<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the Com-
mission Only (as permitted by
Rule 14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
----------------------------------------------
PSINET INC.
(Name of Registrant as Specified in Its Charter)
----------------------------------------------
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
/ / Fee paid previously with preliminary materials: N/A
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
<PAGE>
PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia 20170
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 10, 1997
The Annual Meeting of Shareholders of PSINET INC. (the "Company") will be
held at the Hyatt Regency Reston, 1800 Presidents Street, Reston, Virginia 20190
on Saturday, May 10, 1997, at 9:00 A.M. for the purpose of considering and
acting upon the following matters:
(1) The election of four directors for terms expiring at the Company's
1999 Annual Meeting of Shareholders.
(2) The ratification or disapproval of the appointment by the Board of
Directors of Price Waterhouse LLP as independent accountants for the year
ending December 31, 1997.
(3) The transaction of such other business as may properly come before
the meeting and any adjournments thereof.
Pursuant to the provisions of the By-Laws of the Company, the Board of
Directors has fixed the close of business on March 24, 1997 as the record date
for determining the shareholders of the Company entitled to notice of and to
vote at the meeting and any adjournments thereof.
ALL SHAREHOLDERS ARE URGED TO DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED
PROXY TO THE COMPANY IN THE ACCOMPANYING POSTAGE PAID ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS,
David N. Kunkel
Secretary
March 31, 1997
Herndon, Virginia
<PAGE>
PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia 20170
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 10, 1997
SOLICITATION
This Proxy Statement is being mailed to shareholders on or about April 7,
1997, in connection with the solicitation of proxies by the Board of Directors
of PSINET INC., a New York corporation ("PSINet" or the "Company"), to be used
at the Annual Meeting of Shareholders of the Company (the "Annual Meeting"), to
be held on May 10, 1997. Accompanying this Proxy Statement is a Notice of Annual
Meeting of Shareholders and a form of proxy for such meeting. A copy of the 1996
Annual Report to Shareholders of the Company, which contains financial
statements and related data, also accompanies this Proxy Statement.
All proxies which are properly completed, signed and returned to the Company
in time will be voted in accordance with the instructions thereon. Proxies may
be revoked by any shareholder upon written notice to the Secretary of the
Company prior to the exercise thereof and shareholders who are present at the
Annual Meeting may withdraw their proxies and vote in person if they so desire.
The expense of preparing, assembling, printing and mailing the form of proxy
and the material used in the solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
to solicit proxies personally and by telephone and telegraph. The Company has
requested banks, brokers and other custodians, nominees and fiduciaries to
forward copies of the proxy materials to their principals and to request
authority for the execution of proxies and will reimburse such persons for their
services in doing so. The cost of such additional solicitation incurred
otherwise than by use of the mails is estimated not to exceed $5,000. In
addition, the Company has engaged the firm of MacKenzie Partners, Inc. as its
proxy solicitor in connection with the Annual Meeting for a retainer of $10,000
plus such amount as may be agreed upon by the Company and MacKenzie Partners,
Inc.
The Board of Directors has fixed the close of business on March 24, 1997, as
the record date for the determination of shareholders who are entitled to notice
of and to vote at the Annual Meeting and any adjournments thereof. As of the
record date, the Company had outstanding approximately 40,273,596 shares of its
common stock, $.01 par value (the "Common Stock"). Holders of the Company's
Common Stock are entitled to one vote per whole share. Holders of fractional
shares are entitled to exercise voting rights in proportion to their fractional
holdings. A majority of the outstanding shares of the Company's Common Stock
entitled to vote at the Annual Meeting is required to establish a quorum at the
Annual Meeting. A plurality of the votes cast by the holders of the shares of
the Company's Common Stock entitled to vote at the Annual Meeting is required
for the election of directors. A majority of the votes cast by the holders of
the Company's Common Stock entitled to vote at the Annual Meeting is required
for the ratification of the appointment of independent accountants.
With regard to the election of directors, votes may be cast in favor or
withheld. Votes withheld from any director will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but will not affect the outcome of the voting in such
election. With regard to other proposals, abstentions may be specified. The
Company believes that abstentions are shares present and entitled to vote, but
do not constitute votes cast in respect of a particular matter. The Company,
therefore, intends to count abstentions and votes withheld for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but
<PAGE>
not as votes having been cast in respect of any proposal. Accordingly, such
abstentions or votes withheld will not affect the outcome of any proposal.
Broker non-votes (that is, proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owners or other
persons entitled to vote shares on a particular matter as to which the brokers
or nominees do not have discretionary power) may be counted as present or
represented for purposes of determining the presence or absence of a quorum for
the transaction of business, but not for purposes of determining the voting
power present with respect to proposals in respect of which brokers do not have
discretion (non-discretionary proposals). The Company believes that all
proposals being presented to shareholders at the Annual Meeting are
discretionary proposals and intends to treat broker non-votes in respect of
these proposals as stated above. Unless one or more beneficial owners of the
Common Stock have withheld discretionary authority from their brokers or
nominees in respect of these proposals, the Company does not anticipate that
there will be any broker non-votes in respect of such proposals. If there are
any broker non-votes in respect of these proposals, such broker non-votes also
will be treated as stated above.
PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 24, 1997, by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each director and director nominee of the Company who owns shares of
the Company's Common Stock; (iii) each executive officer named in the Summary
Compensation Table appearing elsewhere herein; and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT
NAME OF BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED (1) OF CLASS
- - --------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
William L. Schrader.................................................. 5,714,840(2) 14.1%
Amerindo Investment Advisors Inc..................................... 3,428,430(3) 8.5
Mitchell Levinn...................................................... 345,053(4) *
David N. Kunkel...................................................... 154,881(5) *
William H. Baumer.................................................... 89,988(6) *
Harold S. Wills...................................................... 69,787(7) *
Mary-Ann Carolan..................................................... 60,611(8) *
Wade Woodson......................................................... 20,883 *
Ian P. Sharp......................................................... 1,875 *
William A. Wilson.................................................... 1,875 *
Executive officers and directors as a group (14 persons)............. 6,631,371(9) 16.1
</TABLE>
- - ------------------------
* Less than 1%.
(footnotes continue on next page)
- 2 -
<PAGE>
(footnotes continued from previous page)
(1) The persons named in the table have sole voting and dispositive power with
respect to all shares of the Company's Common Stock shown as beneficially
owned by them, subject to the information contained in the notes to the
table and to community property laws, where applicable.
(2) Includes 362,400 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable and 2,169,457 shares
which are pledged with a brokerage company in respect of recourse loans of
up to $2,750,000, of which $2,728,329 was outstanding as of March 31, 1997.
Does not include 65,600 shares issuable upon exercise of options which have
not vested or 1,203,012 shares beneficially owned by Mr. Schrader's wife.
Mr. Schrader disclaims beneficial ownership of the shares beneficially
owned by his wife. Mr. Schrader's address is c/o PSINet Inc., 510 Huntmar
Park Drive, Herndon, Virginia, 20170.
(3) Based on information set forth in a Schedule 13D, as amended, filed with the
Securities and Exchange Commission ("SEC"), Amerindo Investment Advisors
Inc., a California corporation ("Amerindo"), has shared voting power and
shared dispositive power with respect to 2,426,500 of such shares; Amerindo
Investment Advisors, Inc., a Panama corporation, has shared voting power and
shared dispositive power with respect to 1,001,930 of such shares; and each
of Alberto W. Vilar and Gary A. Tanaka (each an executive officer and
director of Amerindo) has shared voting power and shared dispositive power
with respect to all of such shares. Amerindo's address is One Embarcadero
Center, Suite 2300, San Francisco, California 94111.
