EJV.
Article 21. Confidentiality
21.1. Except as otherwise agreed by the Parties in writing, the Parties
agree that, at all times during the term of this Agreement and for a two-year
period following termination or expiration hereof, the Party receiving
information (the "Receiving Party") shall keep completely confidential, shall
not publish or otherwise
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
disclose and shall not use, directly or indirectly, for any purpose any
information furnished to it by the other Party (the "Disclosing Party")
pursuant to this Agreement or otherwise relating to any transaction
contemplated hereby, except to the extent that the Receiving Party can
establish by competent proof that such information
(a) was already known to the Receiving Party, other than under an
obligation of confidentiality, at the time of disclosure by the Disclosing
Party;
(b) was part of the public domain at the time of its disclosure by
the Disclosing Party;
(c) became part of the public domain after its disclosure by the
Disclosing Party, other than through any act or omission of the Receiving Party
in breach of this Agreement;
(d) was disclosed to the Receiving Party by a third party who had no
obligation not to disclose such information to others; or
(e) has been disclosed by the Disclosing Party to any third party
without an obligation not to disclose such information to others.
21.2. Each Party may disclose the others Party's information to the
extent that such disclosure is reasonably necessary in filing or prosecuting
patent applications, pursuing or defending litigation, or complying with
applicable law or governmental or stock exchange regulations; provided, however,
that, if a Receiving Party intends to make any such disclosure, it shall give
reasonable advance written notice to the Disclosing Party of such intention.
Furthermore, nothing in this Article 21 shall be construed to preclude either
Party from disclosing such information to third parties as may be necessary in
connection with the transactions contemplated by this Agreement; provided,
however, that the Receiving Party shall in each case obtain from the proposed
third-party recipient a written confidentiality undertaking containing
confidentiality obligations no less onerous than those set forth in this Article
21.
Article 22. Notices
22.1 All written notices, requests, demands and other communications under
this Agreement or in connection herewith shall be given by letter (delivered by
hand, by air courier, or by registered airmail) or by facsimile or e-mail
transmission confirmed by such a letter, and addressed to the respective Parties
as follows:
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
To TCG or the TCG Designee:
Chatterjee Management Company
888 7th Avenue, Suite 3000
New York, NY 10106
Attention: W. James Peet
Internet e-mail address: [email protected]
Facsimile No.: 212-397-5554
with copies to: Chatterjee Management Company
888 7th Avenue, Suite 3000
New York, NY 10106
Attention: Peter Hurwitz, Esq.
Facsimile No.: 212-262-9637
and: Soros Fund Management
888 7th Avenue, Suite 3200
New York, NY 10106
Attention: Michael Neus, Esq.
Facsimile No.: 212-664-0544
and: Perkins Coie
One Bellevue Center, Suite 1800
411 - 108th Avenue N.E.
Bellevue, WA 98004-5584
Attention: Craig E. Shank, Esq.
Internet e-mail address: [email protected]
Facsimile No.: (206) 453-7350
To PSI: PSINet, Inc.
510 Huntmar Park Drive
Herndon, VA 22070 USA
Attention: William L. Schrader
Internet e-mail address: [email protected]
Facsimile No: 703-904-1608
with a copy to: PSINet, Inc.
510 Huntmar Park Drive
Herndon, VA 22070 USA
Attention: David Kunkel, Esq.
Internet e-mail address: [email protected]
Facsimile No.: 703-904-9527
25
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
22.2. A Party may change its notice information at any time by written
notice to the other Party.
Article 23. Press Releases
Each Party shall not, and shall cause their Affiliates not to, make
publicly available any press release, promotional material or similar public
statement naming or otherwise identifying the other Party or any of its
Affiliates without such other Party's prior consent, which consent will not
unreasonably be withheld. Each Party and any of their respective Affiliates
shall provide the other Party, as early as reasonably practicable, drafts of all
press releases that include references to such other Party or any of its
Affiliates, and shall consider and use reasonable efforts to incorporate into
all such press releases any comments provided by such other Party in a
reasonably timely manner.
Article 24. No Waiver
The waiver by a Party of a breach or a failure to assert a breach by the
other Party of any covenant, obligation or provision in this Agreement
(contained or implied) does not operate as a waiver of another or continuing
breach or failure to assert a breach by the other Party of the same or any other
covenant, obligation or provision in this Agreement contained or implied.
Article 25. Severance
If any one or more of the provisions contained in this Agreement shall be
invalid, illegal or unenforceable in any respect under any applicable law, then
the validity, legality and enforceability of the remaining provisions contained
in this Agreement shall not in any way be affected or impaired, and in such
case, the parties agree to use their best efforts to achieve the purpose of the
invalid provision by a new, legally valid provision.
Article 26. Counterparts
This Agreement may be executed in two counterparts, each of which shall be
deemed an original.
Article 27. Government Approval
27.1. TCG shall provide reasonable cooperation (e.g., furnishing
reasonable background or contact information) with the efforts of PSI or the EJV
to obtain any Government Approval.
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
27.2. TCG shall provide reasonable cooperation (e.g., furnishing
reasonable background or contact information) with the efforts of PSI and the
EJV in obtaining, after the date of the Initial Funding, any further Government
Approval of this Agreement or of any amendment hereto as required under the laws
or regulations of any jurisdiction in which the EJV shall desire to conduct
business.
Article 28. Further Assurances
Each Party shall duly execute and deliver, or cause to be duly executed and
delivered, such further instruments and do, or cause to be done, such further
acts and things, including, without limitation, the filing of such assignments,
agreements, documents and instruments, as may be necessary or as the other Party
may reasonably request in connection with this Agreement or to carry out more
effectively the provisions and purposes hereof, or to better assure and confirm
to such other Party its rights and remedies under this Agreement.
Article 29. Entire Agreement
This Agreement supersedes all previous representations, understandings or
agreements, oral or written, between the Parties with respect to the subject
matter hereof, and, together with the agreements and documents attached hereto
as exhibits, contains the entire understanding of the Parties as to the terms
and conditions of their relationship.
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CONFIDENTIAL TREATMENT REQUESTED
--------------------------------
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by a representative thereunto duly authorized as of the date first set forth
above.
PSINET INC.
By /s/ David N. Kunkel
-----------------------------
Name: David Kunkel
Title: Senior Vice President and General Counsel
CHATTERJEE MANAGEMENT COMPANY
By /s/ James Peet
-----------------------------
Name: James Peet
Title: Vice President
28
<PAGE>
Exhibits to the Joint Venture Agreement have been omitted.
The following is a list of the omitted Exhibits which the Company agrees to
furnish supplementally to the Commission upon request:
Exhibits:
Exhibit A Decisions Requiring the Consent of the TCG Directors or
the TCG Designee
Exhibit B Terms of Services Agreement
Exhibit C Terms of License Agreement
Exhibit D Form of Registration Rights Agreement
<PAGE>
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made as of the
19th day of September, 1996 by and between PSINet Inc., a New York
corporation (the "Company"), and The Chatterjee Management Company, a
Delaware corporation ("TCG").
WITNESSETH:
WHEREAS, the Company and TCG have entered into a Joint Venture Agreement
dated as of September 19, 1996 (the "JVA"), pursuant to which, under certain
circumstances, the Company may issue shares of Common Stock to TCG and/or its
Affiliates.
WHEREAS, it is a condition precedent to the consummation of
the transactions under the JVA that this Agreement be entered into.
WHEREAS, the Company has previously granted registration rights to
certain other holders of the Company's securities pursuant to the Amended and
Restated Registration Rights Agreement, the 2/8/95 Registration Rights
Agreement, the 6/16/95 Registration Rights Agreement and the 7/11/95
Registration Rights Agreement.
WHEREAS, it is the intention of the parties to this Agreement that the
registration rights granted hereunder shall rank ratably with the
registration rights under the Amended and Restated Registration Rights
Agreement, the 2/8/95 Registration Rights Agreement, the 6/16/95 Registration
Rights Agreement and the 7/11/95 Registration Rights Agreement and with
registration rights to be granted under other agreements as more fully
provided in Section 2.7 hereof.
WHEREAS, certain defined terms are set forth in Article I hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and in consideration of the mutual
covenants contained herein and for other good and available consideration,
the receipt and adequacy of which are hereby acknowledged, the parties
hereto, intending to be legally bound, agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1 CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"Affiliate" shall have the meaning set forth in the JVA.
"Amended and Restated Registration Rights Agreement" shall mean the
Amended and Restated Registration Rights Agreement dated as of January 17,
1995 among the Company and the other parties thereto, as the same has been
and hereafter may be amended from time to time to add additional parties
signatory thereto.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $.01 par value per share, of
the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Existing Registration Rights" shall have the meaning set forth in
Section 2.7 hereof.
"Holders" shall mean the holders of Registrable Securities then
outstanding.
"Other Registration Rights" shall have the meaning set forth
in Section 2.7 hereof.
"primary offering" shall have the meaning set forth in Section 2.1
hereof.
"Registrable Securities" shall have the meaning set forth in Section 2.4
hereof.
"Rule 144A Information" shall have the meaning set forth in Section 4.2
hereof.
"secondary offering" shall have the meaning set forth in Section 2.1
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
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<PAGE>
"2/8/95 Registration Rights Agreement" shall mean the Registration
Rights Agreement dated as of February 8, 1995 among the Company and the other
parties thereto, as the same may be amended from time to time.
"6/16/95 Registration Rights Agreement" shall mean the Registration
Rights Agreement dated as of June 16, 1995 among the Company and the other
parties thereto, as the same may be amended from time to time.
"7/11/95 Registration Rights Agreement" shall mean the Registration
Rights Agreement dated as of July 11, 1995 among the Company and the other
parties thereto, as the same may be amended from time to time.
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1 OPTIONAL REGISTRATIONS
If at any time or times after the date hereof until the earlier of (a)
three years after the issuance of the relevant shares of Common Stock to TCG
or any of its Affiliates pursuant to the JVA (so long as the relevant Holder
is not an "affiliate" of the Company for purposes of Rule 144 under the
Securities Act) and (b) September 19, 2003, the Company shall determine to
register any shares of Common Stock or securities convertible into or
exchangeable or exercisable for shares of the Common Stock under the
Securities Act (whether in connection with a public offering of securities by
the Company (a "primary offering"), a public offering of securities by
shareholders (a "secondary offering"), or both, but not in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Commission
under the Securities Act is applicable), the Company will promptly give
written notice thereof to the Holders of Registrable Securities then
outstanding. In connection with any such registration, if within 30 days
after their receipt of such notice any one or more of the Holders of
Registrable Securities request the inclusion of some or all of the
Registrable Securities owned by them in such registration, the Company will
notify all of the Holders of its receipt of such request, and, subject to
Section 2.7 hereof, will use its best efforts to effect the registration
under the Securities Act of all Registrable Securities which such Holders may
request in a writing delivered to the Company within 30 days after the notice
given by the Company with respect to its receipt of such request; provided,
that such registration is in connection with an underwritten public offering;
provided, further, that, if the underwriter determines that the registration
of securities in excess of any amount to be registered by the Company would
adversely affect such offering then the Company may (subject to the
allocation priority set forth below) exclude
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<PAGE>
from such registration and underwriting some or all of the Registrable
Securities which would otherwise be underwritten pursuant to the notice
described herein. The Company shall advise all Holders of Registrable
Securities promptly after such determination by the underwriter, and the
number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated in the following manner:
the securities to be sold by the Company shall be included in such
registration and underwriting, and, subject to Section 2.7 hereof, the number
of additional shares that may be included in the registration and
underwriting shall be allocated among all Holders of Registrable Securities
and all holders of other securities having registration rights granted by the
Company requesting that Registrable Securities or such other securities, as
the case may be, be included in such registration and underwriting in
proportion, as nearly as practicable, to their respective holdings of
Registrable Securities and such other securities. All expenses of the
registration and offering and the reasonable fees and expenses of one
independent counsel for the Holders and all holders of other securities
having registration rights granted by the Company shall be borne by the
Company, except that the Holders and all holders of other securities having
registration rights granted by the Company shall bear underwriting and
selling discounts and commissions attributable to their Registrable
Securities or such other securities, as the case may be, being registered and
transfer taxes on shares being sold by such Holders or other holders, as the
case may be. Without in any way limiting the types of registrations to which
this Section 2.1 shall apply, in the event that the Company shall effect a
"shelf registration" under Rule 415 of the Securities Act or any other
similar rule or regulation, the Company shall take all necessary action,
including, without limitation, the filing of post-effective amendments, to
permit the Holders to include their shares in such registration in accordance
with the terms of this Section 2.1.
