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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 1997
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 - 40,434,933 shares as of October 31, 1997
(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 24.
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PSINET INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1996 and
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1997. . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PSINET INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
ASSETS (AUDITED) (UNAUDITED)
----------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 52,695 $ 40,510
Short-term investments and marketable securities........................... 4,649 3,000
Accounts receivable, net................................................... 17,421 13,004
Notes receivable........................................................... 747 5,098
Prepaid expenses........................................................... 1,963 2,597
Other current assets....................................................... 4,836 2,408
----------- ------------
Total current assets..................................................... 82,311 66,617
----------- ------------
----------- ------------
Property and equipment, net................................................ 72,061 82,145
Goodwill and other intangibles, net........................................ 16,673 2,066
Other assets and deferred charges.......................................... 6,067 3,207
----------- ------------
Total assets............................................................... $ 177,112 $ 154,035
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................................. $ 2,000 $ 3,000
Current portion of long-term debt.......................................... 24,915 32,860
Trade accounts payable..................................................... 19,868 21,723
Accrued payroll and related expenses....................................... 3,098 3,323
Other accounts payable and accrued liabilities............................. 3,632 2,341
Deferred revenue........................................................... 5,612 5,398
----------- ------------
Total current liabilities................................................ 59,125 68,645
Long-term debt............................................................. 26,938 25,335
Deferred income taxes...................................................... 476 --
Other liabilities.......................................................... 790 1,238
----------- ------------
Total liabilities...................................................... 87,329 95,218
----------- ------------
Shareholders' equity:
Preferred stock............................................................ -- --
Common stock............................................................... 402 405
Capital in excess of par value............................................. 208,000 208,406
Retained deficit........................................................... (116,636) (147,901)
Treasury stock............................................................. (2,005) (2,005)
Cumulative foreign currency translation adjustment......................... 22 (88)
----------- ------------
Total shareholders' equity............................................... 89,783 58,817
----------- ------------
Total liabilities and shareholders' equity................................. $ 177,112 $ 154,035
----------- ------------
----------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue........................................................... $ 24,147 $ 32,001 $ 61,547 $ 87,147
Other income, net................................................. 3,017 -- 5,417 --
---------- ---------- ---------- ----------
27,164 32,001 66,964 87,147
Operating costs and expenses:
Data communications and operations.............................. 19,698 23,765 50,169 66,847
Sales and marketing............................................. 6,000 6,210 20,865 18,070
General and administrative...................................... 5,309 5,354 15,012 16,976
Depreciation and amortization................................... 8,377 6,557 21,585 20,648
---------- ---------- ---------- ----------
Total operating costs and expenses............................ 39,384 41,886 107,631 122,541
Loss from operations.............................................. (12,220) (9,885) (40,667) (35,394)
Interest expense.................................................. (1,411) (1,516) (3,654) (4,162)
Interest income................................................... 1,179 550 3,346 1,995
Other income (expense)............................................ 19 177 2,863 119
Gain on sale of subsidiary........................................ -- -- -- 5,701
Equity in loss of affiliate....................................... (100) -- (307) --
---------- ---------- ---------- ----------
Loss before income taxes.......................................... (12,533) (10,674) (38,419) (31,741)
Income tax benefit................................................ 40 -- 119 476
---------- ---------- ---------- ----------
Net loss.......................................................... $ (12,493) $ (10,674) $ (38,300) $ (31,265)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Loss per share.................................................... $ (0.31) $ (0.26) $ (0.98) $ (0.78)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing loss per share........................... 39,888 40,407 39,143 40,264
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net cash used in operating activities..................................................... $ (28,391) $ (13,009)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net................................................ (508) (9,120)
Purchase of short-term investments and marketable securities............................ (14,621) (3,000)
Net proceeds from sale of subsidiary.................................................... -- 20,353
Proceeds from sale of investments....................................................... 3,219 4,649
Other, net.............................................................................. (610) 148
---------- ----------
Net cash (used in) provided by investing activities................................... (12,520) 13,030
---------- ----------
Cash flows from financing activities:
Net (payments) proceeds on line of credit............................................... (1,012) 1,000
Proceeds from issuance of notes payable................................................. 6,848 5,988
Repayments of notes payable............................................................. (3,368) (5,290)
Principal payments under capital lease obligations...................................... (20,172) (14,313)
Other, net.............................................................................. 1,605 409
---------- ----------
Net cash used in financing activities................................................. (16,099) (12,206)
---------- ----------
Net decrease in cash and cash equivalents................................................. (57,010) (12,185)
Cash and cash equivalents, beginning of year.............................................. 102,710 52,695
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 45,700 $ 40,510
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note l - Basis of Presentation
These consolidated financial statements for the three and nine months
ended September 30, 1997 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, 1996
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, 1996 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, 1997 and June 30,
1997 included in the Company's Form 10-Q for the quarters then ended, as
filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial position of
the Company at September 30, 1997 and the results of operations and cash
flows for the three and nine month periods ended September 30, 1996 and 1997.
The results of operations for the three and nine month periods ended
September 30, 1997 may not be indicative of the results expected for any
succeeding quarter or for the entire year ending December 31, 1997.
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
Loss per share is computed using the weighted average number of shares
of common stock that were outstanding during the periods presented,
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.
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share" (EPS), which is effective for the Company's December 31, 1997
financial statements, requires disclosure of Basic EPS and Diluted EPS.
Basic EPS excludes the dilutive effect of common stock equivalents.
Diluted EPS reflects the potential dilution that could occur if common
stock equivalents or other contracts to issue common stock were exercised
or converted into common stock. The Company anticipates that the adoption
of SFAS No. 128 will not have a material effect on the Company's loss per
share data.
Note 3 - Short-Term Investments and Marketable Securities
At September 30, 1997, short-term investments and marketable securities
consisted of debt securities classified as held-to-maturity with original
maturities of greater than 90 days.
Other income for the nine months ended September 30, 1996 consisted of
$2.8 million of realized gains on equity securities sold by the Company.
6
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-Term Debt
During the nine months ended September 30, 1997, the Company incurred
capital lease obligations of $20.0 million upon the execution of leases for
new data communications equipment and other fixed assets. At September 30,
1997, the aggregate unused portion under the Company's various financing
arrangements for purchases of data communications equipment and other fixed
assets was $26.4 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 the aggregate principal amount of certain term
credit advances (approximately $4.4 million at September 30, 1997). There
was $3.0 million advanced under this credit agreement at September 30,
1997. Interest is payable monthly at an annual rate of prime plus 1.5%
(10% at September 30, 1997).
Note 5 - Sale of Subsidiary
Effective as of February 1, 1997, the Company sold all of the issued and
outstanding capital stock of its wholly-owned subsidiary, InterCon Systems
Corporation ("InterCon"), to Ascend Communications, Inc. The Company
recognized a gain of $5.7 million in connection with the sale of InterCon.
Note 6 - Agreements with Chatterjee Management Company
On September 19, 1996, the Company entered into a Joint Venture Agreement
(the "Joint Venture 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 for the purpose
of building an Internet network across Europe and providing Internet-related
services in Europe and such investment group would invest up to $41.0 million
in the joint venture. No monies were invested by Chatterjee or the
Chatterjee Investment Group pursuant to the Joint Venture Agreement nor were
any other actions undertaken to implement it. The Company nevertheless has
continued to proceed on its own to provide Internet-related services in the
European market. While the parties sought, for a period of time, to
negotiate a direct investment in the Company by Chatterjee, those
negotiations were not successful. As a result, the Company believes that it
is likely that Chatterjee may seek to commence arbitration or other
adversarial proceedings against the Company under the Joint Venture Agreement
and related documents (seeking, among other things, to enforce the Joint
Venture Agreement) or otherwise. In any such event, the Company would
vigorously defend such action.
Note 7 - Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. The Statement establishes standards for reporting and
displaying comprehensive income, as defined, and its components. The
Company plans to adopt the Statement's disclosure requirements in 1998.
7
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Recently Issued Accounting Pronouncements (continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997. The Statement establishes
standards for the way companies report information about operating segments
in annual and interim financial statements. Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company plans to adopt the Statement's
disclosure requirements in 1998.
Note 8 - Agreements with IXC Internet Services, Inc.
On July 22, 1997, the Company entered into an IRU and Stock Purchase
Agreement, as amended on October 1, 1997, with IXC Internet Services, Inc.
("IXC"), an indirect subsidiary of IXC Communications, Inc., to acquire a
20-year noncancellable indefeasible right of use ("IRU") in up to 10,000
equivalent route miles of fiber-based OC-48 network bandwidth across the
IXC fiber optic telecommunication network within the United States in
exchange for an approximately 20 percent (post-issuance) common stock
interest in the Company. The Company also signed a long-term joint
marketing and services agreement with IXC. Under the marketing and services
agreement, the Company will be selling its Internet access and value-added
services through IXC. The non-exclusive marketing and services agreement
provides for IXC and its resellers to be able to offer all of the Company's
Internet services with long distance and other telephone services to IXC
customers throughout the United States.
In connection with this transaction, IXC will receive common stock at
closing equal to approximately 20 percent of the issued and outstanding
shares of the Company, after giving effect to the IXC issuance (the
"Initial Shares"). In addition, if the fair market value of the Initial
Shares is less than $240.0 million at the earlier of one year following
delivery and acceptance of the total bandwidth or the fourth anniversary of
the closing of the transaction, the Company has agreed to provide IXC with
additional stock and/or cash, at the Company's sole option, in an amount
equal to the difference between $240.0 million and the then fair market
value of such shares (the "Contingent Payment Obligation"). The Company
has the right to accelerate its Contingent Payment Obligation to deliver
additional stock and/or cash to IXC at any date after the closing of this
transaction. In addition, the right of IXC to receive the Contingent
Payment Obligation will terminate on such date as the Initial Shares value,
as defined, is equal to or greater than $240.0 million. The agreement
permits PSINet to use the OC-48 bandwidth for any purpose in connection
with the provision of Internet services and for non-Internet
telecommunications transport at a rate of DS-3 or less, but restricts
PSINet and its customers from using the OC-48 bandwidth to deliver private
line or long distance telephone services (based on non-Internet telephone
switching technologies) to any third party. The agreement contemplates that
the total amount of OC-48 bandwidth will be delivered to the Company in
specified minimum increments every six months during the two year period
following the closing of this transaction. In addition, after the closing
of this transaction, the Company expects to incur on an annual basis
approximately $1.15 million in operation and maintenance fees with respect
to the IRU to be acquired from IXC per each 1,000 route miles of OC-48
bandwidth accepted under the purchase agreement with IXC. The transaction
with IXC is expected to close prior to March 31, 1998, subject to approval
by the Company's shareholders and other closing conditions. In addition,
the Company's Board of Directors has approved certain modifications to the
Company's Preferred Stock Purchase Rights Plan in connection with this
transaction.
8
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Nonmonetary Exchange Transaction
The Company exchanges capacity on its network for capacity on the
network of another Internet service provider.
The Company records such exchange agreement at the fair value of either
the services provided or received, whichever is more readily determinable.
For the nine months ended September 30, 1997, the Company recognized $1.2
million of revenue and data communications and operations expense relating
to such an exchange.
Note 10 - Wholesale Financing Arrangements
The Company is obligated, under the terms of one of its wholesale
network services agreements, to provide the wholesale customer with a
rental facility of up to $5.0 million for telecommunications equipment
owned or leased by the Company and deployed in the customer's network. As
of September 30, 1997, the Company had provided $1.4 million of equipment
to the wholesale customer under three year operating leases. Additionally,
under the terms of the agreement, the customer may defer payments until
July 31, 1998 on payables of up to $5.0 million for wholesale network
services provided by the Company until July 31, 1998. At September 30,
1997, $3.2 million under this agreement is reflected as current notes
receivable.
Note 11 - Subsequent Events
Private Placement
On November 10, 1997, the Company completed a private placement of
600,000 shares of its Series B 8% Convertible Preferred Stock ("Series B
Preferred Stock") for proceeds of $30.0 million, before expenses. Each
share of Series B Preferred Stock has a par value of $.01 per share and a
stated value of $50.00 per share. The Series B Preferred Stock will accrue
dividends at an annual rate of 8%, payable quarterly, in cash or the
Company's Series B Preferred Stock, at the Company's option.
The Series B Preferred Stock is convertible into the Company's common
stock at $10 per share during the first year. In certain circumstances, the
conversion price may be reset at the end of each year based on the Company's
stock price. The Company also has the right to call the Series B Preferred
Stock for redemption under certain circumstances and commencing on the third
anniversary of original issuance. The Company is subject to certain
restrictions on the redemption, purchase or acquisition of, and the payment
of dividends on, common stock while the Series B Preferred Stock is
outstanding. The holders were granted certain registration rights in
connection with the transaction.
Proceeds of the issuance are invested in short-term, investment grade,
interest bearing securities. The proceeds will be used for general
corporate purposes and acquisition support.
9
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PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Subsequent Events (continued)
iSTAR internet inc. Acquisition
On November 10, 1997, the Company announced the execution of a
definitive agreement for the acquisition of all of the outstanding common
stock of iSTAR internet inc. ("iSTAR"), a Canadian Internet solutions
company providing advanced Internet services for businesses, institutions
and individuals for US$0.86 (C$1.206) per share or approximately US$25.0
million payable in shares of a new series of the Company's preferred stock.
The transaction is expected to be completed within 60 to 90 days and is
subject to certain closing conditions including government, regulatory, and
third party approvals.
Under the terms of the agreement, iSTAR shareholders will receive
non-voting, 8% cumulative convertible preferred stock of the Company. Up
to one-third of the convertible preferred stock of each holder will be
convertible on or after each of April 1, 1998, July 1, 1998 and January 1,
1999, at the ten-day weighted average price of the Company's common stock
prevailing at the time of conversion, subject to certain limitations. Any
remaining convertible preferred stock outstanding at the end of three
years, if not converted, will be subject to optional redemption by the
Company. The Company also has the right to call the convertible preferred
stock for redemption at any time following six months from the date of
issuance. Prior to the closing of the transaction, the Company is
obligated to provide iSTAR approximately US$3.6 million in short-term
financing.
10
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying unaudited consolidated financial statements and associated
notes thereto and the audited consolidated financial statements, the notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company as of December 31, 1996 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, 1997 and June 30, 1997 included in the Company's 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
PSINet is a leading provider of turn-key corporate Internet and intranet
access, managed security services, electronic commerce solutions, Web
hosting services and Wholesale Network Services throughout the United
States and internationally. PSINet manages a fast-packet network that
provides high speed Internet access ranging from dedicated high-speed
circuits to ISDN to high-speed modem dial-up. Pursuant to wholesale
network services agreements with other Internet service providers ("ISPs"),
the Company also provides Internet connection services which allow the
subscribers of the ISPs to connect to the Internet through PSINet's network
local access points called Points-of-Presence or "POPs" for specified fees
payable by the ISPs. At September 30, 1997, the Company served
approximately 23,000 corporate customers and 41 ISPs through more than 350
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 in advance of anticipated customer growth
and resulting revenue. The Company also has increased its sales and
marketing, customer support, network operations and field services
commitments in anticipation of the expansion of its customer base. These
expansion efforts have caused the Company to experience fluctuations in
expenses from time to time, both in absolute terms and as a percentage of
revenue. The nature and amount of these expenses may continue to fluctuate
over time as the Company shifts its focus from expanding its network to
refining and enhancing its existing network.
Strategic Alliance with IXC Internet Services, Inc.
On July 22, 1997, the Company entered into an IRU and Stock Purchase
Agreement, as amended on October 1, 1997 (the "IRU Agreement"), with IXC
Internet Services, Inc. ("IXC"), an indirect subsidiary of IXC
Communications, Inc., to acquire a 20-year noncancellable indefeasible
right of use ("IRU") in up to 10,000 equivalent route miles of fiber-based
OC-48 network bandwidth across the IXC fiber optic telecommunication
network within the United States in exchange for an approximately 20
percent (post-issuance) common stock interest in the Company. The Company
also signed a long-term marketing agreement with IXC. Under the marketing
agreement, the Company will be selling its Internet access and value-added
services through IXC. The non-exclusive marketing agreement provides for
IXC and its resellers to be able to offer all of the Company's Internet
services with long distance and other telephone services to IXC customers
throughout the United States.
11
<PAGE>
In connection with this transaction, IXC will receive common stock at
closing equal to approximately 20 percent of the issued and outstanding
shares of the Company, after giving effect to the IXC issuance (the
"Initial Shares"). In addition, if the fair market value of the Initial
Shares is less than $240.0 million at the earlier of one year following
delivery and acceptance of the total bandwidth or the fourth anniversary of
the closing of the transaction, the Company has agreed to provide IXC with
additional stock and/or cash, at the Company's sole option, in an amount
equal to the difference between $240.0 million and the then fair market
value of such shares (the "Contingent Payment Obligation"). The Company
has the right to accelerate its Contingent Payment Obligation to deliver
additional stock and/or cash to IXC at any date after the closing of this
transaction. In addition, the right of IXC to receive the Contingent
Payment Obligation will terminate on such date the Initial Shares value, as
defined, is equal to or greater than $240.0 million. The agreement permits
PSINet to use the OC-48 bandwidth for any purpose in connection with the
provision of Internet services and for non-Internet telecommunications
transport at a rate of DS-3 or less, but restricts PSINet and its customers
from using the OC-48 bandwidth to deliver private line or long distance
telephone services (based on non-Internet telephone switching technologies)
to any third party. The agreement contemplates that the total amount of
OC-48 bandwidth will be delivered to the Company in specified minimum
increments every six months during the two year period following the
closing of this transaction. In addition, after the closing of this
transaction, the Company expects to incur on an annual basis approximately
$1.15 million in operation and maintenance fees with respect to the IRUs to
be acquired from IXC per each 1,000 route miles of OC-48 bandwidth accepted
under the IRU Agreement. The transaction is expected to close prior to
March 31, 1998, subject to approval by the Company's shareholders and other
closing conditions. In addition, the Company's Board of Directors has
approved certain modifications to the Company's Preferred Stock Purchase
Rights Plan in connection with this transaction.
Issuance of Preferred Stock
On November 10, 1997, the Company completed a private placement of
600,000 shares of its Series B 8% Convertible Preferred Stock ("Series B
Preferred Stock") for proceeds of $30.0 million, before expenses. Each
share of Series B Preferred Stock has a par value of $.01 per share and a
stated value of $50.00 per share. The Series B Preferred Stock will accrue
dividends at an annual rate of 8%, payable quarterly, in cash or the
Company's Series B Preferred Stock, at the Company's option.
The Series B Preferred Stock is convertible into the Company's common
stock at $10 per share during the first year. In certain circumstances, the
conversion price may be reset at the end of each year based on the Company's
stock price. The Company also has the right to call the Series B Preferred
Stock for redemption under certain circumstances and commencing on the third
anniversary of original issuance. The Company is subject to certain
restrictions on the redemption, purchase or acquisition of, and the payment
of dividends on, common stock while the Series B Preferred Stock is
outstanding. The holders were granted certain registration rights in
connection with the transaction.
Sale of Software Operations
To further refine the Company's focus on corporate Internet services, in
February 1997, the Company sold its software subsidiary, InterCon Systems
Corporation ("InterCon"), to Ascend Communications, Inc. ("Ascend") for
cash consideration of $12.0 million. The Company also was paid $8.5
million in cash by Ascend as repayment of intercompany debt owed by
InterCon to the Company. Revenue and expenses of InterCon included in the
Company's consolidated statements of operations were $1.1 million and $3.6
million, respectively, for the three months ended September 30, 1996, while
there were no results of operations related to InterCon for the three
months ended September 30, 1997. For the nine months ended September 30,
1996, revenue and expenses relating to InterCon were $4.2 million and $8.7
12
<PAGE>
million, respectively, and $0.3 million and $1.1 million, respectively, for
the nine months ended September 30, 1997.
International Operations
The Company's revenue from international operations increased from $1.9
million (7.9% of consolidated revenue) for the three months ended September
30, 1996 to $5.1 million (16.0% of consolidated revenue) for the three
months ended September 30, 1997. Revenue increased from $4.5 million (7.3%
of consolidated revenue) for the nine months ended September 30, 1996 to
$11.6 million (13.4% of consolidated revenue) for the nine months ended
September 30, 1997.
As part of the Company's continuing strategy to offer Internet-based
business communication solutions globally, on October 30, 1997, the Company
acquired CalvaCom SA, an Internet service provider in France for
approximately $3.1 million in cash. Additionally, on November 10, 1997, the
Company announced the execution of a definitive agreement for the acquisition
of all of the outstanding common stock of iSTAR internet inc. ("iSTAR"), a
Canadian Internet solutions company providing advanced Internet services for
businesses, institutions and individuals for US$0.86 (C$1.206) per share or
approximately US$25.0 million payable in shares of a new series of the
Company's convertible preferred stock. The transaction is expected to be
completed within 60 to 90 days and is subject to certain closing conditions
including shareholder, government, regulatory, and third party approvals.
These acquisitions will be accounted for as purchase business combinations,
and accordingly, the purchase price will be allocated to net tangible assets
acquired with the excess allocated to intangible assets which will be
amortized over the estimated economic life of the intangible assets from the
date of acquisition.
Three and Nine Months Ended September 30, 1997 as Compared to the Three and
Nine Months Ended September 30, 1996
Results of Operations
Revenue. Revenue is derived from the sale of Internet access and related
services to businesses. Revenue increased by 32.5% from $24.1 million for the
three months ended September 30, 1996 to $32.0 million for the three months
ended September 30, 1997. Revenue increased by 41.6% from $61.5 million for
the nine months ended September 30, 1996 to $87.1 million for the nine months
ended September 30, 1997. The increase in revenue over the comparable three
and nine month periods in 1996 resulted principally from greater sales of
Internet services to businesses and new revenue generated from wholesale
network services not provided until late 1996, offset by a decrease in
consumer-oriented revenue and software revenue. The Company believes the
greater revenue was attributable to a number of factors including an increase
in the number of customers facilitated by an increase in the Company's
network capability; an expansion of the Company's sales force; greater public
awareness and acceptance of the Internet and increased international revenue.
The Company's corporate customer base increased by 52.3% from approximately
15,100 corporate customers at September 30, 1996 to approximately 23,000
corporate customers and 41 ISPs at September 30, 1997. At September 30,
1997, the Company served these customers through more than 350 POPs.
Other Income, Net. Other income, net, consists of the consideration
received, net of related asset costs and transfer expenses relating to the
transfer of substantially all of the Company's individual consumer
subscribers and certain related tangible and intangible assets during the
second and third quarters of 1996. Other income, net was $3.0 million and
$5.4 million for the three and nine months ended September 30, 1996,
respectively.
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Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance circuit costs, local
loop costs and expenses associated with network operations, customer
support and field service. Data communications and operations expenses have
increased, (although decreased as a percentage of revenue) from $19.7
million (81.6% of revenue) to $23.8 million (74.3% of revenue) for the
three months ended September 30, 1996 and 1997, respectively. Data
communications and operations expenses for the nine months ended September
30, 1996 and 1997, respectively have also increased (although decreased as
a percentage of revenue) from $50.2 million (81.5% of revenue) to $66.8
million (76.7% of revenue). The $4.1 million increase for the three months
ended September 30, 1997 and the $16.6 million increase for the nine months
ended September 30, 1997 in data communications and operations expenses as
compared to the same periods in 1996 related principally to increases in
(i) costs associated with providing dedicated circuits to the Company's
InterFrame and InterMan customers and (ii) circuit costs relating to the
Company's network infrastructure enhancements. Circuit costs relating to
the Company's new and expanded POPs generally are incurred by the Company
in advance of anticipated growth in the Company's customer base. Although
the Company expects that data communications and operations expenses will
continue to increase as the Company's customer base continues to grow, it
anticipates that such expenses will continue to decrease as a percentage of
revenue. In addition, the Company anticipates that costs for data
communications and operations per equivalent route mile will decrease upon
completion of the transaction with IXC, as the Company accepts delivery of
bandwidth from IXC and, in connection therewith, terminates leased circuit
arrangements with IXC as well as other telecommunications carriers.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, advertising costs, distribution costs
and related occupancy costs. Sales and marketing expenses remained fairly
constant, increasing from $6.0 million (24.9% of revenue) for the three
months ended September 30, 1996 to $6.2 million (19.4% of revenue) for the
three months ended September 30, 1997. Sales and marketing expenses
decreased from $20.9 million (33.9% of revenue) for the nine months ended
September 30, 1996 to $18.1 million (20.7% of revenue) for the nine months
ended September 30, 1997. The $2.8 million decrease for the nine months
ended September 30, 1997, as compared to the same period in 1996, resulted
principally from an aggregate reduction in sales and marketing expenses of
$6.5 million associated with the a change in the Company's wholesale
network services strategy and the sale of InterCon. These decreased
expenses were offset, in part, by an increase of $3.2 million in sales and
marketing expenses relating to the expansion of the Company's operations in
Canada, Japan and Europe. All advertising and marketing costs are expensed
in the period incurred. The Company expects that, as a result of continued
emphasis on its wholesale network services strategy and its continued
efforts to focus on increasing its corporate customer base, its sales and
marketing expenses will continue to grow in amount but continue to decrease
as a percentage of revenue over the long-term.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were approximately $5.3 million (22.0% of
revenue) for the three months ended September 30, 1996 and $5.4 million
(16.7% of revenue) for the three months ended September 30, 1997. General and
administrative expenses were $15.0 million (24.4% of revenue) for the nine
months ended September 30, 1996 and $17.0 million (19.5% of revenue) for the
nine months ended September 30, 1997. Although the Company experienced
decreased expenses relating to the change in the Company's wholesale network
services strategy in the second and third quarters of 1996 (a decrease of
$0.6 million and $1.6 million for the respective three and nine month
periods) and the sale of InterCon in February 1997 (a decrease of $0.7
million and $1.7 million for the respective three and nine month periods),
overall general and administrative expenses increased due to increases in the
provision for doubtful accounts receivable of $0.4 million and $3.8 million
for the respective three and nine month periods. This increase resulted from
the identification of certain inactive and/or terminated accounts as well as
an on-going analysis of the Company's accounts receivable
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portfolio. The Company may from time to time adjust its general and
administrative function in response to current business developments.