(4) Includes approximately 85,511 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable. Does not
include approximately 204,789 shares issuable upon the exercise of options
which are not deemed to be presently exercisable.
(5) Includes approximately 122,601 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable. Does not
include approximately 228,592 shares issuable upon the exercise of options
which are not deemed to be presently exercisable.
(6) Includes 50,000 shares issuable upon the exercise of outstanding warrants.
(7) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 380,213 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(8) Includes approximately 45,511 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable. Does not
include approximately 214,789 shares issuable upon the exercise of options
which are not deemed to be presently exercisable.
(9) See notes (2) and (4) through (8) above. Includes also approximately 138,792
shares issuable upon the exercise of vested options and options which are
deemed to be presently exercisable granted to five executive officers. Does
not include approximately 810,408 shares issuable upon the exercise of
outstanding options granted to five executive officers which are not deemed
to be presently exercisable or 4,000 shares held by trusts of which an
executive officer's children are the beneficiaries and as to which such
executive officer disclaims beneficial ownership.
- 3 -
<PAGE>
PROPOSAL 1--ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors will be
divided into two classes consisting of at least three directors each and as
nearly equal in number as possible, and that directors will be elected for terms
of two years on a staggered basis. The Board of Directors is currently composed
of seven directors, four whose terms expire in 1997 and three whose terms expire
in 1998. Unless authority to vote for the election of a director is specifically
withheld by appropriate designation on the face of the proxy, it is the
intention of the persons named in the accompanying form of proxy to vote such
proxy for the election at the Annual Meeting of David N. Kunkel, William L.
Schrader, Ian P. Sharp and William A. Wilson as directors to serve until the
1999 Annual Meeting of Shareholders and until their respective successors shall
have been elected and qualified.
All nominees presently are members of the Company's Board of Directors. The
proxies cannot be voted for a greater number of persons than four. Management
has no reason to believe that the named nominees will be unable or unwilling to
serve if elected to office. In such case, however, it is intended that the
individuals named in the enclosed proxy will vote for the election of such
substituted nominees as the Company's Board of Directors may recommend.
Certain information concerning the nominees and directors continuing in
office is set forth in the following table.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, BUSINESS
NAME AGE EXPERIENCE AND DIRECTORSHIPS
- - ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Nominees For Terms Expiring In 1999
David N. Kunkel 53 Senior Vice President of the Company since September
1996, Secretary, Vice President and General Counsel
of the Company since September, July and June 1995,
respectively. Vice President of International
Operations of the Company from April 1996 to
September 1996. Senior Counsel to Nixon, Hargrave,
Devans & Doyle LLP, outside counsel for the Company,
from July 1995 through December 1995. Partner of
Nixon, Hargrave, Devans & Doyle LLP from January 1979
until July 1995. Outside counsel to NYSERNet Inc.
("NYSERNet"), a provider of data networking services
in New York State, from 1986 until 1989 and to the
Company from its inception until July 1995. Director
of the Company since 1995.
William L. Schrader 45 Founder of the Company. Chairman of the Board of
Directors, President and Chief Executive Officer of
the Company, since inception. President and Chief
Executive Officer of NYSERNet from January 1986 to
December 1989. Co-founder and Executive Director of
Cornell Theory Center, a supercomputer center, from
May 1984 until February 1987. Director of the Company
since inception.
</TABLE>
(table continues on next page)
- 4 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, BUSINESS
NAME AGE EXPERIENCE AND DIRECTORSHIPS
- - ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Nominees For Terms Expiring in 1999 (cont.)
Ian P. Sharp 65 Retired. President and founder of I.P. Sharp
Associates, a software development company, from
December 1964 through July 1989. Director of the
Company since September 1996.
William A. Wilson 51 Executive Vice President and Chief Financial Officer
of Arch Communications Group, Inc., a wireless
messaging company, since June 1996 and Vice
President, Finance and Chief Financial Officer of
Arch Communications Group, Inc. from January 1989 to
June 1996. Director of the Company since September
1996.
Directors Whose Terms Expire In 1998
William H. Baumer 64 Professor at the University at Buffalo since 1971.
Acting Chairman of the Department of Economics at the
University at Buffalo from June 1992 until June 1995.
Treasurer and Vice President of NYSERNet from January
1986 to December 1990 and from December 1989 to
December 1990, respectively. Director of the Company
since 1993.
Harold S. Wills 55 Executive Vice President and Chief Operating Officer
of the Company since April 1996 and Acting Chief
Financial Officer of the Company from April 1996 to
October 1996. Chief Operating Officer of Hospitality
Information Networks, Inc., a provider of information
services for the hospitality industry, from July 1995
through January 1996. Served in various capacities
including Managing Director, International Computer
Services, Technical Service Director and Sales
Director of Granada Group PLC, a computer services
provider, from September 1991 through September 1995.
Director of the Company since April 1996.
Wade Woodson 38 General partner with the Sigma Partners venture
capital organization, with which he has been
affiliated since 1987. Director of Worldtalk
Corporation, a provider of messaging and directory
software. Director of the Company since 1993.
</TABLE>
- 5 -
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors met 16 times during the year ended December 31, 1996.
Each of the directors other than Mr. Sharp attended 75% or more of the meetings
held during the last fiscal year by the Board of Directors during the period for
which such person served as a director and 75% or more of the meetings held by
the Committees of the Board of Directors on which such person served during the
period for which such person served as a committee member.
The Company's Board of Directors has two committees, the Audit Committee and
the Compensation Committee. The Audit Committee met six times during the year
ended December 31, 1996. The Committee, among other things, recommends the firm
to be appointed as independent accountants to audit the Company's financial
statements, discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants the
Company's interim and year-end operating results, considers the adequacy of the
internal accounting controls and audit procedures of the Company and reviews the
non-audit services to be performed by the independent accountants. The current
members of the Audit Committee are Messrs. Baumer, Sharp and Wilson.
The Compensation Committee met five times during the year ended December 31,
1996. The Committee reviews and recommends the compensation arrangements for
management of the Company and administers the Company's Executive Stock Option
Plan and Executive Stock Incentive Plan. The current members of the
Compensation Committee are Messrs. Baumer, Schrader and Woodson.
Directors, other than those who also are employees or consultants of the
Company or are serving on the Board of Directors as representatives of a
shareholder, receive annual fees of $5,000 and are eligible for awards under the
Company's Directors Stock Incentive Plan (the "Directors' Plan"). The Directors'
Plan provides for initial option grants with respect to 10,000 shares of the
Company's Common Stock ("Initial Grants") to be made to each eligible director
upon his or her first election to the Company's Board of Directors and,
thereafter, for annual grants of options to purchase 2,000 shares of the
Company's Common Stock to be made to each eligible director who has served on
the Company's Board of Directors for at least 12 months. Each of Messrs. Sharp
and Wilson received Initial Grants upon their election to the Board in
accordance with the Directors' Plan. In addition, directors who are not also
officers of the Company receive fees of $1,000 per day for committee meetings
and consultations not in conjunction with a Board of Directors meeting.
Directors also are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. The Company has issued to Mr. Baumer
warrants to purchase 25,000 shares of the Company's Common Stock (formerly
exercisable for the Company's Series B Convertible Participating Preferred
Stock) for $1.60 per share in return for Mr. Baumer's services as a director of
the Company. Mr. Baumer also holds warrants to purchase an additional 25,000
shares in return for consulting services rendered to the Company by Mr. Baumer.