SECTION 2.2 REQUIRED REGISTRATIONS
Prior to September 30, 2006, one or more of the
Holders may notify the Company in writing that he, she, it or they (i) intend
to offer or cause to be offered for public sale all or any portion of his,
her, its or their Registrable Securities having an aggregate proposed
offering price of not less than $1,000,000 (such requests shall be in writing
and shall state the number of shares of Registrable Securities to be disposed
of and the intended method of disposition of such shares by such Holder or
Holders) and (ii) request that the Company cause such Registrable Securities
to be registered under the Securities Act; provided, however, that each
Holder (or transferee of his, her or its Registrable Securities in accordance
with the terms of this Agreement) may make only two requests for registration
under this Section 2.2. Upon receipt of such notification, subject to
Section 2.7 hereof, the Company will notify all of the Holders of Registrable
Securities who would be entitled to notice of a proposed registration
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<PAGE>
under Section 2.1 above of its receipt of such notification. Upon the
written request of any such Holder delivered to the Company within 15 days
after receipt from the Company of such notification, the Company will use its
best efforts to cause such of the Registrable Securities as may be requested
by any Holders (including the Holder or Holders giving the initial notice of
intent to register hereunder) to be registered under the Securities Act
within 180 days of the notification by the Holders, in accordance with the
terms of this Section 2.2; PROVIDED, HOWEVER, that unless such registration
becomes effective, such registration shall not be counted as Athe one request
for registration that may be made by each Holder (or transferee of his, her
or its Registrable Securities in accordance with this Agreement) under this
Section 2.2. THE COMPANY SHALL, AFTER CONSULTATION WITH THE HOLDERS
REQUESTING REGISTRATION,The Holders participating in a registration under
this Section 2.2 shall select one or more underwriters to sell the
Registrable Securities to be registered through an underwritten public
offering. If the underwriter determines that the registration of
securities in excess of an amount determined by such underwriter would
adversely affect such offering, then the Company may (subject to the
allocation priority set forth below) exclude from such registration and
underwriting some or all of the Registrable Securities which would otherwise
be underwritten pursuant to this Section 2.2. The Company shall advise all
Holders promptly after such determination by the underwriter, and the number
of shares of securities that are entitled to be included in the registration
and underwriting shall be allocated in the following manner: subject to
Section 2.7 hereof, the number of shares that may be included in the
registration and underwriting shall be allocated among all Holders of
Registrable Securities requesting that Registrable Securities be included in
such registration and underwriting in proportion, as nearly as practicable,
to their respective holdings of Registrable Securities. All expenses of such
registration and offerings and the reasonable fees and expenses of one
independent counsel for the Holders shall be borne by the Company; PROVIDED,
HOWEVER, that (i) the Company shall have no liability for such expenses if
such registration does not become effective due solely to the action or
failure to act of any Holder requiring such registration and (ii) the Holders
shall bear underwriting and selling discounts and commissions attributable to
their Registrable Securities being registered and transfer taxes on shares
being sold by such Holders. The Company may postpone the filing of any
registration statement required hereunder for a reasonable period of time,
not to exceed 180 days during any 12 month period, if the Company has been
advised by legal counsel, which counsel shall be acceptable to the Holders,
that such filing would require the disclosure of a material transaction or
other matter which would not otherwise be required to be disclosed at such
time and the Company determines reasonably and in good faith that such
disclosure would have a material adverse effect on the Company.
Notwithstanding anything in this Section 2.2 to the contrary, the Company
shall not be required to effect a registration under this Section 2.2 more
than 135 days following the end of the Company's fiscal year, if such
registration shall require the
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<PAGE>
preparation of audited financial statements
for any interim period not otherwise prepared by the Company. If a demand
registration is requested during such period, the Company will commence such
registration promptly following the end of the next fiscal year. If so
requested by any Holder in connection with a registration under this Section
2.2, the Company shall take such steps as are required to register such
Holder's Registrable Securities for sale on a delayed or continuous basis
under Rule 415 for a period not to exceed 180 days, and also take such steps,
during such 180-day period, as are required to keep any registration
effective until all Registrable Securities registered thereunder are sold. A
request under this Section 2.2 shall not be counted as a request under
Section 2.3.
SECTION 2.3 FORM S-3
If the Company becomes eligible to use Form S-3 under the Securities Act
or a comparable successor form, the Company shall use its reasonable best
efforts to continue to qualify at all times for registration of its capital
stock on Form S-3 or such successor form. Each Holder (or transferee of his,
her or its Registrable Securities in accordance with the terms of this
Agreement) shall have the right to request and have effected one registration
of shares of Registrable Securities on Form S-3 or such successor form for a
public offering of shares of Registrable Securities having an aggregate
proposed offering price of not less than $1,000,000 (such request shall be in
writing and shall state the number of shares of Registrable Securities to be
disposed of and the intended method of disposition of such shares by such
Holder or Holders). The Company shall give notice to all of the Holders of
the receipt of a request for registration pursuant to this Section 2.3 and
shall provide a reasonable opportunity for such Holders to participate in
such a registration. Subject to the foregoing and the provisions of
applicable law, the Company will use its best efforts to effect promptly the
registration of all shares of Registrable Securities on Form S-3 or such
successor form to the extent requested by the Holder or Holders thereof. The
Company shall, after consultation with the Holders requesting registration,
select one or more underwriters to sell the Registrable Securities to be
registered through an underwritten public offering. All expenses in
connection with a registration requested pursuant to this Section 2.3 and the
reasonable fees and expenses of one independent counsel for the Holders shall
be borne by the Company; PROVIDED, HOWEVER, that (i) the Company shall have
no liability for such expenses if such registration does not become effective
due solely to the action or failure to act of any Holder requiring such
registration and (ii) the Holders shall bear underwriting and selling
discounts and commissions attributable to their Registrable Securities being
registered and transfer taxes on shares being sold by such Holders. The
Company may postpone the filing of any registration statement required
hereunder for a reasonable period of time, not to exceed 180 days, if the
Company has been advised by legal counsel, which counsel shall be acceptable
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<PAGE>
to the Holders, that such filing would require the disclosure of a material
transaction or other factor which would not otherwise be required to be
disclosed at such time and the Company determines reasonably and in good
faith that such disclosure would have a material adverse effect on the
Company with respect to the registration of the Registrable Shares. At the
Company's option, the Company may elect to include in such registration on
Form S-3, securities to be issued by the Company and, if required in order to
effect the registration of such securities, cause the registration to be made
pursuant to a Registration Statement on Form S-1 or S-2, which shall count as
the Registration Statement on Form S-3 to be filed pursuant to this Section
2.3. In the event that the Company exercises such option, the inclusion of
shares by Holders will be subject to the right of the underwriters to reduce,
in view of market conditions, the number of Registrable Securities proposed
to be registered (in which case the number of shares of Registrable
Securities to be registered shall be allocated among all Holders in
proportion, as nearly as practicable, to their respective holdings of
Registrable Securities); PROVIDED, HOWEVER, that if the number of Registrable
Securities pursuant to such a registration shall be reduced to a number which
is less than 60% of the number of Registrable Securities as to which such
Holders requested registration pursuant to this Section 2.3 then such
registration shall not be counted as the Registration Statement on Form S-3
to be filed pursuant to this Section 2.3 by the Holders requesting such
registration. Holders of Registrable Securities will not be permitted to
require the Company to file a Registration Statement pursuant to this Section
2.3 more frequently than once every six months. The registration rights
provided by this Section 2.3 shall expire on September 19, 2006. If so
requested by any Holder in connection with a registration under this Section
2.3, the Company shall take such steps as are required to register such
Holder's Registrable Securities for sale on a delayed or continuous basis
under Rule 415 for a period not to exceed 180 days, and also take such steps,
during such 180-day period, as are required to keep any registration
effective until all Registrable Securities registered thereunder are sold.
SECTION 2.4 REGISTRABLE SECURITIES
For purposes of this Agreement, the term
"Registrable Securities" shall mean the Common Stock issued pursuant to the
JVA and any Common Stock issued or issuable with respect thereto by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
SECTION 2.5 FURTHER OBLIGATIONS OF THE COMPANY
Whenever the Company is required under this Article II to register any
Registrable Securities, it agrees that it shall also do the following:
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(a) Use its best efforts to diligently prepare and file with the
Commission a registration statement and such amendments and supplements to
said registration statement and the prospectus used in connection therewith
as may be necessary to keep said registration statement effective (but, in
the case of a registration under this Agreement, for no more than 180 days
after the initial effective date of the registration statement) and to comply
with the provisions of the Securities Act with respect to the sale of
securities covered by said registration statement for the period necessary to
complete the proposed public offering;
(b) Furnish to each selling Holder such copies of each preliminary
and final prospectus and such other documents as such Holder may reasonably
request to facilitate the public offering of his or its Registrable
Securities;
(c) Enter into any reasonable underwriting agreement required by
the proposed underwriter for the selling Holders, if any;
(d) Use its best efforts to register or qualify the securities
covered by said registration statement under the securities or "blue-sky"
laws of such jurisdiction as any selling Holder may reasonably request,
provided that the Company shall not be required to register or qualify the
securities in any jurisdictions which require it to qualify to do business or
subject itself to taxation or general service of process therein;
(e) Immediately notify each selling Holder, at any time when a
prospectus relating to his or its Registrable Securities is required to be
delivered under the Securities Act, of the happening of any event as a result
of which such prospectus contains an untrue statement of a material fact or
omits any material fact necessary to make the statements therein not
misleading, and, at the request of any such selling Holder, prepare a
supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Registrable Securities, such prospectus will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(f) Cause all such Registrable Securities to be listed on or
included in each securities exchange or quotation system (other than PORTAL)
on which similar securities issued by the Company are then listed;
(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make generally available to its
security holders, in each case as soon as practicable, but not later than 30
days after the close of the period covered thereby, an earnings statement of
the Company which will satisfy the provisions of Section 11(a) of the
Securities Act;
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(h) Obtain and furnish to each selling Holder, immediately prior
to the effectiveness of the registration statement (and, in the case of an
underwritten offering, at the time of delivery of any Registrable Securities
sold pursuant thereto), a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters at the holders of a majority of
the Registrable Securities being sold reasonably request; and
(i) Choose the underwriters, auditors, Company legal counsel and
financial printer to be engaged by the Company in any such registration.
SECTION 2.6 TRANSFER OF REGISTRATION RIGHTS
The registration rights of the Holders under this Agreement may be
transferred to any transferee of at least 500,000 shares (adjusted
appropriately for stock splits, stock dividends and the like) of Registrable
Securities in connection with the transfer of at least 80% of the Registrable
Securities held by the transferor; PROVIDED, HOWEVER, that (i) the
registration rights may not be transferred to any transferee reasonably
deemed by a majority of the Board of Directors to be a direct or indirect
competitor of the Company and (ii) the Company is given written notice at the
time of or within a reasonable time after such transfer stating the name and
address of the transferee and identifying the securities with respect to
which such registration rights are being transferred; PROVIDED, FURTHER, that
the transferee assumes the obligations of the transferring Holder under this
Agreement. Each such transferee shall be deemed to be a "Holder" for
purposes of this Agreement. Notwithstanding the foregoing, transfers by any
Holder to a partner or shareholder of such Holder shall be without
restriction as to minimum number or percentage of shares.
SECTION 2.7 PRIOR AND OTHER REGISTRATION RIGHTS AGREEMENTS
Notwithstanding any provision hereof to the contrary, the provisions of
this Article II: (i) shall rank ratably with the registration rights granted
under the Amended and Restated Registration Rights Agreement (the "Amended
Registration Rights") and, to the extent the provisions of this Article II
conflict or are inconsistent with any such Amended Registration Rights, such
conflict or inconsistency shall be resolved in a manner which, to the
greatest extent reasonably feasible, affords the Holders and the holders of
such Amended Registration Rights, the ratable benefits of this Article II and
such Amended Registration Rights; (ii) shall rank ratably with the
registration rights granted under the 2/8/95 Registration Rights Agreement
(the "2/8/95 Registration Rights") and, to the extent the provisions of this
Article II conflict or are inconsistent with any such 2/8/95 Registration
Rights, such conflict or inconsistency shall be resolved in a manner which,
to the greatest extent reasonably feasible, affords the Holders and the
holders of the 2/8/95 Registration Rights, the ratable benefits of this
Article II and such 2/8/95 Registration Rights; (iii) shall rank ratably with
the registration rights granted under the 6/16/95 Registration Rights
Agreement (the "6/16/95 Registration Rights") and, to the extent the
provisions of this Article II conflict or are inconsistent with any such
6/16/95 Registration Rights, such conflict or inconsistency shall be resolved
in a manner which, to the greatest extent reasonably
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<PAGE>
feasible, affords the Holders and the holders of the 6/16/95
Registration Rights, the ratable benefits of this Article II and such 6/16/95
Registration Rights; (iv) shall rank ratably with the registration rights
granted under the 7/11/95 Registration Rights Agreement (the "7/11/95
Registration Rights") and, to the extent the provisions of this Article II
conflict or are inconsistent with any such 7/11/95 Registration Rights, such
conflict or inconsistency shall be resolved in a manner which, to the
greatest extent reasonably feasible, affords the Holders and the holders of
the 7/11/95 Registration Rights, the ratable benefits of this Article II and
such 7/11/95 Registration Rights; and (v) shall rank ratably with the
registration rights to be granted under any other agreement in connection
with the original issuance of any other capital stock of the Company (the
"Other Registration Rights") and, to the extent the provisions of this
Article II shall conflict with any such Other Registration Rights, such
conflict shall be resolved in a manner which, to the greatest extent
reasonably feasible, affords the Holders and the holders of such Other
Registration Rights, the ratable benefits of the provisions of this Article
II and such Other Registration Rights.