The Company expects to have approximately $3.0 million to $5.0 million in
additional fourth quarter expenditures to support initiatives related to
customer support, marketing, systems and dial-up connectivity, which will
impact general and administrative expenses as well as other components of
operating costs and expenses.
Depreciation and Amortization. Depreciation and amortization costs were
$8.4 million (34.7% of revenue) for the three months ended September 30, 1996
and $6.6 million (20.5% of revenue) for the three months ended September 30,
1997. Depreciation and amortization costs were $21.6 million (35.1% of
revenue) for the nine months ended September 30, 1996 and $20.6 million
(23.7% of revenue) for the nine months ended September 30, 1997. Based upon
its present business plan for its existing operations, the net effect of the
decreases in depreciation and amortization due to the transfer of certain
tangible and intangible assets in connection with the implementation of the
Company's wholesale network services strategy in the second and third
quarters of 1996 and the sale of its software operations in the first quarter
of 1997 and increases due to anticipated capital expenditures associated with
network infrastructure enhancements, the Company anticipates no material
changes in the level of depreciation and amortization when compared to 1996.
However, the Company anticipates that, upon consummation of the transactions
contemplated with IXC, as the Company accepts delivery of bandwidth from IXC,
and the consummation of the recent acquisitions, the Company's depreciation
and amortization expenses will increase significantly.
Interest Expense. Interest expense between periods remained fairly
constant, increasing from $1.4 million for the three months ended September
30, 1996 to $1.5 million for the three months ended September 30, 1997.
Interest expense increased from $3.7 million for the nine months ended
September 30, 1996 to $4.2 million for the nine months ended September 30,
1997. The $0.5 million increase in interest expense for the nine months ended
September 30, 1997 over the comparable period in 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. As the
Company continues its international expansion of its network and positions
itself to take advantage of the IXC transaction, the Company expects to incur
increased borrowings and capital lease obligations in the near term which
will further impact the amount of the Company's interest expense.
Interest Income. Interest income decreased from $1.2 million for the
three months ended September 30, 1996 to $0.6 million for the three months
ended September 30, 1997. Interest income decreased from $3.3 million for the
nine months ended September 30, 1996 to $2.0 million for the nine months
ended September 30, 1997. The $0.6 million decrease for the three months
ended September 30, 1997 and the $1.3 million decrease for the nine months
ended September 30, 1997 in interest income as compared to the comparable
period in 1996 was principally due to a decrease in the amount of proceeds
remaining from the Company's public offerings in 1995. All remaining proceeds
are currently invested in short-term, investment grade, interest bearing
securities.
Other income. Other income of $2.9 million for the nine months ended
September 30, 1996 relates to the recognition of realized gains on equity
securities that were sold by the Company.
Gain on sale of subsidiary. The gain on the sale of subsidiary of $5.7
million relates to the sale in the first quarter of 1997 of the Company's
software subsidiary, InterCon.
Net loss and loss per share. As a result of the factors discussed above,
the Company's net loss was $12.5 million, or $0.31 per share, for the three
months ended September 30, 1996, compared with a net loss of $10.7 million,
or $0.26 per share, for the three months ended September 30, 1997. The
Company's
15
<PAGE>
net loss was $38.3 million, or $0.98 per share, for the nine months ended
September 30, 1996, compared with a net loss of $31.3 million, or $0.78 per
share, for the nine months ended September 30, 1997. Dividends payable
with respect to Series B Preferred Stock and other new series of preferred
stock that may be issued in connection with the iSTAR acquisition will
impact the loss per share computation.
In its Annual Report on Form 10-K for the fiscal year ended December 31,
1996, the Company reported that it would achieve positive earnings before
interest, taxes, depreciation and amortization ("EBITDA") sometime during
the second quarter of 1997 and would be profitable by the first quarter of
1998 or prior thereto. The Company has achieved breakeven EBITDA in
certain months of the second and third quarters of 1997, but as a result of
several factors that arose subsequent to the date of the Company's filing
of its Form 10-K for fiscal 1996, the Company was unable to meet certain of
its prior objectives. Principal among these factors adversely affecting
the Company's operating performance were delivery delays for Primary Rate
Interface ("PRI") telecommunications facilities required to meet customer
demand, accelerated investment by the Company in its overseas operations in
order to respond to rapidly developing markets, and lower than expected
growth during the third quarter in the demand for its domestic Internet
services.
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 $28.4 million and $13.0
million for the nine months ended September 30, 1996 and 1997,
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, 1996 was $12.5 million and cash flow provided by investing
activities for the nine months ended September 30, 1997 was $13.0 million.
The expansion of the Company's network resulted in capital expenditures of
$30.9 million and $29.1 million for the nine months ended September 30,
1996 and 1997, respectively (which included capital expenditures financed
under equipment financing agreements aggregating $30.4 million and $20.0
million for the respective periods). Additionally, for the nine months
ended September 30, 1996, the Company invested $14.6 million in equity and
debt securities with original maturities of greater than 90 days and
received $3.2 million from the sale of certain equity investments held by
the Company. In February 1997, the Company sold its software subsidiary,
InterCon, for cash consideration of $12.0 million. The Company also was
paid $8.5 million as repayment of intercompany debt owed by InterCon to the
Company.
Cash flow used in financing activities was $16.1 million and $12.2
million for the nine months ended September 30, 1996 and 1997,
respectively. During these periods the Company made repayments aggregating
$23.5 million and $19.6 million, respectively, on its financing facilities
and received proceeds from the issuance of notes payable of $6.8 million
and $6.0 million, respectively.
As of September 30, 1997, the Company had $40.5 million of cash and cash
equivalents and $3.0 million of short-term investments and marketable
securities. The Company also had $26.4 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, 1997 a
maximum availability of $4.4 million), under which $3.0 million was
outstanding.
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The Company's financing arrangements, which are secured by substantially
all of the Company's assets, require the Company to satisfy certain financial
covenants such as those relating to liquidity, tangible net worth, EBITDA,
leverage and debt service and prohibit the payment of dividends and the
repurchase of capital stock of the Company without, in each case, the
lender's consent. Additionally, on November 10, 1997, the Company completed a
private placement of 600,000 shares of its Series B Convertible Preferred
Stock for proceeds of $30.0 million, before expenses.
As of September 30, 1997, the Company had commitments to certain
telecommunications vendors totaling $29.1 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, 1997, the Company was
obligated to make future minimum lease payments of $13.1 million on
non-cancellable operating leases expiring in various years through 2005.
In order to take full advantage of the IRUs being acquired from IXC, in
addition to other planned capital expenditures, the Company expects to
incur capital expenditures through the end of the year 2000 of up to
approximately $95.0 million. In addition, after the closing of the IXC
transactions, the Company expects to incur on an annual basis approximately
$1.15 million in operation and maintenance fees with respect to the IRUs
per each 1,000 route miles of OC-48 bandwidth accepted under the Purchase
Agreement with IXC. Other planned capital expenditures expected to be
incurred by the Company over the next four years include up to $35.0
million in connection with the Company's anticipated buildout of its
pan-European Internet network.
The Company is also obligated, under the terms of one of its Wholesale
Network Services Agreements, to provide the wholesale customer with a
rental facility of up to $5.0 million for telecommunications equipment
($1.4 million drawn at September 30, 1997) for deployment in the customer's
network. In addition, the Company may be obligated in accordance with the
Contingent Payment Obligation under the Purchase Agreement with IXC to
provide IXC with additional stock and/or cash, at the Company's option, in
an amount equal to the difference between $240.0 million and the then fair
market value of such shares on the earlier of one year following delivery
and acceptance of the total bandwidth to be acquired from IXC or the fourth
anniversary of the closing of the transaction. The Company has the right
to accelerate its Contingent Payment Obligation to deliver additional stock
and/or cash to IXC at any date after the closing of the transaction.
The Company presently believes it will have a reasonable degree of
flexibility to adjust the amount and timing of such capital expenditures in
response to the Company's then existing financing capabilities, market
conditions, competition and other factors. Accordingly, the Company
believes that working capital generated from the use of bandwidth
corresponding to the IRUs to be acquired from IXC, together with other
working capital from operations, from existing credit facilities, from
capital lease financings, and from proceeds of future equity or debt
financings (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 operations. There can be no
assurance, however, that the Company will have access to sufficient
additional capital and/or financing on satisfactory terms to enable it to
meet its capital expenditure and working capital requirements. In the
event the Contingent Obligation to IXC becomes payable, it may be satisfied
by the Company, at the Company's sole option, by the delivery of additional
shares of Common Stock or cash or a combination thereof, and the Company
presently believes that, in such circumstances, it would have sufficient
flexibility to satisfy the Contingent Obligation. There can be no
assurance, however, that satisfaction of the Contingent Obligation will not
have a material adverse effect on the Company and its shareholders.
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<PAGE>
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," (EPS) which is effective for the Company's December 31, 1997
financial statements. The Company anticipates that the adoption of SFAS
No. 128 will not have a material effect on the Company's reported loss per
share data.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997. The Statement establishes standards for reporting and displaying
comprehensive income, as defined, and its components. The Company plans to
adopt the Statement's disclosure requirements in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997. The Statement establishes
standards for the way companies report information about operating segments
in annual and interim financial statements. Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company plans to adopt the Statement's
disclosure requirements in 1998.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On November 10, 1997, the Company completed a private placement of
600,000 shares of its Series B Convertible Preferred Stock ("Series B
Preferred Stock") for proceeds of $30.0 million, before expenses. Each share
of Series B Preferred Stock has a par value of $.01 per share and a stated
value of $50.00 per share. The Series B Preferred Stock will accrue dividends
at an annual rate of 8%, payable quarterly, in cash or the Company's Series B
Preferred Stock, at the Company's option.
The conversion price for each share of Series B Preferred Stock is equal
to 125% of the five day average market price of the Company's common stock as
of the original issue date. The initial conversion price for each share of
Series B Preferred Stock is $10. The conversion price will reset each year
on the anniversary date of the original issuance to the lower of i) the
existing conversion price, or ii) the 30 day average market price of the
Company's common stock on the anniversary date. On the third anniversary date
of the original issuance, the conversion price will be reset to 95% of the 30
day average market price of the Company's common stock on the third
anniversary date if the 30 day average market price is lower than the then
existing conversion price. In no event may the Company issue more than
8,086,580 shares of common stock upon conversion of Series B Preferred Stock
and in no event may the Company issue more than an aggregate of 11.9776
shares of common stock upon conversion of each share of Series B Preferred
Stock. The holders were granted demand and piggyback registration rights as
part of the transaction. The Company has the right to call the Series B
Preferred Stock for redemption at the end of three years and under certain
other circumstances.
Reference is made to the Certificate of Amendment to the Company's
Certificate of Incorporation which sets forth the designations, rights,
preferences, privileges, limitations and restrictions of the Series B
Preferred Stock for a more complete description of the Series B Preferred
Stock, a copy of which is filed herewith as Exhibits 3.1 and 4.1 and
incorporated herein by reference.
(b) The Certificate of Incorporation pursuant to which the Series B
Preferred Stock was issued provides that so long as any Series B Preferred
Stock shall remain outstanding, except for any payment which may be made in
connection with the IXC transaction, neither the Company nor any subsidiary
shall (i) redeem, purchase or otherwise acquire directly or indirectly any
common stock or other junior securities, (ii) directly or indirectly pay or
declare any dividend or make any distribution (other than certain dividends
or distributions or a dividend or distribution on securities issuable
pursuant to any rights pursuant to the Rights Agreement dated as of May 8,
1996 between the Company and First Chicago Trust Company of New York, as the
same may be amended from time to time (the "Rights Agreement")) upon, nor
shall any distribution (other than certain dividends or distributions or a
distribution on securities issuable pursuant to any rights pursuant to the
Rights Agreement) be made in respect of, any common stock or other junior
securities, or (iii) set aside any funds for or apply any funds to the
purchase, redemption or acquisition (through a sinking fund or otherwise) of
any common stock or other junior securities (other than pursuant to the
Rights Agreement). Notwithstanding the foregoing, during such period, the
Company may redeem, purchase or otherwise acquire and set aside funds for and
apply funds to the purchase, redemption or acquisition of common stock or
other junior securities (a) for up to an aggregate amount not to exceed, at
any point in time the sum of: (i) $10 million plus (ii) an amount equal to
100% of the aggregate net cash proceeds received by the Company after the
date hereof from the issuance of common stock or other junior securities or
debt securities that have been converted into common stock or other junior
securities plus (iii) an amount equal to 50% of the Company's cumulative
consolidated positive earnings before interest, taxes, depreciation and
amortization as
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reported by the Company in respect of each fiscal quarter of the Company
commencing with the fiscal quarter ending December 31, 1997 or (b) pursuant
to the right of first offer granted pursuant to the IRU Agreement, provided
that immediately after giving effect to any such redemption, purchase, other
acquisition or setting aside of funds for application to the purchase,
redemption or other acquisition pursuant to such right of first offer, the
Company's consolidated shareholders' equity shall not be less than $20
million.
In addition, the Certificate of Amendment provides that, except as
otherwise provided in the Certificate of Amendment and as otherwise required
by law, the Series B Preferred Stock shall have no voting rights. However, so
long as any shares of Series B Preferred Stock are outstanding, the Company
will not, without the requisite approval of the holders of the Series B
Preferred Stock then outstanding, (a) take any of the actions described in
Section 7 of Article Fourth of the Certificate of Amendment, or (b) enter
into any agreement or arrangement with respect to any other action which
requires the approval of the holders of the Series B Preferred Stock then
outstanding, unless conditioned upon receipt of the requisite approval of the
holders of the Series B Preferred Stock. Section 7 of Article Fourth of the
Certificate of Amendment provides that, so long as shares of Series B
Preferred Stock are outstanding, except as otherwise provided in the
Certificate of Amendment or by applicable law, the Company shall not, without
first obtaining the approval of the holders of at least two-thirds of the
then outstanding shares of Series B Preferred Stock: (a) alter or change the
rights, preferences or privileges of the Series B Preferred Stock so as to
affect adversely the Series B Preferred Stock as a class, provided, however,
that neither the designation, creation or issuance of junior stock or parity
stock nor the IXC transaction shall be deemed to affect adversely the Series
B Preferred Stock as a class; (b) create any new class or series of capital
stock having a preference over the Series B Preferred Stock as to redemption,
the payment of dividends or distribution of assets upon a liquidation event
or any other liquidation, dissolution or winding up of the Company; (c)
increase the authorized number of shares of Series B Preferred Stock; or (d)
issue any additional shares of Series B Preferred Stock other than in payment
of dividends thereon.
Reference is made to the Certificate of Amendment to the Company's
Certificate of Incorporation which sets forth the designations, rights,
preferences, privileges, limitations and restrictions of the Series B
Preferred Stock for a more complete description of the Series B Preferred
Stock, a copy of which is filed herewith as Exhibits 3.1 and 4.1 and
incorporated herein by reference.
(c) The issuance of Series B Preferred Stock and underlying common stock
was exempt from registration under the Securities Act of 1993, as amended
(the "Act"), in reliance on Section 4(2) of the Act as a transaction by an
issuer not involving any public offering and Regulation D thereunder. In
such transaction, the purchasers of the shares were accredited investors
within the meaning of Securities and Exchange Commission Rule 501 and had
access to information about the Company, and appropriate legends regarding
the restricted nature of such securities were affixed to the certificates
representing such securities.
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<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed herewith:
Exhibit 2.1 iSTAR Agreement dated as of November 10, 1997
between iSTAR Internet Inc. and PSINet Inc.
Exhibit 3.1 Certificate of Amendment of Certificate of
Incorporation dated as of November 10, 1997
Exhibit 4.1 Certificate of Amendment of Certificate of
Incorporation dated as of November 10, 1997
Exhibit 10.1 Amendment No. 1 to Deed of 460 Spring Park
Technology Center dated as of June 12, 1997
between JBG/Spring Park Limited Partnership
and PSINet Inc.
Exhibit 10.2 Sublease Agreement dated as of June 2, 1997
between LUCAS INDUSTRIES, INC. and PSINet
Inc. and Office Lease Agreement between 3B
Limited Partnership and Lucas Industries Inc.
dated as of September 12, 1989
Exhibit 10.3 Master Equipment/Software Rental Agreement
dated as of September 11, 1997 between PSINet
and Earthlink Network, Inc. and Change Order
Amendment Master Equipment dated as of
September 22, 1997
Exhibit 10.4 Equipment lease dated as of June 30, 1997
between Royal Bank of Canada and PSINet
Limited
Exhibit 10.5 Employment Agreement dated July 1, 1997
between the Company and Michael Malesardi
Exhibit 10.6 Employment Agreement dated August 2, 1997,
1997 between the Company and Tony Aveta
Exhibit 10.7 Employment Agreement dated August 4, 1997
between the Company and Harry Hobbs
Exhibit 10.8 First Amendment dated as of September, 10,
1997 to the Amended and Restated Credit
Agreement between the Company and FleetBank
of Massachusetts, N.A.
Exhibit 10.9 Stock Purchase Agreement dated as of November 11,
1997 between PSINet Inc. and the purchasers of
Series B 8% Convertible Preferred Stock
Exhibit 10.10 Registration Rights Agreement dated as of
November 11, 1997 between PSINet Inc. and the
purchasers of Series B 8% Convertible
Preferred Stock
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Exhibit 11.1 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the
Three Months Ended September 30, 1997
Exhibit 11.2 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the
Nine Months Ended September 30, 1997
Exhibit 27 Financial Data Schedule **
Exhibit 99.1 Risk Factors
** Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust
Indenture Act of 1939 or otherwise subject to the
liabilities of such sections and not deemed part of any
registration statement to which such exhibit relates.
(b) Reports on Form 8-K
On August 1, 1997, the Company filed a Current Report on Form
8-K, dated July 31, 1997 relating to its entering into the
IRU and Stock Purchase Agreement dated as of July 22, 1997
with IXC Internet Services, Inc. ("IXC") and a Joint
Marketing and Services Agreement dated as of July 22, 1997
with IXC.
On August 21, 1997, the Company filed a Current Report on
Form 8-K, dated August 20, 1997, relating to an amendment to
the Company's Shareholder Rights Plan in connection with the
IRU and Stock Purchase Agreement dated as of July 22, 1997
between the Company and IXC.
22
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PSINET INC.
FORM 10-Q
SEPTEMBER 30, 1997
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, 1997 By: /s/ William L. Schrader
- ----------------- ------------------------------
Date William L. Schrader
Chairman, President, Chief
Executive Officer and Director
November 14, 1997 By: /s/ Edward D. Postal
- ----------------- ------------------------------
Date Edward D. Postal
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Item 6 (a) Exhibits:
Exhibit Exhibit Name Location
- ------- ------------ --------
2.1 iSTAR Agreement dated as of November 10, 1997
between iSTAR Internet Inc. and PSINet Inc.. . . . Sequentially numbered
3.1 Certificate of Amendment of Certificate
of Incorporation dated as of November 10, 1997 . . Sequentially numbered
4.1 Certificate of Amendment of Certificate of
Incorporation dated as of November 10, 1997. . . . Incorporated by
reference from
Exhibit 3.1
10.1 Amendment No. 1 to Deed of 460 Spring Park
Technology Center dated as of June 12, 1997
between JBG/Spring Park Limited Partnership
and PSINet Inc.. . . . . . . . . . . . . . . . . . Sequentially numbered
10.2 Sublease Agreement dated as of June 2, 1997
between LUCAS INDUSTRIES, INC. and PSINet Inc.
and Office Lease Agreement between 3B Limited
Partnership and Lucas Industries Inc. dated
as of September 12, 1989. . . . . . . . . . . . . . Sequentially numbered
10.3 Master Equipment/Software Rental Agreement
dated as of September 11, 1997 between PSINet
and Earthlink Network, Inc. and Change Order
Amendment Master Equipment dated as of
September 22 , 1997. . . . . . . . . . . . . . . . Sequentially numbered
10.4 Equipment lease dated as of June 30, 1997
between Royal Bank of Canada and PSINet
Limited. . . . . . . . . . . . . . . . . . . . . . Sequentially numbered
10.5 Employment Agreement dated July 1, 1997 between
the Company and Michael Malesardi. . . . . . . . . Sequentially numbered
10.6 Employment Agreement dated August 2, 1997,
1997 between the Company and Tony Aveta. . . . . . Sequentially numbered
10.7 Employment Agreement dated August 4, 1997
between the Company and Harry Hobbs. . . . . . . . Sequentially numbered
10.8 First Amendment dated as of September, 10,1997
to the Amended and Restated Credit Agreement
between the Company and Fleet Bank of
Massachusetts, N.A. . . . . . . . . . . . . . . . . Sequentially numbered
10.9 Stock Purchase Agreement dated as of
November 11, 1997 between PSINet Inc. and the
purchasers of Series B 8% Convertible Preferred
Stock. . . . . . . . . . . . . . . . . . . . . . . Sequentially numbered
10.10 Registration Rights Agreement dated as of
November 11, 1997 between PSINet Inc. and the
purchasers of Series B 8% Convertible Preferred
Stock.. . . . . . . . . . . . . . . . . . . . . . Sequentially numbered
24
<PAGE>
Item 6 (a) Exhibits:
Exhibit Exhibit Name Location
- ------- ------------ --------
11.1 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the
Three Months Ended September 30, 1997. . . . . . . Sequentially numbered
11.2 Calculation of Loss per Share and Weighted
Average Shares Used in Calculation for the
Nine Months Ended September 30, 1997. . . . . . . Sequentially numbered
27 Financial Data Schedule . . . . . . . . . . . . . Sequentially numbered
99.1 Risk Factors. . . . . . . . . . . . . . . . . . . Sequentially numbered
25
<PAGE>
Exhibit 2.1
PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia
20170-5100 U.S.A.
STRICTLY CONFIDENTIAL
November 9, 1997
iSTAR Internet Inc.
Royal Bank Tower
200 Bay Street
North Tower
Suite 2200
Toronto, Ontario
M5J 2J4
Attention: Jack O. Kiervin
Chairman of the Board
Dear Sirs:
1. The Offer
(a) Subject to the conditions set out in paragraph (b) below, PSINet Inc.
(the "Offeror") is prepared to make as soon as practicable but in no
event later than November 14, 1997, a takeover bid (the "Offer") for
any and all outstanding Common Shares of iSTAR Internet Inc.
("iSTAR"). The Offer shall consist of an offer to purchase Common
Shares of iSTAR by a circular bid prepared in accordance with the
requirements of the Securities Act (Ontario) and other applicable
provincial securities laws. Subject to Section 2 hereof, the Offer
for the Common Shares will be at a price per Common Share of $1.206
(Cdn.), subject to the adjustments in paragraph 1(d) below, made up of
a fraction of a convertible preferred share (a "Preference Share") of
the Offeror. The terms of the Preference Shares will be substantially
as set out in Schedule "A". The obligation of the Offeror to take up
and pay for Shares under the Offer will be subject to the following
conditions and to other conditions usual to a comparable takeover bid
in Canada:
(i) the approval and consent of all governmental or regulatory
authorities required to be obtained in order to proceed with the
Offer and take up and pay for the Common Shares tendered pursuant
to the Offer will have been obtained prior to the expiration of
the Offer;
<PAGE>
(ii) there will be no prohibition at law against the making of the
Offer or taking up and paying for 100% of the Common Shares under
the Offer or completing a transaction in which the Offeror would
acquire the Common Shares not deposited pursuant to the Offer;
(iii) all options existing under iSTAR's employee stock option plan
will be cancelled;
(iv) all outstanding warrants will be cancelled or otherwise dealt
with to the satisfaction of the Offeror, failing which, the
Offeror will purchase the outstanding warrants and adjust the
price offered per Common Share under the Offer accordingly;
(v) all of the covenants contained in section 6 will have been met,
or will not have been breached, as the case may be;
(vi) there will be no material breach of any material contract to
which iSTAR is a party that has not been remedied;
(vii) the offerees must have validly deposited and not withdrawn, on or
before the expiration of the 21st day following the making of the
Offer, Common Shares under the Offer which represent not less
than 66 2/3% of the issued and outstanding Common Shares on the
date of the Offer; and
(viii) there shall not have occurred or arisen any change or fact (or
any condition, event or development involving a prospective
change) in the business, assets, capitalization or financial
condition of iSTAR or any of its subsidiaries which in the
opinion of the Offeror is materially adverse to iSTAR or any of
its subsidiaries or may be considered significant to a purchaser
of the Common Shares.
iSTAR agrees to provide to the Offeror on closing a certificate of iSTAR
that the conditions of this Offer have been complied with by iSTAR, such
certificate to be in a form satisfactory to the Offeror.
The Offeror shall not be obligated to make the Offer or may withdraw its
Offer if a third party has announced its intention to effect an Acquisition
Proposal (as defined below) and the board of directors of iSTAR concludes
that such an Acquisition Proposal provides greater value to the holders of
Common Shares than the Offer.
The Offer will be stated to expire on December 5, 1997, subject to the
right of the Offeror to extend the same in accordance with applicable law
(hereinafter referred to as the "Expiry Date").
2
<PAGE>
(b) Notwithstanding any of the terms of this agreement, the Offeror may
terminate its obligations hereunder if, on or before the date the
Offeror is required to make the Offer:
(i) there has been any material breach of any of the covenants of
iSTAR contained herein;
(ii) iSTAR shall have failed to obtain all consents to the change of
control of iSTAR and, if applicable the amalgamation of iSTAR
with the Offeror and/or an affiliate of the Offeror, the absence
of which would be materially adverse to iSTAR;
(iii) the board of directors of iSTAR shall have failed to (A) resolve
to recommend the Offer; or (B) provide a directors' circular
supporting the Offer to be mailed together with the Offer;
(iv) any representation and warranty set out in section 4 herein is not
true and correct in all material respects, as determined by the
Offeror, as at the date of the Offer;
(v) there shall not have occurred or arisen any change or fact (or any
condition, event or development involving a prospective change)
in the business, assets, capitalization or financial condition of
iSTAR or any of its subsidiaries which in the opinion of the
Offeror is materially adverse to iSTAR or any of its subsidiaries
or may be considered significant to a purchaser of the Common
Shares; or
(vi) the Offeror has not received all requisite consents of any third
parties and Offeror agrees to use all reasonable efforts to obtain
such consents.