Each of these warrants became fully vested effective September 9, 1996. Other
than these fees and awards and the warrants issued to Mr. Baumer, no member of
the Board of Directors receives any fees or other compensation for serving in
such capacity.
- 6 -
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers and other key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
- - ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William L. Schrader 45 Chairman of the Board of Directors, President and
Chief Executive Officer (Founder)
Harold S. Wills 55 Executive Vice President, Chief Operating Officer and
Director
David N. Kunkel 53 Senior Vice President, General Counsel, Secretary and
Director
Edward D. Postal 41 Vice President and Chief Financial Officer
Mary-Ann Carolan 36 Vice President of Customer Administration
James R. Davin 40 Vice President and Chief Technical Officer
Mark S. Fedor 33 Vice President of Engineering
Richard R. Frizalone 39 Vice President of Corporate Sales
David L. Hudson 55 Vice President of Business and Product Development
Mitchell Levinn 37 Vice President of Network Operations
</TABLE>
William L. Schrader is the founder of the Company and has served as Chairman
of the Board of Directors, President and Chief Executive Officer of the Company
since its inception. Prior to forming the Company, Mr. Schrader served as
President and Chief Executive Officer of NYSERNet from January 1986
to December 1989. Mr. Schrader also was a co-founder, and, from May 1984 until
February 1987, served as Executive Director of the Cornell Theory Center, a
National Science Foundation supercomputer center.
Harold S. Wills has served as a director and Executive Vice President and
Chief Operating Officer of the Company since April 1996 and as Acting Chief
Financial Officer of the Company from April 1996 to October 1996. Mr. Wills
served as Chief Operating Officer of Hospitality Information Networks, Inc., a
provider of information services for the hospitality industry, from July 1995
through January 1996. Mr. Wills also held various positions including, Managing
Director, International Computer Services, Technical Service Director and Sales
Director of Granada Group PLC, a computer services provider, from September 1991
through September 1995.
David N. Kunkel has served as Senior Vice President of the Company since
September 1996, as a director and Secretary of the Company since September 1995,
as Vice President of the Company since July 1995 and as General Counsel of the
Company since June 1995. Mr. Kunkel also served as Vice President of
International Operations of the Company from April 1996 to September 1996 and as
Senior Counsel to Nixon, Hargrave, Devans & Doyle LLP, outside counsel to the
Company, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to the
Company from its inception until July 1995.
- 7 -
<PAGE>
Edward D. Postal has served as Vice President and Chief Financial Officer of
the Company since October 1996. Prior thereto, Mr. Postal served as Senior Vice
President, Chief Financial Officer and a director of The Hunter Group, Inc., a
systems integration consulting firm, from March 1995 to October 1996 and as Vice
President and Chief Financial Officer of The Wyatt Company, a human resources
consulting firm, from December 1991 to October 1994. Mr. Postal also served as
controller/treasurer of The Wyatt Company from November 1985 to December 1991.
Mary-Ann Carolan has served as Vice President of Customer Administration
since May 1996 and as Vice President of Individual Customer Support from
November 1995 to April 1996. From November 1989 until November 1995, Ms. Carolan
held various positions with the Company, including Assistant Director for
Individual Support, Assistant Sales Manager, Systems Administrator and Customer
Support Administrator.
James R. Davin has served as Vice President and Chief Technical Officer of
the Company since February 1997. From January 1995 until February 1997, Mr.
Davin held various positions with the Company, including Assistant Director of
Engineering, Assistant Director of New Product Development and Senior Scientist.
Prior to joining the Company, Mr. Davin had served as a member of the technical
staff of Bell Communications Research Inc., a telephone engineering and
consulting company and wholly-owned subsidiary of Bell Atlantic Corp., from
August 1992 to January 1995, as a member of the research staff at the
Massachusetts Institute of Technology from June 1988 to August 1992 and as an
engineer for Proteon Inc., a provider of network access solutions, from February
1987 to June 1988.
Mark S. Fedor has served as Vice President of Engineering since February
1997. From November 1989 until February 1997, Mr. Fedor held various positions
with the Company, including Director of Engineering.
Richard R. Frizalone has served as Vice President of Corporate Sales since
October 1996. During the period from March 1995 to October 1996, Mr. Frizalone
served as Area Vice President-Distribution and Planning for Bell Atlantic
Communications, Inc. and as Vice President and Chief Marketing Officer-Telezone
Corporation and Director-Marketing and Sales for Bell Atlantic International.
From March 1994 to February 1995, Mr. Frizalone was Director of Sales and
Marketing for Comcast Cellular One and, from November 1990 to March 1994, Mr.
Frizalone was Director of Sales for McCaw Cellular One.
David L. Hudson has served as Vice President of Business and Product
Development since February 1997. From January 1996 to February 1997, Mr. Hudson
served as President and Chief Executive Officer of InterCon Systems
Corporation, a former subsidiary of the Company. Prior thereto, Mr. Hudson
served as Vice President of International Operations for AGE Logic, a
subsidiary of NetManage Inc., a developer and marketer of integrated
internetworking applications, from March 1995 to December 1995, and as Vice
President of Sales and Marketing for Pacer Software, also a subsidiary of
NetManage Inc., from October 1989 to March 1995. Mr. Hudson was the founder
and served as President of Sterling Communications, a software communications
company, from July 1988 to October 1989 and was the Vice President of Marketing
for Dove Computer Corporation, a supplier of Macintosh networking and
performance products, from December 1987 to August 1988.
Mitchell Levinn has served as Vice President of Network Operations of the
Company since February 1995. Prior thereto, Mr. Levinn had been Director of
Operations of the Company since its inception. Prior to joining the Company, Mr.
Levinn served as Director of the Computer Science Laboratory of the Computer
Science Department at Rensselaer Polytechnic Institute from June 1985 to
December 1990.
Each of the Company's executive officers and other key employees serves at
the pleasure of the Board of Directors.
- 8 -
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder require the
Company's officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC") and
to furnish to the Company copies of all such filings. The Company has
determined, based solely upon a review of those reports and amendments thereto
furnished to the Company during and with respect to the year ended December 31,
1996 and written representations from certain reporting persons, that Mr.
Schrader was inadvertently late in filing a Form 4 reporting a purchase by his
spouse of 2,070 shares of the Company's Common Stock and Kurt D. Baumann, a
former officer of the Company, was late in filing a Form 3 reporting his
election as an officer of the Company.
SUMMARY COMPENSATION. The following table sets forth in summary form the
compensation paid by the Company to its chief executive officer, each of
its four most highly compensated executive officers other than the chief
executive officer and two former executive officers as of December 31, 1996
for services rendered to the Company in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------------------ SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS(1)($) COMPENSATION($) OPTIONS (#) COMPENSATION($)
- - ----------------------------------- --------- ------------- ----------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 1996 $ 194,471 $ 2,438 $ 2,015 (2) -- $ 3,135 (3)
Chairman, President and Chief 1995 169,104 45,514 6,245 (2) -- 3,135 (3)
Executive Officer 1994 154,000 36,791 1,950 (2) -- 2,885 (3)
David N. Kunkel (4) 1996 $ 272,596 $ 103,438 $ 88,474(5) 251,193(6) --
Senior Vice President, General 1995 77,038 106,323(7) 25,988(8) -- (9) --
Counsel and Secretary
Harold S. Wills (10) 1996 $ 146,154 $ 77,500 $ 30,825(11) 250,000(12) --
Executive Vice President and
Chief Operating Officer
Mitchell Levinn (13) 1996 $ 149,392 $ 42,687 -- 100,000(14) $ 3,024 (15)
Vice President of 1995 107,317 4,547 -- 40,000(16) 2,993 (15)
Network Operations
Daniel P. Cunningham (17) 1996 $ 124,231(18) $ 40,000 -- 100,000(14) $ 2,866 (15)
Former Chief Financial Officer, Chief 1995 88,269 20,256 -- 50,000(16) 3,060 (15)
Information Officer, Vice President 1994 30,289 1,084 -- 300(16) --
Finance and Treasurer
Bruce M. Ley (13)(19) 1996 $ 155,624(18) $ 4,712 $ 3,844(20) 100,000(14) $ 1,059 (15)
Former Vice President of Marketing, 1995 27,124 54,747(21) -- -- --
Corporate Services
Mary-Ann Carolan (13) 1996 $ 110,481 $ 41,519 $ 3,996(20) 100,000(14) $ 2,648 (15)
Vice President of Customer 1995 55,195 32,471(22) -- 40,000(23) 3,060 (15)
Administration
</TABLE>
- - ------------------------
(1) Amounts reported in respect of a particular fiscal year reflect bonuses
earned for services rendered in that fiscal year regardless of when paid.