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
SECTION 3.1 INDEMNIFICATION
Incident to any registration statement referred to in this Agreement,
and subject to applicable law, the Company will indemnify and hold harmless
each underwriter, each Holder of Registrable Securities (including its
respective partners, directors, officers, employees and agents) so
registered, and each person who controls any of them within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, expenses and liabilities, joint
or several (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based on (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement (including any
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<PAGE>
related preliminary or definitive prospectus, or any amendment or supplement
to such registration statement or prospectus), (ii) any omission or alleged
omission to state in such document a material fact required to be stated in
it or necessary to make the statements in it not misleading, or (iii) any
violation by the Company of the Securities Act, any state securities or "blue
sky" laws or any rule or regulation thereunder in connection with such
registration; PROVIDED, HOWEVER, that the Company will not be liable to the
extent that such loss, claim, damage, expense or liability (x) arises from
and is based on an untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information furnished
in writing to the Company by or on behalf of such underwriter, Holder or
controlling person expressly for use in such registration statement or (y)
provided that the Company has theretofore timely prepared all necessary
prospectus supplements or amendments and provided them to the Holder or its
representative, arises from the failure of any Holder or underwriter to
comply with such prospectus delivery requirements as are applicable to it.
With respect to losses, claims, damages, expenses and liabilities arising out
of or based upon such untrue statement or omission or alleged untrue
statement or omission in the information furnished in writing to the Company
by or on behalf of such Holder expressly for use in such registration
statement or such failure to comply with such prospectus delivery
requirements, such Holder, severally and not jointly, will indemnify and hold
harmless each underwriter, the Company (including its directors, officers,
employees and agents), each other Holder of Registrable Securities (including
its respective partners, directors, officers, employees and agents) so
registered, and each person who controls any of them within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, expenses and liabilities, joint
or several, to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise to the same extent provided in the
immediately preceding sentence. In no event, however, shall the liability of
a Holder for indemnification under this Section 3.1 exceed the proceeds
received by such Holder from its sale of Registrable Securities under such
registration statement.
SECTION 3.2 CONTRIBUTION
If the indemnification provided for in Section 3.1 above for
any reason is held by a court of competent jurisdiction to be unavailable to
an indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this
Article III, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities in such
proportion as is appropriate to reflect the relative benefits received by the
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<PAGE>
Company, the other selling Holders and the underwriters from the offering of
the Registrable Securities as well as the relative fault of the Company, the
other selling Holders and the underwriters in connection with the statements
or omissions which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company, the selling Holders and the
underwriters shall be deemed to be in the same respective proportions as the
net proceeds from the offering (before deducting expenses) received by the
Company and the selling Holders and the underwriting discount received by the
underwriters, in each case as set forth in the table on the cover page of the
applicable prospectus, bear to the aggregate public offering price of the
Registrable Securities. The relative fault of the Company, the selling
Holders and the underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company, the selling Holders or the underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and the Holders agree that it would not be just and equitable if contribution
pursuant to this Section 3.2 were determined by pro rata or per capita
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph. In no event,
however, shall a Holder be required to contribute any amount under this
Section 3.2 in excess of the proceeds received by such Holder from its sale
of Registrable Securities under such registration statement. No person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
SECTION 3.3 EXPENSES, ETC.
(a) The amount paid or payable by an indemnified
party as a result of the losses, claims, damages and liabilities referred to
in this Article III shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. The indemnification and contribution provided for in this
Article III will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified parties or any officer,
director, employee, agent or controlling person of the indemnified parties.
(b) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in an underwriting agreement
entered into in connection with any registration statement referred to in
this Agreement are in
-12-
<PAGE>
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
ARTICLE IV
RULE 144 AND 144A REPORTING
SECTION 4.1 RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of the Registrable
Securities to the public without registration, the Company agrees to: (i) at
all times make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act (and any
successor rule to Rule 144); (ii) file with the Commission in a timely manner
all reports and other documents required of the Company under the Securities
Act and the Exchange Act; and (iii) furnish to each Holder as promptly as
possible upon its request a written statement by the Company confirming its
compliance with the reporting requirements of Rule 144 and of the Securities
Act and the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and any other reports and documents so filed as a
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a holder to sell any such securities without
registration.
SECTION 4.2 RULE 144A INFORMATION
The Company shall, at all times during which it is neither subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, nor
exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act,
promptly upon the written request of any Holder, provide in writing to such
Holder and to any prospective transferee of any of Common Stock of such
Holder the information concerning the Company described in Rule 144A(d)(4)
under the Securities Act ("Rule 144A Information"). The Company also shall,
upon the written request of any Holder, cooperate with and assist such Holder
or any member of the National Association of Securities Dealers, Inc. PORTAL
system in applying to designate and thereafter maintain the eligibility of
the Common Stock for trading through PORTAL. The Company's obligations under
this Section 4.2 shall at all times be contingent upon receipt from the
prospective transferees of Common Stock of a written agreement to take all
reasonable precautions to safeguard the Rule 144A Information from disclosure
to anyone other than persons who will assist such transferee in evaluating
the purchase of Common Stock.
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<PAGE>
ARTICLE V
GENERAL
SECTION 5.1 GRANTING OF RIGHTS AGREEMENTS
The Company shall not grant any registration rights in respect of any
shares of capital stock of the Company or other securities of the Company if
such rights would be superior to the registration rights granted to TCG under
this Agreement; PROVIDED, HOWEVER, that TCG hereby consents and agrees that
the Company may (i) amend the Amended and Restated Registration Rights
Agreement from time to time to add additional parties thereto and/or (ii)
grant in other agreements to other holders of securities of the Company
registration rights which rank ratably with the registration rights granted
hereunder to TCG.
SECTION 5.2 AMENDMENTS, WAIVERS AND CONSENTS
For purposes of this Agreement and all agreements, documents and
instruments executed pursuant hereto, except as otherwise specifically set
forth herein or therein, no course of dealing between the Company and any
Holder and no delay on the part of any party hereto in exercising any rights
hereunder or thereunder shall operate as a waiver of the rights hereof or
thereof. No covenant or other provision hereof or thereof may be waived or
amended other than by a written instrument signed by the party so waiving or
amending such covenant or other provision. Any waiver or amendment affected
in accordance with this Section 5.2 shall be binding upon such Holder and
each future holder of all such securities and the Company at the time such
waiver or amendment is effected.
SECTION 5.3 SURVIVAL OF COVENANTS; ASSIGNABILITY OF RIGHTS
All covenants and agreements of the Company or TCG made herein shall
survive until fully discharged. All covenants and agreements of the Company
herein shall bind the Company's successors and assigns, whether so expressed
or not, and, except as otherwise provided in this Agreement, all such
covenants and agreements shall inure to the benefit of TCG's successors and
assigns.
SECTION 5.4 GOVERNING LAW
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
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<PAGE>
SECTION 5.5 HEADINGS
The headings used in this Agreement have been inserted for reference
purposes only and shall not control or affect in any manner the meaning or
interpretation of any provision of this Agreement.
SECTION 5.6 PRONOUNS
All pronouns and any variation thereof, shall be deemed to refer to the
masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
SECTION 5.7 NOTICES AND DEMANDS
Any notice or demand which, by any provision of this Agreement or any
agreement, document or instrument executed pursuant hereto or thereto, except
as otherwise provided therein, is required or provided to be given shall be
deemed to have been sufficiently given or served and received for all
purposes when delivered or 5 days after being sent by certified or registered
mail, postage and charges prepaid, return receipt requested, or by express
delivery providing receipt of delivery, to the following addresses: if to
the Company, at 510 Huntmar Park Drive, Herndon, Virginia 22070, or at such
other address designated by the Company to TCG in writing; if to TCG, at its
mailing address maintained on the books and records of the Company, or at
such other address designated by TCG to the Company in writing; and if to an
assignee of TCG, at its address as designated to the Company in writing.
SECTION 5.8 SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of the remaining provisions
of this Agreement, and this Agreement shall be construed in all respects as
if such invalid or unenforceable provision were omitted. All provisions of
this Agreement shall be enforced to the full extent permitted by law.
SECTION 5.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes and cancels all other
prior agreements, understandings, negotiations and discussions, whether
written or oral, relating to the subject matter hereof.
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<PAGE>
SECTION 5.10 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together shall be
deemed one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PSINET INC.
By: /S/ WILLIAM L. SCHRADER
------------------------
Name: William L. Schrader
Title: President & CEO
Accepted and Agreed as of the date first above written.
THE CHATTERJEE MANAGEMENT COMPANY
By: /S/ W. JAMES PEET
--------------------
Name: W. James Peet
Title: Vice President
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<PAGE>
[LOGO]
October 1, 1996
Mr. Edward D. Postal
9329 Crimson Leaf Terrace
Potomac, Maryland 20854
Dear Ed:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), contingent upon successful completion of final reference checks
and subject to ratification and election by the Board of Directors, and sets
forth the terms and conditions which shall govern such employment as outlined
below. This offer shall remain open until Tuesday, October 1, 1996 at
5:00 PM.
1. EMPLOYMENT:
a) The Company will employ you as Vice President and Chief Financial Officer
reporting to the President and CEO. This is a corporate vice president
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 as soon as possible, which we anticipate will be by October 10, 1996;
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 & CEO.
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 the
greater Washington, D.C. 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.
PSINet Inc.
510 Huntmar Park Drive, Herndon, VA 22070
tel. 703.904.4100 * fax. 703.904.4200 * http://www.psi.net
<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
$185,000 per annum. On each of January 1, 1998, and January 1 of 1999 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
President, 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 equal ten thousand dollars ($10,000)
plus a special bonus of up to fifty thousand dollars ($50,000). Bonuses for
the years ending December 31, 1997, 1998 and 1999 will be $35,000 at the
first tier and an additional $25,000 at the second tier, for a performance
bonus of not less than $60,000. Separate criteria will be established for
your entitlement to each tier's bonus money. The performance bonus may be
adjusted upward at any time by the Compensation Committee of the Company's
Board of Directors.
c) CAR ALLOWANCE. The Company will provide you with either a company car or
a car allowance.
d) INCENTIVE STOCK OPTIONS. Effective upon the start of your employment,
the Company shall grant you options to purchase 100,000 shares of the
Company's common stock (the "Options") pursuant to the Company's Executive
Stock Incentive Plan, as amended. 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 closing price per share of
the Company's common stock as reported by the NASDAQ Stock Market on the day
of the start of your employment, (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 a forty-eight (48) month
period, provided that for each months' vesting purposes you continue
<PAGE>
to be employed by the Company or a subsidiary of the Company during such
month.
In addition to the terms of the Plan which govern these stock options, in the
event of a change of control as defined in Section 8(c) below, vesting will
be accelerated on the number of options necessary so that a total of one half
of the then outstanding, unvested options will be vested.
4. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), 4 weeks paid vacation, 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. 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. Your
employment may also be terminated by the Company at any time without Cause
provided the Company shall have given you thirty (30) days' prior written
notice of such termination. That written notice must state whether the
Company has elected to use the non-Competition restriction (which decision
may not be rescinded). If you are terminated without cause, you will be paid
26 weeks of severance, plus a pro-rata bonus and benefits will continue for
the same period. 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. Termination by
your resignation does not entitle you to any severance benefits. 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, 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
<PAGE>
you had remained employed by the 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 reckless conduct or wanton or willful misconduct, your
conviction of a felony, or any material breach by you of this Agreement.
6. 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
<PAGE>
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 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.
7. 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.
8. 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. In the event of a Change of Control, (as
defined in Section 8(c) below), this agreement shall terminate. 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.
<PAGE>
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
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.
9. 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.
10. 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.
11. 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.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
<PAGE>
THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS PRINCIPLES OF
CONFLICTS OF LAW.
13. 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.
<PAGE>
POSTAL 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 & CEO
Accepted and Agreed to as of
the day first above written:
By: /s/ Edward D. Postal
--------------------------------------------------
Edward D. Postal
<PAGE>
Exhibit 10.3
[LOGO]
October 9, 1996
Mr. Richard R. Frizalone
10420 Flowerfield Way
Potomac, MD 20854
Dear Rick:
This letter confirms our offer to you 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 ratification by the Company's Board of
Directors, but otherwise shall remain open until midnight on October 11, 1996.
1. EMPLOYMENT:
a) The Company agrees to employ you as Vice President of Corporate Sales
reporting to the Chief Operating Officer ("COO") 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 before October 28, 1996, 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 COO.
b) 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.
2. COMPENSATION:
a) BASE SALARY. The Company shall pay you a base salary at the rate of
$135,000 per annum. 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.
PSINet Inc.
510 Huntmar Park Drive, Herndon, VA 22070
tel. 703.904.4100 - fax 703.904.4200 - http://www.psi.net
<PAGE>
b) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about January 15, 1998. The performance criteria will be
issued separately by the COO, and may be changed, with mutual fairness, from
time to time as situations develop. The target bonus for the period ending
December 31, 1997 for the combined period (start date through December 31,
1997) will be a total of up to $50,000. Separate criteria will be
established for your entitlement for the year starting January 1, 1998.
c) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc.
shall grant you options, subject to Board approval, to purchase fifty
thousand (50,000) shares of PSINet Inc.'s common stock (the "Options")
pursuant to its Executive Stock Incentive Plan (the "Plan"), plus some
additional shares on June 30, 1997 subject to your satisfactory performance
as determined by the COO. 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 at the close of
business on your start date, (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 7 below, or
upon the occasion of your death during the term of this Agreement while you
are in compliance with the requirements hereof, the Company shall vest all
unvested stock options immediately.
d) SIGNING BONUS. You shall be entitled, upon your acceptance of this offer
and your commencement of employment here in our offices, to the payment of an
additional $15,000 (lump sum, subject to normal withholdings). This bonus
shall be repaid by you to the Company in the event you resign or otherwise
voluntarily leave our employ before December 31, 1996.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies
<PAGE>
and programs available to employees in accordance with the provisions of such
plans, policies, and programs.