The foregoing conditions are for the sole benefit of the Offeror and
may be waived by the Offeror at any time.
(c) Bell Claims. It is a condition of this Offer for the sole benefit of
the Offeror that the contract between Bell Sygma Inc. and iSTAR dated
August 29, 1997 ("Bell Sygma Contract") be terminated and extinquished
before the closing of the Offer, whether by settlement with a full
release of any and all of the obligations of iSTAR to Bell Sygma Inc.
or an award pursuant to arbitration or any other mechanism acceptable
to the Offeror, the settlement or result of which must be acceptable
to the Offeror in the Offeror's sole discretion. In the event that
the Offeror is not satisfied with the settlement or result, the Offeror
shall have the right to either withdraw the Offer and terminate its
obligations hereunder or amend the terms of the Offer. iSTAR
represents and warrants to the Offeror that, other than
telecommunications circuit agreements in the normal course, the only
agreement with Bell Sygma Inc., or any of its affiliates or the Stentor
members, is the Bell Sygma Contract.
3
<PAGE>
(d) If the claim by Chrism Technology Inc. ("Chrism") against iSTAR is
settled, with a full release in favour of iSTAR, before the closing of
the Offer, then the amount by which the final settlement amount paid
to Chrism is less than $750,000.00 (Cdn.), if any, shall be divided by
29,315,527 and added to the price per Common Share.
2. Further Agreements to be Entered into Between the Offeror and iSTAR
(a) On or about November 10, 1997, the Offeror agrees to provide a loan or
other credit facility to iSTAR in an aggregate principal amount of
$5,000,000 (Cdn.), with such terms and security as are set out in
Schedule "B" hereto. The principal amount will become immediately
payable if an Acquisition Proposal is made and the board of directors
of iSTAR concludes that such an Acquisition Proposal provides greater
value to the holders of Common Shares than the Offeror, or if the
Offer fails.
(b) In consideration of the loan referred to in (a) above, the parties
agree that they will negotiate and, on or about November 10, 1997,
enter into a sales and marketing agreement whereby the Offeror will
become the exclusive agent of iSTAR and any new corporate customers of
iSTAR will utilize the Offeror's or its affiliate's network. The
sales and marketing agreement will terminate in the event that the
Offer fails.
3. Representations, Warranties and Covenants of the Offeror
The Offeror represents and warrants to iSTAR as follows:
(a) The Offeror is a corporation duly organized and subsisting under the
laws of New York.
(b) The Offeror has the corporate power and authority to enter into this
agreement, to make the Offer and to carry out the transactions
contemplated hereby and by the Offer. The execution and delivery of
this agreement and the consummation of the transactions contemplated
hereby and by the Offer have been duly and validly authorized by all
necessary corporate action on the part of the Offeror. This agreement
has been duly executed and delivered by the Offeror and constitutes a
legal, valid and binding obligation of the Offeror.
(c) Neither the execution and delivery of this agreement by the Offeror
nor the consummation of the transactions contemplated hereby in
accordance with the terms hereof nor compliance with any of the
provisions hereof will (i) conflict with or result in any breach of
any provision of the Offeror's certificate of incorporation and
by-laws (or similar constating documents), (ii) result in a violation
or breach of, or constitute (with or without due notice or lapse of
time or both) a
4
<PAGE>
default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, contract, agreement or other
instrument or obligation to which the Offeror or any of its
subsidiaries is a party or by which any of them or any of their
properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the
Offeror or any of its subsidiaries of any of their properties or
assets, except in the case of (ii) and (iii) for violations, breaches
or defaults which would not in the aggregate materially and adversely
affect the Offeror and its subsidiaries taken as a whole.
(d) The Offer when made will comply in all material respects with
applicable Canadian securities legislation.
(e) Following the successful completion of the Offer and any subsequent
amalgamation of iSTAR with the Offeror or an affiliate of the Offeror,
the Offeror will pay a retention bonus of $2,000 to each of the
employees of iSTAR, provided that such employee continues to be
employed by iSTAR or its affiliate on March 31, 1998.
(f) Following the successful completion of the Offer, the Offeror will
continue to keep the current director and officers' insurance in place
for the remainder of the fiscal year.
4. Representations and Warranties of iSTAR
iSTAR represents and warrants to the Offeror as follows:
(a) iSTAR is a corporation duly organized and subsisting under the laws of
Ontario and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now
being conducted. Each of the subsidiaries of iSTAR is a corporation
duly organized and validly existing under the laws of its jurisdiction
of incorporation and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business
as now being conducted.
(b) iSTAR has the requisite corporate power and authority to enter into
this agreement and to carry out the transactions contemplated hereby.
The execution and delivery of this agreement and the consummation of
the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of iSTAR and
no other corporate proceedings on the part of iSTAR are necessary to
authorize this agreement. This agreement has been approved by the
board of directors of iSTAR, has been duly executed and delivered by
iSTAR and constitutes a legal, valid and binding obligation of iSTAR.
5
<PAGE>
(c) iSTAR has filed all forms, reports and documents with Canadian
securities commissions required to be filed by it under applicable
Canadian securities legislation (collectively, the "Reports"). None
of the Reports, including without limitation any financial statements
or schedules included therein, at the time filed, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. iSTAR has not filed any confidential
material change reports with Canadian securities commissions.
(d) The authorized share capital of iSTAR consists of an unlimited number
of Common Shares of which 29,315,527 Common Shares are issued and
outstanding as fully paid and non-assessable as at the date hereof. As
at the date hereof, there are no outstanding options, warrants or
other rights to acquire Common Shares or other securities of iSTAR and
no securities convertible into or exchangeable for Common Shares or
other securities of iSTAR other than options outstanding under
iSTAR's employee stock option plan, 48,107 warrants exerciseable at a
price of $4.10 per warrant until September 28, 1998, 1,450,000
warrants exerciseable at a price of $6.75 until November 12, 1997 and
46,394 warrants exerciseable at a price of $0.01 until October 24,
2005.
(e) Neither the execution and delivery of this agreement by iSTAR nor the
consummation of the transactions contemplated hereby nor the
amalgamation of iSTAR with the Offeror or an affiliate of the Offeror
nor compliance by iSTAR with any of the provisions hereof will (i)
conflict with or result in any breach of any provisions of the
articles of incorporation or by-laws of iSTAR (or similar constating
documents); (ii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, licence, contract, agreement or other instrument
or obligation to which iSTAR or any of the subsidiaries is a party or
by which any of them or any of their properties or assets may be
bound, or (iii) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to iSTAR, any of its subsidiaries or any
of their properties or assets, except in the case of (ii) or (iii) for
violations, breaches or defaults which would not in the aggregate be
material to a purchaser of all of the Common Shares.
5. Covenants of iSTAR
iSTAR covenants and agrees:
6
<PAGE>
(a) not to declare or pay any dividend prior to or during the period of
the Offer or make any distribution of its properties or assets to its
shareholders or, other than as provided for herein, purchase, redeem
or retire any shares of its capital stock or other securities of
iSTAR;
(b) not to allot or issue, or enter into any agreement for the allotment
or issuance of, or grant any other rights to acquire, shares of its
capital stock or the capital stock of any of its subsidiaries or
securities convertible into, exchangeable for or which carry a right
to acquire, directly or indirectly, shares of its capital stock or the
capital stock of any of its subsidiaries;
(c) not to, and not to permit any subsidiary to, merge, amalgamate, or
consolidate into or with any person or enter into any other corporate
reorganization, or, sell all or any substantial part of its assets to
any person, or, perform any act or enter into any transaction or
negotiation which can reasonably be expected to interfere or be
inconsistent with the consummation of the transactions contemplated
hereby;
(d) not to, and not permit any subsidiary to, alter or amend its articles
or bylaws, as they exist at the date of this agreement;
(e) to use all reasonable efforts to make all filings and obtain all
consents, approvals and waivers necessary or desirable in connection
with the Offer and the transactions contemplated hereby and to take
such other measures as may be appropriate to fulfil its obligations
under and to carry out the transactions contemplated by this
agreement;
(f) not to, and not permit any subsidiary to enter into any agreement out
of the ordinary course of business, including, (i) the payment of any
bonuses or benefits or increase any salaries or benefits of any kind
to employees, or alter commissions payable to sales agents, that it is
not contractually or legally obligated to pay or alter as at the date
hereof; (ii) entering into an arrangement with any new consultants or
renewing any existing arrangements with consultants or hiring any
employees; (iii) entering into any contractual obligations for data
communications, equipment or services with any supplier; (iv)
contracting with new corporate customers other than as provided in the
sales and marketing agreement to be entered into with the Offeror; (v)
leasing or purchasing equipment from a supplier for internal use by
iSTAR (provided that iSTAR may purchase or provide such equipment for
resale to a customer without the prior written consent of the
Offeror); (vi) entering into any commitment with a term greater than
one year; (vii) entering into a commitment for or paying any
professional fees in connection with an Acquisition Proposal (as
defined below), other than this Offer or under the circumstances
pursuant to which iSTAR may terminate its obligations under this
agreement pursuant to section 7(b);
7
<PAGE>
(viii) entering into any new or renewing any existing facilities or
lease arrangements; (ix) engaging in any business other than the
provisions of internet services; (x) introducing any new products or
providing any new services; (xi) engaging in any new research and
development; (xii) incurring financing indebtedness in excess of
$5,000 except in connection with the right of first refusal described
in Schedule "B" hereto, or granting security on any of the assets of
iSTAR or any subsidiary; or (xiii) selling any assets, including,
without limitation, its customers, without the prior written consent
of the Offeror, not to be unreasonably withheld;
(g) to afford to the Offeror and to its financial advisers, accountants,
counsel and other representatives, full access during the period from
the date hereof until the Expiry Date to the management, properties,
books, contracts, commitments and records of iSTAR and its
subsidiaries and to allow the Offeror and such representatives to
continue to perform a diligent and complete examination of the
financial condition, business, affairs, property and assets of iSTAR
and its subsidiaries and to confirm the representations contained in
section 4;
(h) not to, or allow its subsidiaries to, nor authorize or permit any of
the officers, directors or employees of iSTAR or its subsidiaries or
any financial advisor, expert or other representative retained by them
to:
(A) solicit, initiate or encourage (including, without limitation, by
way of furnishing information) any inquiry or the making of any
proposal to iSTAR or its shareholders from any person which
constitutes, or may reasonably be expected to lead to (in either
case whether in one transaction or a series of transactions), (a)
an acquisition from iSTAR or its shareholders of any securities
of iSTAR, (b) any acquisition of a substantial amount of assets
of any of iSTAR or its subsidiaries, (c) an amalgamation, merger,
or consolidation of any of iSTAR or its subsidiaries, or (d) any
take-over bid, issuer bid, exchange offer, recapitalization,
liquidation, dissolution, reorganization or similar transaction
involving any of iSTAR or its subsidiaries or any other
transaction the consummation of which would or could reasonably
be expected to impede, interfere with, prevent or delay the Offer
or any other transactions contemplated by this agreement or that
would or could reasonably be expected to materially reduce the
benefits to the Offeror of the Offer (any of the foregoing being
an "Acquisition Proposal"); or
(B) enter into or participate in any discussions or negotiations
regarding any of the foregoing, or furnish to any other person
8
<PAGE>
any information with respect to the business, properties,
operations, prospects or conditions (financial or otherwise) of
iSTAR or its subsidiaries or any of the foregoing, or otherwise
co-operate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other
person to do or seek to do any of the foregoing;
provided that nothing in this paragraph (h) shall be construed as
limiting the power of the board of directors of iSTAR to respond to
any unsolicited, good faith Acquisition Proposal which the board of
directors of iSTAR believes provides or may provide greater value to
holders of shares in the capital stock or other securities of iSTAR
than the Offer if the board of directors of iSTAR (having consulted
its outside counsel) concludes that to do so would be a proper
exercise of such directors' fiduciary duties and provided further
that, except as contemplated by section 6(b), the foregoing shall not
entitle iSTAR to terminate this agreement, and iSTAR shall promptly
provide notice to the Offeror of any inquiry or proposal that iSTAR
receives that is, or could become, an Acquisition Proposal and to
promptly provide to the Offeror a copy of any written Acquisition
Proposal received by it.
(i) to recommend that holders of Common Shares of iSTAR accept the Offer,
subject to section 6(b);
(j) to advise the Offeror as soon as practicable of any matter which comes
to its attention which might constitute a material change in the
affairs of iSTAR (within the meaning of the Securities Act (Ontario));
(k) to use their reasonable best efforts to secure, before the expiration
of the Offer, commitments from no less than 66 2/3% of the holders of
Common Shares to tender their Common Shares into the Offer; and
(l) to provide to the Offeror all information that would be material to a
purchaser of all of the Common Shares. In connection therewith, iSTAR
represents and warrants that all such Disclosed Information will be
true, correct and complete as of the date provided to iSTAR in all
material respects.
6. Termination
(a) iSTAR may terminate its obligations hereunder if:
(i) the Offeror has not made the Offer by 5:00 p.m., Eastern time, on
November 14, 1997; or
(ii) the Offer has been made by the time specified in (i) above, if
the Offeror has not, for any reason whatsoever, taken up and paid
9
<PAGE>
for the shares under the Offer in the manner contemplated
hereunder on or before 5:00 p.m. December 31, 1997, Eastern time.
(b) iSTAR may terminate its obligations under this agreement by notice to
the Offeror, and iSTAR and the Offeror shall each be released from its
obligations hereunder in the event that the board of directors of
iSTAR has received, in circumstances in which iSTAR is not in breach
of its obligations under section 5(h), an Acquisition Proposal which
the board of directors of iSTAR concludes provides greater value to
the holders of Common Shares than the Offer.
7. General
(a) No disclosure of this offer and any resulting agreement will be made
by iSTAR or the Offeror, except to their respective counsel or to any
financial adviser engaged by any of them and its counsel or as may be
required by applicable law or regulatory authorities. The parties will
co-ordinate in the making and dissemination of any public announcement
relating to the subject matter of this agreement as soon as
practicable after signing.
(b) The Offeror may assign the benefits of the agreement resulting from
acceptance of this offer to a wholly-owned subsidiary but such
assignment shall not relieve the Offeror from responsibility for
performance of its obligations hereunder, and any securities issued
will be ultimately convertible into securities of the Offeror on
materially the same terms. This agreement shall not otherwise be
assignable by any party hereto.
(c) The Offer may be effected by the Offeror by way of a merger,
reorganization, or other form of arrangement, including without
limitation a plan of arrangement, provided there is no material change
in the consideration received by the shareholders of iSTAR who accept
the Offer and the terms hereof shall apply mutatis mutandis. iSTAR
and its directors will take all reasonable steps required to put an
Offer by way of merger or plan arrangement before the shareholders for
their consideration.
(d) This agreement shall be binding upon and shall enure to the benefit of
and be enforceable by iSTAR and the Offeror and their respective
successors and permitted assigns.
(e) Time shall be of the essence of this agreement.
10
<PAGE>
(f) Any notice or other communication required or permitted to be given
hereunder shall be sufficiently given if delivered by hand or sent by
means of facsimile transmission:
(ii) in the case of iSTAR, to the address appearing on the first page
of the letter, Attention: Jack O. Kiervin, and in the case of a
facsimile transmission, to Facsimile No. (416) 367-5827; and
(ii) in the case of the Offeror to PSINet Inc., 510 Huntmar Park
Drive, Herndon, VA 20170-5100, Attention: William Schrader, and
in the case of a facsimile transmission, to Facsimile No. (703)
904-1608;
or at such other address or telecopy number as the party to which such
notice or other communication is to be given has last notified the
party giving the same in the manner provided in this paragraph.
(g) Each of the parties upon the request of the other parties, shall do,
execute, acknowledge and deliver or cause to be done, executed,
acknowledged or delivered all such further acts, deeds, documents and
instruments as may be reasonably necessary or desirable to carry out
the provisions of their agreement and to enhance the benefits to all
relevant parties, so long as no party is materially prejudiced,
financially or otherwise.
(h) This agreement shall be governed by and construed in accordance with
the laws of the Province of Ontario and the laws of Canada applicable
therein.
(i) References herein to Common Shares of iSTAR include any shares into
which Common Shares may be reclassified, subdivided, redivided,
consolidated or converted.
(j) The Offeror shall have the option to review and oversee the operations
of iSTAR including without limitation the right to have one of the
Offeror's personnel participate in the day to day management and
operation of iSTAR's business. In addition to its obligations in
Section 5 hereof, iSTAR agrees to consult with the Offeror on the day
to day management and operations of iSTAR's business. For greater
certainty, the Offeror shall not have any authority or right to make
decisions for or direct either the officers or directors of iSTAR in
their duties and responsibilities in the management and operation of
iSTAR's business.
If you are in agreement with the foregoing, kindly signify your
acceptance by signing the second copy of this letter and delivering it to the
Offeror in the manner provided above. This Offer may be signed in two or more
counterparts
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<PAGE>
which together shall be deemed to constitute one valid and binding agreement and
delivery of the counterparts may be effected by means of facsimile transmission
from the Offeror to iSTAR and from the iSTAR to the Offeror.
Yours very truly,
PSINET INC.
By: /s/Harold S. Wills
------------------------------------
Harold S. Wills
Executive Vice-President and Chief
Operating Officer
In consideration of your agreement to make the Offer described above and other
good and valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), we hereby irrevocably accept the foregoing this 9th day of
November, 1997.
iSTAR INTERNET INC.
By: /s/ Craig Wallace
------------------------------------
Craig Wallace
President and Chief Executive
Officer
12
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Schedule A
Terms of Preference Shares
Class Convertible preferred shares.
Voting/Non-Voting Non-voting.
Ranking On parity with Series B 8% Convertible Preferred
Stock
Coupon 8.0% per annum, cumulative, payable in cash on a
quarterly basis, in arrears (the record date shall
be March 31, June 30, September 30 and December 31
of each year).
Conversion by the Holder Up to 1/3rd of the aggregate number of preferred
shares held by a holder may be converted into
common shares of the Offeror at the holder's
option on or after each of April 1, 1998,
July 1, 1998 and January 1, 1999.
In the event of a change of control of the
Offeror, the preferred shares will become
immediately convertible, provided that the holders
thereof agree not to prohibit the change of
control.
In the event that on or after April 1, 1998, the
number of common shares of the Offeror into which
the preferred shares are convertible would exceed
5,665,676 common shares of the Offeror then the
preferred shares will become convertible at the
holders' option. The Offeror will notify the
holders of the preferred shares that the preferred
shares have become convertible as promptly as
possible thereafter.
Redemption by the Offeror The preferred shares may be redeemed by the
Offeror for cash at any time after the period
ending six months from the date of issue.
Optional Redemption The preferred shares will be subject to optional
redemption at Offeror's option on 30 days written
notice at a redemption price of $.01 (U.S.) per
share upon the earlier of:
(i) the period ending 36 months from the date of
issuance; or
(ii) upon the change of control of the Offeror.
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There will be put in place a trustee arrangement
or other arrangement designed so as to ensure that
all preferred shares are converted into common
shares prior to the end of the 36 month period.
Value for Conversion/
Redemption Each of the shares will be valued at the same
amount per Common Share price after accounting for
all adjustments, converted to U.S. dollars at the
exchange rate published in the Wall Street Journal
on Monday, November 10, 1997.
Market Price for The market price of the Offeror's common stock
Conversion/Redemption (based on a 10 day weighted average of the closing
price) at the time of the event; provided that the
maximum number of common shares of the Offeror to
be issued upon conversion or redemption will not
exceed 7,400,000 common shares of the Offeror. As
at the date of this agreement, there are
approximately 40,000,000 common shares of the
Offeror outstanding, and the most recent trading
price was approximately US$8.00.
14
<PAGE>
Schedule B
Terms of Credit Facility
Amount $5.0 million dollars (Cdn.).
Interest 9.9% per annum calculated and payable monthly not
in arrears.
Term Ninety (90) days from November 10, 1997.
Security 1. First security interest on all accounts
receivable, free and clear of any and all liens
and encumbrances.
2. General security interest on other assets
subordinate to existing secured creditors.
3. All prior security registrations against
accounts receivable to be discharged or fully
postponed.
Repayment All outstanding indebtedness payable on the
earliest to occur of:
1. demand by the Offeror for payment (provided
that demand will not be made prior to the 90 day
term); or
2. if an Acquisition Proposal is received by
iSTAR and the board of directors of iSTAR
concludes that such an Acquisition Proposal
provides greater value to the holders of Common
Shares than the Offer; or
3. the Offer fails or is terminated by the
Offeror.
Advances Up to $2.5 million dollars will be advanced on
November 10, 1997 subject to iSTAR providing to
the Offeror a statement of use of the funds to be
advanced. It is agreed that the funds may be used
to pay existing accounts payable and accounts
payable incurred in the ordinary course after
November 10, 1997.
Remaining funds to be drawn in tranches of
$250,000 subject to iSTAR providing to the Offeror
a statement of use of the funds to be advanced.
15
<PAGE>
Restrictions Amounts advanced cannot be used for purposes that
violate the covenants in the agreement to which
this Schedule is attached.
After the first advance under the facility is
made, iSTAR is restricted from soliciting any
alternative/additional financing from any third
party.
Right of First Refusal Offeror has the right of first refusal on any
alternative/additional financing that iSTAR seeks
to obtain between the date of the agreement to
which this Schedule is attached and the date upon
which the first advance under the facility is
made, exercisable within 48 hours after receipt of
written notice from iSTAR of such additional
financing and the terms thereof.
Termination: Offer of credit shall be terminated in the event
the agreement to which this Schedule is attached
is terminated or alternative/additional financing
is obtained.
16
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINet INC.
Under Section 805 of the Business Corporation Law
The undersigned, being the President and Assistant Secretary of PSINet
Inc. (the "Corporation"), respectively, in order to amend the Corporation's
Certificate of Incorporation, do hereby certify that:
FIRST: The name of the Corporation is PSINet Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed
by the Department of State of the State of New York on October 21, 1988 under
the name Graphic Specialty Finishers, Inc.
THIRD: The Certificate of Incorporation is hereby amended to effect the
following amendments authorized by the Business Corporation Law:
(a) To amend Paragraph FOURTH, relating to the
aggregate number of shares which the Corporation
shall have authority to issue, to add a provision
stating the number, designation, relative rights,
preferences and limitations of a new series of
Preferred Stock, as fixed by the Board of
Directors of the Corporation, which shall be
designated as Series B 8% Convertible Preferred
Stock, par value $.01 per share, and to set forth
in full the text of such provision; and
(b) To amend Paragraph SEVENTH regarding the address
for service of process.
<PAGE>
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FOURTH: To effect the foregoing:
(a) Paragraph FOURTH is hereby amended to add the
following at the end of such Paragraph FOURTH:
Series B 8% Convertible Preferred Stock
The Corporation is hereby authorized to establish a series of Preferred
Stock of the Corporation of the designation and number of shares, and having
the relative rights, preferences and limitations thereof (in addition to the
provisions set forth in this Certificate of Incorporation which are
applicable to all classes and series of Preferred Stock) as set forth in the
following Sections 1 through 9 and in Exhibit A attached hereto and made a
part hereof.
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as the Series B 8% Convertible Preferred Stock (the
"Series B Preferred Stock"), and the number of shares so designated shall be
675,142 (which shall not be subject to increase without the prior approval
of the holders (each holder of shares of Series B Preferred Stock, a "Holder"
and together with all other Holders, the "Holders") of 66 2/3% of the shares
of Series B Preferred Stock then outstanding). Each share of Series B
Preferred Stock shall have a par value of $.01 per share and a stated value
of $50.00 per share (the "Stated Value"). Of the designated shares of
Series B Preferred Stock, 600,000 shares are being issued initially and
75,142 shares are being authorized for payment of dividends in shares of
Series B Preferred Stock when, as and if declared by the Board of Directors.
As used in this Section 1 and the immediately following Sections 2 through 9,
all references to a "Section" or "Sections" shall be to any one or more of
this Section 1 and such Sections 2 through 9, as appropriate, and not to any
other provision of this Certificate of Incorporation.
Section 2. Dividends.
(a) (i) Holders shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available therefor,
and the Corporation shall, to the extent funds are legally available
therefor, pay on each Dividend Payment Date, in arrears, cumulative dividends
on the Series B Preferred Stock at the rate per share (as a percentage of the
Stated Value per share) equal to 8% per annum (subject to adjustment as
provided in Section 2(d)), payable in cash or shares of Series B Preferred
Stock, or any combination thereof, at (subject to the terms and conditions
set forth herein) the option of the Corporation. Dividends on the Series B
Preferred Stock shall be calculated on the basis of a 360-day year, shall
accrue daily commencing the Original Issue Date, and
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shall be deemed to accrue on such date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. The party that holds of
record the Series B Preferred Stock on the record date for the applicable
Dividend Payment Date for any dividend payment will be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefor, such dividend payment and any other accrued and unpaid
dividends which accrued prior to such Dividend Payment Date, without regard
to any sale or disposition of such Series B Preferred Stock subsequent to the
applicable record date but prior to the applicable Dividend Payment Date.