(footnotes continue on next page)
- 9 -
<PAGE>
(footnotes continued from previous page)
(2) Represents amounts attributable to Mr. Schrader's personal use of a
Company-owned automobile in 1994, amounts paid with respect to installation
of a security system at Mr. Schrader's home in 1995 and a car allowance of
$2,015 during 1996.
(3) Consists of: (i) insurance premiums in the amount of $2,135 paid by the
Company in each of 1994, 1995 and 1996 with respect to the proportionate
beneficial interest of Mr. Schrader's spouse in an insurance policy on Mr.
Schrader's life and (ii) matching contributions in the amount of $750,
$1,000 and $1,000 made to Mr. Schrader's account under the Company's 401(k)
Plan in 1994, 1995 and 1996, respectively.
(4) Mr. Kunkel joined the Company as General Counsel on June 21, 1995.
Accordingly, no information is provided for periods prior to such date with
respect to Mr. Kunkel.
(5) Consists of payments made to Mr. Kunkel in connection with his relocation as
follows: $52,175 pursuant to an agreement to guarantee Mr. Kunkel a minimum
price on the sale of his primary residence and $36,299 for certain carrying
costs for his residence pending such sale.
(6) Consists of options issued in connection with a company-wide repricing of
certain previously granted options as of April 5, 1996. Does not include
options with respect to 18,494 shares granted in February 1996 (with respect
to 1995) which were replaced in connection with such repricing or options
with respect to 75,000 shares of the Company's Common Stock granted in
November 1996 which were cancelled as of December 31, 1996 due to failure to
satisfy certain vesting conditions.
(7) Includes a signing bonus of $50,000 and a performance bonus of $50,000 paid
to Mr. Kunkel pursuant to his employment agreement with the Company.
(8) Consists of payments made to Mr. Kunkel in connection with his relocation as
follows: $13,456 for moving expenses, $9,200 for certain closing costs on
his new home and $3,332 for installation of a security system at his new
home.
(9) Does not include options with respect to 251,193 shares issued under the
Company's Executive Stock Incentive Plan pursuant to Mr. Kunkel's employment
agreement with the Company which were replaced in connection with a
company-wide repricing as of April 5, 1996. See footnote 6 above.
(10) Mr. Wills joined the Company as Executive Vice President and Chief
Operating Officer on April 8, 1996. Accordingly, no information is provided
for periods prior to such date with respect to Mr. Wills.
(11) Consists of (i) payments made to Mr. Wills in connection with his
relocation as follows: $15,271 for certain closing costs on his new home and
$15,298 for moving expenses and (ii) a car allowance of $256.
(12) Consists of options issued under the Company's Executive Stock Incentive
Plan. Does not include options with respect to 100,000 shares of the
Company's Common Stock granted in November 1996 which were cancelled as of
December 31, 1996 due to failure to satisfy certain vesting conditions.
(13) Such officer, although employed by the Company, was not an executive
officer of the Company prior to 1995. Accordingly, no information for 1994
is provided in this table with respect to such officer.
(14) Consists of options issued in connection with a company-wide repricing of
certain previously granted options as of April 5, 1996. Does not include
options with respect to 100,000 shares granted in February 1996 which were
replaced in connection with such repricing.
(footnotes continue on next page)
- 10 -
<PAGE>
(footnotes continued from previous page)
(15) Consists of matching contributions made to the named officer's account
under the Company's 401(k) Plan in the years indicated.
(16) Issued pursuant to the Company's Executive Stock Option Plan.
(17) Mr. Cunningham resigned from the Company effective June 19, 1996. No
information is provided in this table with respect to Mr. Cunningham prior
to August 1994, as Mr. Cunningham was on leave from the Company until such
date.
(18) Includes certain severance payments paid during 1996.
(19) Mr. Ley resigned from the Company effective August 8, 1996.
(20) Consists of certain relocation costs.
(21) Includes a signing bonus of $25,000 and a performance bonus of $25,000 paid
to Mr. Ley pursuant to his employment agreement with the Company.
(22) Includes sales commissions of $13,787.
(23) Issued pursuant to the Company's Executive Stock Incentive Plan.
OPTION GRANTS. The following table sets forth certain information, as of
December 31, 1996, concerning individual grants of stock options made during the
fiscal year ended December 31, 1996 to the persons named in the Summary
Compensation Table above.
Option Grants in 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF
----------------- STOCK
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS GRANTED TERM
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR (1) PRICE($/SH) DATE 5% 10%
- - -------------------------------- ------------------- ------------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David N. Kunkel (2) 18,494(3) .32% $ 9.375 02/05/06 $ 106,820 $ 269,450
232,699(4) 3.98 9.375 06/21/05 1,237,765 3,066,910
75,000(5) 1.28 8.500 -- -- --
Harold S. Wills 150,000(6) 2.56% $ 8.250 04/08/06 $ 778,257 $1,972,256
100,000(7) 1.71 10.500 06/27/06 660,339 1,673,430
100,000(5) 1.71 8.500 11/04/06 -- --
Mitchell Levinn 100,000(8) 1.71% $13.000 -- -- --
100,000(9) 1.71 9.375 02/21/06 $ 580,836 $1,466,983
Daniel P. Cunningham 100,000(8) 1.71% $13.000 -- -- --
100,000(9)(10) 1.71 9.375 -- -- --
Bruce M. Ley 100,000(8) 1.71% $14.500 -- -- --
100,000(9)(11) 1.71 9.375 02/05/06 $ 398,539 $1,005,301
Mary-Ann Carolan 100,000(8) 1.71% $13.000 02/21/06 -- --
100,000(9) 1.71 9.375 02/21/06 $ 580,836 $1,466,983
</TABLE>
- - ------------------------
(footnotes appear on next page)
- 11 -
<PAGE>
(footnotes to table on previous page)
(1) Based upon total grants of options in respect of 5,852,349 shares of the
Company's Common Stock made during 1996.
(2) Does not include information with respect to options for 18,494 shares of
the Company's Common Stock granted under the Company's Executive Stock
Incentive Plan in February 1996 with respect to an award to which Mr. Kunkel
became entitled in June 1995 pursuant to his employment agreement with the
Company. These options were disclosed in the table included under this
heading in the Proxy Statement relating to the Company's 1996 Annual Meeting
of Shareholders.
(3) Consists of options previously granted under the Company's Executive Stock
Incentive Plan which were repriced on April 5, 1996. Vest monthly over 40
months from the anniversary of the previous grant (February 1996), subject
to continued employment by the Company on each of such dates.