4. TERMINATION:
a) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 4(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 5(a) hereof. Your
employment may also be terminated by the Company at any time without Cause
provided the Company shall have given you thirty (30) days' prior written
notice of such termination. That written notice must state whether the
Company has elected to use the non-Competition restriction (which decision
may not be rescinded). If you are terminated by the Company without cause
within the initial one year term of your employment, you will be paid ninety
(90) days' severance pay. 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 5 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
twelve (12) months after termination of employment, to the following
(collectively, the "Termination Payments"): (i) your then current rate of
base salary as provided in Section 2; (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 Company
during such 12-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 5
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.
5. AGREEMENT NOT TO COMPETE.
<PAGE>
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
twelve (12) 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 5(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 5(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 5(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 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
<PAGE>
continue paying the Termination Payments before a final decision has been
made by the court.
6. 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.
7. 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 7, 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
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
<PAGE>
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.
8. 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 5 shall be restricted, a proportional
reduction shall be made in the payments under Section 4.
9. 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.
10. 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.
11. 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.
12. 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.
<PAGE>
FRIZALONE 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/ Harold S. Wills
----------------------------------------------
HAROLD S. WILLS, CHIEF OPERATING OFFICER
Accepted and Agreed to as of October 21, 1996:
By: /s/ Richard R. Frizalone
----------------------------------------------
RICHARD R. FRIZALONE
<PAGE>
Exhibit 10.4
RETURN TO LPI
MSELA No. 488
Counterpart No. 001
MASTER SOFTWARE/EQUIPMENT LEASE AGREEMENT
MASTER SOFTWARE/EQUIPMENT LEASE AGREEMENT ("Agreement") dated as of September
20, 1996 between LPI SOFTWARE FUNDING GROUP, INC., One Glenhardie Corporate
Center, 1275 Drummers Lane, Wayne, PA 19087 ("Lessor") and PSINet, Inc., 510
Huntmar Park Drive, Herndon, VA 22070 ("Lessee").
1. LEASE
-----
This Agreement specifies the general terms and conditions which
apply to each separate lease transaction, including renewals, between
Lessor and Lessee. Each Lease ("Lease") will be a separate Lease of
the software and documentation ("Software") and equipment ("Equipment")
specified in the Lease, will substantially be in the form attached as
Exhibit A, will incorporate by reference all provisions of this
Agreement, and may specify additional provisions.
In return for Lessor paying the Software License fee and Equipment cost
so that the Lessee may acquire the right to use the Software and the
Equipment, Lessee shall pay all Lease Payments to Lessor, as well as
comply with all other terms and conditions of this Agreement. A Lease
shall be binding upon Lessor and Lessee from the date of acceptance and
execution by Lessor at its office in Pennsylvania.
Software does not include any intellectual property rights vested in
the Software Licensor or developer.
2. TERM
----
The term of this Agreement shall commence on the date set forth
above and shall continue in effect as long as any Lease remains in
effect. The term of each Lease shall commence on the date the Software
and Equipment is accepted by Lessee, as evidenced in the Certificate of
Acceptance ("Commencement Date"), and shall continue for the full
number of periods specified in such Lease ("Initial Term") after the
first day of the month following the Commencement Date.
3. LEASE PAYMENT
-------------
Lessee shall for each period pay to Lessor, without notice or
demand, at the office of Lessor in Wayne, Pennsylvania, or at such
other place as Lessor may designate, the amount specified as Lease
Payment in the Lease plus applicable state and local sales or use
taxes. Lessee's obligation to pay shall begin on the Commencement
Date. Lease Payment is due in advance on the first day of each period.
When the Commencement Date is not on the first day of a month, an
interim Lease Payment, at the daily amount equal to Lease Payment times
the number of periods per year divided by 360, from and including the
Commencement Date to the end of the month, shall be due and payable
upon Lessee's receipt of an invoice from Lessor.
4. SECURITY INTEREST
-----------------
Lessee grants to Lessor a security interest in the Software, the
Software License, the Software License Agreement, all other rights
acquired by Lessee from the Software Licensor relating to the Software,
and the Equipment, together with all options, accessories, accessions,
and replacements to the Equipment and all proceeds thereof, including
insurance proceeds, and all general intangibles related thereto
("Collateral"). The security interest granted by Lessee includes any
upgrades, new releases or new versions of the Collateral.
Page 1
<PAGE>
5. LEASE NOT CANCELLABLE; LESSEE'S OBLIGATIONS ABSOLUTE
----------------------------------------------------
Lessee's obligation to pay shall be absolute and unconditional and
shall not be subject to any delay, reduction, set-off, defense,
counterclaim or recoupment for any reason whatsoever, including any
failure of the Software or Equipment. If the Software or Equipment is
unsatisfactory for any reason, Lessee shall make any claim solely
against Software Licensor and Equipment manufacturer or vendor and
shall, nevertheless, pay Lessor all amounts payable under the Lease.
6. TITLE
-----
(a) SOFTWARE. No title or right in the Software or Software
License shall pass to the Lessee by virtue of this Agreement. All
upgrades, new releases or new versions of the Software acquired by
Lessee shall immediately become subject to the Lease.
(b) EQUIPMENT. The Equipment is and shall remain the property of
Lessor. Lessee shall have no right, title or interest in the Equipment,
except as set forth in the Lease. The Equipment is and shall remain
personal property and shall not become a fixture or realty. Lessee
shall affix to the Equipment any labels supplied by Lessor indicating
Lessor as the owner.
7. SELECTION AND USE OF SOFTWARE
-----------------------------
Lessee shall be responsible for selection, use, and results
obtained from the Software and Equipment and acknowledges that Lessor
is not a developer of, dealer in, or licensor of, the Software and that
Lessor is not a manufacturer of or dealer in the Equipment. Lessee
authorizes Lessor to insert in each Lease the identifying data of the
Software and Equipment.
8. ASSIGNMENT OF WARRANTIES
------------------------
Lessor assigns to Lessee, to the extent assignable, for the term of
this Lease, any warranty applicable to the Software and Equipment, and
authorizes Lessee to obtain the customary service and support furnished
by Software Licensor and Equipment manufacturer or vendor at Lessee's
expense.
9. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES BY LESSOR
------------------------------------------------------
LESSOR MAKES NO REPRESENTATION OR WARRANTY, DIRECT OR INDIRECT,
EXPRESS OR IMPLIED, WITH RESPECT TO THE SOFTWARE AND EQUIPMENT,
INCLUDING THOSE OF THE DURABILITY, SUITABILITY, MERCHANTABILITY,
FITNESS FOR PARTICULAR PURPOSE, CONDITION, OR DESIGN. AS TO LESSOR,
LESSEE LEASES THE SOFTWARE AND EQUIPMENT "AS IS". LESSEE WAIVES ALL
RIGHT TO MAKE ANY CLAIM AGAINST LESSOR FOR BREACH OF ANY WARRANTY OF
ANY KIND WHATSOEVER.
LESSOR SHALL NOT BE LIABLE TO LESSEE FOR ANY LOSS, DAMAGE OR
EXPENSE OF ANY KIND CAUSED BY OR RELATED TO, DIRECTLY, INDIRECTLY OR
CONSEQUEN-TIALLY, THE SOFTWARE AND EQUIPMENT OR FOR ANY CONSEQUENTIAL
DAMAGES, ANY LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER
COMMERCIAL LOSS.
10. POSSESSION, USE AND OPERATION OF SOFTWARE AND EQUIPMENT
-------------------------------------------------------
(a) DELIVERY AND INSTALLATION. Lessee shall arrange and pay for
the delivery and installation of the Software and Equipment.
(b) USE AND MAINTENANCE. Lessee shall use the Software and
Equipment in a good and careful manner and in compliance with all
operating instructions, laws and regulations and the Software License
Agreement.
Page 2
<PAGE>
(c) ALTERATIONS AND ATTACHMENTS. Lessee may make alterations,
modifications or attachments to the Software and Equipment so long as
not in violation of the Software License Agreement. Any alterations,
unless consented to by the Software Licensor, shall not be made to the
original Software, but only to a copy. All alterations, modifications
and attachments to the Equipment which cannot be readily removed
without damaging the function, use or economic value of the Equipment
shall immediately become a part of the Equipment and property of the
Lessor.
(d) SUBLEASE AND RELOCATION. LESSEE MAY NOT SUBLEASE THE SOFTWARE
AND EQUIPMENT OR RELOCATE SUCH ITEMS FROM THE STATE IN WHICH THEY WERE
INSTALLED, UNLESS CONSENTED TO BY LESSOR.
(e) ASSIGNMENT BY LESSEE. LESSEE SHALL NOT ASSIGN, TRANSFER OR
OTHERWISE DISPOSE OF THE LEASE OR COLLATERAL, OR ANY INTEREST THEREIN,
OR CREATE OR PERMIT ANY LIEN OR ENCUMBRANCE THEREON, EXCEPT THOSE
CREATED BY LESSOR. LESSEE ACKNOWLEDGES THAT ANY ASSIGNMENT BY LESSEE
WOULD MATERIALLY INCREASE THE RISK TO LESSOR.
(f) INSPECTION. Lessee shall make the Software, Equipment and any
maintenance records available for inspection by Lessor during Lessee's
normal business hours.
11. TAXES AND FEES
--------------
Lessee shall pay when due, or reimburse (including taxes on any
reimbursement) and indemnify and hold Lessor harmless from and against,
all taxes, fees, assessments or other charges of any nature whatsoever
(except for any taxes based upon Lessor's net income, unless such net
income taxes are in substitution for or release Lessee from any taxes
which Lessee would otherwise be obligated to pay under this Section),
which may be imposed by any taxing jurisdiction upon or relating to the
Software and Equipment. If Lessee determines that any item of Software
or Equipment is not taxable, Lessee shall, prior to the date of
commencement of any Lease, provide Lessor with written notice of such
determination and the basis for such determination. Should any taxing
jurisdiction challenge such determination, Lessee shall indemnify
Lessor for all costs (including interest, penalties and attorneys'
fees) associated with defending Lessee's determination. Lessee shall
file personal property tax returns including all items of Software or
Equipment which may be taxable and pay any taxes which may be due
rather than waiting for Lessor to file and pay such taxes and then
invoice Lessee for reimbursement.
12. END OF LEASE - $0 TERMINATION OPTION AMOUNT
-------------------------------------------
Provided an Event of Default has not occurred, the Lease has not
been terminated, and all Lessee's obligations under the Lease have been
satisfied, all Lessor's right, title and interest in the Software and
Equipment shall automatically revert to Lessee at the expiration of the
Initial Term of the lease.
13. END OF LEASE - GREATER THAN $0 TERMINATION OPTION AMOUNT
--------------------------------------------------------
Provided an Event of Default has not occurred, the Lease has not
been terminated, and Lessee desires to retain possession of the
Software and Equipment, Lessee shall have the option at the expiration
of the Lease upon no less than 60 days' and no more than 120 days'
prior irrevocable written notice to Lessor: (a) to retain the Equipment
and original and all backup copies of the Software upon payment of the
Termination Option Amount specified in the Lease, payment of which
shall automatically terminate the Lease, or (b) to extend the Lease for
12 months at a monthly Lease Payment equal to the Termination Lease
Percentage specified in the Lease multiplied by the Software License
Fee and Equipment cost.
If the retention or extension options are not exercised, Lessee
shall, pursuant to Lessor's instructions and at Lessee's sole expense,
return the Equipment and the original and all backup copies of the
Software, including documentation, to Lessor in the same operating
order as when received, except for normal wear and tear. Lessee shall
return the Software and Equipment to a location in the continental
United States specified by Lessor.
If the retention or extension options are not exercised and the
Software and Equipment are not returned, the Lease shall be renewed for
one period at a time until the Software and Equipment are returned to
Lessor and Lessee shall continue to pay Lease Payments in the original
amount set forth in the Lease.
Page 3
<PAGE>
14. EARLY TERMINATION OPTION
------------------------
Provided an Event of Default has not occurred, upon no less than 30
days' and no more than 90 days' prior irrevocable written notice to
Lessor, Lessee may as of any Lease Payment Date, terminate the Lease
upon payment to Lessor an amount equal to (1) the total Lease Payment
and other sums due and unpaid under the Lease at the date of payment
and (2) Stipulated Loss Value set forth in Exhibit B as of the date of
payment.
15. RISK OF LOSS
------------
Lessee shall bear the entire risk of loss, theft, destruction and
damage to the Software and Equipment ("Event of Loss") after the
Commencement Date. If an Event of Loss shall occur, Lessee shall
immediately notify Lessor and, at the option of Lessor, shall promptly,
at Lessee's sole cost:
(a) place the Software and Equipment in good condition, repair and
working order.
(b) replace the Software and Equipment with like Software and Equipment
and grant to Lessor all rights in such Software and Equipment and
related Collateral.