Except as otherwise provided in this Certificate of Incorporation or as
required by law, if at any time the Corporation pays a portion of but less
than the total amount of dividends then accrued on account of the Series B
Preferred Stock, such payment shall be distributed ratably among the Holders
based upon the number of shares held by each Holder. In order for the
Corporation to exercise its right to pay dividends in shares of Series B
Preferred Stock on a Dividend Payment Date, the Corporation shall, no less
than thirty (30) days prior to the Dividend Payment Date, provide each Holder
notice ("Series B Preferred Stock Dividend Notice") of its intention to pay
dividends in shares of Series B Preferred Stock. If the Corporation elects
to pay dividends in shares of Series B Preferred Stock, then the number of
shares of Series B Preferred Stock issuable with respect to each share of
Series B Preferred Stock outstanding on the record date for payment of such
dividend shall be equal to (i) a number which is the Conversion Price at such
time divided by the Stated Value of a share of Series B Preferred Stock
multiplied by (ii)(a) the aggregate dollar amount of dividends then payable
in respect of such share, divided by (b) the Five Day Average Market Price at
the applicable Dividend Payment Date. The Corporation shall, at its option,
have the right to redeem all, but not less than all, of the shares of Series
B Preferred Stock paid in the form of dividends pursuant to this Section 2(a)
(the "Dividend Shares") for $.01 per share with such redemption to be
effective on the Trading Day following the payment of such dividend (the
"Dividend Redemption Date"). If the Corporation does not desire to effect
such a redemption, it shall give written notice (the "Dividend Non-Redemption
Notice") to the Holders, at least five (5) days prior to the applicable
Dividend Payment Date, of its intent not to redeem the Dividend Shares on
such Dividend Payment Date. If the Corporation does not give a Dividend
Non-Redemption Notice to the Holders by the time set forth in the preceding
sentence, each Holder shall have the option, exercisable by failing to give a
Non-Conversion Notice, as hereinafter defined, to convert on the applicable
Dividend Payment Date, its Dividend Shares, with the Conversion Price being
equal to the Conversion Price in effect on the applicable Dividend Payment
Date and, notwithstanding any provision of this Certificate of Incorporation
to the contrary, such Holder shall be deemed to have elected to so convert,
effective on the Dividend Payment Date, if the Corporation does not actually
receive written notice to the contrary (a "Non-Conversion Notice") prior to
the Dividend Payment Date. To the extent that a Holder cannot convert
Dividend Shares on such Dividend Payment Date as a result of the application
of Section 5(a)(ii), and retains any of such Dividend Shares after the
applicable Dividend
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Redemption Date, such retained shares shall not be redeemed, and shall remain
outstanding, provided, however, that notwithstanding any other provision of
this Certificate of Incorporation to the contrary and regardless of the then
per share market value of the Common Stock (i) dividends shall, except as
required by applicable law, cease to accrue on such shares and, except as
required by law, such shares shall have no rights pursuant to Sections 3, 4
or 7 (other than, to the extent permitted by applicable law, Section 7(a))
and (ii) the Holder of such shares, or any transferee of the Holder, shall
convert such shares into Common Stock within 120 days of such Dividend
Payment Date at a Conversion Price equal to the Conversion Price on the
applicable Dividend Payment Date; provided that if any such shares remain
outstanding on the Business Day immediately following such 120th day, the
Corporation may redeem such shares for $.01 per share. To the extent any
Dividend Shares are called for redemption pursuant to this Section 2(a) and
the Holder thereof shall not have converted such shares prior to the
applicable Dividend Redemption Date (other than by reason of Section
5(c)(ii)) and the Corporation shall have set aside funds for such redemption,
such Dividend Shares to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the applicable Dividend
Redemption Date.
(ii) Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, no dividends or distributions
on shares of Series B Preferred Stock shall be declared by the Board of
Directors of the Corporation or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement,
instrument or indenture of the Corporation relating to its indebtedness
specifically prohibits such declaration, payment or setting apart for payment
or provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default or event of default thereunder;
provided, however, that nothing contained in this Certificate of
Incorporation shall be construed or deemed to require the Board of Directors
to declare or the Corporation to pay or set apart for payment any dividends
or distributions on shares of Series B Preferred Stock at any time, whether
permitted by any of such agreements, instruments or indentures, or not.
(b) Notwithstanding anything to the contrary contained in Section 2(a)
above, the Corporation may not pay dividends on the Series B Preferred Stock
in shares of Series B Preferred Stock (and, except as otherwise provided
below, must deliver cash in respect thereof) if at the date of declaration of
such dividend:
(i) (A) the number of shares of Series B Preferred Stock
at the time reserved for issuance for the payment of such dividends in shares
of Series B Preferred Stock on such Dividend Payment Date, together with the
number of shares held as treasury stock, are insufficient to satisfy the
Corporation's then existing obligations to issue shares of Series B Preferred
Stock for the payment of such dividends in shares of
<PAGE>
-5-
Series B Preferred Stock on such Dividend Payment Date or (B) the number of
shares equal to the sum of (i) the number of shares of Common Stock at the
time reserved for issuance for the conversion of shares of Series B Preferred
Stock to be paid to Holders as dividends hereunder on such Dividend Payment
Date, (ii) the number of authorized but unissued shares of Common Stock not
reserved for any purpose, (iii) the number of shares of Common Stock at the
time reserved for issuance for all other purposes and (iv) the number of
shares held as treasury stock, is insufficient to satisfy the Corporation's
then existing obligations to issue shares of Common Stock for all purposes
(including the conversion of shares of Series B Preferred Stock paid to
Holders as dividends hereunder on such Dividend Payment Date);
(ii) solely with respect to the applicable Holder, the
shares of Common Stock issuable upon conversion of Series B Preferred Stock
issued in payment of such dividends are not registered under the Securities
Act of 1933, as amended (the "Securities Act"), for resale pursuant to an
effective registration statement, or may not be sold by such Holder pursuant
to an effective registration statement because the Corporation is not
allowing sales to be made thereunder, that names the recipient of such
dividend as a selling stockholder thereunder (unless such registration
statement is not declared effective or such sales may not be made as a result
of the actions of such recipient or such recipient has not requested in
writing to be named therein as a selling stockholder on or prior to the date
of the related Series B Preferred Stock Dividend Notice) and may not be sold
without volume restrictions pursuant to Rule 144(k) promulgated under the
Securities Act, as determined by counsel to the Corporation (which may be
counsel employed by the Corporation);
(iii) the shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock to be delivered in
respect of such dividends are not designated for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market or listed on The New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX");
(iv) solely with respect to the applicable Holder and to
the extent permitted by applicable law, the Corporation shall have been
notified in writing by a Holder that the conversion of such shares would
result in (A) such Holder beneficially owning, in accordance with Rule 13d-3
promulgated under the Exchange Act (exclusive of any shares of Common Stock
beneficially owned by such Holder otherwise than as a result of the issuance
of Common Stock upon conversion of the Series B Preferred Stock owned by such
Holder) more than 4.999% of the issued and outstanding shares of Common Stock
and (B) if such Holder is subject to the Bank Holding Company Act of 1956, as
amended (the "Bank Holding Company Act"), such Holder owning or controlling
more than 4.999% of the voting shares of the Corporation for purposes of
Section 4(c)(6) thereof and Regulation Y thereunder, unless, in the case of
clause (A) above, the provisions of this Section 2(b)(iv)
<PAGE>
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shall have theretofore been waived (except as otherwise provided by
applicable law, if the Holder provides to the Corporation the written notice
described above in this paragraph, the Corporation shall not be obligated to
deliver cash dividend payments in lieu of such payment in Series B Preferred
Stock and, to the extent permitted by applicable law, such dividend shall not
be payable until such time as the Holder delivers to the Corporation a
written notice to so deliver such dividend shares); provided, however, that,
the Corporation may continue to pay dividends on the Series B Preferred Stock
in shares of Series B Preferred Stock to Holders who are not then restricted
from receiving such Series B Preferred Stock pursuant to this Section
2(b)(iv);
(v) the Corporation has failed to timely
satisfy its obligations with respect to any Conversion Notice and
such failure shall be continuing as of such Dividend Payment
Date; or
(vi) the aggregate number of shares of Common
Stock then held by the Holders of Series B Preferred Stock which were issued
upon the conversion of shares of Series B Preferred Stock plus the number of
shares of Common Stock issuable upon the conversion of any shares of Series B
Preferred Stock held by such Holders which were received as dividends on
Series B Preferred Stock, including in payment of the current dividend,
exceeds 8,086,580 shares of Common Stock (as such amount may be adjusted to
reflect the occurrence of any of the events described in Sections
5(c)(ii)(b), (c) and (d)).
(c) So long as any Series B Preferred Stock shall remain outstanding,
except for any payment which may be made in connection with the IXC
Transaction, neither the Corporation nor any Subsidiary shall (i) redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities,
(ii) directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section
5(c)(ii) or 5(c)(iii) or a dividend or distribution or a distribution on
securities issuable pursuant to any rights pursuant to the Rights Agreement
dated as of May 8, 1996 between the Corporation and First Chicago Trust
Company of New York, as the same may be amended from time to time) upon, nor
shall any distribution (other than a dividend or distribution described in
Section 5(c)(ii) or 5(c)(iii) or a distribution on securities issuable
pursuant to any rights pursuant to the Rights Agreement dated as of May 8,
1996 between the Corporation and First Chicago Trust Company of New York, as
the same may be amended from time to time) be made in respect of, any Junior
Securities, or (iii) set aside any funds for or apply any funds to the
purchase, redemption or acquisition (through a sinking fund or otherwise) of
any Junior Securities (other than pursuant to the Rights Agreement dated as
of May 8, 1996 between the Corporation and First Chicago Trust Company of New
York, as the same may be amended from time to time). Notwithstanding the
foregoing, during such period, the Corporation may redeem, purchase or
otherwise acquire and set aside funds for and apply
<PAGE>
-7-
funds to the purchase, redemption or acquisition of Junior Securities (a) for
up to an aggregate amount not to exceed, at any point in time the sum of: (i)
$10,000,000 plus (ii) an amount equal to 100% of the aggregate net cash
proceeds received by the Corporation after the date hereof from the issuance
of Junior Securities or debt securities that have been converted into Junior
Securities plus (iii) an amount equal to 50% of the Corporation's cumulative
consolidated positive earnings before interest, taxes, depreciation and
amortization as reported by the Corporation in respect of each fiscal quarter
of the Corporation commencing with the fiscal quarter ending December 31,
1997 or (b) pursuant to Section 15.7 of the IRU Agreement, provided that
immediately after giving effect to any such redemption, purchase, other
acquisition or setting aside of funds for application to the purchase,
redemption or other acquisition pursuant to such Section 15.7, the
Corporation's consolidated shareholders' equity, as determined by the
Corporation's Chief Financial Officer, shall not be less than $20,000,000.
(d) Notwithstanding anything to the contrary contained in this
Certificate of Incorporation, if the Common Stock issuable upon conversion of
the Series B Preferred Stock shall not be freely tradable without restriction
under the United States federal securities laws as a result of (A) the
failure by the Corporation to file a registration statement under the
Securities Act as required by the Registration Rights Agreement for 30 days
after such registration statement is required to have been filed (a "Delayed
Filing Event") or (B) the suspension by the Corporation of the effectiveness
of, or the prohibition by the Corporation of sales of Common Stock by the
Holders under, such registration statement pursuant to the terms of the
Registration Rights Agreement for more than 180 days in any calendar year
period (an "Excessive Blackout Event"), then the dividend payable hereunder
shall, in the case of a Delayed Filing Event, increase by 100 basis points,
and shall increase by an additional 50 basis points on the first day of each
successive 30 day period until such registration statement is filed,
provided, that in no event shall the dividend payable hereunder be increased
by more than 200 basis points for such Delayed Filing Event and in the case
of an Excessive Blackout Event be increased by 75 basis points, and shall
increase by an additional 25 basis points on the 31st day of such Excessive
Blackout Event; provided, that, once such registration statement is filed or
such suspension or prohibition is lifted, as the case may be, the dividend
payable hereunder shall revert back to 8% per annum.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Series B Preferred Stock shall have no voting
rights. However, so long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall not, without the requisite approval of the
Holders of the Series B Preferred Stock then outstanding, (a) take any of the
actions described in Section 7, or (b) enter into any agreement or
arrangement with respect to any other action which requires the approval of
the Holders of the Series B Preferred Stock then outstanding, unless
conditioned upon receipt of the requisite approval of the Holders of the
Series B Preferred Stock.
<PAGE>
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Section 4. Liquidation. Subject to applicable law, upon any
liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary (a "Liquidation"), the Holders shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or
surplus, for each share of Series B Preferred Stock an amount equal to the
Stated Value plus all accrued but unpaid dividends per share, whether
declared or not, before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Corporation shall
be insufficient to pay in full such amounts and amounts payable to holders of
Parity Stock, if any, then, subject to applicable law, the entire assets to
be distributed to the Holders and the holders of Parity Stock, if any, shall
be distributed among the Holders and the holders of Parity Stock, if any,
ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. Neither a
transaction subject to the provisions of Section 6(a) nor a Subsidiary
Merger, as defined in Section 6(a), shall be treated as a Liquidation, but
rather shall be treated in accordance with Section 6(a). The Corporation
shall mail written notice of any such Liquidation not less than 45 days prior
to the payment date stated therein to each Holder.
Section 5. Conversion.
(a) (i) Subject to Section 5(a)(iii), each share of Series B
Preferred Stock is convertible by the Holder thereof into shares of Common
Stock (subject to adjustment as provided in this Section 5) at the Conversion
Ratio at the option of the Holder at any time on or after the 130th day
following the Original Issue Date, provided, however, that a Holder may
convert its Series B Preferred Stock prior to such 130th day, in accordance
with Section 6(a), during the pendency of a Merger Event (as defined in
Section 6(a)). A Holder shall effect conversions by surrendering the
certificate or certificates representing the shares of Series B Preferred
Stock to be converted to the Corporation, together with the form of
conversion notice attached hereto as Exhibit A (the "Conversion Notice").
Each Conversion Notice shall specify the number of shares of Series B
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date on which the Holder
delivers such Conversion Notice (the "Conversion Date"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the
date that the Conversion Notice is deemed delivered pursuant to Section 5(i).
Subject to Section 5(b) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all shares of Series B
Preferred Stock represented by the certificate or certificates tendered by
the Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Corporation shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares of Series B Preferred Stock as have not
been converted. Except as otherwise provided in this Certificate of
Incorporation, on and after the effective date of conversion, the Holder
entitled to receive Common Stock
<PAGE>
-9-
issuable upon such conversion shall be treated for all purposes as the record
holder of the shares of Common Stock issuable upon conversion, and the Series
B Preferred Stock so converted shall no longer be deemed to be issued and
outstanding.
(ii) Notwithstanding anything contained in this
Certificate of Incorporation apart from this Section 5(a)(ii) to the
contrary, in no event shall a Holder be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which, exclusive of any shares of Common Stock beneficially
owned by such Holder otherwise than as a result of the issuance of Common
Stock upon conversion of the Series B Preferred Stock held of record by such
Holder, the sum of (w) the number of shares of Common Stock beneficially
owned by such Holder immediately prior to such conversion plus (x) the number
of shares of Common Stock that would be issuable upon such conversion would
equal 4.999% of the sum of (y) the number of shares of Common Stock then
issued and outstanding plus (z) the number of shares of Common Stock that
would be issuable upon such conversion. For purposes of the preceding
sentence beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and the rules thereunder. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary and to the
extent permitted by applicable law, in no event shall a Holder that is
subject to the Bank Holding Company Act be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which the sum of (w) the number of shares of Common Stock owned
or controlled by such Holder immediately prior to such conversion plus (x)
the number of shares of Common Stock that would be issuable upon such
conversion would equal 4.999% of the sum of (y) the number of shares of
Common Stock then issued and outstanding plus (z) the number of shares of
Common Stock that would be issuable upon such conversion. For purposes of
the preceding sentence, ownership and control shall be determined in
accordance with the Bank Holding Company Act and Regulation Y thereunder.
The determination of the number of shares of Series B Preferred Stock that
are convertible at any time without exceeding any of the foregoing
limitations that are applicable to a Holder shall be made by that Holder, and
the submission of shares of Series B Preferred Stock for conversion shall be
deemed to be such Holder's determination that such shares of Series B
Preferred Stock are convertible without exceeding any such applicable
limitation, and the Corporation shall have no obligation to verify or confirm
the accuracy of such determination. Except as otherwise required by law,
this paragraph may be amended (i) in order to clarify an ambiguity or
otherwise to give effect to the foregoing limitations, by the Board of
Directors of the Corporation and the Holders of two-thirds (2/3) of the
shares of Series B Preferred Stock then outstanding and (ii) for any other
reason, with the further approval of the holders of a majority of the shares
of Common Stock then outstanding, to the extent permitted by applicable law
and subject to the rights and preferences of any securities ranking senior
thereto or on parity therewith or, to the extent the holders thereof may have
any approval rights with respect thereto, other preferred stock of the
Corporation. The
<PAGE>
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limitation imposed by the first sentence of this Section 5(a)(ii) may be
waived by a Holder of Series B Preferred Stock as to itself (and solely as to
itself) upon not less than 65 days prior written notice to the Corporation,
and the provisions of this Section 5(a)(ii) shall continue to apply until
such 65th Day (or later, if stated in the notice of waiver).
(iii) Notwithstanding anything contained in this
Certificate of Incorporation, in no event shall the Corporation be obligated
to issue more than an aggregate of 8,086,580 shares of Common Stock (as such
amount may be adjusted to reflect the occurrence of any of the events
described in Sections 5(c)(ii)(b), (c) and (d)) upon conversion of the
Series B Preferred Stock (such amount being equal to 19.999% of the
outstanding Common Stock on the Original Issue Date), and in no event shall
the Corporation be obligated to issue more than an aggregate of 11.9776
shares of Common Stock upon conversion of each share of Series B Preferred
Stock (the "Maximum Conversion Ratio"), provided, however, that the Maximum
Conversion Ratio shall be adjusted to reflect the occurrence of any of the
events described in Sections 5(c)(ii)(b), (c) and (d). On or after the third
anniversary of the Original Issue Date, if the Corporation has issued to the
Holders the maximum number of shares of Common Stock permitted pursuant to
this Section 5(a)(iii), then the Corporation shall, at its option, have the
right to redeem the then outstanding shares of Series B Preferred Stock for
$.01 per share. If the Corporation does determine to so redeem the then
outstanding Series B Preferred Stock as set forth above, then once the
Corporation has set aside such funds for such redemption the then outstanding
Series B Preferred Stock to be so redeemed shall, for all purposes, no longer
be deemed to be issued and outstanding on and after the date fixed for
redemption.
(iv) In the case of a Merger Event (as defined in
Section 6(a)) (other than solely a Cash Event (as defined in Section 6(a))
where the Corporation does not deliver a Merger Event Redemption Notice
pursuant to Section 6(a), the Holders (1) shall be issued shares of
convertible preferred stock or, to the extent possible and to the extent
permitted by applicable law, at the Corporation's option, convertible
debentures of the entity with which such Merger Event takes place, which
newly issued convertible security shall, to the extent possible and to the
extent permitted by applicable law, have terms substantially similar in all
material respects to the terms of the Series B Preferred Stock (including
with respect to conversion and registration) and shall, to the extent
possible and to the extent permitted by applicable law, be entitled to all of
the rights and privileges of a Holder of Series B Preferred Stock set forth
in this Certificate of Incorporation, the Registration Rights Agreement and
the Purchase Agreement (including, without limitation, as such rights relate
to the acquisition, transferability, registration and listing of such shares
of stock or other securities issuable upon conversion of such convertible
security), and (2) simultaneously with such issuance of the convertible
security, shall have the right to convert such convertible security only into
the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of
<PAGE>
-11-
Common Stock upon the effectiveness of such Merger Event, provided, that the
conversion price for such newly issued convertible security shall be based
upon the amount of securities, cash or property that each share of Common
Stock would receive in such transaction, the Conversion Ratio immediately
prior to the effective or closing date for such transaction and the
Conversion Price stated herein and the terms of any such consolidation,
merger, sale, transfer or other disposition shall include such terms so as to
continue to give to the Holder the right to receive the securities, cash or
property set forth in this Section 5(a)(iv) upon any conversion or redemption
following such consolidation, merger, sale, transfer or other disposition.
In the case of solely a Cash Event where the Corporation does not deliver a
Merger Event Redemption Notice pursuant to Section 6(a), the Conversion
Price, at the option of each Holder, shall be adjusted so that it is equal to
the cash price paid for each share of Common Stock in accordance with the
terms of Section 6(a). Notwithstanding anything else contained in this
Certificate of Incorporation, if the Corporation does not redeem the Series B
Preferred Stock and the Conversion Price is adjusted pursuant to this Section
5(a)(iv), then such Conversion Price shall be further adjusted on any
subsequent Reset Date to the lower of such adjusted Conversion Price and the
Conversion Price which would have otherwise gone into effect on such
subsequent Reset Date.
(b) Not later than three (3) Business Days after a Conversion Date, the
Corporation will deliver to the converting Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Series B Preferred Stock, (ii) one or more
certificates representing the number of shares of Series B Preferred Stock
not converted, (iii) to the extent funds are legally available therefor, a
bank check in the amount of accrued and unpaid dividends (if the Corporation
has elected or is required hereunder to pay accrued dividends in cash) and
(iv) to the extent funds are legally available therefor, if the Corporation
has elected and is permitted hereunder (notwithstanding any applicable notice
period) to pay accrued dividends in shares of Series B Preferred Stock, and
the record holders of the shares of Series B Preferred Stock with respect to
which such dividends are paid did not deliver a Non-Conversion Notice to the
Corporation prior to the Dividend Conversion Date with respect to such shares
of Series B Preferred Stock paid as dividends, certificates, which shall be
free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement), representing such
number of Shares of Common Stock are as issuable on account of accrued
dividends determined in accordance with Section 2(a); provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion of any shares of Series B
Preferred Stock until certificates evidencing such shares of Series B
Preferred Stock are either delivered for conversion to the Corporation or, if
so directed by the Corporation, to any transfer agent for the Series B
Preferred Stock or Common Stock, or the Holder of such Series B Preferred
Stock certifies to the Corporation and, if required, any
<PAGE>
-12-
transfer agent for the Series B Preferred Stock that such certificates have
been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Corporation and any such transfer
agent to indemnify and hold harmless the Corporation and any such transfer
agent from any loss incurred by it in connection therewith. The Corporation
shall, upon request of the Holder, use its reasonable best efforts to deliver
any certificate or certificates required to be delivered by the Corporation
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions. If in
the case of any Conversion Notice such certificate or certificates, including
for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are not
delivered to or as directed by the applicable Holder by the close of business
on the third Business Day after the Conversion Date, the Holder shall be
entitled by written notice to the Corporation at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Corporation shall immediately return the
certificates representing the shares of Series B Preferred Stock tendered to
it for conversion and thereupon shall no longer be treated as a record holder
of the shares of Common Stock issuable upon conversion.
(c) (i) The conversion price for each share of Series B
Preferred Stock (the "Conversion Price") on any Conversion Date shall be
equal to 125% of the Five Day Average Market Price as of the Original Issue
Date; provided, however, that (A) if on the first anniversary of the Original
Issue Date (the "One Year Date") the Thirty Day Average Market Price of the
Common Stock (the "One Year Reset Price") is less than the then effective
Conversion Price, then on and after the One Year Date the Conversion Price
shall be equal to the One Year Reset Price; and (B) if on the second
anniversary of the Original Issue Date (the "Two Year Date") the Thirty Day
Average Market Price of the Common Stock (the "Two Year Reset Price") is less
than the then effective Conversion Price, then on and after the Two Year Date
the Conversion Price shall be equal to the Two Year Reset Price; and (C) if
on the third anniversary of the Original Issue Date (the "Three Year Date")
the Thirty Day Average Market Price of the Common Stock (the "Three Year
Reset Price") is less than the then effective Conversion Price, then on and
after the Three Year Date the Conversion Price shall be equal to 95% of the
Three Year Reset Price. The Conversion Price determined in accordance with
this Section 5(c)(i) shall be subject to further adjustment as set forth in
Sections 5(c)(ii) and (iii) and Section 6. Notwithstanding the foregoing, to
the extent that a Holder converts such Holder's Series B Preferred Stock and
at the time of such conversion the Corporation has not paid all accrued but
unpaid dividends (whether such dividends were to have been paid in cash or in
shares of Series B Preferred Stock), then at the time of such conversion the
Conversion Price for such Series B Preferred Stock shall be adjusted so that
the total amount of Common Stock received upon conversion is equal to the
amount of Common Stock that would have been received in respect of such
Series B Preferred Stock immediately prior to such adjustment plus an
<PAGE>
-13-
amount of Common Stock equal in value to the Common Stock which would have
been issuable upon conversion of any Series B Preferred Stock which, on the
date of conversion, would have been issuable in payment of accrued but unpaid
dividends (whether such dividends were to have been paid in cash or in shares
of Series B Preferred Stock) in respect of such Series B Preferred Stock, and
thereupon the Corporation shall have no further obligation with respect to
such dividends.
(ii) If the Corporation, at any time while any
shares of Series B Preferred Stock are outstanding, (a) shall pay a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d)
issue by reclassification of shares of Common Stock any shares of capital
stock of the Corporation, the Conversion Price shall be adjusted by
multiplying the Conversion Price then in effect by a fraction the numerator
of which shall be the number of shares of Common Stock outstanding before
such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to
this Section 5(c)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend
or distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
Notwithstanding the foregoing, in no event shall the Conversion Price be
adjusted by reason of the issuance or exercise of any rights pursuant to the
Rights Agreement dated as of May 8, 1996 between the Corporation and First
Chicago Trust Company of New York, as the same may be amended from time to
time, or any dividends or distributions or distributions on securities
issuable pursuant to such rights.
(iii) If the Corporation, at any time while shares
of Series B Preferred Stock are outstanding, shall distribute to all holders
of Common Stock as a class (and not to Holders) evidences of its indebtedness
or assets, then in each such case the Conversion Price at which each share of
Series B Preferred Stock shall thereafter be convertible shall be adjusted by
multiplying the Conversion Price in effect immediately prior to the record
date fixed for determination of stockholders entitled to receive such
distribution by a fraction the denominator of which shall be the Five Day
Average Market Price of Common Stock determined as of the record date
mentioned above, and the numerator of which shall be such Five Day Average
Market Price of the Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or the value
of such evidence of indebtedness so distributed applicable to one outstanding
share of Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Corporation, such fair market value shall be
determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of
<PAGE>
-14-
recognized standing (which may be the firm that regularly examines the
financial statements of the Corporation) (an "Appraiser") selected in good
faith by the Corporation and reasonably acceptable to the Holders of a
majority in interest of the shares of Series B Preferred Stock then
outstanding. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(iv) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may
be.