(4) Consists of options previously granted under the Company's Executive Stock
Incentive Plan which were repriced on April 5, 1996. Vest monthly over 48
months from the anniversary of the previous grant (June 1995), subject to
continued employment by the Company on each of such dates.
(5) Granted under the Company's Executive Stock Incentive Plan in November 1996.
These options were cancelled as of December 31, 1996 due to failure to
satisfy certain vesting conditions.
(6) Granted under the Company's Executive Stock Incentive Plan in April 1996.
Vest monthly over 48 months from the anniversary of the grant, subject to
continued employment by the Company on each of such dates.
(7) Granted under the Company's Executive Stock Incentive Plan in June 1996.
Vest monthly over 48 months from the anniversary of the grant, subject to
continued employment by the Company on each of such dates.
(8) Granted under the Company's Executive Stock Incentive Plan in February 1996.
Replaced on April 5, 1996 in connection with a company-wide repricing of
certain options. See footnote 9 below.
(9) Consists of options previously granted under the Company's Executive Stock
Incentive Plan which were repriced on April 5, 1996. Vest monthly over 48
months from the anniversary of the previous grant (February 1996), subject
to continued employment by the Company on each of such dates.
(10) Options with respect to 54,167 of these shares were cancelled upon Mr.
Cunningham's resignation from the Company effective June 29, 1996 and the
remaining options were exercised by Mr. Cunningham on September 25, 1996.
(11) Options with respect to 31,000 of these shares were cancelled upon Mr.
Ley's resignation from the Company effective August 8, 1996. Consequently,
the potential realizable values reported in this table with respect to Mr.
Ley's options reflect only those options still outstanding at December 31,
1996.
Under each of the Company's Executive Stock Incentive Plan, Directors Stock
Incentive Plan and Strategic Stock Incentive Plan, upon the acquisition of
beneficial ownership of 30% or more of the Company's outstanding Common Stock by
any person other than a wholly-owned subsidiary of the Company or the occurrence
of certain other change in control events specified in such plans, including
certain mergers, consolidations and transfers of all or substantially all of the
Company's assets, all options
- 12 -
<PAGE>
and stock appreciation rights will become fully exercisable and all restricted
stock awards will become immediately vested.
Aggregate Year-End Option Values. The following table provides information
concerning the number of unexercised options held by the individuals named in
the Summary Compensation Table as of December 31, 1996. Also reported are the
values for "in the money" options, which represent the positive spread between
the exercise price and the fair market value of the Company's Common Stock as of
December 31, 1996.
Aggregated Option Exercises 1996 and Year-End Option Values
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1996(#) AT DECEMBER 31, 1996 ($)(1)
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------------------- --------------- ------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader.............. -- -- 296,800 131,200 $ 2,612,820 $ 1,216,880
David N. Kunkel (2).............. -- -- 91,885 159,308 137,828 238,961
Harold S. Wills (3).............. -- -- 37,500 212,500 70,313 360,938
Mitchell Levinn.................. -- -- 70,933 119,367 520,673 389,095
Daniel P. Cunningham............. 96,133 $ 515,167 (4) 25,000 -- 244,375 --
Bruce M. Ley..................... -- -- 69,000 -- 103,500 --
Mary-Ann Carolan................. -- -- 20,933 139,367 31,922 432,596
</TABLE>
- - ------------------------
(1) Based upon a closing price of $10.875 on December 31, 1996, as reported on
the Nasdaq National Market System.
(2) Does not include options with respect to 75,000 shares of the Company's
Common Stock which were cancelled as of December 31, 1996 due to failure to
satisfy certain vesting conditions.
(3) Does not include options with respect to 100,000 shares of the Company's
Common Stock which were cancelled as of December 31, 1996 due to failure to
satisfy certain vesting conditions.
(4) Based upon a closing price of $12.00 on September 25, 1996, the exercise
date, as reported on the Nasdaq National Market System.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with Ms.
Carolan and each of Messrs. Kunkel, Levinn and Wills. The Company also has
employment agreements with each of its other executive officers other than Mr.
Schrader pursuant to which they serve in their respective capacities.
Ms. Carolan's employment agreement provides for a three-year term ending
February 1999, a current annual base salary of $135,000, a performance bonus of
$40,000 for 1996, subject to achievement of certain objectives, performance
bonuses for subsequent years as determined by the Compensation Committee of the
Company's Board of Directors, and the award of options to purchase 100,000
shares of Common Stock pursuant to the Company's Executive Stock Incentive Plan.
Mr. Kunkel's employment agreement provides for a five-year term ending in
June 2000 and a current annual base salary of $300,000. Mr. Kunkel's agreement
also provides for a performance bonus of $100,000 for 1996, subject to the
successful completion of pre-established performance objectives, performance
bonuses for subsequent years as determined by the Compensation Committee subject
to a $100,000 minimum, and the award of options to purchase 250,000 shares of
Common Stock under the Company's Executive Stock Incentive Plan. Due to the
unavailability of sufficient shares under the Executive Stock Incentive Plan to
satisfy this award in full during 1995, Mr. Kunkel was awarded options
- 13 -
<PAGE>
with respect to only 232,699 shares during 1995. The remaining options were
awarded during February 1996 and, pursuant to Mr. Kunkel's employment
arrangements with the Company, the number of shares for which such options can
be exercised was adjusted to take into account the change in exercise price as
a result of the delay in such issuance.
Mr. Levinn's employment agreement provides for a three-year term ending
February 1999, a current annual base salary of $165,000, a performance bonus of
$40,000 for 1996, subject to achievement of certain objectives, performance
bonuses in subsequent years as determined by the Compensation Committee, and the
award of options to purchase 100,000 shares of Common Stock pursuant to the
Company's Executive Stock Incentive Plan.
Mr. Wills' employment agreement provides for a three-year term ending April
1999, a current annual base salary of $210,000, a performance bonus of $75,000
for 1996, subject to achievement of certain objectives, performance bonuses in
subsequent years as determined by the Compensation Committee subject to a
$75,000 minimum, and the award of options to purchase 150,000 shares of Common
Stock pursuant to the Company's Executive Stock Incentive Plan.
These employment agreements also provide for standard employee benefits,
including, without limitation, participation in the Company's 401(k) plan and
bonus plan as well as life, health, accident and disability insurance. These
agreements also provide for a 24-month non-competition period. If the Company
elects to enforce such non-competition restrictions, these officers are
entitled, for a period of 24 months after termination of their employment, to
receive their then current base salary and all benefits being provided to them
at the time of termination. Options awarded pursuant to these agreements are
subject to immediate vesting upon the occurrence of certain change in control
events.
The Company also had employment agreements with each of Messrs. Cunningham
and Ley prior to their respective resignations from the Company during 1996. Mr.
Cunningham's employment agreement provided for a three-year term ending in
February 1999, an annual base salary of $120,000 and a performance bonus of
$40,000 (subject to achievement of certain objectives) for 1996 and the award of
options to purchase 100,000 shares of Common Stock under the Company's Executive
Stock Incentive Plan. Mr. Ley's employment agreement provided for a three-year
term ending in October 1998, an annual base salary of $183,750 and a performance
bonus of $50,000 (subject to achievement of certain objectives) for 1996 and the
award of options to purchase 100,000 shares of the Company's Common Stock under
the Company's Executive Stock Incentive Plan. Each of these agreements also
contained benefit and non-competition provisions of the nature described above.