Lessee appoints Lessor as Lessee's attorney-in-fact to make claim
for, receive payment of, and execute and endorse all documents, checks
or drafts issued with respect to such loss or damage under any
insurance policy relating thereto.
If and when Lessor shall have received any insurance proceeds on
account of an Event of Loss, and if Lessor, in its reasonable judgment,
shall be satisfied that Lessee has properly performed the obligations
undertaken by this section, Lessor shall pay over to Lessee out of such
proceeds the actual amounts expended by Lessee under Section 15 (a) or (b).
16. INSURANCE
---------
Lessee shall, at its own expense, obtain on the Software and
Equipment all risk property damage insurance in such amounts, against
such risks, in such form and with such insurers as shall be reasonably
satisfactory to Lessor. The amount of property damage insurance shall
not be less than Stipulated Loss Value. Each insurance policy shall
name Lessee as an insured and Lessor and its assignees as an additional
insured and loss payee and shall contain a clause requiring the insurer
to give Lessor at least 30 days' prior written notice of any alteration
or cancellation of such policies. Lessee shall furnish to Lessor a
certificate of insurance or other evidence satisfactory to Lessor that
such insurance coverage is in effect, provided, however, that Lessor
shall be under no duty either to ascertain the existence of or to
examine such insurance or to advise Lessee in the event such insurance
shall not comply with the requirements hereof.
17. GENERAL INDEMNITY
-----------------
Lessee shall defend, indemnify and hold Lessor, any assignee and
any secured party harmless from and against all claims (including
claims based on negligence, tort and strict liability ("Claims")),
costs, including reasonable attorney's fees, damages and liabilities
arising out of or related to the ownership, selection, possession,
leasing, renting, operation, control, use, maintenance, delivery,
return or other disposition of the Software and Equipment and/or the
Collateral or by operation of law, excluding any Claims which result
from the gross negligence or willful misconduct of Lessor.
Lessor may, at its option and at its sole expense, participate in
any such action with counsel of its own choice. Lessee agrees that it
shall not settle or compromise any claim, action or proceeding without
first obtaining Lessor's prior written consent.
18. REPRESENTATIONS AND WARRANTIES OF LESSEE
----------------------------------------
Lessee represents, warrants and covenants, with the execution of
each Lease that, with respect to this Agreement and each Lease:
(a) this Agreement and each Lease constitute legal, valid and binding
agreements of Lessee enforceable in accordance with their respective
terms;
(b) all financial statements furnished to Lessor are true and
correct in all material respects and Lessee shall furnish Lessor with
its annual independently reviewed financial statements
Page 4
<PAGE>
and such other financial information as Lessor may reasonably request; and
(c) the Equipment is personal property and will not become a fixture
under applicable law.
(d) that Lessee is the Licensee of the Software under the Software
License Agreement.
19. ASSIGNMENT/TRANSFER BY LESSOR
-----------------------------
LESSOR MAY SELL OR OTHERWISE TRANSFER ITS INTEREST IN THE LEASE AND
THE COLLATERAL IN WHOLE OR IN PART. LESSEE CONSENTS TO SUCH TRANSFER
AND, IF LESSEE IS GIVEN WRITTEN NOTICE OF ANY TRANSFER, IT SHALL
PROMPTLY ACKNOWLEDGE RECEIPT IN WRITING. LESSEE ACKNOWLEDGES THAT ANY
ASSIGNMENT BY LESSOR WILL NOT MATERIALLY CHANGE THE DUTY OF THE LESSEE.
LESSEE SHALL NOT ASSERT AGAINST ANY TRANSFEREE ANY SET-OFF, DEFENSE OR
COUNTERCLAIM THAT LESSEE MAY HAVE AGAINST LESSOR (INCLUDING ANY DEFENSE
ARISING OUT OF THE INSOLVENCY OR BANKRUPTCY OF LESSOR) OR ANY OTHER
PERSON AND UPON NOTICE FROM LESSOR SHALL PAY THE LEASE PAYMENT AND ANY
OTHER AMOUNTS DUE UNDER THE LEASE AS DIRECTED.
LESSOR'S TRANSFEREE SHALL BE ENTITLED TO ENFORCE THE RIGHTS SO
TRANSFERRED, BUT SHALL BE UNDER NO LIABILITY TO LESSEE TO PERFORM ANY
OF THE OBLIGATIONS OF LESSOR, THE SOLE REMEDY OF LESSEE BEING AGAINST
LESSOR. LESSOR SHALL NOT BE RELIEVED OF ITS OBLIGATIONS HEREUNDER,
EXCEPT AS SPECIFICALLY PROVIDED.
20. LATE PAYMENTS
-------------
If any amount to be paid to Lessor is not received within 5 days
after its due date, Lessee shall pay Lessor on demand a late charge of
1.5% (or the maximum allowed by law, whichever is less) of such payment
for each month, or any part thereof, that the payment is not received.
21. DEFAULT; NO WAIVER
------------------
Lessee shall be in default under the Lease upon the occurrence of
any of the following event ("Events of Default"):
(a) Lessee fails to pay any amount required to be paid under the
Lease within 5 days after the due date;
(b) Lessee fails to perform any other provisions under the Lease, or any
other Lease incorporating this Agreement, and such failure shall continue
unremedied for a period of 10 days after written notice from Lessor;
(c) Any representation or warranty made by Lessee in the Lease or
related documents is inaccurate in any material respect;
(d) Lessee makes an assignment for the benefit of creditors, consents to
the appointment of a trustee or receiver, or if either shall be appointed
for Lessee or for a substantial part of its property without its consent;
(e) any petition or proceeding is filed by or against Lessee under
any Federal or state bankruptcy or insolvency code or similar law;
(f) if applicable, Lessee makes a bulk transfer subject to the
provisions of the Uniform Commercial Code;
(g) Lessee shall default under any other agreement with Lessor or
Fleet Bank, N.A. or their successors or assigns; or
(h) Lessee suffers an adverse material change in its financial
condition from the Commencement Date and Lessor, acting in good faith,
deems itself or any of its Collateral to be insecure.
Any failure of Lessor to require strict performance by Lessee or any waiver
by Lessor of any provision in the Lease shall not be construed as a consent
or waiver of any other breach of the same or of any other provision.
22. REMEDIES
--------
Upon the occurrence of an Event of Default, Lessor may, in its sole
discretion, do any one or more of the following:
(a) proceed by appropriate court action to enforce performance by Lessee
of the terms of the Lease, or recover from Lessee all damages or expenses,
including reasonable attorneys' fees, arising from the Event of Default;
(b) declare the Lease to be in default;
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<PAGE>
(c) terminate the Lease in whole or in part;
(d) recover from Lessee all amounts then due and as liquidated
damages the Stipulated Loss Value which would have been due on the
occurrence of the exercise by Lessee of its Early Termination Option;
(e) take possession of and remove Equipment and the original and
all backup copies of the Software, wherever located, without demand or
notice, without any court order or other process of law, without
liability to Lessor or its agents for entry, damage to property or
otherwise, except for gross negligence or willful misconduct;
(f) demand that Lessee return any or all items of Software and
Equipment to Lessor in accordance with Section 13 and, for each day
that Lessee fails to return any item of Software and Equipment, Lessor
may demand an amount equal to the Lease Payment prorated on the basis
of a 30-day month, in effect immediately prior to such default; and
(g) upon demand by Lessor, Lessee shall immediately cease using the
Software and Equipment and remove such Software from any computer on
which it is installed.
Lessor shall, to the extent permitted by law or any agreement
pertaining to the Collateral, sell, lease or otherwise dispose of all
or any portion of the repossessed or recovered Collateral in a
commercially reasonable manner, with or without notice and on public or
private bid. The cash proceeds from any sale or other disposition, or,
if the Collateral is leased, the present value, discounted at 3%, of
the Lease Payments due under any replacement lease for a term not to
exceed the expiration of the lease or renewal lease (all such amounts
being referred to as "Proceeds") shall be retained by Lessor. If the
net proceeds (Proceeds less all costs and expenses, including
reasonable attorney's fees, incurred in connection with the recovery,
repair or disposition of the Software and Equipment) shall be less than
the amount Lessee owes to Lessor, Lessee shall be liable for such
deficiency. Lessor may pursue any other remedy available at law or in
equity, including seeking damages, specific performance and injunctive
relief.
No right or remedy is exclusive of any other or permitted by law or
equity. All such rights and remedies shall be cumulative and may be
enforced concurrently or individually from time to time. Except as set
forth expressly in this Section and to the extent permitted by
applicable law, Lessee waives any rights now or hereafter conferred by
statute or otherwise which may require Lessor to sell, lease or use the
Software and Equipment in mitigation of Lessor's damages or which may
otherwise limit or modify any of Lessor's rights or remedies and Lessee
waives any rights conferred upon Lessee by UCC Sections 2A-508 through
2A-522.
23. BANKRUPTCY OF SOFTWARE LICENSORS
--------------------------------
The bankruptcy of the Software Licensor or Equipment manufacturer
or vendor shall not be a valid cause for Lessee to terminate Lease
Payments to Lessor. Lessee shall take all action necessary to protect
Lessee's rights to use the Software under Section 365 of the Bankruptcy
Code. Lessee shall elect to retain its rights under the Bankruptcy
Code to use the Software, and to the extent the Software License grants
customer access to the source code, Lessee shall make written request
under the Bankruptcy Code of the Bankruptcy Trustee to obtain the
source code. Lessee shall take other reasonable action to protect its
rights to use the Software. In the event Lessee fails to take the
action specified above, Lessee appoints Lessor its Attorney-in-fact, to
secure, at Lessor's sole discretion and at Lessee's cost, the right to
use the Software for Lessee.
24. MISCELLANEOUS
(a) NOTICES. Service of all notices under the Lease shall be
sufficient if delivered personally or mailed to Lessee at the address
above set forth, or to such other address as each party may substitute
by notice to the other. Notice by mail shall be effective when
deposited in the United States mail, duly addressed and with postage
prepaid.
(b) ENTIRE AGREEMENT. The Lease is the complete and exclusive
statement of the
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<PAGE>
agreement between the parties, superseding all proposals or prior
agreements, oral or written, and all other communications between the
parties relating to the subject matter.
(c) GOVERNING LAW. This Lease shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
(d) SEVERABILITY. If any provision shall be held to be invalid or
unenforceable, the validity and enforceability of the remaining
provisions shall not in any way be affected or impaired.
(e) QUIET ENJOYMENT. So long as Lessee shall not be in default,
Lessor shall not interfere with Lessee's right of quiet enjoyment and
use of the Software and Equipment.
(f) FURTHER DOCUMENTS. Lessee shall provide Lessor with such
documents as Lessor may reasonably request, including documents
relating to preserving the security of Lessor, or financing statements
under the Uniform Commercial Code. Lessor may execute Uniform
Commercial Code financing statements for and on behalf of Lessee for
the purpose of indicating Lessor's interest in the Collateral.
(g) TIME. Time is of the essence with respect to this Lease.
(h) COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one instrument. No security
interest in this Lease or the Collateral or any sums payable hereunder
may be created through the transfer or possession of any counterpart
other than Counterpart No. 1.
(i) SURVIVAL OF OBLIGATION. All agreements, representations,
indemnities and warranties contained in this Agreement or any related
document shall survive the expiration or other termination of this
Agreement.
(j) SUCCESSORS. This Lease shall be binding upon and inure to the
benefit of Lessor and Lessee and their respective successors and
assigns, unless otherwise expressly provided herein.
(k) DISPUTES. THE PARTIES CONSENT TO THE NON-EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS IN PENNSYLVANIA AND
VIRGINIA IN CONNECTION WITH ANY DISPUTE UNDER THIS LEASE, AND LESSEE
WAIVES ITS RIGHT TO TRIAL BY JURY.
LPI SOFTWARE FUNDING GROUP, INC. PSINET, INC.
LESSOR LESSEE
By: /S/ Lawrence N. Bazrod By: /S/ Harold S. Wills
------------------------------- -----------------------------
Title: Vice President Title: C.O.O
--------------------------- -------------------------
Date: September 18, 1996 Date: September 19, 1996
----------------------------- ---------------------------
j:\software\agremnts\psinet.doc
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Exhibits to the Master Software/Equipment Lease Agreement have been omitted.
The following is a list of the omitted Exhibits which the Company agrees to
furnish supplementally to the Commission upon request:
Exhibits:
--------
Exhibit A Form of Software/Equipment Lease Agreement
Exhibit B Stipulated Loss Value Schedule
<PAGE>
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT AND
NETWORK SERVICES AGREEMENT
THIS AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT AND NETWORK
SERVICES AGREEMENT (the "Amendment") is entered into as of June 28, 1996 by
and between PSINET INC. ("Seller") and MINDSPRING ENTERPRISES, INC. ("Buyer").