(v) Whenever the Conversion Price is adjusted
pursuant to Section 5(c)(i) or (ii), the Corporation shall promptly give
notice to each Holder, which notice shall set forth the Conversion Price
after such adjustment and a brief statement of the facts requiring such
adjustment.
(vi) If:
A. the Corporation shall declare dividend (or
any other distribution) on its Common
Stock; or
B. the Corporation shall declare a special
nonrecurring cash dividend on its Common
Stock; or
C. the Corporation shall authorize the
granting to all holders of the Common
Stock, as a class, rights or warrants to
subscribe for or purchase any shares of
capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Corporation shall be required in connection
with any reclassification of the Common
Stock of the Corporation, any consolidation
or merger to which the Corporation is a
party (other than any merger of the
Corporation into a subsidiary of the
Corporation in connection with the IXC
Transaction), any sale or
<PAGE>
-15-
transfer of all or substantially all of the
assets of the Corporation; or
E. the Corporation shall authorize the
voluntary or involuntary dissolution,
liquidation or winding up of the affairs of
the Corporation;
then the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion and transfer of Series B Preferred
Stock, and shall cause to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Corporation, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, rights or warrants,
or if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distributions, redemption,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale or transfer is expected by the
Corporation to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale or
transfer; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Except as required
by applicable law, no such notice shall be required in connection with any
matter relating to the IXC Transaction.
(d) If at any time conditions shall arise by reason of action taken by
the Corporation which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which would materially
and adversely affect the rights of the Holders (different than or
distinguished from the effect generally on rights of holders of any class of
the Corporation's capital stock) or if at any time any such conditions are
expected by the Corporation to arise by reason of any action contemplated by
the Corporation, the Corporation shall mail a written notice briefly
describing the action contemplated and the material adverse effects of such
action on the rights of the Holders at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the Corporation
and reasonably acceptable to the Holders of a majority in interest of the
Series B Preferred Stock then outstanding, shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Series B Preferred Stock may
thereafter be convertible) and any distribution which is or would be required
to preserve without diluting the rights of the Holders. To the extent
permitted by applicable law and stock exchange or Nasdaq rules, the
Corporation shall make the adjustment recommended forthwith
<PAGE>
-16-
upon the receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; provided, however, that no such adjustment
of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
(e) The Corporation will at all times reserve and keep available out of
its authorized and unissued Common Stock solely for the purpose of issuance
upon conversion of Series B Preferred Stock as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than the number of shares of Common Stock as
shall (subject to any additional requirements of the Corporation as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5(c)) upon
the conversion of all outstanding shares of Series B Preferred Stock assuming
the payment of all future dividends in shares of Series B Preferred Stock in
accordance with the terms hereof. All shares of Common Stock that shall be
so issuable shall, upon issue, be duly authorized, validly issued and fully
paid, and nonassessable subject to Section 630 of the New York Business
Corporation Law. At such time as the Corporation would be, if a notice of
conversion were to be delivered on such date, precluded from converting the
then outstanding Series B Preferred Stock by reason of an insufficient number
of authorized shares of Common Stock then being authorized for issuance, the
Corporation shall promptly prepare and mail to the shareholders of the
Corporation proxy materials requesting authorization to amend the
Corporation's Certificate of Incorporation to increase the number of shares
of Common Stock which the Corporation is authorized to issue to at least a
number of shares equal to the sum of (i) all shares of Common Stock then
outstanding, (ii) the number of shares of Common Stock issuable on account of
all outstanding warrants, options and convertible securities (other than the
Series B Preferred Stock) and on account of all shares reserved under any
stock option, stock purchase, warrant or similar plan and (iii) the number
of Underlying Shares as would then be issuable upon a conversion in full of
the Series B Preferred Stock assuming the payment of all future dividends in
shares of Series B Preferred Stock in accordance with the terms hereof. In
connection therewith, the Corporation shall use reasonable efforts to cause
its Board of Directors to (a) adopt proper resolutions authorizing such
increase, (b) recommend to and otherwise use its reasonable best efforts to
promptly and duly obtain shareholder approval to carry out such resolutions
(and hold a special meeting of the shareholders no later than the 60th day
after delivery of the proxy materials to the shareholders relating to such
meeting) and (c) within 5 Trading Days of obtaining such shareholder
authorization, file an appropriate amendment to the Corporation's certificate
of incorporation to evidence such increase.
(f) Upon a conversion hereunder the Corporation shall not be required
to issue stock certificates representing fractions of shares of Common Stock,
but may, to the
<PAGE>
-17-
extent permitted by applicable law, make a cash payment in respect of any
final fraction of a share based on the Five Day Average Market Price at the
applicable Conversion Date.
(g) The issuance of certificates for shares of Common Stock on
conversion of Series B Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificates, provided
that the Corporation shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Series B Preferred Stock so converted and the Corporation shall not
be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Corporation
the amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(h) Shares of Series B Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares
of undesignated preferred stock.
(i) Except as may be otherwise required by applicable law, any and all
notices or other communications or deliveries to be provided by the Holders
hereunder, including, without limitation, any Conversion Notice, shall be in
writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Corporation, with a copy to the Corporation's General Counsel (provided
that the failure to send a copy of such notice to the Corporation's General
Counsel shall not affect the validity of such notice), at the facsimile
telephone number or address of the principal place of business of the
Corporation as set forth in the Purchase Agreement, or at such other
facsimile number or address as the Corporation may notify the Holders from
time to time. Except as otherwise specifically provided herein, any and all
notices or other communications or deliveries to be provided by the
Corporation hereunder shall be delivered in accordance with the provisions of
Section 5.3 of the Purchase Agreement and deemed given on the date or time
provided therein.
Section 6. Optional Redemptions.
(a) In case of any consolidation or merger of the Corporation with or
into another Person pursuant to which the Corporation will not be the
surviving entity (other than any merger of the Corporation into a subsidiary
of the Corporation where the holders of Voting Securities of the Corporation
immediately prior to such merger own at least 50% of the Voting Securities of
the subsidiary of the Corporation immediately subsequent to such merger (a
"Subsidiary Merger")) or the sale, transfer or other disposition of all or
<PAGE>
-18-
substantially all of the assets of the Corporation pursuant to which the
Common Stock is converted into other securities or property (a "Stock
Event"), or any consolidation or merger of the Corporation with or into
another Person pursuant to which the Corporation will not be the surviving
entity (other than any Subsidiary Merger), or any sale, transfer or other
disposition of all or substantially all of the assets of the Corporation
pursuant to which the Common Stock is converted into the right to receive
cash (a "Cash Event" and together with a Stock Event, or any combination
thereof, a "Merger Event"), then the Corporation shall, at its option, have
the right to redeem all, but not less than all, of the then outstanding
shares of Series B Preferred Stock for $.01 per share with such redemption to
be effective immediately prior to the effective time of the Merger Event (the
"Merger Event Redemption Time"). If the Corporation desires to effect such a
redemption it shall give written notice (the "Merger Event Redemption
Notice") to the Holders of its intent to redeem the Series B Preferred Stock
at least thirty (30) days prior to the Merger Event Redemption Time and each
Holder shall have the option to convert its shares of Series B Preferred
Stock at any time from the date of the Merger Event Redemption Notice to a
time immediately prior to the Merger Event Redemption Time with the
Conversion Price, at the option of each Holder, being equal to (A) the
Conversion Price in effect on the date of the Merger Event Redemption Notice
or (B) the price equal to the consideration to be paid for each share of
Common Stock pursuant to the Merger Event, provided, that if a Holder shall
elect to convert using the price set forth in (B) above, such Holder shall,
upon such conversion, receive, if subsequent to the Original Issue Date but
prior to the One Year Date, 110%, if subsequent to the One Year Date but
prior to the Two Year Date, 105%, and if subsequent to the Two Year Date,
100%, of the number of shares of Common Stock that it otherwise would have
received upon such conversion. To the extent that a Holder cannot convert
shares of Series B Preferred Stock as a result of the application of Section
5(a)(ii), and retains shares of Series B Preferred Stock at the Merger Event
Redemption Time, such retained shares shall not be redeemed, shall remain
outstanding and shall be converted into such number of shares of stock and
such amount of other securities, cash and property receivable by holdders of
Common Stock upon the effectiveness of such Merger Event as such Holder
would have been entitled to receive if such Holder had converted such Series
B Preferred Stock immediately prior to the time of the effectiveness of the
Merger Event Redemption Time. To the extent any shares of Series B Preferred
Stock are called for redemption pursuant to this Section 6(a) and the Holder
thereof shall not have converted such shares prior to the Merger Event
Redemption Time (other than by reason of Section 5(c)(ii)) and the
Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the Merger Event Redemption
Time.
(b) If at any time (the "225% Date") after the 180th day after the
Original Issue Date (A) the Per Share Market Value for at least 30
consecutive Trading Days (provided, however, that, for purposes of such
calculation, at the option of the Corporation,
<PAGE>
-19-
any day during such 30 Trading Day period on which a Holder sets the last
closing bid price on the Common Stock shall not be used in such calculation,
in which case the first Trading Day preceding such 30 Trading Day period on
which no Holder set the last closing bid price on the Common Stock shall be
used for determining such calculation) is greater than 225% of the lesser of
(1) the then effective Conversion Price and (2) the Five Day Average Market
Price as of the Original Issue Date (as adjusted for stock splits, reverse
stock splits, stock dividends, recapitalizations and similar events), and (B)
the average daily trading volume of the Common Stock on the Nasdaq National
Market (or such other national securities market on which the shares of
Common Stock are listed or quoted) for such 30 consecutive Trading Days
exceeds 100,000 shares (as adjusted for stock splits, reverse stock splits,
stock dividends recapitalizations and similar events), then the Corporation
shall, at its option, have the right to redeem all, but not less than all, of
the then outstanding shares of Series B Preferred Stock for $.01 per share.
If the Corporation elects to effect such a redemption it shall, within
fifteen (15) days after the 225% Date, give written notice (the "225%
Redemption Notice") to the Holders of its intent to redeem the Series B
Preferred Stock on the date which is thirty (30) days subsequent to the date
of the 225% Redemption Notice (the "225% Redemption Date"), and each Holder
shall have the option to convert its shares of Series B Preferred Stock at
any time from the date of the 225% Redemption Notice to a time immediately
prior to the 225% Redemption Date with the Conversion Price being equal to
the Conversion Price in effect on the date of the 225% Redemption Notice;
provided, however, that no such redemption shall be permitted unless at the
time of the delivery of the 225% Redemption Notice and on the 225% Redemption
Date, (a) the shares of Common Stock which would be issuable upon conversion
of the Series B Preferred Stock are designated for quotation or listed for
trading on the Nasdaq National Market, the Nasdaq Small Cap Market, the NYSE
or the AMEX, (b) the Corporation has duly reserved for issuance the shares of
Common Stock which would be issuable upon such conversion, and (c) the Common
Stock to be issued upon such conversion is freely tradable under a
registration statement effective under the Securities Act or under Rule
144(k) under the Securities Act; provided, however, that if such Common Stock
is not so freely tradable on the 225% Redemption Date due solely to the last
paragraph of Section 3 of the Registration Rights Agreement, then the
Corporation shall have 60 days from the 225% Redemption Date (as specified in
the 225% Redemption Notice) to cause such Common Stock to be freely tradable
and, if the conditions of (a) and (b) above remain satisfied, the 225%
Redemption Date shall be postponed to the date immediately following the
first Trading Day within such 60 day period on which such Common Stock
becomes freely tradable. If no such date occurs at or prior to the end of
such 60 day period, then such 225% Redemption Notice shall be void and of no
effect. Each 225% Redemption Notice under this Section shall specify the
225% Redemption Date. To the extent that a Holder cannot convert shares of
Series B Preferred Stock, and retains shares of Series B Preferred Stock
after the 225% Redemption Date, as a result of the application of Section
5(a)(ii), such retained shares shall not be redeemed, and shall remain
outstanding, provided, however, that notwithstanding any other provision of
this
<PAGE>
-20-
Certificate of Incorporation to the contrary and regardless of the then per
share market value of the Common Stock (i) dividends shall, except as
required by applicable law, cease to accrue on such shares and, except as
required by law, such shares shall have no rights pursuant to Sections 3, 4
or 7 (other than, to the extent permitted by applicable law, Section 7(a))
and (ii) the Holder of such shares, or any transferee of the Holder, shall
convert such shares into Common Stock within 120 days of the 225% Redemption
Date at a Conversion Price equal to the Conversion Price on the date of the
225% Redemption Notice; provided that if any such shares remain outstanding
on the Business Day immediately following such 120th day, the Corporation may
redeem such shares for $.01 per share. To the extent any shares of Series
B Preferred Stock are called for redemption pursuant to this Section 6(b) and
the Holder thereof shall not have converted such shares prior to the 225%
Redemption Date (other than by reason of Section 5(c)(ii)) and the
Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the 225% Redemption Date.
(c) Commencing on the third anniversary of the Original Issue Date (the
"Third Anniversary Date"), the Corporation shall, at its option, have the
right to redeem all, but not less than all, of the then outstanding shares of
Series B Preferred Stock for $.01 per share. If the Corporation desires to
effect such a redemption it shall, within five (5) days following the Third
Anniversary Date give written notice (the "Third Anniversary Redemption
Notice") to the Holders of its intent to redeem the Series B Preferred Stock
on the date which is thirty (30) days subsequent to the date of the Third
Anniversary Redemption Notice (the "Third Anniversary Redemption Date"), and
each Holder shall have the option to convert its shares of Series B Preferred
Stock at any time from the date of the Third Anniversary Redemption Notice to
a time immediately prior to the Third Anniversary Redemption Date with the
Conversion Price being equal to the Conversion Price in effect on the date of
the Third Anniversary Redemption Notice. To the extent that a Holder cannot
convert shares of Series B Preferred Stock, and retains shares of Series B
Preferred Stock after the Third Anniversary Redemption Date, as a result of
the application of Section 5(a)(ii), such retained shares shall not be
redeemed, and shall remain outstanding, provided, however, that
notwithstanding any other provision of this Certificate of Incorporation to
the contrary and regardless of the then per share market value of the Common
Stock (i) dividends shall, except as required by applicable law, cease to
accrue on such shares and, except as required by law, such shares shall have
no rights pursuant to Sections 3, 4 or 7 (other than, to the extent permitted
by applicable law, Section 7(a)) and (ii) the Holder of such shares, or any
transferee of the Holder, shall convert such shares into Common Stock within
120 days of the Third Anniversary Redemption Date at a Conversion Price equal
to the Conversion Price on the date of the Third Anniversary Redemption
Notice; provided that if any such shares remain outstanding on the Business
Day immediately following such 120th day, the Corporation may redeem such
shares for $.01 per share. To the extent any shares of Series B Preferred
Stock are called for redemption pursuant to this Section 6(c) and the
<PAGE>
-21-
Holder thereof shall not have converted such shares prior to the Third
Anniversary Redemption Date (other than by reason of Section 5(c)(ii)) and
the Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the Third Anniversary
Redemption Date.
(d) If at any time after the Original Issue Date the Conversion Price
is equal to or less than the Threshold Price, then the Corporation shall have
the option, to the extent funds are legally available therefor, to elect (a
"Cash Redemption Election") to redeem any shares of Series B Preferred Stock
in lieu of issuing Common Stock upon any conversion of the Series B Preferred
Stock. The Corporation shall notify the Holders of any Cash Redemption
Election, and such Cash Redemption Election shall be applicable to any
conversion of Series B Preferred Stock the Conversion Date of which is after
the date of such notice and prior to the effective date of any termination or
revocation of such Cash Redemption Election. A Cash Redemption Election
shall terminate if, at any time, during such Cash Redemption Election period
the Corporation shall not have adequate funds legally available therefor.
The Corporation shall give notice of such termination of the Cash Redemption
Election to each Holder of the Series B Preferred Stock as soon as
practicable prior to or following such termination. The Corporation may
revoke a Cash Redemption Election at any time during any Cash Redemption
Election period upon one Trading Day's notice to each Holder of the Series B
Preferred Stock. During the period in which any Cash Redemption Election is
effective, if any Holder tenders shares of Series B Preferred Stock for
conversion, whether pursuant to Section 5(a), Section 6(a), Section 6(b),
Section 6(c) or otherwise, the Corporation shall redeem each share of the
Series B Preferred Stock tendered in lieu of delivering the shares of Common
Stock that otherwise would have been issued on such conversion for a
redemption price equal to the Five Day Average Market Price of the Common
Stock as at the applicable Conversion Date times the number of shares of
Common Stock the Holder would be entitled to receive upon conversion (taking
into account limitations imposed pursuant to Section 5(a)(iii) hereof). Such
amount shall be payable in immediately available funds within three Trading
Days after the applicable Conversion Date, and if such amount is not paid
within such period the unpaid amount shall accrue interest at a rate equal to
the Prime Rate plus 5% per annum (but in no event greater than 15% per annum)
from the applicable Conversion Date until paid in full. For purposes of this
Section 6(d), the "Threshold Price" shall mean $5.00, adjusted
proportionately to take into account any stock splits, stock dividends,
reverse stock splits, recapitalizations or similar transactions taking place
after the Original Issue Date. To the extent any shares of Series B
Preferred Stock are redeemed pursuant to this Section 6(d), such Series B
Preferred Stock so redeemed shall, for all purposes, no longer be deemed to
be issued and outstanding.
Section 7. Protective Provisions. So long as shares of Series B
Preferred Stock are outstanding, except as otherwise provided herein or by
applicable law, the
<PAGE>
-22-
Corporation shall not, without first obtaining the approval of the Holders of
at least two-thirds (2/3) of the then outstanding shares of Series B
Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock so as to affect adversely the Series B Preferred
Stock as a class, provided, however, that neither the designation, creation
or issuance of Junior Stock or Parity Stock nor the IXC Transaction shall be
deemed to affect adversely the Series B Preferred Stock as a class;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to redemption, the payment of
dividends or distribution of assets upon a Liquidation Event or any other
liquidation, dissolution or winding up of the Corporation;
(c) increase the authorized number of shares of Series B Preferred
Stock; or
(d) issue any shares of Series B Preferred Stock other than
pursuant to Section 2 of this Certificate of Incorporation or the Purchase
Agreement.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day other than the following: Saturday, Sunday,
any day which shall be a legal holiday in the State of New York and any day
on which banking institutions in the State of New York are authorized or
required by law or other government action to close.
"Common Stock" means the common stock, $.01 par value per share, of the
Corporation and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Date" shall have the meaning set forth in Section 5(a)(i).
"Conversion Notice" shall have the meaning set forth in Section 5(a)(i).
"Conversion Price" shall have the meaning set forth in Section 5(c)(i).
"Conversion Ratio" with respect to a share of Series B Preferred Stock
means, at any time, a fraction, the numerator of which is the Stated Value of
such share and the denominator of which is the Conversion Price at such time.
<PAGE>
-23-
"Dividend Non-Redemption Notice" shall have the meaning set forth in
Section 2(a).
"Dividend Payment Date" shall mean March 31, June 30, September 30 and
December 31 of each year, commencing December 31, 1997, and each Conversion
Date.
"Dividend Redemption Date" shall have the meaning set forth in Section
2(a).
"Dividend Shares" shall have the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Five Day Average Market Price" as at any date shall mean the average
Per Share Market Value for the five Trading Days immediately preceding but
not including such date, provided, however, that, at the Corporation's
option, any Trading Day during such five Trading Day period on which a Holder
sets the last closing bid price on the Common Stock shall not be used for
determining the Five Day Average Market Price, in which case the first
Trading Day preceding such five Trading Day period on which no Holder set the
last closing bid price on the Common Stock shall be used for determining the
Five Day Average Market Price.
"IRU Agreement" means the Stock Purchase Agreement dated as of July 22,
1997 between the Corporation and IXC Internet Services, Inc., as the same may
be amended from time to time, a copy of which, in relevant part, is available
for inspection at the principal corporate office of the Corporation.
"IXC Transaction" means the transactions contemplated by the IRU and
Stock Purchase Agreement dated as of July 22, 1997 between the Corporation
and IXC Internet Services, Inc., as the same may be amended from time to
time, pursuant to terms substantially similar to the terms in effect on the
Original Issue Date or as contemplated in the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity
securities of the Corporation, other than Series B Preferred Stock and Parity
Stock.
"Non-Conversion Notice" shall have the meaning set forth in Section 2(a).
"Original Issue Date" means the date of the first issuance of any shares
of the Series B Preferred Stock regardless of the number of transfers of any
particular shares of Series B Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Series B Preferred Stock.
<PAGE>
-24-
"Parity Stock" means any capital stock of the Corporation that ranks on
parity with the Series B Preferred Stock as to the payment of dividends or
distribution of assets upon a Liquidation Event or any other liquidation,
dissolution or winding up of the Corporation.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other principal stock exchange or quotation system on which the
Common Stock is then listed or quoted or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed or
quoted then on the Nasdaq National Market or any stock exchange or quotation
system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding
to its functions of reporting prices), then the average of the "Pink Sheet"
bid quotes for the relevant day, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value
of a share of Common Stock on such date as determined by an Appraiser
selected in good faith by the Corporation and reasonably acceptable to
Holders of a majority in interest of the shares of the Series B Preferred
Stock then outstanding.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision
thereof) or other entity of any kind.
"Prime Rate" means the rate of interest (expressed as an annual rate)
publicly announced by the Fleet National Bank, at its main office, from time
to time as its "prime rate" or if such institution shall not announce such
rate, the generally accepted prime rate, each change in such a rate to take
effect on the date of effective change of such prime rate.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Corporation and the
original Holders of the Series B Preferred Stock, a copy of which is
available for inspection at the principal corporate office of the Corporation.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Corporation and the
original Holders of Series B Preferred Stock, a copy of which is available
for inspection at the principal corporate office of the Corporation.
<PAGE>
-25-
"Reset Date" means each of the One Year Date, the Two Year Date and the
Three Year Date.
"Series B Preferred Stock Dividend Notice" shall have the meaning set
forth in Section 2(a).
"Thirty Day Average Market Price" as at any date shall mean the average
Per Share Market Value for the 30 Trading Days immediately preceding but not
including such date, provided, however, that, at the Corporation's option,
any Trading Day during such 30 Trading Day period on which a Holder sets the
last closing bid price on the Common Stock shall not be used for determining
the Thirty Day Average Market Price, in which case the first Trading Day
preceding such 30 Trading Day period on which no Holder set the last closing
bid price on the Common Stock shall be used for determining the Thirty Day
Average Market Price.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or other stock exchange or market on which the Common
Stock is listed or quoted, or (b) if the Common Stock is not listed or quoted
on the Nasdaq National Market or any other national securities exchange or
market, a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is
not quoted on the OTC Bulletin Board, a day on which the Common Stock is
quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to its
functions of reporting prices).
"Underlying Shares" means the shares of Common Stock into which the
shares of Series B Preferred Stock are convertible in accordance with the
terms hereof.
"Voting Securities" means "voting securities" as such term is defined in
Rule 12b-2 under the Exchange Act.
Section 9. Tax Withholding. Notwithstanding any provision hereof to
the contrary, all payments, distributions or transfers in respect of Series B
Preferred Stock shall be subject to such withholdings as may be required by
applicable law.
(b) Paragraph SEVENTH is hereby amended in its entirety to read as
follows:
SEVENTH: The Secretary of State of the State of New York is hereby
designated as the agent of the Corporation upon whom process in any action or
proceeding against the
<PAGE>
-26-
Corporation may be served; the post office address to which the Secretary of
State shall mail a copy of any such process so served is:
510 Huntmar Park Drive
Herndon, Virginia 20170
ATTN: President
FIFTH: No shares of the Corporation's Series A Junior Participating
Preferred Stock have been issued as of the date hereof. The foregoing
amendments to the Certificate of Incorporation were authorized by the
affirmative vote of a majority of the members of the Board of Directors of
the Corporation at a meeting duly called and held on November 2, 1997.
<PAGE>
-27-
IN WITNESS WHEREOF, we have made and subscribed this certificate and
hereby affirm under the penalties of perjury that its contents are true this
6th day of November, 1997.
/s/ William L. Schrader
---------------------------------------
William L. Schrader, President
/s/ Teresa Zajonczkoski
---------------------------------------
Teresa Zajonczkoski, Assistant Secretary
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be executed by the registered Holder
in order to convert shares of Series B Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series B 8%
Convertible Series B Preferred Stock of PSINet Inc. (the "Corporation")
indicated below, into the number of shares of the Corporation's common stock,
par value $.01 per share (the "Common Stock"), indicated below, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Corporation in connection therewith.
No fee will be charged to the Holder for any conversion, except for such
transfer taxes, if any.
Conversion calculations:
- -----------------------------------------------------------------------------
Date to Effect Conversion
- -----------------------------------------------------------------------------
Number of shares of Series B Preferred Stock to be Converted
- -----------------------------------------------------------------------------
Number of shares of Common Stock to be Issued
- -----------------------------------------------------------------------------
Applicable Conversion Price
- -----------------------------------------------------------------------------
Signature
- -----------------------------------------------------------------------------
Name
By:
- -----------------------------------------------------------------------------
Address
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINet INC.
Under Section 805 of the Business Corporation Law
The undersigned, being the President and Assistant Secretary of PSINet
Inc. (the "Corporation"), respectively, in order to amend the Corporation's
Certificate of Incorporation, do hereby certify that:
FIRST: The name of the Corporation is PSINet Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed
by the Department of State of the State of New York on October 21, 1988 under
the name Graphic Specialty Finishers, Inc.