The Company entered into a separation agreement with Mr. Cunningham in
connection with his resignation from the Company. This agreement provided for
the payment of total severance compensation in the amount of $180,000 over an
18-month period, payment of a lump sum bonus of $40,000, and the accelerated
vesting of options to purchase 87,750 shares of the Company's Common Stock. The
Separation Agreement also provided for continued coverage under the Company's
health plans for Mr. Cunningham, the repayment by Mr. Cunningham of an
outstanding loan by the Company in the principal amount of $55,000 and a general
release of the Company by Mr. Cunningham.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee currently is composed of Messrs. Baumer and
Woodson, each a non-employee director of the Company, and Mr. Schrader. The
Compensation Committee is responsible, subject to the approval of the Board of
Directors, for establishing the Company's compensation program.
COMPENSATION PHILOSOPHY AND POLICY
The Company's compensation program generally is designed to motivate and
reward the Company's executive officers and other personnel responsible for
attaining financial, operational and strategic objectives that will contribute
to the overall goal of enhancing shareholder value. In administering
- 14 -
<PAGE>
the plan, the Compensation Committee assesses the performance of individuals
and the Company relative to those objectives.
The Company's compensation program generally provides incentives to achieve
annual and longer term objectives. The principal elements of the compensation
plan include base salary, cash bonus awards and stock awards in the form of
grants of stock options and restricted Common Stock. These elements generally
are blended in order to provide compensation packages which provide competitive
pay, reward the achievement of financial, operational and strategic objectives
and align the interests of the Company's executive officers and other high level
personnel with those of the Company's shareholders.
BASE SALARY. During 1996, the Company had employment agreements with Ms.
Carolan and each of Messrs. Kunkel, Levinn and Wills as well as with each of the
other individuals who served as executive officers during such period other than
Mr. Schrader, whose employment agreement expired on March 10, 1996. Mr.
Schrader's agreement was negotiated with certain prospective investors in 1993
in connection with a venture capital financing and reflected the
responsibilities of Mr. Schrader's position and the size of the revenues of the
Company. Mr. Schrader was not a member of the Compensation Committee at the time
his employment agreement was entered into. Following the expiration of his
employment agreement in March 1996, the Board of Directors determined not to
enter into a new employment agreement with Mr. Schrader. Mr. Schrader's
compensation was determined based upon his leadership of the Company in setting
and pursuing its financial, operational and strategic objectives. Mr. Schrader
did not participate as a member of the Compensation Committee in determining his
compensation.
Until May 1995, the Company was a private company and senior management of
the Company possessed primary responsibility for establishing base salaries for
its executive officers and key employees of the Company. The Company's most
direct competitors, like the Company, have been, until recently, private
companies and, prior to going public, have not publicly disclosed executive
compensation, financial condition or operating performance information.
Accordingly, the Company generally did not consider the compensation paid by
other Internet service providers or other companies similar to the Company in
determining the base pay levels and increases for its executive officers and
other key employees prior to 1995. The Company considered the experience of the
individual, the scope and complexity of the position and the size and growth
rate of the Company as well as the salary payable to Mr. Schrader in setting
base salaries for these officers and employees. During 1996, in addition to the
factors discussed above, the compensation paid by the Company's competitors,
when such information was available to the Company, was considered in making
these compensation decisions. Due to the increasingly competitive nature of the
Company's industry segment, this factor is expected to continue to grow in
importance to the Company as it assesses its compensation structure in the
future in order to ensure its ability to attract and retain highly qualified
executives.
BONUS PLANS. The Company adopted a bonus plan for 1996 pursuant to which
general and customized bonuses were paid to eligible employees based upon
periodic revenue and subscriber growth targets established by the Company. All
full-time employees who are not eligible for a customized bonus are eligible to
receive a general bonus. Full-time employees in the Company's inside sales,
outside sales, sales administrative support, marketing, customer support,
operations, administrative, finance and accounting work groups are eligible to
receive customized bonuses, which are tailored to specific criteria for
participation and compensation and are based upon contributions made by their
groups to the Company's performance. Under the general cash bonus plan, the
Company's actual revenues for specified periods are compared to the comparable
periods in the prior year to determine the growth rate. Based upon growth rate
targets, cash bonuses are payable in fixed dollar amounts equal to the
percentage of growth plus a percentage of salary paid during the period. Bonus
payments under the 1996 plan of $2,438, $3,438, $2,500, $2,687, $4,712, and
$1,519 were made to Messrs. Schrader, Kunkel, Wills, Levinn and Ley, and Ms.
Carolan, respectively. Bonuses also were paid to each of these officers (other
than Mr. Schrader and Mr. Ley) pursuant to their employment agreements with the
Company.
- 15 -
<PAGE>
STOCK AWARDS. To promote the Company's long-term objectives, stock awards
are made to directors, officers and employees who are in a position to make a
significant contribution to the Company's long-term success. The stock awards
are made to officers and employees pursuant to the Company's Executive Stock
Option Plan, in the form of incentive stock options and non-qualified stock
options, and since 1995, pursuant to the Company's Executive Stock Incentive
Plan, in the form of incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock awards, and to directors pursuant to
the Company's Directors Stock Incentive Plan, in the form of non-qualified stock
options. The Company also makes awards in the form of incentive stock options,
non-qualified stock options, stock appreciation rights and restricted stock
grants to key personnel in connection with acquisitions, mergers, strategic
alliances and other business combinations pursuant to its Strategic Stock
Incentive Plan.
Stock options represent rights to purchase shares of the Company's Common
Stock in varying amounts pursuant to a vesting schedule determined by the
Compensation Committee prior to expiration of a fixed term (generally 10 years)
at a price per share specified on the date of grant of the option (which may not
be less than the fair market value on the date of the grant). Stock options vest
in accordance with a vesting schedule determined by the Compensation Committee.
Stock appreciation rights may be granted in tandem with options and, upon
exercise, entitle the holder to receive cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of fair market value per share of the Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is
exercised over the option exercise price for such number of shares.
Restricted stock awards consist of a specified number of shares of the
Company's Common Stock with an appropriate restrictive legend affixed thereto.
Shares of restricted stock may not be sold or otherwise transferred until
ownership vests in the recipient, at the time and in the manner specified by the
Compensation Committee at the time of the award.
Since the stock options, stock appreciation rights and restricted stock
awards vest and may grow in value over time, these components of the Company's
compensation plan are designed to reward performance over a sustained period and
to enhance shareholder value through the achievement of corporate objectives.
The Company intends that these awards will strengthen the focus of its
directors, officers and employees on managing the Company from the perspective
of a person with an equity stake in the Company.
In selecting recipients and the size of grants, the Compensation Committee
considers various factors such as the potential of the recipient, the salary of
the recipient and competitive factors affecting the Company's ability to attract
and retain employees, prior grants, a comparison of awards made to officers in
comparable positions at similar companies and Company performance.
No stock awards were made during 1996 to Mr. Schrader. Messrs. Kunkel and
Wills were awarded options to purchase 344,687 and 350,000 shares of the
Company's Common Stock, respectively, under the Company's Executive Stock
Incentive Plan during 1996 of which awards with respect to 75,000 and 100,000
shares, respectively, were cancelled as of December 31, 1996 due to the failure
to satisfy certain vesting conditions. The awards made to Mr. Kunkel during 1996
included options to purchase an aggregate of 251,193 shares which replaced
certain options previously granted to Mr. Kunkel (of which options for 18,494
shares were granted during 1996) and were issued in connection with a
company-wide repricing of such options. Each of Ms. Carolan and Messrs.