WHEREAS, Seller and Buyer are parties to that certain Asset Purchase
Agreement of even date herewith (the "Purchase Agreement") and that certain
Network Services Agreement of even date herewith (the "Network Services
Agreement"); and
WHEREAS, capitalized terms that are used but not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement;
and
WHEREAS, Seller and Buyer desire to amend the Purchase Agreement and
the Network Services Agreement, and provide for the replacement of the First
Note (as defined in the Purchase Agreement), 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
amend the Purchase Agreement, the Network Services Agreement and the First
Note, as follows:
1. The following shall be inserted at the end of the section
entitled "Conversion" in the First Note, as replaced in accordance with
Paragraph 2 hereof, and in the corresponding section of each of the forms of
the First Note, the Second Note, the Third Note and the Fourth Note, attached
as Exhibits 2.3 (a), (b), (c), and (d), respectively, to the Purchase
Agreement:
Notwithstanding the foregoing, in no event shall this Note
be convertible into Common Stock if, as a result of such conversion,
the aggregate amount of Common Stock that would be issued pursuant to
the Notes (as such term is defined in the Purchase Agreement, as
defined herein) exceeds 19.9% of the issued and outstanding Common
Stock as of June 28, 1996, unless approval by the Company's
stockholders has been obtained. In addition, if the approval of the
Company's stockholders referred to in the immediately preceding
sentence has not been obtained by the time this Note would otherwise be
convertible as provided above, the registered owner of this Note may
convert this Note in part on the terms and conditions set forth in this
section entitled "Conversion" (with the written notice of conversion to
specify the amount to be converted); PROVIDED,
<PAGE>
HOWEVER, that if the registered holder of this Note converts this Note
in part pursuant to this sentence, the registered holder shall present
to Buyer for conversion the Note representing the unconverted
balance of this Note within ten (10) days following receipt of written
notice from Buyer that the stockholders consent referred to in the
immediately preceding sentence has been obtained.
2. The defined term "Purchase Agreement" in the forms of the First
Note, the Second Note, the Third Note and the Fourth Note is hereby amended
to include the following:
which term shall include all amendments thereto.
3. Upon execution of this Amendment, Buyer shall re-execute the
First Note in the form attached hereto as Exhibit A and deliver the same to
Buyer, and, promptly thereafter, Seller shall return to Buyer the original
First Note, which shall be deemed replaced by such re-executed First Note.
4. If, as of the date that notice of the next annual meeting of
stockholders of Buyer is required to be mailed, any of the Notes remain
outstanding such that upon conversion, the aggregate amount of Common Stock
that would be issued pursuant to all of the Notes would exceed 19.9% of the
issued and outstanding Common Stock as of June 28, 1996, then Buyer shall
request from its stockholders at such annual meeting the approval referred to
in Paragraph 1 above.
5. By their signatures hereto, ITC Holding Company, Inc. and
Charles M. Brewer agree to vote all shares of Common Stock, and other capital
stock of Buyer, held by them in favor of the approval referred to in
paragraph 1 above, whenever such approval is requested by Buyer of its
stockholders.
6. Section 2.3(c) of the Purchase Agreement is hereby amended by
inserting the following at the end thereof:
or, in the event that funds were raised through a stock
offering or other financing which Buyer would have been required to use
to pay down the principal and accrued but unpaid interest under the
Third Note pursuant to Section 3.4 after the principal and accrued but
unpaid interest under the First Note and the Second Note were paid in
full, Buyer shall pay to Seller such funds, not to exceed what would
otherwise be the initial principal amount of the Third Note, and the
initial principal amount of the Third Note so issued shall be reduced
accordingly.
7. Section 2.3(d) of the Purchase Agreement is hereby amended
by inserting the following at the end thereof:
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<PAGE>
, or, in the event that funds were raised through a stock
offering or other financing which Buyer would have been required to use
to pay down the principal and accrued but unpaid interest under the
Fourth Note pursuant to Section 3.4 after the principal and accrued but
unpaid interest under the First Note, the Second Note and the Third Note
were paid in full, Buyer shall pay to Seller such funds, not to exceed
what would otherwise be the initial principal amount of the Fourth Note,
and the initial principal amount of the Fourth Note so issued shall be
reduced accordingly.
8. The period at the end of Section 2.3(d) of the Purchase
Agreement is hereby replaced with a semicolon and the following is hereby
added to the Purchase Agreement as new Section 2.3(e):
(e) Buyer shall deliver to Seller within ten (10) days after the
Third Measurement Date a fully executed copy of the Fifth Note, or, in the
event that funds were raised through a stock offering or other financing
which Buyer would have been required to use to pay down the principal and
accrued but unpaid interest under the Fifth Note pursuant to Section 3.4
after the principal and accrued but unpaid interest under the First Note, the
Second Note, the Third Note and the Fourth Note were paid in full, Buyer
shall pay to Seller such funds, not to exceed what would otherwise be the
initial principal amount of the Fifth Note, and the initial principal amount
of the Fifth Note so issued shall be reduced accordingly.
9. The phrase "First Measurement Date" in Section 3.3(a) of the
Purchase Agreement is hereby replaced with "November 30, 1996." The
following is hereby inserted after the last sentence of Section 3.3(a) of the
Purchase Agreement:
No later than December 10, 1996, Buyer shall notify Seller of
the number of customers of Buyer signed up by Seller pursuant to this Section
3.3(a).
10. Section 3.3(b) of the Purchase Agreement is hereby amended and
restated to read as follows:
(b) (i) After the First Closing Date, Buyer shall use reasonable
efforts to seek confirmation from the Subscribers to Seller's Pipeline
service (A) that such Subscribers desire to be switched to Buyer's network
and (B) of the Subscribers' relevant subscription information. After the
Second Closing, Buyer shall produce and ship software and other necessary
materials (collectively, "Kits") to allow Subscribers, who have confirmed
that they desire to switch to Buyer's network to make such switch, promptly
following receipt of such confirmation. Buyer shall pay the costs of such
production and shipment initially, but on the Second Measurement Date and
upon presentation of reasonably
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<PAGE>
satisfactory documentation of such costs Seller shall pay to Buyer fifty
percent (50%) of Buyer's costs actually incurred in connection with such
production and shipment and Buyer shall offset the amount due from Seller
against the payments otherwise due Seller under the Notes.
(ii) After the First Closing Date, Buyer shall use reasonable
efforts to seek confirmation from the Subscribers to Seller's Interramp
service (A) that such Subscribers desire to be switched to Buyer's network
and (B) of the Subscribers' relevant subscription information. After the
Second Closing, Buyer shall assist Subscribers to Seller's Interramp service,
who have confirmed that they desire to switch to Buyer's network, to
configure their current software to work on Buyer's network. After the
Second Closing, Buyer shall also produce and ship Kits upon request to
Subscribers to Seller's Interramp service who have requested such Kits and
have confirmed their desire to switch to Buyer's network. Buyer shall pay
the costs of such production and shipment initially, but on the Second
Measurement Date and upon presentation of reasonably satisfactory
documentation of such costs Seller shall pay to Buyer fifty percent (50%) of
Buyer's costs actually incurred in connection with such production and
shipment and Buyer shall offset the amount due from Seller against the
payments otherwise due Seller under the Notes.
(iii) Notwithstanding, the foregoing provisions of this
Section 3.3(b), Subscribers who do not transition to Buyer's network shall be
considered Continuing Subscribers if they otherwise satisfy the definition of
"Continuing Subscribers" set forth in Annex 1 to this Agreement. In no event
shall the aggregate payments made by Seller to Buyer under (i) and (ii) above
exceed $400,000.
11. Seller's total obligations under Sections 3.3(d) and (e) of the
Purchase Agreement shall be satisfied by paying Buyer Three Thousand Dollars
($3,000) at the Second Closing.
12. The phrase "First Measurement Date" in Section 3.3(f) of the
Purchase Agreement is hereby replaced with "date specified by Buyer in a
written notice to Seller but in no event later than December 31, 1996."
13. Section 3.4 of the Purchase Agreement is hereby amended and
restated as follows:
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:
4
<PAGE>
(a) if the net proceeds (which term shall mean gross proceeds less
normal offering expenses) of any offering or other financing exceed thirty
million dollars ($30,000,000.00), Buyer shall use all of such net proceeds,
up to the amount of principal and accrued but unpaid interest outstanding
under the Notes, to pay down the Notes 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 use seventy-five percent (75%) of such net proceeds, up to the
amount of principal and accrued but unpaid interest outstanding under the
Notes, to pay down 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 use fifty percent (50%) of such net proceeds, up to the amount of
principal and accrued but unpaid interest outstanding under the Notes, to pay
down the Notes promptly following the closing of such offering or other
financing; and
(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 use thirty-three percent (33%) of such net proceeds, up to the amount
of principal and accrued but unpaid interest outstanding under the Notes, to
pay down the Notes promptly following the closing of such offering or other
financing.
14. The following is hereby added as new Section 4.24 of the
Purchase Agreement:
4.24 INTELLECTUAL PROPERTY.
The Intellectual Property constitutes all intellectual property of
Seller, used or useful in connection with the Assets and the Business, other
than that intellectual property described on SCHEDULE 4.11 which is not
described on SCHEDULE ANNEX 2, 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
5
<PAGE>
(including, without limitation, all ideas, research and development, know-how,
formulas, compositions, manufacturing and production 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 Section 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, (ix) the source code for Seller's
Interramp auto-registration software along with a perpetual license to use
and modify, but not resell, such software, and (x) all copies and tangible
embodiments of the foregoing in whatever form or medium.
15. The outside date for the Second Closing set forth in Section
8.1 of the Purchase Agreement is hereby extended from August 31, 1996 to
September 3, 1996.
16. The Network Services Agreement is hereby amended by (i)
replacing the text of Section 4.1 thereof with the following:
"[intentionally deleted]", (ii) redesignating the text of Section 1.6 thereof
as Section 1.6(a) and (iii) adding the following as Section 1.6(b):
During the term of this Agreement, PSINet shall allow
MindSpring to co-locate up to 4 racks of equipment at PSINet's network
operations center, which is currently located in Troy, New York. During the
term of this Agreement, MindSpring shall allow PSINet to co-locate up to 2
racks of equipment at the Harrisburg Facility (as defined in the Purchase
Agreement). Each of PSINet and MindSpring may permit the other to increase
the number of racks of equipment which such person is permitted to co-locate
pursuant to this subsection at PSINet's operations center and at the
Harrisburg Facility, respectively, as may be mutually agreed. MindSpring
shall pay PSINet $1,000 per month for each of MindSpring's two excess racks.
In connection with the 4 racks of equipment installed by MindSpring at
PSINet's network operations center, PSINet shall supply MindSpring with
bandwidth equal to the bandwidth of a T1 line for no additional cost, and
such additional bandwidth as MindSpring may reasonably request for an
additional charge equal to PSINet's T1 price.
17. The definitions of "Continuing Subscribers," "First Measurement
Date," "Intellectual Property," "Sales Term" and "Second Measurement Date"
set forth in Annex 1 to the Purchase Agreement are hereby amended to read as
follows:
CONTINUING SUBSCRIBERS shall mean those Subscribers who remain
Buyer's customers (regardless of whether or not they transition to Buyer's
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<PAGE>
network) 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(a) who remain Buyer's customers (regardless of
whether or not they transition to Buyer's network) and current in their
payments to Buyer for service as of (i) the First Measurement Date, with
respect to customers signed up before October 1, 1996, (ii) the Second
Measurement Date with respect to customers signed up between October 1, 1996
and October 31, 1996, and (iii) the Third Measurement Date with respect to
customers signed up between November 1, 1996 and November 30, 1996.
FIRST MEASUREMENT DATE shall mean November 15, 1996.
INTELLECTUAL PROPERTY shall mean all intellectual property of
Seller listed on Schedule Annex 2 attached hereto.
SALES TERM shall mean the period of five (5) years after
November 30, 1996.
SECOND MEASUREMENT DATE shall mean December 15, 1996.
18. The following are hereby added to Annex 1 to the Purchase
Agreement as new definitions:
FIFTH NOTE shall mean the promissory note in the form attached
hereto as EXHIBIT 2.3(e) in an original principal amount equal to the excess,
if any, of the Purchase Price determined as of the Third Measurement Date
over the sum of the Cash Payment and the original amounts of the First Note,
Second Note, Third Note and Fourth Note.
THIRD MEASUREMENT DATE shall mean January 15, 1997.
19. SCHEDULE 2.3(e) attached hereto shall be deemed SCHEDULE 2.3(e)
of the Purchase Agreement, as amended by this Amendment, and SCHEDULE ANNEX 2
attached hereto shall be deemed SCHEDULE ANNEX 2 of the Purchase Agreement,
as amended by this Amendment.
20. The Purchase Agreement and the Network Services Agreement are
hereby ratified and confirmed and, except as expressly modified hereby, shall
continue unmodified and in full force and effect.
21. This Amendment 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
Amendment 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.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment 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: Chairman & CEO
------------------------------
SELLER
PSINET INC.
By: /s/ Harold S. Wills (SEAL)
---------------------------
Name: Harold S. Wills
-------------------------------
Title: C.O.O.
------------------------------
By their signatures hereto, the undersigned hereby agree to the
terms of paragraph 4 above, as of the date first set forth above.
ITC HOLDING COMPANY, INC.
By: /s/ J. Douglas Cox (SEAL)
---------------------------
Name: J. Douglas Cox
-------------------------------
Title: CFO
------------------------------
/s/ Charles M. Brewer (SEAL)
-------------------------------
CHARLES M. BREWER, individually
8
<PAGE>
Exhibit and Schedules to the Amendment No. 1 to the Asset Purchase Agreement
have been omitted.