THIRD: The Certificate of Incorporation is hereby amended to effect the
following amendments authorized by the Business Corporation Law:
(a) To amend Paragraph FOURTH, relating to the
aggregate number of shares which the Corporation
shall have authority to issue, to add a provision
stating the number, designation, relative rights,
preferences and limitations of a new series of
Preferred Stock, as fixed by the Board of
Directors of the Corporation, which shall be
designated as Series B 8% Convertible Preferred
Stock, par value $.01 per share, and to set forth
in full the text of such provision; and
(b) To amend Paragraph SEVENTH regarding the address
for service of process.
<PAGE>
-2-
FOURTH: To effect the foregoing:
(a) Paragraph FOURTH is hereby amended to add the
following at the end of such Paragraph FOURTH:
Series B 8% Convertible Preferred Stock
The Corporation is hereby authorized to establish a series of Preferred
Stock of the Corporation of the designation and number of shares, and having
the relative rights, preferences and limitations thereof (in addition to the
provisions set forth in this Certificate of Incorporation which are
applicable to all classes and series of Preferred Stock) as set forth in the
following Sections 1 through 9 and in Exhibit A attached hereto and made a
part hereof.
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as the Series B 8% Convertible Preferred Stock (the
"Series B Preferred Stock"), and the number of shares so designated shall be
675,142 (which shall not be subject to increase without the prior approval
of the holders (each holder of shares of Series B Preferred Stock, a "Holder"
and together with all other Holders, the "Holders") of 66 2/3% of the shares
of Series B Preferred Stock then outstanding). Each share of Series B
Preferred Stock shall have a par value of $.01 per share and a stated value
of $50.00 per share (the "Stated Value"). Of the designated shares of
Series B Preferred Stock, 600,000 shares are being issued initially and
75,142 shares are being authorized for payment of dividends in shares of
Series B Preferred Stock when, as and if declared by the Board of Directors.
As used in this Section 1 and the immediately following Sections 2 through 9,
all references to a "Section" or "Sections" shall be to any one or more of
this Section 1 and such Sections 2 through 9, as appropriate, and not to any
other provision of this Certificate of Incorporation.
Section 2. Dividends.
(a) (i) Holders shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available therefor,
and the Corporation shall, to the extent funds are legally available
therefor, pay on each Dividend Payment Date, in arrears, cumulative dividends
on the Series B Preferred Stock at the rate per share (as a percentage of the
Stated Value per share) equal to 8% per annum (subject to adjustment as
provided in Section 2(d)), payable in cash or shares of Series B Preferred
Stock, or any combination thereof, at (subject to the terms and conditions
set forth herein) the option of the Corporation. Dividends on the Series B
Preferred Stock shall be calculated on the basis of a 360-day year, shall
accrue daily commencing the Original Issue Date, and
<PAGE>
-3-
shall be deemed to accrue on such date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. The party that holds of
record the Series B Preferred Stock on the record date for the applicable
Dividend Payment Date for any dividend payment will be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available therefor, such dividend payment and any other accrued and unpaid
dividends which accrued prior to such Dividend Payment Date, without regard
to any sale or disposition of such Series B Preferred Stock subsequent to the
applicable record date but prior to the applicable Dividend Payment Date.
Except as otherwise provided in this Certificate of Incorporation or as
required by law, if at any time the Corporation pays a portion of but less
than the total amount of dividends then accrued on account of the Series B
Preferred Stock, such payment shall be distributed ratably among the Holders
based upon the number of shares held by each Holder. In order for the
Corporation to exercise its right to pay dividends in shares of Series B
Preferred Stock on a Dividend Payment Date, the Corporation shall, no less
than thirty (30) days prior to the Dividend Payment Date, provide each Holder
notice ("Series B Preferred Stock Dividend Notice") of its intention to pay
dividends in shares of Series B Preferred Stock. If the Corporation elects
to pay dividends in shares of Series B Preferred Stock, then the number of
shares of Series B Preferred Stock issuable with respect to each share of
Series B Preferred Stock outstanding on the record date for payment of such
dividend shall be equal to (i) a number which is the Conversion Price at such
time divided by the Stated Value of a share of Series B Preferred Stock
multiplied by (ii)(a) the aggregate dollar amount of dividends then payable
in respect of such share, divided by (b) the Five Day Average Market Price at
the applicable Dividend Payment Date. The Corporation shall, at its option,
have the right to redeem all, but not less than all, of the shares of Series
B Preferred Stock paid in the form of dividends pursuant to this Section 2(a)
(the "Dividend Shares") for $.01 per share with such redemption to be
effective on the Trading Day following the payment of such dividend (the
"Dividend Redemption Date"). If the Corporation does not desire to effect
such a redemption, it shall give written notice (the "Dividend Non-Redemption
Notice") to the Holders, at least five (5) days prior to the applicable
Dividend Payment Date, of its intent not to redeem the Dividend Shares on
such Dividend Payment Date. If the Corporation does not give a Dividend
Non-Redemption Notice to the Holders by the time set forth in the preceding
sentence, each Holder shall have the option, exercisable by failing to give a
Non-Conversion Notice, as hereinafter defined, to convert on the applicable
Dividend Payment Date, its Dividend Shares, with the Conversion Price being
equal to the Conversion Price in effect on the applicable Dividend Payment
Date and, notwithstanding any provision of this Certificate of Incorporation
to the contrary, such Holder shall be deemed to have elected to so convert,
effective on the Dividend Payment Date, if the Corporation does not actually
receive written notice to the contrary (a "Non-Conversion Notice") prior to
the Dividend Payment Date. To the extent that a Holder cannot convert
Dividend Shares on such Dividend Payment Date as a result of the application
of Section 5(a)(ii), and retains any of such Dividend Shares after the
applicable Dividend
<PAGE>
-4-
Redemption Date, such retained shares shall not be redeemed, and shall remain
outstanding, provided, however, that notwithstanding any other provision of
this Certificate of Incorporation to the contrary and regardless of the then
per share market value of the Common Stock (i) dividends shall, except as
required by applicable law, cease to accrue on such shares and, except as
required by law, such shares shall have no rights pursuant to Sections 3, 4
or 7 (other than, to the extent permitted by applicable law, Section 7(a))
and (ii) the Holder of such shares, or any transferee of the Holder, shall
convert such shares into Common Stock within 120 days of such Dividend
Payment Date at a Conversion Price equal to the Conversion Price on the
applicable Dividend Payment Date; provided that if any such shares remain
outstanding on the Business Day immediately following such 120th day, the
Corporation may redeem such shares for $.01 per share. To the extent any
Dividend Shares are called for redemption pursuant to this Section 2(a) and
the Holder thereof shall not have converted such shares prior to the
applicable Dividend Redemption Date (other than by reason of Section
5(c)(ii)) and the Corporation shall have set aside funds for such redemption,
such Dividend Shares to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the applicable Dividend
Redemption Date.
(ii) Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, no dividends or distributions
on shares of Series B Preferred Stock shall be declared by the Board of
Directors of the Corporation or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement,
instrument or indenture of the Corporation relating to its indebtedness
specifically prohibits such declaration, payment or setting apart for payment
or provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default or event of default thereunder;
provided, however, that nothing contained in this Certificate of
Incorporation shall be construed or deemed to require the Board of Directors
to declare or the Corporation to pay or set apart for payment any dividends
or distributions on shares of Series B Preferred Stock at any time, whether
permitted by any of such agreements, instruments or indentures, or not.
(b) Notwithstanding anything to the contrary contained in Section 2(a)
above, the Corporation may not pay dividends on the Series B Preferred Stock
in shares of Series B Preferred Stock (and, except as otherwise provided
below, must deliver cash in respect thereof) if at the date of declaration of
such dividend:
(i) (A) the number of shares of Series B Preferred Stock
at the time reserved for issuance for the payment of such dividends in shares
of Series B Preferred Stock on such Dividend Payment Date, together with the
number of shares held as treasury stock, are insufficient to satisfy the
Corporation's then existing obligations to issue shares of Series B Preferred
Stock for the payment of such dividends in shares of
<PAGE>
-5-
Series B Preferred Stock on such Dividend Payment Date or (B) the number of
shares equal to the sum of (i) the number of shares of Common Stock at the
time reserved for issuance for the conversion of shares of Series B Preferred
Stock to be paid to Holders as dividends hereunder on such Dividend Payment
Date, (ii) the number of authorized but unissued shares of Common Stock not
reserved for any purpose, (iii) the number of shares of Common Stock at the
time reserved for issuance for all other purposes and (iv) the number of
shares held as treasury stock, is insufficient to satisfy the Corporation's
then existing obligations to issue shares of Common Stock for all purposes
(including the conversion of shares of Series B Preferred Stock paid to
Holders as dividends hereunder on such Dividend Payment Date);
(ii) solely with respect to the applicable Holder, the
shares of Common Stock issuable upon conversion of Series B Preferred Stock
issued in payment of such dividends are not registered under the Securities
Act of 1933, as amended (the "Securities Act"), for resale pursuant to an
effective registration statement, or may not be sold by such Holder pursuant
to an effective registration statement because the Corporation is not
allowing sales to be made thereunder, that names the recipient of such
dividend as a selling stockholder thereunder (unless such registration
statement is not declared effective or such sales may not be made as a result
of the actions of such recipient or such recipient has not requested in
writing to be named therein as a selling stockholder on or prior to the date
of the related Series B Preferred Stock Dividend Notice) and may not be sold
without volume restrictions pursuant to Rule 144(k) promulgated under the
Securities Act, as determined by counsel to the Corporation (which may be
counsel employed by the Corporation);
(iii) the shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock to be delivered in
respect of such dividends are not designated for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market or listed on The New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX");
(iv) solely with respect to the applicable Holder and to
the extent permitted by applicable law, the Corporation shall have been
notified in writing by a Holder that the conversion of such shares would
result in (A) such Holder beneficially owning, in accordance with Rule 13d-3
promulgated under the Exchange Act (exclusive of any shares of Common Stock
beneficially owned by such Holder otherwise than as a result of the issuance
of Common Stock upon conversion of the Series B Preferred Stock owned by such
Holder) more than 4.999% of the issued and outstanding shares of Common Stock
and (B) if such Holder is subject to the Bank Holding Company Act of 1956, as
amended (the "Bank Holding Company Act"), such Holder owning or controlling
more than 4.999% of the voting shares of the Corporation for purposes of
Section 4(c)(6) thereof and Regulation Y thereunder, unless, in the case of
clause (A) above, the provisions of this Section 2(b)(iv)
<PAGE>
-6-
shall have theretofore been waived (except as otherwise provided by
applicable law, if the Holder provides to the Corporation the written notice
described above in this paragraph, the Corporation shall not be obligated to
deliver cash dividend payments in lieu of such payment in Series B Preferred
Stock and, to the extent permitted by applicable law, such dividend shall not
be payable until such time as the Holder delivers to the Corporation a
written notice to so deliver such dividend shares); provided, however, that,
the Corporation may continue to pay dividends on the Series B Preferred Stock
in shares of Series B Preferred Stock to Holders who are not then restricted
from receiving such Series B Preferred Stock pursuant to this Section
2(b)(iv);
(v) the Corporation has failed to timely
satisfy its obligations with respect to any Conversion Notice and
such failure shall be continuing as of such Dividend Payment
Date; or
(vi) the aggregate number of shares of Common
Stock then held by the Holders of Series B Preferred Stock which were issued
upon the conversion of shares of Series B Preferred Stock plus the number of
shares of Common Stock issuable upon the conversion of any shares of Series B
Preferred Stock held by such Holders which were received as dividends on
Series B Preferred Stock, including in payment of the current dividend,
exceeds 8,086,580 shares of Common Stock (as such amount may be adjusted to
reflect the occurrence of any of the events described in Sections
5(c)(ii)(b), (c) and (d)).
(c) So long as any Series B Preferred Stock shall remain outstanding,
except for any payment which may be made in connection with the IXC
Transaction, neither the Corporation nor any Subsidiary shall (i) redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities,
(ii) directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section
5(c)(ii) or 5(c)(iii) or a dividend or distribution or a distribution on
securities issuable pursuant to any rights pursuant to the Rights Agreement
dated as of May 8, 1996 between the Corporation and First Chicago Trust
Company of New York, as the same may be amended from time to time) upon, nor
shall any distribution (other than a dividend or distribution described in
Section 5(c)(ii) or 5(c)(iii) or a distribution on securities issuable
pursuant to any rights pursuant to the Rights Agreement dated as of May 8,
1996 between the Corporation and First Chicago Trust Company of New York, as
the same may be amended from time to time) be made in respect of, any Junior
Securities, or (iii) set aside any funds for or apply any funds to the
purchase, redemption or acquisition (through a sinking fund or otherwise) of
any Junior Securities (other than pursuant to the Rights Agreement dated as
of May 8, 1996 between the Corporation and First Chicago Trust Company of New
York, as the same may be amended from time to time). Notwithstanding the
foregoing, during such period, the Corporation may redeem, purchase or
otherwise acquire and set aside funds for and apply
<PAGE>
-7-
funds to the purchase, redemption or acquisition of Junior Securities (a) for
up to an aggregate amount not to exceed, at any point in time the sum of: (i)
$10,000,000 plus (ii) an amount equal to 100% of the aggregate net cash
proceeds received by the Corporation after the date hereof from the issuance
of Junior Securities or debt securities that have been converted into Junior
Securities plus (iii) an amount equal to 50% of the Corporation's cumulative
consolidated positive earnings before interest, taxes, depreciation and
amortization as reported by the Corporation in respect of each fiscal quarter
of the Corporation commencing with the fiscal quarter ending December 31,
1997 or (b) pursuant to Section 15.7 of the IRU Agreement, provided that
immediately after giving effect to any such redemption, purchase, other
acquisition or setting aside of funds for application to the purchase,
redemption or other acquisition pursuant to such Section 15.7, the
Corporation's consolidated shareholders' equity, as determined by the
Corporation's Chief Financial Officer, shall not be less than $20,000,000.
(d) Notwithstanding anything to the contrary contained in this
Certificate of Incorporation, if the Common Stock issuable upon conversion of
the Series B Preferred Stock shall not be freely tradable without restriction
under the United States federal securities laws as a result of (A) the
failure by the Corporation to file a registration statement under the
Securities Act as required by the Registration Rights Agreement for 30 days
after such registration statement is required to have been filed (a "Delayed
Filing Event") or (B) the suspension by the Corporation of the effectiveness
of, or the prohibition by the Corporation of sales of Common Stock by the
Holders under, such registration statement pursuant to the terms of the
Registration Rights Agreement for more than 180 days in any calendar year
period (an "Excessive Blackout Event"), then the dividend payable hereunder
shall, in the case of a Delayed Filing Event, increase by 100 basis points,
and shall increase by an additional 50 basis points on the first day of each
successive 30 day period until such registration statement is filed,
provided, that in no event shall the dividend payable hereunder be increased
by more than 200 basis points for such Delayed Filing Event and in the case
of an Excessive Blackout Event be increased by 75 basis points, and shall
increase by an additional 25 basis points on the 31st day of such Excessive
Blackout Event; provided, that, once such registration statement is filed or
such suspension or prohibition is lifted, as the case may be, the dividend
payable hereunder shall revert back to 8% per annum.
Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Series B Preferred Stock shall have no voting
rights. However, so long as any shares of Series B Preferred Stock are
outstanding, the Corporation shall not, without the requisite approval of the
Holders of the Series B Preferred Stock then outstanding, (a) take any of the
actions described in Section 7, or (b) enter into any agreement or
arrangement with respect to any other action which requires the approval of
the Holders of the Series B Preferred Stock then outstanding, unless
conditioned upon receipt of the requisite approval of the Holders of the
Series B Preferred Stock.
<PAGE>
-8-
Section 4. Liquidation. Subject to applicable law, upon any
liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary (a "Liquidation"), the Holders shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or
surplus, for each share of Series B Preferred Stock an amount equal to the
Stated Value plus all accrued but unpaid dividends per share, whether
declared or not, before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Corporation shall
be insufficient to pay in full such amounts and amounts payable to holders of
Parity Stock, if any, then, subject to applicable law, the entire assets to
be distributed to the Holders and the holders of Parity Stock, if any, shall
be distributed among the Holders and the holders of Parity Stock, if any,
ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. Neither a
transaction subject to the provisions of Section 6(a) nor a Subsidiary
Merger, as defined in Section 6(a), shall be treated as a Liquidation, but
rather shall be treated in accordance with Section 6(a). The Corporation
shall mail written notice of any such Liquidation not less than 45 days prior
to the payment date stated therein to each Holder.
Section 5. Conversion.
(a) (i) Subject to Section 5(a)(iii), each share of Series B
Preferred Stock is convertible by the Holder thereof into shares of Common
Stock (subject to adjustment as provided in this Section 5) at the Conversion
Ratio at the option of the Holder at any time on or after the 130th day
following the Original Issue Date, provided, however, that a Holder may
convert its Series B Preferred Stock prior to such 130th day, in accordance
with Section 6(a), during the pendency of a Merger Event (as defined in
Section 6(a)). A Holder shall effect conversions by surrendering the
certificate or certificates representing the shares of Series B Preferred
Stock to be converted to the Corporation, together with the form of
conversion notice attached hereto as Exhibit A (the "Conversion Notice").
Each Conversion Notice shall specify the number of shares of Series B
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date on which the Holder
delivers such Conversion Notice (the "Conversion Date"). If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the
date that the Conversion Notice is deemed delivered pursuant to Section 5(i).
Subject to Section 5(b) hereof, each Conversion Notice, once given, shall be
irrevocable. If the Holder is converting less than all shares of Series B
Preferred Stock represented by the certificate or certificates tendered by
the Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Corporation shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares of Series B Preferred Stock as have not
been converted. Except as otherwise provided in this Certificate of
Incorporation, on and after the effective date of conversion, the Holder
entitled to receive Common Stock
<PAGE>
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issuable upon such conversion shall be treated for all purposes as the record
holder of the shares of Common Stock issuable upon conversion, and the Series
B Preferred Stock so converted shall no longer be deemed to be issued and
outstanding.
(ii) Notwithstanding anything contained in this
Certificate of Incorporation apart from this Section 5(a)(ii) to the
contrary, in no event shall a Holder be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which, exclusive of any shares of Common Stock beneficially
owned by such Holder otherwise than as a result of the issuance of Common
Stock upon conversion of the Series B Preferred Stock held of record by such
Holder, the sum of (w) the number of shares of Common Stock beneficially
owned by such Holder immediately prior to such conversion plus (x) the number
of shares of Common Stock that would be issuable upon such conversion would
equal 4.999% of the sum of (y) the number of shares of Common Stock then
issued and outstanding plus (z) the number of shares of Common Stock that
would be issuable upon such conversion. For purposes of the preceding
sentence beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and the rules thereunder. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary and to the
extent permitted by applicable law, in no event shall a Holder that is
subject to the Bank Holding Company Act be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which the sum of (w) the number of shares of Common Stock owned
or controlled by such Holder immediately prior to such conversion plus (x)
the number of shares of Common Stock that would be issuable upon such
conversion would equal 4.999% of the sum of (y) the number of shares of
Common Stock then issued and outstanding plus (z) the number of shares of
Common Stock that would be issuable upon such conversion. For purposes of
the preceding sentence, ownership and control shall be determined in
accordance with the Bank Holding Company Act and Regulation Y thereunder.
The determination of the number of shares of Series B Preferred Stock that
are convertible at any time without exceeding any of the foregoing
limitations that are applicable to a Holder shall be made by that Holder, and
the submission of shares of Series B Preferred Stock for conversion shall be
deemed to be such Holder's determination that such shares of Series B
Preferred Stock are convertible without exceeding any such applicable
limitation, and the Corporation shall have no obligation to verify or confirm
the accuracy of such determination. Except as otherwise required by law,
this paragraph may be amended (i) in order to clarify an ambiguity or
otherwise to give effect to the foregoing limitations, by the Board of
Directors of the Corporation and the Holders of two-thirds (2/3) of the
shares of Series B Preferred Stock then outstanding and (ii) for any other
reason, with the further approval of the holders of a majority of the shares
of Common Stock then outstanding, to the extent permitted by applicable law
and subject to the rights and preferences of any securities ranking senior
thereto or on parity therewith or, to the extent the holders thereof may have
any approval rights with respect thereto, other preferred stock of the
Corporation. The
<PAGE>
-10-
limitation imposed by the first sentence of this Section 5(a)(ii) may be
waived by a Holder of Series B Preferred Stock as to itself (and solely as to
itself) upon not less than 65 days prior written notice to the Corporation,
and the provisions of this Section 5(a)(ii) shall continue to apply until
such 65th Day (or later, if stated in the notice of waiver).
(iii) Notwithstanding anything contained in this
Certificate of Incorporation, in no event shall the Corporation be obligated
to issue more than an aggregate of 8,086,580 shares of Common Stock (as such
amount may be adjusted to reflect the occurrence of any of the events
described in Sections 5(c)(ii)(b), (c) and (d)) upon conversion of the
Series B Preferred Stock (such amount being equal to 19.999% of the
outstanding Common Stock on the Original Issue Date), and in no event shall
the Corporation be obligated to issue more than an aggregate of 11.9776
shares of Common Stock upon conversion of each share of Series B Preferred
Stock (the "Maximum Conversion Ratio"), provided, however, that the Maximum
Conversion Ratio shall be adjusted to reflect the occurrence of any of the
events described in Sections 5(c)(ii)(b), (c) and (d). On or after the third
anniversary of the Original Issue Date, if the Corporation has issued to the
Holders the maximum number of shares of Common Stock permitted pursuant to
this Section 5(a)(iii), then the Corporation shall, at its option, have the
right to redeem the then outstanding shares of Series B Preferred Stock for
$.01 per share. If the Corporation does determine to so redeem the then
outstanding Series B Preferred Stock as set forth above, then once the
Corporation has set aside such funds for such redemption the then outstanding
Series B Preferred Stock to be so redeemed shall, for all purposes, no longer
be deemed to be issued and outstanding on and after the date fixed for
redemption.
(iv) In the case of a Merger Event (as defined in
Section 6(a)) (other than solely a Cash Event (as defined in Section 6(a))
where the Corporation does not deliver a Merger Event Redemption Notice
pursuant to Section 6(a), the Holders (1) shall be issued shares of
convertible preferred stock or, to the extent possible and to the extent
permitted by applicable law, at the Corporation's option, convertible
debentures of the entity with which such Merger Event takes place, which
newly issued convertible security shall, to the extent possible and to the
extent permitted by applicable law, have terms substantially similar in all
material respects to the terms of the Series B Preferred Stock (including
with respect to conversion and registration) and shall, to the extent
possible and to the extent permitted by applicable law, be entitled to all of
the rights and privileges of a Holder of Series B Preferred Stock set forth
in this Certificate of Incorporation, the Registration Rights Agreement and
the Purchase Agreement (including, without limitation, as such rights relate
to the acquisition, transferability, registration and listing of such shares
of stock or other securities issuable upon conversion of such convertible
security), and (2) simultaneously with such issuance of the convertible
security, shall have the right to convert such convertible security only into
the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of
<PAGE>
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Common Stock upon the effectiveness of such Merger Event, provided, that the
conversion price for such newly issued convertible security shall be based
upon the amount of securities, cash or property that each share of Common
Stock would receive in such transaction, the Conversion Ratio immediately
prior to the effective or closing date for such transaction and the
Conversion Price stated herein and the terms of any such consolidation,
merger, sale, transfer or other disposition shall include such terms so as to
continue to give to the Holder the right to receive the securities, cash or
property set forth in this Section 5(a)(iv) upon any conversion or redemption
following such consolidation, merger, sale, transfer or other disposition.
In the case of solely a Cash Event where the Corporation does not deliver a
Merger Event Redemption Notice pursuant to Section 6(a), the Conversion
Price, at the option of each Holder, shall be adjusted so that it is equal to
the cash price paid for each share of Common Stock in accordance with the
terms of Section 6(a). Notwithstanding anything else contained in this
Certificate of Incorporation, if the Corporation does not redeem the Series B
Preferred Stock and the Conversion Price is adjusted pursuant to this Section
5(a)(iv), then such Conversion Price shall be further adjusted on any
subsequent Reset Date to the lower of such adjusted Conversion Price and the
Conversion Price which would have otherwise gone into effect on such
subsequent Reset Date.
(b) Not later than three (3) Business Days after a Conversion Date, the
Corporation will deliver to the converting Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Series B Preferred Stock, (ii) one or more
certificates representing the number of shares of Series B Preferred Stock
not converted, (iii) to the extent funds are legally available therefor, a
bank check in the amount of accrued and unpaid dividends (if the Corporation
has elected or is required hereunder to pay accrued dividends in cash) and
(iv) to the extent funds are legally available therefor, if the Corporation
has elected and is permitted hereunder (notwithstanding any applicable notice
period) to pay accrued dividends in shares of Series B Preferred Stock, and
the record holders of the shares of Series B Preferred Stock with respect to
which such dividends are paid did not deliver a Non-Conversion Notice to the
Corporation prior to the Dividend Conversion Date with respect to such shares
of Series B Preferred Stock paid as dividends, certificates, which shall be
free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement), representing such
number of Shares of Common Stock are as issuable on account of accrued
dividends determined in accordance with Section 2(a); provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion of any shares of Series B
Preferred Stock until certificates evidencing such shares of Series B
Preferred Stock are either delivered for conversion to the Corporation or, if
so directed by the Corporation, to any transfer agent for the Series B
Preferred Stock or Common Stock, or the Holder of such Series B Preferred
Stock certifies to the Corporation and, if required, any
<PAGE>
-12-
transfer agent for the Series B Preferred Stock that such certificates have
been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Corporation and any such transfer
agent to indemnify and hold harmless the Corporation and any such transfer
agent from any loss incurred by it in connection therewith. The Corporation
shall, upon request of the Holder, use its reasonable best efforts to deliver
any certificate or certificates required to be delivered by the Corporation
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions. If in
the case of any Conversion Notice such certificate or certificates, including
for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are not
delivered to or as directed by the applicable Holder by the close of business
on the third Business Day after the Conversion Date, the Holder shall be
entitled by written notice to the Corporation at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Corporation shall immediately return the
certificates representing the shares of Series B Preferred Stock tendered to
it for conversion and thereupon shall no longer be treated as a record holder
of the shares of Common Stock issuable upon conversion.