Cunningham, Levinn, and Ley were awarded options to purchase 200,000 shares of
the Company's Common Stock under the Company's Executive Stock Incentive Plan
during 1996 of which options to purchase 100,000 shares awarded to each of them
were cancelled in April 1996 in connection with a company-wide repricing of
certain options. In addition, options to purchase an aggregate of 85,167 shares
were cancelled as a result of the resignations of Messrs. Cunningham and Ley
during 1996. Awards made to other executive officers during 1996 consisted of
options to purchase an aggregate of 340,000 shares under the Company's Executive
Stock Incentive Plan of
- 16 -
<PAGE>
which options to purchase an aggregate of 20,000 shares were cancelled in
April 1996 in connection with a company wide-repricing of certain options.
Options to purchase 53,334 shares of the Company's Common Stock also were
awarded under the Company's Strategic Stock Incentive Plan in connection with
a repricing of options held by one executive officer during 1996. Total option
awards under the Company's Executive Stock Incentive Plan and the Company's
Strategic Stock Incentive Plan were made during 1996 with respect to 5,563,787
and 268,562 shares of Common Stock, respectively. No awards were made under
the Company's Executive Stock Option Plan during 1996. Awards made to
directors during 1996 consisted of options with respect to 20,000 shares of
the Company's Common Stock under the Directors Stock Incentive Plan.
REPORT ON REPRICING OF OPTIONS. On April 5, 1996, the Company's Board of
Directors approved a stock option repricing (the "Repricing") pursuant to which
all employees, including executive officers, holding stock options with an
exercise price above the then current fair market value of the Company's Common
Stock were given the opportunity to exchange such options for new options.
The decision to approve the Repricing followed a review by the Company's
Board of Directors of existing option grants and the recognition that because
of a significant decline in the market value of the Company's Common Stock,
many of the outstanding options at that time were exercisable at prices which
substantially exceeded the market value of the Company's Common Stock. The
Board of Directors determined that, due to this decline in market value, many
of these options were significantly less likely to serve their purposes of
retaining and motivating employees. In addition, the Board of Directors was
advised by management that management believed that employee morale and
productivity would benefit as a result of a repricing. In view of the decline
in market value and in keeping with the Company's philosophy of utilizing
equity incentives to motivate and retain qualified employees, the Board of
Directors felt it was important and in the best interests of the Company to
regain the incentive intended to be provided by options to purchase shares of
the Company's Common Stock.
In connection with the Repricing, holders of stock options on April 5, 1996
which had an exercise price greater than $9.375 per share (the "Existing
Options") were offered the opportunity to request that the Company issue new
options ("New Options") having an exercise price equal to $9.375, the closing
market value of a share of the Company's Common Stock on that date (the "Base
Exercise Price"). The New Options modify only the exercise price of the Existing
Options to which each relates and, in certain cases, the vesting schedules of
the Existing Options in order to standardize certain option grants made to
executive officers. Otherwise, the option agreements relating to the New Options
are substantially identical to the option agreements for the Existing Options
they replaced. The New Options were issued under and are governed by the
respective plans under which such options were originally granted.
A total of 466 option holders (constituting 99% of eligible option holders)
holding options to purchase an aggregate of 2,520,255 shares of Common Stock
under Existing Options elected to participate in the Repricing and were issued
the same aggregate number of New Options as they had held Existing Options.
The following table provides information with respect to all repricings of
options held by the individuals named in the Summary Compensation Table who
participated in such repricings and the Company's other executive offers since
May 1, 1995, the date on which the Company became a reporting company pursuant
to Section 13(a) of the Securities Exchange Act of 1934, as amended.
- 17 -
<PAGE>
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SECURITIES MARKET PRICE PRICE LENGTH OF ORIGINAL
UNDERLYING OF STOCK AT AT NEW OPTION TERM
OPTION TIME OF TIME OF EXERCISE REMAINING AT DATE
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($) OF REPRICING
- - ------------------------------------ --------- ------------ ------------- ------------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
David N. Kunkel 4/5/96 232,699 $ 9.375 $ 13.875 $ 9.375 9 Years, 77 Days
Senior Vice President, General 4/5/96 18,494 9.375 14.500 9.375 9 Years, 306 Days
Counsel and Secretary
Mitchell Levinn 4/5/96 100,000 $ 9.375 $ 13.000 $ 9.375 9 Years, 322 Days
Vice President of Network
Operations
Daniel P. Cunningham 4/5/96 100,000(1) $ 9.375 $ 13.000 $ 9.375 9 Years, 322 Days
Former Chief Financial Officer,
Chief Information Officer,
Vice President-Finance and
Treasurer
Kurt D. Baumann 4/5/96 53,334 $ 9.375 $ 13.375 $ 9.375 9 Years, 72 Days
Former Vice President of
Business Development
Bruce M. Ley 4/5/96 100,000(2) $ 9.375 $ 14.500 $ 9.375 9 Years, 306 Days
Former Vice President of
Marketing, Corporate Services
David Mann 4/5/96 20,000(3) $ 9.375 $ 14.500 $ 9.375 9 Years, 306 Days
Former Vice President of
Human Resources
Mary-Ann Carolan 4/5/96 100,000 $ 9.375 $ 13.000 $ 9.375 9 Years, 322 Days
Vice President of Customer
Administration
</TABLE>
- - ------------------------
(1) Options for the purchase of 54,167 shares subsequently were cancelled at the
time Mr. Cunningham's employment with the Company ceased.
(2) Options for the purchase of 31,000 shares subsequently were cancelled at the
time Mr. Ley's employment with the Company ceased.
(3) All of such options were cancelled at the time Mr. Mann's employment with
the Company ceased.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Beginning in 1994, the
Internal Revenue Code (the "Code") imposed limitations upon the federal income
tax deductibility of compensation paid to the Company's chief executive officer
and to each of the other four most highly compensated executive officers. Under
these limitations, the Company may deduct such compensation only to the extent
that during any fiscal year the compensation paid to any such officer does not
exceed $1,000,000 or meets certain specified conditions (such as shareholder
approval). Based on the Company's current compensation plans and policies and
proposed regulations interpreting the Code, the Company and the Compensation
Committee believe that, for the near future, there is little risk that the
Company will lose any significant tax deduction for executive compensation. The
Company's compensation plans and policies will be modified to ensure full
deductibility of executive compensation if the Company and the Compensation
Committee determine that such an action is in the best interests of the
Company.
COMPENSATION COMMITTEE
William H. Baumer, Chairman
William L. Schrader
Wade Woodson
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<PAGE>
STOCK PRICE PERFORMANCE
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based upon the market price of the
Company's Common Stock, with the cumulative total return of companies in the
Nasdaq Composite Index and two Internet industry peer groups for the period
from May 1, 1995 through December 31, 1996. Prior to May 1, 1995, the
Company's Common Stock was not publicly traded. Peer Group 1 is comprised of
UUNET Technologies, Inc. ("UUNET"), NETCOM On-Line Communications Services,
Inc. ("NETCOM") and America Online, Inc. ("AOL"). Peer Group 2 is comprised of
Bolt, Beranek and Newman Inc. ("BBN"), Digex Inc. ("Digex") and NETCOM.
The Company believes that the companies comprising Peer Group 2 are more
representative of its current competitors than are those companies comprising
Peer Group 1 (which were selected for purposes of this comparison last year) due
to the merger of UUNET into another entity during August 1996 and the exit of
the Company from the consumer services business (in which AOL is engaged) during
June 1996. Digex was not included in Peer Group 1 because it was not a public
company at the time this peer group was selected. Although the Company has
considered BBN to be a competitor, it had not previously included BBN in its
peer group because BBN is also engaged in different industry sectors and it is
not practicable to distinguish the extent to which these different sectors may
have impacted BBN's stock price. BBN has been included in Peer Group 2, however,
due to a lack of other more appropriate direct competitors of the Company.