The following is a list of the omitted Exhibit and Schedules which the
Company agrees to furnish supplementally to the Commission upon request:
Exhibit:
--------
Exhibit A Form of Amended First Convertible Note
Schedules:
----------
Schedule 2.3(e) Form of Fifth Convertible Note
Schedule Annex 2 Intellectual Property
<PAGE>
Exhibit 10.6
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".
1
<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 not 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.
Notwithstanding the foregoing, in no event shall this Note be convertible
into Common Stock if, as a result of such conversion, the aggregate amount of
Common Stock that would be issued pursuant to the Notes (as such term is defined
in the Purchase Agreement, as defined herein) exceeds 19.9% of the issued and
outstanding Common Stock as of June 28, 1996, unless approval by the Company's
stockholders has been obtained. In addition, if the approval of the Company's
stockholders referred to in the immediately preceding sentence has not been
obtained by the time this Note would otherwise be convertible as provided above,
the registered owner of this Note may convert this Note in part on the terms and
conditions set forth in this section entitled "Conversion" (with the written
notice of conversion to specify the amount to be converted); PROVIDED, HOWEVER,
that if the registered holder of this Note converts this Note in part pursuant
to this sentence, the registered holder shall present to Buyer for conversion
the Note representing the unconverted balance of this Note within ten (10) days
following receipt of written notice from Buyer that the stockholders consent
referred to in the immediately preceding sentence has been obtained.
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", which term
4
<PAGE>
shall include all amendments thereto)) 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.
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: CHAIRMAN & CEO
5
<PAGE>
Exhibit 10.7
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 SEPTEMBER 1, 1997
$9,929,000.00 September 1, 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 Nine Million Nine Hundred Twenty
Nine Thousand Dollars ($9,929,000.00) (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
<PAGE>
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".
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.
Notwithstanding the foregoing, in no event shall this Note be convertible
into Common Stock if, as a result of such conversion, the aggregate amount of
Common Stock that would be issued pursuant to the Notes (as such term is
defined in the Purchase Agreement, as defined herein) exceeds 19.9% of the
issued and outstanding Common Stock as of June 28, 1996, unless approval by
the Company's stockholders has been obtained. In addition, if the approval
of the Company's stockholders referred to in the immediately preceding
sentence has not been obtained by the time this Note would otherwise be
convertible as provided above, the registered owner of this Note may convert
this Note in part on the terms and conditions set forth in this section
entitled "Conversion" (with the written notice of conversion to specify the
amount to be converted); PROVIDED, HOWEVER, that if the registered holder of
this Note converts this Note in part pursuant to this sentence, the
registered holder shall present to Buyer for conversion the Note representing
the unconverted balance of this Note within ten (10) days following receipt
of written notice from Buyer that the stockholders consent referred to in the
immediately preceding sentence has been obtained.
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", which term
4
<PAGE>
shall include all amendments thereto)) 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.
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.
5
<PAGE>
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: Chairman & CEO
6
<PAGE>
AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT (the "Amendment") is
entered into as of September 1, 1996 by and between PSINET INC. ("Seller")
and MINDSPRING ENTERPRISES, INC. ("Buyer").
WHEREAS, Seller and Buyer are parties to that certain Asset Purchase
Agreement, and Amendment No. 1 thereto, dated as of June 28, 1996
(collectively, the "Purchase Agreement"); and
WHEREAS, capitalized terms that are used but not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement;
and
WHEREAS, Seller and Buyer desire to amend the Purchase Agreement 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. The definition of "Assets" as set forth in ANNEX 1 to the Purchase
Agreement is hereby amended to read as follows:
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) other than Seller's
arrangements with MPATH Interactive, Inc.;
(d) All of the ownership rights to the Pipeline Software (including auto
registration software), including, but not limited to, all work
<PAGE>
currently being undertaken to upgrade and/or improve such software;
(e) Rights to the Local Content published by the Pipeline
Group;
(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;
(i) A paid up non-exclusive license to use and modify (but not to
sublicense) the software described in SCHEDULE ANNEX 2; and
(j) All furniture, fixtures, equipment and other fixed assets located at
the Harrisburg Facility as of June 28, 1996 and materially necessary
to the operation of the Harrisburg Facility in the ordinary course of
business as set forth on SCHEDULE ANNEX 3 attached hereto, as well as
all other furniture and non-fixed assets located at the Harrisburg
Facility on the Second Closing Date (all of the property described
in this subparagraph (j) being deemed part of the Harrisburg Facility).
2. The net book value of the Harrisburg Facility is One Million One
Hundred Twenty Nine Thousand Dollars ($1,129,000) and the Second Note shall
be in the original principal amount of Nine Million Nine Hundred Twenty Nine
Thousand Dollars ($9,929,000).
3. SCHEDULE ANNEX 1 to the Purchase Agreement is hereby deleted in its
entirety.
4. SCHEDULE ANNEX 2 to the Purchase Agreement is hereby amended by (a)
deleting the first bullet item ("Interactive Voice Response (IVR) system
which includes the license, programming and other enhancements and the PSINet
enhanced data.") and (b) adding an asterisk ("*") after the fifteenth bullet
item ("Source code for InterRamp auto-registration client and server software
and perpetual license to use and modify, but not resell, such software.").
5. SCHEDULE ANNEX 3 attached hereto shall be deemed SCHEDULE ANNEX 3 of
the Purchase Agreement, as amended by this Amendment.
6. The Purchase Agreement is hereby ratified and confirmed and, except as
expressly modified hereby, shall continue unmodified and in full force and
effect.
2
<PAGE>
7. This Amendment 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
Amendment 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.
[rest of page intentionally left blank]
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment 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: Chairman & CFO
SELLER
PSINET INC.
By: /s/ Harold S. Wills (SEAL)
---------------------------------
Name: Harold S. Wills
Title: C.O.O.
4
\\\DC - 60327/7 - 0350996.02
<PAGE>
Schedules to the Amendment No. 2 to the Asset Purchase Agreement have been
omitted.
The following is a list of the omitted Schedules which the Company agrees to
furnish supplementally to the Commission upon request:
Schedules:
Schedule Annex 3 Certain Furniture, Fixtures and Equipment
Schedule 4.10 Certain Leases
<PAGE>
EXHIBIT 11.1
PSINET INC.
AND SUBSIDIARIES
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
THREE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period ........... 38,702,157
Weighted average shares issued during the
three months ended September 30, 1996
(355,286 shares) ............................... 186,209
----------
39,888,366
----------
----------
Net Loss.......................................................$ (12,493,000)
----------
----------
Loss per share (unaudited).....................................$ (0.31)
----------
----------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) For a description of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
18
<PAGE>
EXHIBIT 11.2
PSINET INC.
AND SUBSIDIARIES
CALCULATION OF LOSS PER SHARE (UNAUDITED) (1)
Nine Months Ended
September 30, 1996
------------------
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year.............. 37,914,932
Weighted average shares issued during
the nine months ended September 30,
1996 (2,142,511 shares)............................ 1,228,331
----------
39,143,263
----------
----------
Net Loss........................................................$ (38,300,000)
----------
----------
Loss per share (unaudited)......................................$ (0.98)
----------
----------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) For a description of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 45,700
<SECURITIES> 14,653
<RECEIVABLES> 17,192
<ALLOWANCES> 1,335
<INVENTORY> 1,494
<CURRENT-ASSETS> 96,852
<PP&E> 95,333
<DEPRECIATION> 25,835
<TOTAL-ASSETS> 189,092
<CURRENT-LIABILITIES> 53,379
<BONDS> 28,397
0
0
<COMMON> 401
<OTHER-SE> 105,584
<TOTAL-LIABILITY-AND-EQUITY> 189,092
<SALES> 61,547
<TOTAL-REVENUES> 61,547
<CGS> 50,169
<TOTAL-COSTS> 50,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,654
<INCOME-PRETAX> (38,419)
<INCOME-TAX> 119
<INCOME-CONTINUING> (38,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,300)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
<PAGE>
Exhibit 99.1
RISK FACTORS
FROM TIME TO TIME, IN BOTH WRITTEN REPORTS AND IN ORAL STATEMENTS BY
PSINET SENIOR MANAGEMENT, EXPECTATIONS AND OTHER STATEMENTS ARE EXPRESSED
REGARDING FUTURE PERFORMANCE OF THE COMPANY. THESE FORWARD-LOOKING
STATEMENTS ARE INHERENTLY UNCERTAIN AND INVESTORS MUST RECOGNIZE THAT EVENTS
COULD TURN OUT TO BE DIFFERENT THAN SUCH EXPECTATIONS AND STATEMENTS. KEY
FACTORS IMPACTING CURRENT AND FUTURE PERFORMANCE ARE DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION. IN ADDITION, THE FOLLOWING RISK FACTORS AS WELL AS
THE OTHER INFORMATION IN THIS QUARTERLY REPORT SHOULD BE CONSIDERED 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 $38.3 million and negative
cash flow from operations of $28.4 million for the nine months ended
September 30, 1996. At September 30, 1996, the Company had a retained
deficit of $99.8 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
services, is highly competitive. The industry has relatively insignificant
barriers to entry and numerous entities competing for the same customers.
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.
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The Company's current and prospective competitors generally may be divided
into the following three groups: (1) other Internet access providers, such as
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; and (3) on-line services providers, such as America Online, Inc.
("America Online"), CompuServe Incorporated ("CompuServe"), Delphi Internet
Services (a division of News Corp.), the Microsoft Network ("MSN"), a service
of Microsoft Corp. ("Microsoft"), NETCOM On-Line Communications Services,
Inc. ("NETCOM"), and Prodigy. 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
recent merger of UUNET Technologies, Inc. ("UUNET") with MFS and the pending
merger of MFS and WorldCom, Inc., for example, may create the potential for
network expense reductions which could result in a competitive advantage for
the combined entity. 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.
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 industry competition, the Company expects to encounter
pricing pressure, 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, 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
increasing price pressure on PSINet. The Company has in the past reduced
prices on certain of its 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. PSINet is not able presently to predict the impact which future
growth in the Internet access and on-line services businesses will have upon
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.
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RECENT ENTRY INTO CONSUMER WHOLESALING BUSINESS
In response to competitive considerations in the market for individual
customers, the Company has determined to focus its efforts in this 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.
RISKS OF GROWTH AND EXPANSION
The Company had expanded its network to approximately 345 POPs as of
September 30, 1996 and plans to continue to add additional POPs and expand
the capacity of existing POPs as needed during the remainder of 1996 and
1997. The Company's rapid growth has placed, and in the future may continue
to place, a significant strain on the Company's administrative, operational
and financial resources and increased demands on its systems and controls.
The Company anticipates that its consumer wholesale focus, as well as other
business growth, may require continued enhancements to and expansion of its
network. Competition for qualified personnel in the internetworking industry
is intense and there are a limited number of persons with knowledge of and
experience in the Internet service industry. The process of locating,
training and successfully integrating qualified personnel into the Company's
operations is often lengthy and expensive. There can be no assurance that the
Company will be successful in attracting, integrating and retaining such
personnel. In addition, there can be no assurance that the Company's
operating and financial control systems and infrastructure will be adequate
to maintain and effectively monitor future growth. The inability to continue
to upgrade the networking systems or the operating and financial control
systems, the inability to recruit and hire necessary personnel, the inability
to successfully integrate new personnel into the Company's operations, the
inability to manage its growth effectively or the emergence of unexpected
expansion difficulties could adversely affect the Company's business, results
of operations and financial condition.
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 September
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 the 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 INTERNATIONAL EXPANSION
A component of the Company's strategy is its planned expansion into
international markets. To date, the Company has only limited experience in
providing international Internet service. There can be no assurance as to the
ability of the Company to obtain the capital it requires to finance its
expansion into these markets. In addition, there can be no assurance that the
Company will be able to obtain the permits and operating licenses required
for it to operate, to hire and train employees or to market, sell and deliver
high quality services in these markets. In addition to the uncertainty as to
the Company's ability to expand its international presence, there are certain
risks inherent to doing business on an international level, such as
unexpected changes in regulatory requirements, tariffs,
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customs, duties and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, expropriation, nationalization,
war, insurrection and other political risks, fluctuations in currency
exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and
certain other parts of the world and potentially adverse tax consequences,
which could adversely impact the success of the Company's international
operations. The Company may need to enter into additional joint ventures or
other strategic relationships with one or more third parties in order to
successfully conduct its foreign operations. There can be no assurance that
such factors will not have an adverse effect on the Company's future
international operations and, consequently, on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that laws or administrative practice relating to taxation, foreign
exchange or other matters of countries within which the Company operates will
not change. Any such change could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company expects to seek to develop
strategic alliances both domestically and internationally and/or to acquire
assets and businesses principally relating to or complementary to its current
operations. The Company has no present commitments or agreements with respect
to any material strategic alliance or acquisition except as otherwise
disclosed in this Form 10-Q and the Company's other periodic reports filed
with the Securities and Exchange Commission. Any such future strategic
alliances or acquisitions would be accompanied by the risks commonly
encountered in strategic alliances with or acquisitions of companies. Such
risks include, among other things, the difficulty of assimilating the
operations and personnel of the companies, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company by the successful
incorporation of licensed or acquired technology and rights into the
Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees
and customers as a result of changes in management. There can be no assurance
that the Company would be successful in overcoming these risks or any other
problems encountered in connection with such strategic alliances or
acquisitions.