(c) (i) The conversion price for each share of Series B
Preferred Stock (the "Conversion Price") on any Conversion Date shall be
equal to 125% of the Five Day Average Market Price as of the Original Issue
Date; provided, however, that (A) if on the first anniversary of the Original
Issue Date (the "One Year Date") the Thirty Day Average Market Price of the
Common Stock (the "One Year Reset Price") is less than the then effective
Conversion Price, then on and after the One Year Date the Conversion Price
shall be equal to the One Year Reset Price; and (B) if on the second
anniversary of the Original Issue Date (the "Two Year Date") the Thirty Day
Average Market Price of the Common Stock (the "Two Year Reset Price") is less
than the then effective Conversion Price, then on and after the Two Year Date
the Conversion Price shall be equal to the Two Year Reset Price; and (C) if
on the third anniversary of the Original Issue Date (the "Three Year Date")
the Thirty Day Average Market Price of the Common Stock (the "Three Year
Reset Price") is less than the then effective Conversion Price, then on and
after the Three Year Date the Conversion Price shall be equal to 95% of the
Three Year Reset Price. The Conversion Price determined in accordance with
this Section 5(c)(i) shall be subject to further adjustment as set forth in
Sections 5(c)(ii) and (iii) and Section 6. Notwithstanding the foregoing, to
the extent that a Holder converts such Holder's Series B Preferred Stock and
at the time of such conversion the Corporation has not paid all accrued but
unpaid dividends (whether such dividends were to have been paid in cash or in
shares of Series B Preferred Stock), then at the time of such conversion the
Conversion Price for such Series B Preferred Stock shall be adjusted so that
the total amount of Common Stock received upon conversion is equal to the
amount of Common Stock that would have been received in respect of such
Series B Preferred Stock immediately prior to such adjustment plus an
<PAGE>
-13-
amount of Common Stock equal in value to the Common Stock which would have
been issuable upon conversion of any Series B Preferred Stock which, on the
date of conversion, would have been issuable in payment of accrued but unpaid
dividends (whether such dividends were to have been paid in cash or in shares
of Series B Preferred Stock) in respect of such Series B Preferred Stock, and
thereupon the Corporation shall have no further obligation with respect to
such dividends.
(ii) If the Corporation, at any time while any
shares of Series B Preferred Stock are outstanding, (a) shall pay a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d)
issue by reclassification of shares of Common Stock any shares of capital
stock of the Corporation, the Conversion Price shall be adjusted by
multiplying the Conversion Price then in effect by a fraction the numerator
of which shall be the number of shares of Common Stock outstanding before
such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to
this Section 5(c)(ii) shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend
or distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.
Notwithstanding the foregoing, in no event shall the Conversion Price be
adjusted by reason of the issuance or exercise of any rights pursuant to the
Rights Agreement dated as of May 8, 1996 between the Corporation and First
Chicago Trust Company of New York, as the same may be amended from time to
time, or any dividends or distributions or distributions on securities
issuable pursuant to such rights.
(iii) If the Corporation, at any time while shares
of Series B Preferred Stock are outstanding, shall distribute to all holders
of Common Stock as a class (and not to Holders) evidences of its indebtedness
or assets, then in each such case the Conversion Price at which each share of
Series B Preferred Stock shall thereafter be convertible shall be adjusted by
multiplying the Conversion Price in effect immediately prior to the record
date fixed for determination of stockholders entitled to receive such
distribution by a fraction the denominator of which shall be the Five Day
Average Market Price of Common Stock determined as of the record date
mentioned above, and the numerator of which shall be such Five Day Average
Market Price of the Common Stock on such record date less the then fair
market value at such record date of the portion of such assets or the value
of such evidence of indebtedness so distributed applicable to one outstanding
share of Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Corporation, such fair market value shall be
determined by a nationally recognized or major regional investment banking
firm or firm of independent certified public accountants of
<PAGE>
-14-
recognized standing (which may be the firm that regularly examines the
financial statements of the Corporation) (an "Appraiser") selected in good
faith by the Corporation and reasonably acceptable to the Holders of a
majority in interest of the shares of Series B Preferred Stock then
outstanding. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.
(iv) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may
be.
(v) Whenever the Conversion Price is adjusted
pursuant to Section 5(c)(i) or (ii), the Corporation shall promptly give
notice to each Holder, which notice shall set forth the Conversion Price
after such adjustment and a brief statement of the facts requiring such
adjustment.
(vi) If:
A. the Corporation shall declare dividend (or
any other distribution) on its Common
Stock; or
B. the Corporation shall declare a special
nonrecurring cash dividend on its Common
Stock; or
C. the Corporation shall authorize the
granting to all holders of the Common
Stock, as a class, rights or warrants to
subscribe for or purchase any shares of
capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Corporation shall be required in connection
with any reclassification of the Common
Stock of the Corporation, any consolidation
or merger to which the Corporation is a
party (other than any merger of the
Corporation into a subsidiary of the
Corporation in connection with the IXC
Transaction), any sale or
<PAGE>
-15-
transfer of all or substantially all of the
assets of the Corporation; or
E. the Corporation shall authorize the
voluntary or involuntary dissolution,
liquidation or winding up of the affairs of
the Corporation;
then the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion and transfer of Series B Preferred
Stock, and shall cause to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Corporation, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, rights or warrants,
or if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distributions, redemption,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale or transfer is expected by the
Corporation to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale or
transfer; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Except as required
by applicable law, no such notice shall be required in connection with any
matter relating to the IXC Transaction.
(d) If at any time conditions shall arise by reason of action taken by
the Corporation which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which would materially
and adversely affect the rights of the Holders (different than or
distinguished from the effect generally on rights of holders of any class of
the Corporation's capital stock) or if at any time any such conditions are
expected by the Corporation to arise by reason of any action contemplated by
the Corporation, the Corporation shall mail a written notice briefly
describing the action contemplated and the material adverse effects of such
action on the rights of the Holders at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the Corporation
and reasonably acceptable to the Holders of a majority in interest of the
Series B Preferred Stock then outstanding, shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Series B Preferred Stock may
thereafter be convertible) and any distribution which is or would be required
to preserve without diluting the rights of the Holders. To the extent
permitted by applicable law and stock exchange or Nasdaq rules, the
Corporation shall make the adjustment recommended forthwith
<PAGE>
-16-
upon the receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; provided, however, that no such adjustment
of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
(e) The Corporation will at all times reserve and keep available out of
its authorized and unissued Common Stock solely for the purpose of issuance
upon conversion of Series B Preferred Stock as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than the number of shares of Common Stock as
shall (subject to any additional requirements of the Corporation as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5(c)) upon
the conversion of all outstanding shares of Series B Preferred Stock assuming
the payment of all future dividends in shares of Series B Preferred Stock in
accordance with the terms hereof. All shares of Common Stock that shall be
so issuable shall, upon issue, be duly authorized, validly issued and fully
paid, and nonassessable subject to Section 630 of the New York Business
Corporation Law. At such time as the Corporation would be, if a notice of
conversion were to be delivered on such date, precluded from converting the
then outstanding Series B Preferred Stock by reason of an insufficient number
of authorized shares of Common Stock then being authorized for issuance, the
Corporation shall promptly prepare and mail to the shareholders of the
Corporation proxy materials requesting authorization to amend the
Corporation's Certificate of Incorporation to increase the number of shares
of Common Stock which the Corporation is authorized to issue to at least a
number of shares equal to the sum of (i) all shares of Common Stock then
outstanding, (ii) the number of shares of Common Stock issuable on account of
all outstanding warrants, options and convertible securities (other than the
Series B Preferred Stock) and on account of all shares reserved under any
stock option, stock purchase, warrant or similar plan and (iii) the number
of Underlying Shares as would then be issuable upon a conversion in full of
the Series B Preferred Stock assuming the payment of all future dividends in
shares of Series B Preferred Stock in accordance with the terms hereof. In
connection therewith, the Corporation shall use reasonable efforts to cause
its Board of Directors to (a) adopt proper resolutions authorizing such
increase, (b) recommend to and otherwise use its reasonable best efforts to
promptly and duly obtain shareholder approval to carry out such resolutions
(and hold a special meeting of the shareholders no later than the 60th day
after delivery of the proxy materials to the shareholders relating to such
meeting) and (c) within 5 Trading Days of obtaining such shareholder
authorization, file an appropriate amendment to the Corporation's certificate
of incorporation to evidence such increase.
(f) Upon a conversion hereunder the Corporation shall not be required
to issue stock certificates representing fractions of shares of Common Stock,
but may, to the
<PAGE>
-17-
extent permitted by applicable law, make a cash payment in respect of any
final fraction of a share based on the Five Day Average Market Price at the
applicable Conversion Date.
(g) The issuance of certificates for shares of Common Stock on
conversion of Series B Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificates, provided
that the Corporation shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Series B Preferred Stock so converted and the Corporation shall not
be required to issue or deliver such certificates unless or until the person
or persons requesting the issuance thereof shall have paid to the Corporation
the amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(h) Shares of Series B Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares
of undesignated preferred stock.
(i) Except as may be otherwise required by applicable law, any and all
notices or other communications or deliveries to be provided by the Holders
hereunder, including, without limitation, any Conversion Notice, shall be in
writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Corporation, with a copy to the Corporation's General Counsel (provided
that the failure to send a copy of such notice to the Corporation's General
Counsel shall not affect the validity of such notice), at the facsimile
telephone number or address of the principal place of business of the
Corporation as set forth in the Purchase Agreement, or at such other
facsimile number or address as the Corporation may notify the Holders from
time to time. Except as otherwise specifically provided herein, any and all
notices or other communications or deliveries to be provided by the
Corporation hereunder shall be delivered in accordance with the provisions of
Section 5.3 of the Purchase Agreement and deemed given on the date or time
provided therein.
Section 6. Optional Redemptions.
(a) In case of any consolidation or merger of the Corporation with or
into another Person pursuant to which the Corporation will not be the
surviving entity (other than any merger of the Corporation into a subsidiary
of the Corporation where the holders of Voting Securities of the Corporation
immediately prior to such merger own at least 50% of the Voting Securities of
the subsidiary of the Corporation immediately subsequent to such merger (a
"Subsidiary Merger")) or the sale, transfer or other disposition of all or
<PAGE>
-18-
substantially all of the assets of the Corporation pursuant to which the
Common Stock is converted into other securities or property (a "Stock
Event"), or any consolidation or merger of the Corporation with or into
another Person pursuant to which the Corporation will not be the surviving
entity (other than any Subsidiary Merger), or any sale, transfer or other
disposition of all or substantially all of the assets of the Corporation
pursuant to which the Common Stock is converted into the right to receive
cash (a "Cash Event" and together with a Stock Event, or any combination
thereof, a "Merger Event"), then the Corporation shall, at its option, have
the right to redeem all, but not less than all, of the then outstanding
shares of Series B Preferred Stock for $.01 per share with such redemption to
be effective immediately prior to the effective time of the Merger Event (the
"Merger Event Redemption Time"). If the Corporation desires to effect such a
redemption it shall give written notice (the "Merger Event Redemption
Notice") to the Holders of its intent to redeem the Series B Preferred Stock
at least thirty (30) days prior to the Merger Event Redemption Time and each
Holder shall have the option to convert its shares of Series B Preferred
Stock at any time from the date of the Merger Event Redemption Notice to a
time immediately prior to the Merger Event Redemption Time with the
Conversion Price, at the option of each Holder, being equal to (A) the
Conversion Price in effect on the date of the Merger Event Redemption Notice
or (B) the price equal to the consideration to be paid for each share of
Common Stock pursuant to the Merger Event, provided, that if a Holder shall
elect to convert using the price set forth in (B) above, such Holder shall,
upon such conversion, receive, if subsequent to the Original Issue Date but
prior to the One Year Date, 110%, if subsequent to the One Year Date but
prior to the Two Year Date, 105%, and if subsequent to the Two Year Date,
100%, of the number of shares of Common Stock that it otherwise would have
received upon such conversion. To the extent that a Holder cannot convert
shares of Series B Preferred Stock as a result of the application of Section
5(a)(ii), and retains shares of Series B Preferred Stock at the Merger Event
Redemption Time, such retained shares shall not be redeemed, shall remain
outstanding and shall be converted into such number of shares of stock and
such amount of other securities, cash and property receivable by holdders of
Common Stock upon the effectiveness of such Merger Event as such Holder
would have been entitled to receive if such Holder had converted such Series
B Preferred Stock immediately prior to the time of the effectiveness of the
Merger Event Redemption Time. To the extent any shares of Series B Preferred
Stock are called for redemption pursuant to this Section 6(a) and the Holder
thereof shall not have converted such shares prior to the Merger Event
Redemption Time (other than by reason of Section 5(c)(ii)) and the
Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the Merger Event Redemption
Time.
(b) If at any time (the "225% Date") after the 180th day after the
Original Issue Date (A) the Per Share Market Value for at least 30
consecutive Trading Days (provided, however, that, for purposes of such
calculation, at the option of the Corporation,
<PAGE>
-19-
any day during such 30 Trading Day period on which a Holder sets the last
closing bid price on the Common Stock shall not be used in such calculation,
in which case the first Trading Day preceding such 30 Trading Day period on
which no Holder set the last closing bid price on the Common Stock shall be
used for determining such calculation) is greater than 225% of the lesser of
(1) the then effective Conversion Price and (2) the Five Day Average Market
Price as of the Original Issue Date (as adjusted for stock splits, reverse
stock splits, stock dividends, recapitalizations and similar events), and (B)
the average daily trading volume of the Common Stock on the Nasdaq National
Market (or such other national securities market on which the shares of
Common Stock are listed or quoted) for such 30 consecutive Trading Days
exceeds 100,000 shares (as adjusted for stock splits, reverse stock splits,
stock dividends recapitalizations and similar events), then the Corporation
shall, at its option, have the right to redeem all, but not less than all, of
the then outstanding shares of Series B Preferred Stock for $.01 per share.
If the Corporation elects to effect such a redemption it shall, within
fifteen (15) days after the 225% Date, give written notice (the "225%
Redemption Notice") to the Holders of its intent to redeem the Series B
Preferred Stock on the date which is thirty (30) days subsequent to the date
of the 225% Redemption Notice (the "225% Redemption Date"), and each Holder
shall have the option to convert its shares of Series B Preferred Stock at
any time from the date of the 225% Redemption Notice to a time immediately
prior to the 225% Redemption Date with the Conversion Price being equal to
the Conversion Price in effect on the date of the 225% Redemption Notice;
provided, however, that no such redemption shall be permitted unless at the
time of the delivery of the 225% Redemption Notice and on the 225% Redemption
Date, (a) the shares of Common Stock which would be issuable upon conversion
of the Series B Preferred Stock are designated for quotation or listed for
trading on the Nasdaq National Market, the Nasdaq Small Cap Market, the NYSE
or the AMEX, (b) the Corporation has duly reserved for issuance the shares of
Common Stock which would be issuable upon such conversion, and (c) the Common
Stock to be issued upon such conversion is freely tradable under a
registration statement effective under the Securities Act or under Rule
144(k) under the Securities Act; provided, however, that if such Common Stock
is not so freely tradable on the 225% Redemption Date due solely to the last
paragraph of Section 3 of the Registration Rights Agreement, then the
Corporation shall have 60 days from the 225% Redemption Date (as specified in
the 225% Redemption Notice) to cause such Common Stock to be freely tradable
and, if the conditions of (a) and (b) above remain satisfied, the 225%
Redemption Date shall be postponed to the date immediately following the
first Trading Day within such 60 day period on which such Common Stock
becomes freely tradable. If no such date occurs at or prior to the end of
such 60 day period, then such 225% Redemption Notice shall be void and of no
effect. Each 225% Redemption Notice under this Section shall specify the
225% Redemption Date. To the extent that a Holder cannot convert shares of
Series B Preferred Stock, and retains shares of Series B Preferred Stock
after the 225% Redemption Date, as a result of the application of Section
5(a)(ii), such retained shares shall not be redeemed, and shall remain
outstanding, provided, however, that notwithstanding any other provision of
this
<PAGE>
-20-
Certificate of Incorporation to the contrary and regardless of the then per
share market value of the Common Stock (i) dividends shall, except as
required by applicable law, cease to accrue on such shares and, except as
required by law, such shares shall have no rights pursuant to Sections 3, 4
or 7 (other than, to the extent permitted by applicable law, Section 7(a))
and (ii) the Holder of such shares, or any transferee of the Holder, shall
convert such shares into Common Stock within 120 days of the 225% Redemption
Date at a Conversion Price equal to the Conversion Price on the date of the
225% Redemption Notice; provided that if any such shares remain outstanding
on the Business Day immediately following such 120th day, the Corporation may
redeem such shares for $.01 per share. To the extent any shares of Series
B Preferred Stock are called for redemption pursuant to this Section 6(b) and
the Holder thereof shall not have converted such shares prior to the 225%
Redemption Date (other than by reason of Section 5(c)(ii)) and the
Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the 225% Redemption Date.
(c) Commencing on the third anniversary of the Original Issue Date (the
"Third Anniversary Date"), the Corporation shall, at its option, have the
right to redeem all, but not less than all, of the then outstanding shares of
Series B Preferred Stock for $.01 per share. If the Corporation desires to
effect such a redemption it shall, within five (5) days following the Third
Anniversary Date give written notice (the "Third Anniversary Redemption
Notice") to the Holders of its intent to redeem the Series B Preferred Stock
on the date which is thirty (30) days subsequent to the date of the Third
Anniversary Redemption Notice (the "Third Anniversary Redemption Date"), and
each Holder shall have the option to convert its shares of Series B Preferred
Stock at any time from the date of the Third Anniversary Redemption Notice to
a time immediately prior to the Third Anniversary Redemption Date with the
Conversion Price being equal to the Conversion Price in effect on the date of
the Third Anniversary Redemption Notice. To the extent that a Holder cannot
convert shares of Series B Preferred Stock, and retains shares of Series B
Preferred Stock after the Third Anniversary Redemption Date, as a result of
the application of Section 5(a)(ii), such retained shares shall not be
redeemed, and shall remain outstanding, provided, however, that
notwithstanding any other provision of this Certificate of Incorporation to
the contrary and regardless of the then per share market value of the Common
Stock (i) dividends shall, except as required by applicable law, cease to
accrue on such shares and, except as required by law, such shares shall have
no rights pursuant to Sections 3, 4 or 7 (other than, to the extent permitted
by applicable law, Section 7(a)) and (ii) the Holder of such shares, or any
transferee of the Holder, shall convert such shares into Common Stock within
120 days of the Third Anniversary Redemption Date at a Conversion Price equal
to the Conversion Price on the date of the Third Anniversary Redemption
Notice; provided that if any such shares remain outstanding on the Business
Day immediately following such 120th day, the Corporation may redeem such
shares for $.01 per share. To the extent any shares of Series B Preferred
Stock are called for redemption pursuant to this Section 6(c) and the
<PAGE>
-21-
Holder thereof shall not have converted such shares prior to the Third
Anniversary Redemption Date (other than by reason of Section 5(c)(ii)) and
the Corporation shall have set aside funds for such redemption, such Series B
Preferred Stock to be so redeemed shall, for all purposes, no longer be
deemed to be issued and outstanding on and after the Third Anniversary
Redemption Date.
(d) If at any time after the Original Issue Date the Conversion Price
is equal to or less than the Threshold Price, then the Corporation shall have
the option, to the extent funds are legally available therefor, to elect (a
"Cash Redemption Election") to redeem any shares of Series B Preferred Stock
in lieu of issuing Common Stock upon any conversion of the Series B Preferred
Stock. The Corporation shall notify the Holders of any Cash Redemption
Election, and such Cash Redemption Election shall be applicable to any
conversion of Series B Preferred Stock the Conversion Date of which is after
the date of such notice and prior to the effective date of any termination or
revocation of such Cash Redemption Election. A Cash Redemption Election
shall terminate if, at any time, during such Cash Redemption Election period
the Corporation shall not have adequate funds legally available therefor.
The Corporation shall give notice of such termination of the Cash Redemption
Election to each Holder of the Series B Preferred Stock as soon as
practicable prior to or following such termination. The Corporation may
revoke a Cash Redemption Election at any time during any Cash Redemption
Election period upon one Trading Day's notice to each Holder of the Series B
Preferred Stock. During the period in which any Cash Redemption Election is
effective, if any Holder tenders shares of Series B Preferred Stock for
conversion, whether pursuant to Section 5(a), Section 6(a), Section 6(b),
Section 6(c) or otherwise, the Corporation shall redeem each share of the
Series B Preferred Stock tendered in lieu of delivering the shares of Common
Stock that otherwise would have been issued on such conversion for a
redemption price equal to the Five Day Average Market Price of the Common
Stock as at the applicable Conversion Date times the number of shares of
Common Stock the Holder would be entitled to receive upon conversion (taking
into account limitations imposed pursuant to Section 5(a)(iii) hereof). Such
amount shall be payable in immediately available funds within three Trading
Days after the applicable Conversion Date, and if such amount is not paid
within such period the unpaid amount shall accrue interest at a rate equal to
the Prime Rate plus 5% per annum (but in no event greater than 15% per annum)
from the applicable Conversion Date until paid in full. For purposes of this
Section 6(d), the "Threshold Price" shall mean $5.00, adjusted
proportionately to take into account any stock splits, stock dividends,
reverse stock splits, recapitalizations or similar transactions taking place
after the Original Issue Date. To the extent any shares of Series B
Preferred Stock are redeemed pursuant to this Section 6(d), such Series B
Preferred Stock so redeemed shall, for all purposes, no longer be deemed to
be issued and outstanding.
Section 7. Protective Provisions. So long as shares of Series B
Preferred Stock are outstanding, except as otherwise provided herein or by
applicable law, the
<PAGE>
-22-
Corporation shall not, without first obtaining the approval of the Holders of
at least two-thirds (2/3) of the then outstanding shares of Series B
Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series B Preferred Stock so as to affect adversely the Series B Preferred
Stock as a class, provided, however, that neither the designation, creation
or issuance of Junior Stock or Parity Stock nor the IXC Transaction shall be
deemed to affect adversely the Series B Preferred Stock as a class;
(b) create any new class or series of capital stock having a
preference over the Series B Preferred Stock as to redemption, the payment of
dividends or distribution of assets upon a Liquidation Event or any other
liquidation, dissolution or winding up of the Corporation;
(c) increase the authorized number of shares of Series B Preferred
Stock; or
(d) issue any shares of Series B Preferred Stock other than
pursuant to Section 2 of this Certificate of Incorporation or the Purchase
Agreement.
Section 8. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Business Day" means any day other than the following: Saturday, Sunday,
any day which shall be a legal holiday in the State of New York and any day
on which banking institutions in the State of New York are authorized or
required by law or other government action to close.
"Common Stock" means the common stock, $.01 par value per share, of the
Corporation and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Date" shall have the meaning set forth in Section 5(a)(i).
"Conversion Notice" shall have the meaning set forth in Section 5(a)(i).
"Conversion Price" shall have the meaning set forth in Section 5(c)(i).
"Conversion Ratio" with respect to a share of Series B Preferred Stock
means, at any time, a fraction, the numerator of which is the Stated Value of
such share and the denominator of which is the Conversion Price at such time.
<PAGE>
-23-
"Dividend Non-Redemption Notice" shall have the meaning set forth in
Section 2(a).
"Dividend Payment Date" shall mean March 31, June 30, September 30 and
December 31 of each year, commencing December 31, 1997, and each Conversion
Date.
"Dividend Redemption Date" shall have the meaning set forth in Section
2(a).
"Dividend Shares" shall have the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Five Day Average Market Price" as at any date shall mean the average
Per Share Market Value for the five Trading Days immediately preceding but
not including such date, provided, however, that, at the Corporation's
option, any Trading Day during such five Trading Day period on which a Holder
sets the last closing bid price on the Common Stock shall not be used for
determining the Five Day Average Market Price, in which case the first
Trading Day preceding such five Trading Day period on which no Holder set the
last closing bid price on the Common Stock shall be used for determining the
Five Day Average Market Price.
"IRU Agreement" means the Stock Purchase Agreement dated as of July 22,
1997 between the Corporation and IXC Internet Services, Inc., as the same may
be amended from time to time, a copy of which, in relevant part, is available
for inspection at the principal corporate office of the Corporation.
"IXC Transaction" means the transactions contemplated by the IRU and
Stock Purchase Agreement dated as of July 22, 1997 between the Corporation
and IXC Internet Services, Inc., as the same may be amended from time to
time, pursuant to terms substantially similar to the terms in effect on the
Original Issue Date or as contemplated in the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity
securities of the Corporation, other than Series B Preferred Stock and Parity
Stock.
"Non-Conversion Notice" shall have the meaning set forth in Section 2(a).
"Original Issue Date" means the date of the first issuance of any shares
of the Series B Preferred Stock regardless of the number of transfers of any
particular shares of Series B Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Series B Preferred Stock.
<PAGE>
-24-
"Parity Stock" means any capital stock of the Corporation that ranks on
parity with the Series B Preferred Stock as to the payment of dividends or
distribution of assets upon a Liquidation Event or any other liquidation,
dissolution or winding up of the Corporation.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other principal stock exchange or quotation system on which the
Common Stock is then listed or quoted or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed or
quoted then on the Nasdaq National Market or any stock exchange or quotation
system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding
to its functions of reporting prices), then the average of the "Pink Sheet"
bid quotes for the relevant day, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value
of a share of Common Stock on such date as determined by an Appraiser
selected in good faith by the Corporation and reasonably acceptable to
Holders of a majority in interest of the shares of the Series B Preferred
Stock then outstanding.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision
thereof) or other entity of any kind.
"Prime Rate" means the rate of interest (expressed as an annual rate)
publicly announced by the Fleet National Bank, at its main office, from time
to time as its "prime rate" or if such institution shall not announce such
rate, the generally accepted prime rate, each change in such a rate to take
effect on the date of effective change of such prime rate.