REPRESENTATION OF STOCK PRICE PERFORMANCE GRAPH
INDEXED RETURNS
<TABLE>
<CAPTION>
Base Quarter Ending
Period ------------------------------------------------------
Company Name/Index 2May95 Jun95 Sep95 Dec95 Mar96 Jun96 Sep96 Dec96
- - ------------------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PSINET INC 100 99.61 140.98 150.00 63.52 75.41 71.31 71.31
NASDAQ INDEX 100 110.97 124.04 125.10 131.64 142.38 147.45 154.70
PEER GROUP 1 100 95.57 154.01 176.79 185.09 192.48 153.75 142.46
PEER GROUP 2 100 133.07 197.11 195.79 124.24 119.10 86.24 96.26
</TABLE>
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the members of the Compensation
Committee of the Board of Directors consisted of Messrs. Baumer, Schrader and
Woodson. Mr. Schrader is the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company. None of such persons other than Mr.
Schrader is an executive officer or employee of the Company.
Mr. Schrader has personally guaranteed the payment of all amounts
outstanding under a $750,000 master equipment lease agreement entered into by
the Company and KeyCorp Leasing Ltd. on November 17, 1992. As of December 31,
1996, $58,420 principal amount was outstanding under this facility. Mr. Schrader
did not receive any consideration from the Company for providing this guarantee.
During October 1993, the Company issued to Mr. Baumer warrants to purchase
25,000 shares of its Series B Convertible Participating Preferred Stock ("Series
B Shares") for $1.60 per share in return for Mr. Baumer's services as a director
of the Company. Mr. Baumer also was issued identical warrants to purchase an
additional 25,000 Series B Shares during October 1993 in return for consulting
services rendered to the Company by Mr. Baumer. Each of these warrants became
exercisable (subject to vesting) for the same number of shares of the Company's
Common Stock after the closing of the Company's initial public offering on May
8, 1995 and were fully vested effective September 9, 1996.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SALES OF SECURITIES TO RELATED PARTIES
The Company entered into an agreement with William H. Baumer, a director
of the Company, during October 1993, pursuant to which the Company issued
Mr. Baumer warrants to purchase 25,000 shares of the Company's Series B Shares
for $1.60 per share in return for Mr. Baumer's services as a director of the
Company. In addition, during October 1993, the Company entered into an
additional agreement with Mr. Baumer pursuant to which Mr. Baumer was issued
warrants to purchase an additional 25,000 Series B Shares in return for
consulting services rendered to the Company by Mr. Baumer. Each of these
warrants became exercisable (subject to vesting) for the same number of shares
of the Company's Common Stock after the closing of the Company's initial
public offering on May 8, 1995 and were fully vested effective September 9,
1996.
FINANCING ARRANGEMENTS WITH RELATED PARTIES
Mr. Schrader has personally guaranteed the payment of all amounts
outstanding under a $750,000 master equipment lease agreement entered into by
the Company and KeyCorp Leasing Ltd. on November 17, 1992. As of December 31,
1996, $58,420 principal amount was outstanding under this facility. Mr. Schrader
did not receive any consideration from the Company for providing this guarantee.
On April 5, 1995, the Company loaned an aggregate of $199,960 pursuant to
the option loan program to Martin L. Schoffstall, the Company's former Chief
Technical Officer, Daniel P. Cunningham, the Company's former Chief Financial
Officer, and Marvin Schoffstall (the father of Martin Schoffstall and an
employee of the Company at the time) in respect of their exercises of options to
acquire an aggregate of 195,000 shares of Common Stock. Martin L. Schoffstall,
Daniel P. Cunningham and Marvin Schoffstall received loans in the amount of
$132,460, $55,000 and $12,500, respectively. In addition, the Company loaned
Martin L. Schoffstall $100,000 to refinance the principal amount of a bank loan
incurred by him on October 14, 1993 to finance a portion of the exercise price
relating to his exercise on that date of options to acquire 320,000 shares of
Common Stock. The additional $100,000 loan was secured by a pledge of 200,000
shares of Common Stock. The outstanding balance on each of such loans was paid
in full during the year ended December 31, 1996.
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<PAGE>
In May 1996, the Company purchased 100,000 shares (the "Shares") of the
common stock of Epicenter Inc. for aggregate consideration of $100,000. Martin
Schoffstall, the Company's former Chief Technical Officer and a director of the
Company at the time, and Stephen A. Schoffstall, an executive officer of the
Company at the time, are shareholders and officers of Epicenter Inc. The Company
subsequently sold 75,000 of the Shares to Martin Schoffstall for $93,750.
PROPOSAL 2--RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed the firm of Price Waterhouse LLP, independent accountants, to audit
and report on the financial statements of the Company for the year ending
December 31, 1997. Price Waterhouse LLP has been employed by the Company as its
independent accountants since 1990.
Shareholders are asked to approve the action of the Board of Directors in
appointing Price Waterhouse LLP. It is intended that, unless marked to the
contrary, the shares represented by proxy shall be voted for the ratification
of such appointment.
It is expected that a representative of Price Waterhouse LLP will be present
at the Annual Meeting to answer questions of shareholders and will have the
opportunity, if desired, to make a statement.
SHAREHOLDER PROPOSALS
The Company's Certificate of Incorporation and By-laws require any
shareholder who wishes to bring any proposal before a meeting of shareholders or
to nominate a person to serve as a director to give written notice thereof and
certain related information to the Secretary of the Company at least 60 days
prior to the date one year from the date of the immediately preceding annual
meeting, if such proposal or nomination is to be submitted at an annual meeting,
and within ten days of the giving of notice to the shareholders, if such
proposal or nomination is to be submitted at a special meeting. The written
notice must set forth with particularity (i) the name and business address of
the shareholder submitting such proposal and all persons acting in concert with
such shareholder; (ii) the name and address of the persons identified in clause
(i), as they appear on the Company's books (if they so appear); (iii) the class
and number of shares of the Company beneficially owned by the persons identified
in clause (i); (iv) a description of the proposal containing all material
information relating thereto, including, without limitation, the reasons for
submitting such proposal; and (v) such other information as the Board of
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and shareholders of the Company to consider such proposal.
Management does not know of any matters which are likely to be brought
before the Annual Meeting other than those referred to in this Proxy Statement.
However, in the event that any other matters properly come before the Annual
Meeting, the persons named in the enclosed proxy will vote in accordance with
their judgment on such matters.
The presiding officer at the Annual Meeting may determine that any
shareholder proposal was not permissible under or was not made in accordance
with the foregoing procedures or is otherwise not in accordance with law and, if
he so determines, he may refuse to allow the shareholder proposal or nomination
to be considered at the Annual Meeting.
Under the rules of the SEC, shareholder proposals intended to be presented
at the next annual meeting (to be held in 1998) must be received by the
Secretary of the Company on or before December 1, 1997 in order to be included
in the proxy statement and proxy for that meeting. Proposals should be directed
to Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia 20170.
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<PAGE>
A copy of the Company's Annual Report to Shareholders, which includes
financial statements and related data, accompanies this Proxy Statement.
According to SEC rules, the information presented in this Proxy Statement
under the captions "Compensation Committee Report on Executive Compensation" and
"Stock Price Performance" shall not be deemed to be "soliciting material" or to
be filed with the SEC under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and nothing contained in any previous filings made by the
Company under such Acts shall be interpreted as incorporating by reference the
information presented under the specified captions.
BY ORDER OF THE BOARD OF DIRECTORS,
David N. Kunkel
Secretary
Dated: March 31, 1997
Herndon, Virginia
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