PSINet has entered into strategic alliances in Korea and The Netherlands
and, most recently, has entered into an arrangement to form a joint venture
for the purpose of building a network and providing Internet services
throughout Europe. The Company has no prior experience working with these
companies. This lack of experience as well as the international nature of
these ventures could increase the likelihood of failure and materially
adversely affect the Company's results of operations. Additionally, the
Company may be required to issue Company stock in connection with its
obligation to purchase an additional 10% interest in World Online B.V. and
has entered into option arrangements in connection with the Company's
European joint venture which could result in the issuance of Company stock to
the Company's joint venture partner.
In addition, if the Company were to proceed with one or more significant
acquisitions in which the consideration consists of cash, a substantial
portion of the Company's available cash could be used to consummate the
acquisitions. If the Company were to consummate one or more significant
acquisitions or strategic alliances in which the consideration consists of
stock, shareholders of the Company could suffer a significant dilution of
their interests in the Company. Many of the businesses that might become
attractive acquisition candidates for the Company may have significant
goodwill and intangible assets, and acquisition of these businesses, if
accounted for as a purchase, would typically result in substantial
amortization charges to the Company. In the event the Company consummates
additional acquisitions in the future that must be accounted for as
purchases, such acquisitions would likely further increase the Company's
amortization expenses and the length of time over which they are reported. In
connection with acquisitions, the Company could incur substantial expenses,
including the fees of financial advisors, attorneys and accountants, the
expenses of integrating the business of the acquired company or the strategic
alliance with the Company's business and any expenses associated with
registering shares of the Company's capital stock, if such
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shares are issued. Such expenses, in addition to the financial impact of such
acquisitions, could have a material adverse effect on the Company's business,
financial condition and results of operations and could cause substantial
fluctuations in the Company's quarterly and yearly operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its senior management team and technical, marketing and
sales personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified employees
and personnel in the internetworking industry is intense and there are a
limited number of persons with knowledge of and experience in the Internet
service industry. The Company's success also will depend on its ability to
attract and retain qualified management, marketing, technical and sales
executives and personnel. The process of locating such personnel with the
combination of skills and attributes required to carry out the Company's
strategies is often lengthy. The loss of the services of key personnel, or
the inability to attract additional qualified personnel, could have a
material adverse effect on the Company's results of operations, product
development efforts and ability to expand its network infrastructure. There
can be no assurance that the Company will be successful in attracting and
retaining such executives and personnel. If the Company is unable to hire
additional sales and marketing personnel, the marketing and sale of existing
and new products will likely be adversely impacted. Any such event could have
a material adverse effect on the Company's business, financial condition and
results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK; PENDING AND
THREATENED LITIGATION
The law relating to the liability of on-line services companies and
Internet access providers for information carried on or disseminated through
their systems is currently unsettled in the United States. Several private
lawsuits seeking to impose such liability upon on-line services companies and
Internet access providers are currently pending. In addition, recently
enacted federal legislation prohibits and imposed liability for the
transmission on the Internet of certain types of information and content. In
one case brought against an Internet access provider, RELIGIOUS TECHNOLOGY
CENTER V. NETCOM ON-LINE COMMUNICATIONS SERVICES, INC., a Federal district
court ruled that under certain circumstances Internet access providers could
be held liable for copyright infringement. The imposition upon the Company
and other Internet access providers or Web hosting sites of potential
liability for information carried on or disseminated through their systems
could require the Company to implement measures to reduce its exposure to
such liability, which may require the expenditure of substantial capital and
other resources, or to discontinue certain product or service offerings. The
increased attention focused upon liability issues as a result of these
lawsuits and legislative proposals could impact the growth of the Internet.
The Company carries errors and omissions insurance with a basic policy
limitation of $2.0_million, subject to deductibles, exclusions and
self-insurance retention amounts. Such coverage, however, may not be adequate
or available to compensate the Company for all liability that may be imposed.
The imposition of liability in excess of, or the unavailability of, such
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations.
The law relating to the regulation and liability of on-line services and
Internet access providers in relation to information carried or disseminated
also is undergoing a process of development in other countries. Decisions
regarding regulation and content liability may significantly affect the
development and profitability of companies offering on-line and Internet
access services, including the Company.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
The Company's financing arrangements are secured by substantially all of
the Company's assets and stock of certain subsidiaries of the Company and
require the Company to satisfy certain financial covenants and restrict the
payment of dividends. As of September 30, 1996, the Company was in compliance
with these restrictions. The Company's secured lenders would be entitled to
foreclose
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upon those assets in the event of a default under the financing arrangements
and to be repaid from the proceeds of the liquidation of those assets before
the assets would be available for distribution to the Company's shareholders
in the event that the Company is liquidated. In addition, the collateral
security arrangements under the Company's existing financing arrangements may
adversely affect the Company's ability to obtain additional borrowings.
GOVERNMENT REGULATORY RISKS
The 1996 Federal telecommunications legislation imposes criminal liability
on persons sending or displaying in a manner available to minors indecent
material on an interactive computer service such as the Internet. The 1996
Federal telecommunications legislation also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for such
activities. Entities solely providing access to facilities not under their
control (including transmission, downloading, intermediate storage, access
software and other incidental capabilities) are exempted from liability, as
are service providers that take good faith, reasonable, effective and
appropriate actions to restrict access by minors to the prohibited
communications. The constitutionality of these provisions is being
challenged in Federal court, and the interpretation and enforcement of them
is uncertain. This legislation may decrease demand for Internet access,
chill the development of Internet content, or have other adverse effects on
Internet access providers such as the Company. In addition, in light of the
uncertainty attached to interpretation and application of this law, there can
be no assurance that the Company would not have to modify its operations to
comply with the statute, including prohibiting users from maintaining home
pages on the World Wide Web.
In January 1995, the U.S. Federal Communications Commission ruled that
telephone companies must charge a separate Subscriber Line Charge for each
derived channel available in an ISDN bundle. An ISDN bundle generally
provides from three to 24 channels. The Company currently does not incur
increased costs as a result of this ruling due to an effective waiver for
network access lines. If however, the waiver were to be revoked, this ruling
could result in increased costs being imposed on the Company and,
consequently, could adversely affect the Company's business, results of
operations and financial condition.
RISK OF SYSTEM FAILURE OR SHUTDOWN
The success of the Company is dependent upon its ability to deliver
reliable, high-speed access to the Internet. The Company's network, as is
also the case with other networks providing similar service, is vulnerable to
damage or cessation of operations from fire, earthquakes, severe storms,
power loss, telecommunications failures and similar events, especially if
such an events occur within a high traffic location of the network. The
Company is also dependent upon the ability of its telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. While the Company's network has been designed with redundant
circuits among POPs to allow traffic rerouting, lab and field testing is
performed before integrating new and emerging technology into the network,
and the Company engages in capacity planning, there can be no assurance that
the Company will not experience failures or shutdowns relating to individual
POPs or even catastrophic failure of the entire network. The Company carries
property and business interruption insurance with a basic policy limitation
of $5.0 million, subject to deductibles, exclusions and self-insurance
retention amounts. Such coverage, however, may not be adequate to compensate
the Company for all losses that may occur. In addition, the Company attempts
to limit its liability to customers arising out of network failures through
contractual provisions disclaiming all such liability and, in respect of
certain services, limiting liability to a usage credit based upon the amount
of time that the system was not operational. There can be no assurance that
such limitations will be enforceable. In any event, significant or prolonged
system failures or shutdowns could damage the reputation of the Company and
result in the loss of subscribers.
NEW AND UNCERTAIN MARKET
Substantially all of the Company's revenue to date has been, and for the
foreseeable future will be, derived from the sale of its Internet access,
services and products. The Company's success will depend upon the development
and expansion of the market for Internet access services and products and the
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networks which comprise the Internet. The market for Internet services has
only recently developed and has been accompanied by increased press coverage
concerning the scope and nature of the information and services available on,
and potential uses of, the Internet. Certain critical issues presently
surrounding commercial use of the Internet, including security, reliability,
ease and cost of access, and quality of service, remain unresolved and may
adversely impact the growth of Internet use. If the Internet access market
fails to grow, grows more slowly than anticipated or becomes saturated with
competitors, the Company's business, financial condition and results of
operations would be materially adversely affected.
SECURITY RISKS; RISKS ASSOCIATED WITH SECURITY OFFERINGS
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its routers, its
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers. Furthermore, such inappropriate use of the Internet by third
parties could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company's customers, which
may deter potential subscribers. Persistent security problems continue to
plague public and private data networks. Break-ins have reportedly reached
computers connected to the Internet at General Electric Co., Sprint and IBM
as well as the computer systems of NETCOM, Netscape and the San Diego
Supercomputer Center. Addressing problems caused by computer viruses,
break-ins or other problems caused by third parties could have a material
adverse effect on the Company.
The security services offered by the Company for use in connection with
its customers' networks also cannot assure complete protection from computer
viruses, break-ins and other disruptive problems. Although the Company
attempts to limit contractually its liability in such instances, the
occurrence of such problems may result in claims against or liability on the
part of the Company. Such claims, regardless of their ultimate outcome,
could result in costly litigation and could have a material adverse effect on
the Company's business or reputation or on its ability to attract and retain
customers for its products. Moreover, until more consumer reliance is placed
on security technologies available, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet
service industry and the Company's customer base and revenues.
DEPENDENCE ON SUPPLIERS
The Company has few long term-contracts with its suppliers. The Company is
dependent on third party suppliers for its leased-line connections, or
bandwidth. Certain of these suppliers are or may become competitors of the
Company, and such suppliers are not subject to any restrictions upon their
ability to compete with the Company. To the extent that these suppliers
change their pricing structures, the Company may be adversely affected.
Moreover, the Company is dependent on certain third party suppliers of
hardware components. Although the Company attempts to maintain a minimum of
two vendors for each required product, certain components used by the Company
in providing its networking services are currently acquired or available from
only one source.
The Company has from time to time experienced delays in the receipt of
certain hardware components. A failure by a supplier to deliver quality
products on a timely basis, or the inability to develop alternative sources
if and as required, could result in delays which could materially adversely
affect the Company. The Company's remedies against suppliers who fail to
deliver products on a timely basis are limited by contractual liability
limitations contained in supply agreements and purchase orders and, in many
cases, by practical considerations relating to the Company's desire to
maintain good relationships with the suppliers. As the Company's suppliers
revise and upgrade their equipment technology, the Company may encounter
difficulties in integrating the new technology into the Company's network.
Certain of the vendors from whom the Company purchases telecommunications
bandwidth, including the RBOCs and other local exchange carriers ("LECs"),
currently are subject to tariff controls and other price constraints which in
the future may be changed. In addition, newly enacted
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legislation will produce changes in the market for telecommunications
services. These changes may affect the prices charged by the RBOCs and other
LECs to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
the Company is subject to the effects of other potential regulatory actions
which, if taken, could increase the cost of the Company's telecommunications
bandwidth through, for example, the imposition of access charges.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
PSINet's success will depend upon its ability to develop new products and
provide new services that meet customers' changing requirements. The market
for Internet access is characterized by rapidly changing technology, evolving
industry standards, emerging competition, changes in customer needs and
frequent new service and product introductions. The Company's future success
will depend, in part, on its ability to effectively use leading technologies,
to continue to develop its technical expertise, to enhance its current
services, to develop new services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. There can be no assurance that
the Company will be successful in effectively using new technologies,
developing new services or enhancing its existing services on a timely basis
or that such new technologies or enhancements will achieve market acceptance.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. There
can be no assurance that the Company will be able to effectively address the
compatibility and interoperability issues raised by technological changes or
new industry standards. In addition, there can be no assurance that services
or technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology and proprietary rights, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights. The Company relies on a combination of copyright, trademark and trade
secret laws and contractual restrictions to establish and protect its
technology. It may be possible for a third party to copy or otherwise obtain
and use PSINet's products or technology without authorization or to develop
similar technology independently, and there can be no assurance that such
measures are adequate to protect PSINet's proprietary technology. In
addition, PSINet's products may be licensed or otherwise utilized in foreign
countries where laws may not protect PSINet's proprietary rights to the same
extent as do laws in the United States. It is the Company's policy to require
employees and consultants and, when obtainable, suppliers to execute
confidentiality agreements upon the commencement of their relationships with
the Company. These agreements provide that confidential information developed
or made known during the course of a relationship with the Company is to be
kept confidential and not disclosed to third parties except in specific
circumstances. There can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. The Company
is also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights. While the Company does not believe that it has infringed the
proprietary rights of other parties, there can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of such claims. No assurance can
be given that any necessary licenses will be available or that, if available,
such licenses can be obtained on commercially reasonable terms.
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POTENTIAL VOLATILITY OF STOCK PRICE
The market price and trading volume of the Company's Common Stock has been
and may continue to be highly volatile. Factors such as variations in the
Company's revenue, earnings and cash flow and announcements of new service
offerings, technological innovations or price reductions by the Company, its
competitors or providers of alternative services could cause the market price
of the Common Stock to fluctuate substantially. In addition, the stock
markets recently have experienced significant price and volume fluctuations
that particularly have affected technology based companies and resulted in
changes in the market prices of the stocks of many companies that have not
been directly related to the operating performance of those companies. Such
broad market fluctuations have adversely affected and may continue to
adversely affect the market price of the Common Stock.
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