"Purchase Agreement" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Corporation and the
original Holders of the Series B Preferred Stock, a copy of which is
available for inspection at the principal corporate office of the Corporation.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Corporation and the
original Holders of Series B Preferred Stock, a copy of which is available
for inspection at the principal corporate office of the Corporation.
<PAGE>
-25-
"Reset Date" means each of the One Year Date, the Two Year Date and the
Three Year Date.
"Series B Preferred Stock Dividend Notice" shall have the meaning set
forth in Section 2(a).
"Thirty Day Average Market Price" as at any date shall mean the average
Per Share Market Value for the 30 Trading Days immediately preceding but not
including such date, provided, however, that, at the Corporation's option,
any Trading Day during such 30 Trading Day period on which a Holder sets the
last closing bid price on the Common Stock shall not be used for determining
the Thirty Day Average Market Price, in which case the first Trading Day
preceding such 30 Trading Day period on which no Holder set the last closing
bid price on the Common Stock shall be used for determining the Thirty Day
Average Market Price.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or other stock exchange or market on which the Common
Stock is listed or quoted, or (b) if the Common Stock is not listed or quoted
on the Nasdaq National Market or any other national securities exchange or
market, a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is
not quoted on the OTC Bulletin Board, a day on which the Common Stock is
quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to its
functions of reporting prices).
"Underlying Shares" means the shares of Common Stock into which the
shares of Series B Preferred Stock are convertible in accordance with the
terms hereof.
"Voting Securities" means "voting securities" as such term is defined in
Rule 12b-2 under the Exchange Act.
Section 9. Tax Withholding. Notwithstanding any provision hereof to
the contrary, all payments, distributions or transfers in respect of Series B
Preferred Stock shall be subject to such withholdings as may be required by
applicable law.
(b) Paragraph SEVENTH is hereby amended in its entirety to read as
follows:
SEVENTH: The Secretary of State of the State of New York is hereby
designated as the agent of the Corporation upon whom process in any action or
proceeding against the
<PAGE>
-26-
Corporation may be served; the post office address to which the Secretary of
State shall mail a copy of any such process so served is:
510 Huntmar Park Drive
Herndon, Virginia 20170
ATTN: President
FIFTH: No shares of the Corporation's Series A Junior Participating
Preferred Stock have been issued as of the date hereof. The foregoing
amendments to the Certificate of Incorporation were authorized by the
affirmative vote of a majority of the members of the Board of Directors of
the Corporation at a meeting duly called and held on November 2, 1997.
<PAGE>
-27-
IN WITNESS WHEREOF, we have made and subscribed this certificate and
hereby affirm under the penalties of perjury that its contents are true this
6th day of November, 1997.
/s/ William L. Schrader
---------------------------------------
William L. Schrader, President
/s/ Teresa Zajonczkoski
---------------------------------------
Teresa Zajonczkoski, Assistant Secretary
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be executed by the registered Holder
in order to convert shares of Series B Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series B 8%
Convertible Series B Preferred Stock of PSINet Inc. (the "Corporation")
indicated below, into the number of shares of the Corporation's common stock,
par value $.01 per share (the "Common Stock"), indicated below, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Corporation in connection therewith.
No fee will be charged to the Holder for any conversion, except for such
transfer taxes, if any.
Conversion calculations:
- -----------------------------------------------------------------------------
Date to Effect Conversion
- -----------------------------------------------------------------------------
Number of shares of Series B Preferred Stock to be Converted
- -----------------------------------------------------------------------------
Number of shares of Common Stock to be Issued
- -----------------------------------------------------------------------------
Applicable Conversion Price
- -----------------------------------------------------------------------------
Signature
- -----------------------------------------------------------------------------
Name
By:
- -----------------------------------------------------------------------------
Address
<PAGE>
Exhibit 10-1
THE JBG COMPANIES
June 16, 1997
VIA 2-DAY MAIL
Mr. David Ruppe
PSINet, Inc.
460 Spring Park Place
Suite 100
Herndon, Virginia 20170
Re: PSINet, Inc. at Spring Park Technology Center
Dear Mr. Ruppe:
Enclosed for your files, please find one (1) fully executed original
Amendment No. 1 to Deed of Lease for PSINet, Inc.'s 15,076 square feet of
space located on the lower level of 460 Spring Park Place.
Mr. Ruppe, thank you once again for the opportunity to address PSINet,
Inc.'s office requirements. In the meantime, please do not hesitate to
contact me or Tom Finan with any questions, comments or concerns.
Sincerely,
THE JBG COMPANIES
Joanna Athey
Administrative Assistant
CC W/ ENCLOSURE: MR. STEVE RANCK, CHARLES E. SMITH COMPANIES
MR. ESKO KORHONEN, THE CARLYLE GROUP
MR. GUY STEWART, III, THE STEWART INVESTMENT COMPANY
MR. TOM FINAN, JBG
MR. CHRIS WEEMS, JBG
MS. LISA RITENOUR, JBG
MS. CHERIE STEINBACHER, JBG
NEGOTIATION FILE
CC W/O ENCLOSURE: MS. HOLLY DAVIS MARSH, JBG
<PAGE>
AMENDMENT NO. 1 TO DEED OF LEASE
THIS AMENDMENT NO. 1 TO DEED OF LEASE (the "First Amendment") is made as of
the 12th day of June, 1997, by and between JBG/Spring Park Limited
Partnership, a Virginia limited partnership("Landlord"), as successor Landlord
to TCW REALTY FUND II HOLDING COMPANY, a California corporation,
and PSINET, INC., a New York corporation ("Tenant").
RECITALS:
WHEREAS, Landlord and Tenant are parties to that certam Deed of Lease
("Lease") dated February 5, 1996, pursuant to which Landlord has leased to
Tenant and Tenant has leased from Landlord approximately 14,200 square feet (the
"Premises") in the building known as 460 Spring Park Place, Herndon, Virginia
("Building").
WHEREAS, in January of 1997 Tenant properly exercised its right to
terminate the Lease with respect to the Premises effective July 31, 1997
and Landlord agreed to same.
WHEREAS, Landlord and Tenant desire to reinstate the Lease and amend same
to (i) replace the original 14,200 square feet with 15,076 square feet (the
"Replacement Premises") (ii) extend the term of the lease on the Replacement
Premises (iii) provide a Refurbishment Allowance for the Replacement Premises
and (iv) waive the early termination penalty of three (3) months rent as
outlined in Paragraph 27.22 (ii) (b) of the Lease.
WHEREAS, all capitalized terms set forth herein, unless otherwise defined
herein, shall have the meanings ascribed to them in the Lease.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and for other good and valuable consideration, the receipt and
suff~ciency of which are hereby acknowledged, the parties hereto agree that the
Lease is hereby amended as follows:
Section 1. Substitution of Premises with Replacement Premises.
1.01 As a replacement for the Premises, Landlord hereby leases
to Tenant and Tenant hereby leases from Landlord 15,076 rentable square feet of
space in the Building, as shown on the cross-hatched area of Exhibit A attached
hereto and made a part hereof (hereinafter referred to as the "Replacement
Premises").
<PAGE>
1.02 As of the Replacement Premises Commencement Date, the
Replacement Premises is hereby substituted for and constitutes the Premises
defined in the Lease and is subject to all conditions of the Lease, except as
otherwise provided m this First Amendment.
Section 2. Commencement Date and Term as to the Replacement Premises.
2.01 The "Replacement Premises Commencement Date" shall be
July 26, 1997 and the expiration date shall be September 17, 2003
("Replacement Premises Expiration Date") unless the Lease or this First
Amendment is terminated sooner pursuant to any provision thereof.
2.02 Tenant shall have access to the Replacement Premises, at
no charge, for furniture and cable installation commencing June 15, 1997.
Section 3. Construction and Delivery of the Replacement Premises.
3.01 Landlord and Tenant agree that Tenant shall accept the
Replacement Premises in its "as-is", "where is" condition, except for
latent defects, on the Replacement Premises Commencement Date.
Notwithstanding the foregoing, after the Replacement Premises Commencement
Date, Landlord shall provide Tenant with an allowance of Three and
OO/lOOths Dollars ($3.00) per rentable square foot of the Replacement
Premises ("Refurbishment Allowance") for the refurbishment of the
Replacement Premises ("Refurbishment") which Refurbishment Allowance shall
be paid to Tenant by Landlord upon Landlord's receipt of paid invoices for
such Refurbishment and, in the event Tenant contracted for the performance
of any of the Refurbishment, lien waivers form all such contractors. In the
event the cost of the Refurbishment exceeds the Refurbishment Allowance,
such excess costs shall be paid in full by Tenant. In the event any portion
of the Refurbishment Allowance remains after payment of the costs described
above ("Excess Refurbishment Allowance"), Tenant may submit other moving
related invoices to Landlord for reimbursement.
3.02 Notwithstanding the foregoing, Landlord represents that
the HVAC systems serving the Replacement Premises are in good working order
as of the date hereof and any required service will be completed prior to
the Replacement Premises Commencement Date.
-2-
<PAGE>
Section 4. Base Rent for the Replacement Premises.
4.01 Commencing on the Replacement Premises Commencement
Date, Tenant shall pay Base Rent as set forth below.
LEASE YEAR MONTHLY INSTALLMENT
- ------------------------- ----------------------
8/1/97-7/31/98 $17,274.58
8/1/98-7/31/99 $17,965.57
8/1/99-7/31/00 $18,684.19
8/1/00-7/31/01 $19,431.56
8/1/01-7/31/02 $20,208.82
8/1/02-7/31/03 $21,017.17
8/1/03-10/31/03 $21,857.86
Section 5. Additional Rent for the Replacement Premises.
(i) Commencing on the Replacement Premises Commencement
Date, Section 1.9 and 1.10 of the Lease shall be deleted in their entirety
and the following inserted in their place:
"1.9 Tenant's Proportionate Share of Park Common Area Maintenance
Expenses("PCAM"). 4.20% of the PCAM (which percentage is based
upon the Replacement Premises containing 15,076 gross rentable
square feet of the total Park containing 359,323 gross rentable
square feet).
1.10 Tenant's Proportionate Share of Real Estate Taxes. 11.97%
of Real Estate Taxes(which percentage is based upon the
Replacement Premises containing 15,076 gross rentable square feet
of the total of buildings 450 Spring Park Place and 460 Spring
Park Place which comprise the lot used for tax purposes by
Fairfax County and the Town of Herndon containing 125,942 gross
rentable square feet).
(ii) In addition, Section 1.10A shall be inserted into the Lease:
1.10A Tenant Proportionate Share of Building Operating Expenses
("BOE"). BOE shall consist of all Landlord's actual cost of water,
sewer, roof repairs, and roof maintenance, and non-tenant building
electricity for 460 Spring Park Place only. Tenant's share of the
BOE shall be 23.59% (which percentage is based upon the Replacement
Premises containing 15,076 gross rentable square feet of the total
Building containing 63,912 gross rentable square feet). Expenses
included in the BOE as defincd above, shall be excluded from PCAM,
as defined in Article 7 of the Lease. In addition, the rights and
obligations set forth in Paragraphs 7.5 and 7.6 of the Lease shall
apply to the BOE.
Section 6. Security Deposit.
Simultaneously with the execution of this First Amendment,
Tenant shall deposit with Landlord an additional $7,807.91 which sum shall be
added to the current Security Deposit (i.e., $9,466.67) held under, and in
accordance with, the Lease resulting in a total Security Deposit of
$17,274.58.
-3-
<PAGE>
Section 7. Early Termination Option.
Section 27.22 Early Termination Option of the Lease shall be
deleted in its entirety and be of no further force and effect as of the date
of this First Amendment with respect to the Replacement Premises, however,
Landlord hereby waives Tenant's obligation to pay any penalty as outlined in
Paragraph 27.22 (ii) (b) otherwise due as a result of the January 1997
Termination Notice.
Section 8. Right of First Refusal. For the first six months following the
Replacement Premises' Commencement Date, Tenant shall have the Right Of First
Refusal for lease of that certain space in the Building known as Suite 1000
and containing approximately 3,531 gross rentable square feet (the "Offer
Space"). The notice given by Landlord to Tenant shall describe the Offer
Space, the date as of which such Offer Space shall be available for lease and
the terms and conditions which are equal to a third party tenant's offer
received by the Landlord under which Landlord is willing to lease such Offer
Space.
Tenant shall have fifteen (15) business days from the date of such notice
from Landlord to notify Landlord that Tenant intends to enter into an
amendment to this Lease with Landlord so as to include the Offer Space on
such terms and conditions. Provided that Tenant shall have given the notice
described in the preceding sentence to Landlord before the expiration of such
fifteen (15) business day period of time, Tenant shall have fifteen (15)
business days from the date of such notice from Landlord to enter into an
amendment to this Lease with Landlord so as to include the Offer Space on
such terms and conditions. If Tenant does not give notice of its intention to
enter into such amendment with Landlord as aforesaid or does not enter into
such amendment as aforesaid with Landlord, Landlord shall have the right to
enter into a lease with any third party for the Offer Space on any terms and
conditions as upon which Landlord and such third party shall agree. The
rights extended in Section 8 to Tenant by Landlord are exclusively granted by
Landlord to the original Tenant named under this Lease, PSINET, Inc. and any
"affiliate" of PSINET, Inc. (as such term is defined in Section 11.1 of this
Lease), and shall not inure to the benefit of or be exercisable by any
assignee of the original Tenant named under this Lease other than such an
"affiliate". Notwithstanding the foregoing, Tenant's rights under this
Section 8 shall: (a) terminate automatically upon the issuance of any notice
of default by Landlord to Tenant with respect to any of Tenant's obligations
under this Lease, which default shall have continued after the giving of all
required notices and the expiration of all periods for cure herein specified;
(b) terminate automatically upon the failure of Tenant to have given notice
to Landlord of its intention to enter into an amendment of the Lease with
Landlord on the terms and conditions set forth in the preceding provisions of
this Section 8 within fifteen (15) business days after the date of the giving
by Landlord of notice to Tenant with respect to the availability of Offer
Space; (c) terminate automatically upon the failure or Tenant to enter into
an amendment to this Lease with Landlord on the terms and conditions set
forth in the preceding provisions of this Section 8 within fifteen (15)
business days after the date of the giving by Landlord of notice to Tenant
with respect to the availability of Offer Space and (d) terminate
automatically as of that date which is six (6) months after the Replacement
Premises Commencement Date. For purposes hereof, "Preferential Rights" means
all rights of renewal, rights of first refusal, rights of first offer, rights
to expansion space of any other rights or agreements similar or dissimilar to
the foregoing concerning the future
-4-
<PAGE>
or potential leasing of the Offer Space or any portion thereof or any other
space in the Building of which the Offer Space or any portion thereof shall
be a part.
Section 9. Option to Renew.
Commencing on the Replacement Premises Commencement Date,
Section 27.23 (i) of the Lease shall be deleted and the following
inserted in its place:
"(i) Renewal Term. Provided that there is no existing and
uncured Event of Default by Tenant under this Lease, Tenant shall have
the option to extend the Term of this Lease with respect to the entire
Replacement Premises then subject to this Lease for one (1) additional
term of five (5) years (said term being referred to hereinafter as the
"Renewal Period") upon the same terms and conditions as set forth in
this Lease, except that the Base Rent shall be calculated as set forth
below taking into account lease concessions and Tenant shall have no
further option to renew under this Section 27.23. The option shall be
exercised by written notice from Tenant to Landlord given not later
than one hundred eighty (180) days prior to the expiration of the
initial Term or previous Renewal Period."
Section 10. Signs.
Commencing on the Replacement Premises Commencement Date,
Section 14 of the lease shall be deleted in its entirety and the following
inserted in its place:
"Except, at Tenant's expense, the pedestal sign near the entry to
the Replacement Premises which faces 470 Spring Park Place and a suite
entry located on the entry door, no sign, advertisement or notice
shall be inscribed, painted, aff~xed, placed or otherwise displayed by
Tenant on any part of the Land or the outside or the inside
(including, without limitation, the windows) of the Building or the
Premises. Any permitted signs shall be installed and maintained by
Landlord at Tenant's sole expense. If any prohibited sign,
advertisement or notice is nevertheless exhibited by Tenant, Landlord
shall have the right to remove the same, and Tenant shall pay any and
all expenses incurred by Landlord in such removal, together with
interest thereon at the Interest Rate, upon demand. Landlord shall
have the right to prohibit any sign, advertisement, notice or
statement to the public by Tenant which, in Landlord's opinion, tends
to impair the reputation of the Building or its desirability as a frst
class office building."
Section 11. Parking.
Commencing on the Replacement Premises Commencement
Date, Tenant shall have the right to three (3) additional parking spaces
(i.e. for a total of 54 spaces) which shall be unreserved, non-exclusive
parking spaces in the Parking Facilities.
Section 12. Brokers. Landlord: JBG Properties, Inc.
Tenant: Charles E. Smith Companies.
Landlord recognizes Brokers as the sole brokers procuring this
First Amendment and shall pay Brokers a commission therefor pursuant to separate
agreements between Brokers and Landlord. Landlord and Tenant
-5-
<PAGE>
each represents and warrants to the other that it has not employed any broker,
agent or finder other than Brokers relating to this First Amendment. Landlord
shall indemnify and hold Tenant harmless, and Tenant shall indemnify and hold
Landlord harmless, from and against any claim for brokerage or other commission
arising from or out of any breach of the indemnitor's representation and
warranty.
Section 13. Authority.
Landlord and Tenant represent and warrant to each other that the person
signing this First Amendment on its behalf has the requisite authority and
power to execute this First Amendment and to thereby bind the party on whose
behalf it is being signed.
Section 14. Applicability of Lease Provisions.
Except as otherwise provided in this First Amendment, the terms and
provisions of the Lease shall apply to the Replacement Premises from and after
the date of this Replacement Premises Commencement Date.
Section 15. Ratification.
Except as and only to the extent explicitly modified by the terms and
provisions of this First Amendment, all terms and provisions of the Lease
thereto are ratified and confirmed in all respects and shall hereby remain in
full force and effect.
Section 16. Entire Agreement. This First Amendment contains the entire
understanding of the parties with respect to the subject matters covered hereby
and may be modified only by a written instrument signed by the party against
whom enforcement of any modification is sought.
Section 17. Effectiveness. The furnishing of the form of this First
Amendment shall not constitute an offer and this First Amendment shall become
effective upon and only upon its execution by and delivery to each party hereto.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
-6-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Amendment No. 1 to Deed of Lease and agree to be bound thereby effective as
of the date first written above.
WITNESS: LANDLORD:
/s/ Karen NuWick JBG/SPRING PARK LIMITED PARJTNERSHIP
- ---------------- By: JBG Real Estate Associates,VIII, Inc.,
General Partner
By:/s/Brian P. Coulter (SEAL)
-----------------------------------------
Name: Brian P. Coulter
Title: Vice President
Date: June 12, 1997
ATTEST/WITNESS: TENANT:
PSINET, INC., a New York corporation
/s/ Rob S. Metzler By:/s/Harold S. Wills (SEAL)
- --------------- -----------------------------------------
Name: (Typed): Harold S. Wills
Title: EVP & COO
Date: June 10, 1997
-7-
<PAGE>
Exhibit 10.1 The following Exhibits and Schedules have been omitted, which
the Company agrees to furnish supplementally to the Commission
upon request:
Exhibit A: Floor Plan
Exhibit B: Additional Expansion Space Commencement Date
<PAGE>
June 1, 1997
SUBLEASE AGREEMENT
This Sublease Agreement (the "Sublease"), is made as of the second
day of June, 1997 by and between LUCAS INDUSTRIES, INC., a Michigan
corporation ("Sublessor), and PSINET, INC., a New York corporation
("Sublessee").
RECITALS
A. By Office Lease dated September 12, 1989, with attached
Riders 1 and 2, as amended by that certain First
Amendment To Lease dated December 20, 1989, and that
certain Second Amendment To Lease dated July 31, 1990,
and that certain Third Amendment To Lease dated August
20, 1990, (collectively, the "Overlease"), 3B Limited
Partnership, a Virginia limited partnership (Lessor),
leased to Lucas Industries, Inc., a Michigan corporation,
as lessee, the Demised Premises (defined below) located
in the office building at 11180 Sunrise Valled Drive,
Reston, Virginia (the "Building"), at the rent and upon
and subject to the terms and conditions set forth in the
Overlease.
B. CarrAmerica Realty Corporation (formerly known as Carr
Realty Corporation is successor by purchase to 3B Limited
Partnership under the Overlease.
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<PAGE>
June 1, 1997
C. Sublessee desires to sublet from Sublessor all of the
Demised Permises and Sublessor desires to sublet the Demised
Premises at the rent and upon the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises, the mutual
promises set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, for themselves, their successors
and assigns, mutually covenant and agree as follows:
1. Demised Premises
(a) Demised Premises. Sublessor does hereby sublease to
Sublessee, the Sublessee does hereby sublease from Sublessor,
for the Term (defined hereinafter) and upon the conditions
hereinafter provided, approximately 13,518 rentable square
feet (the "Demised Premises"), which has been determined and
certified in accordance with the 1989 Washington, D.C.
Association fo Realtors Standard Method of Measurement (the
"Standard"), comprising a portion of the Third (3rd) Floor of
the Building. The Demised Premises is approximately 13,518
square feet. The floor plan is attached hereto and made a
part hereof as Exibit A.
(2) Term. The term of the Sublease (the "Term") shall
commence on the later of July 11, 1997 or the day Sublessor's
furniture is removed from the Demised Premises
2
<PAGE>
June 1, 1997
and the Demised Premises is delivered to Sublessee in broom clean
condition (the "Sublease Commencement Date"), and shall end on (i)
July 21, 2000, or (ii) the date upon which the Term may be
terminated pursuant to any of theconditions or limitations or other
provisions of this Sulease or by operation of law. Sublessee's
contractors shall have access to the premises for planning and
network/phone installation purposes, coordinated with a Sublessor
representative, commencing July 1, 1997. If the premises are not
ready for Sublessee's possession on or before August 1, 1997, as a
result of a delay caused by the Sublessor or his agent, Sublessee
may cancel this Sublease.
3. Base Rent. The annual base rent, which Sublessee hereby
agrees to pay to Sublessor and Sublessor hereby agrees to accept
shall be a sum equal to the product of twenty-Two Dollars ($22.00)
multiplied by the number of rentable square feet (13,518), as
certified pursuant to the Standard, in the Demised Premises (the
"Base Rent"). The Base Rent shall be inclusive of Real Estate
Taxes and all other Operating Costs (as such terms are defined in
the Overlease). The obligation of Sublessee to pay Base Rent shall
begin on the Sublease Commencement Date. The annual Base Rent
payable during each Sublease Year, as hereinafter defined, shall be
divided into twelve (12) equal monthly installments and such
monthly installments shall be due and payable in advance, on the
first day of each month during each Sublease Year. For the
purposes of this Sublease, the term "Sublease Year" shall mean a
period of twelve (12) consecutive months, commencing on the
Sublease Commencement Date, and each successive twelve (12)
3
<PAGE>
June 1, 1997
Month period thereafter, except that, if the Sublease Commencement
Date is a day other than the first day of a month, then the first
Sublease Year shall commence on the Sublease Commencement Date and
shall continue for the balance of the month in which the Sublease
Commencement Date occurs and for a period of twenve (12)
consecutive calendar months after the last day of such month. If
the Sublease Commencement Date is a day other than the first day of
a month, then, in the first Sublease Year, said twelve (12)
installments shall be payable beginning on the first day of the
calendar month immediately following the month in which the
Sublease Commencement Date occurs and, in additions, on the
Sublease Commencement Date, a payment of Base Rent shall be payable
in an amount equal to the product of the annual Base Rent then in
effect and a fraction, the numerator of which is the number of days
of the Sublease Term in the month in which the Sublease
Commencement Date occurs, and the denominator of which is 365. The
monthly Base Rent, Additional Rent (as defined herein), and any
other charges herein reserved or payable shall be paid to Sublessor
by wire transfer to the account of: Lucas Industries Inc, Account
Number 3900-0965 Cititbank NY, ABA #021-000-089 with written
confirmation of such transfer to the Sublessor at its offices at
12025 Tech Center Drive, Livonia, Michigan 48150, Attention: Mr.
Ian McaNeill or at such other place as Sublessor may designate in
writing, in lawful money of the United States of America, without
demand therefor and without any deduction, setoff or abatement
whatever, except as expressly provided in this Sublease. In the
event that Sublessee does not remit any payment due under this
Sublease to Sublessor within seven (7) calendar
4
<PAGE>
June 1, 1997
days of when it is due, such amount shall be subject to a late fee
of 5% of the amount, and bear interest at 2% over the Wall Street
Journal Prime Rate until paid.
4. Annual Base Rent Escalation. The annual Base Rent shall
be increased, effective as of the first day of each succeeding
Sublease Year after the first Sublease Year, by an amount equal to
Three Percent (3%) of the annual Base Rent in effect during the
Sublease Year preceding the applicable adjustment. The attached
Exhibit B, incorporated herein by this reference, sets forth the
annual Base Rent during the Term.
5. Additional Rent. Beginning on the first day of the
second (2nd) Sublease Year, and on the first day of each Sublease
Year thereafter, Sublessee agrees to pay to Sublessor, as
additional rent under this Sublease, Sublessor's Pro-Rata Share
(defined below) of increases in the Real Estate Taxes and Operating
Costs (as such terms are defined in the Overlease), over the Real
Estate Taxes and Operating Costs for calendar year 1997, grossed-up
to reflect that the Building was a fully leased and fully assessed
building for Real Estate Taxes and Operating Expenses throughout
calendar 1997 and each of the Sublease Years being compared (the
"Additional rent"). Any Additional Rent which may be payable to
Sublessor in any Sublease Year shall be apportioned such that
Sublessee shall be obligated to pay to Sublessor a proporationate
share of such Additional
5
<PAGE>
June 1, 1997
Rent which is attributable to the number of days in the Sublease
Year. For the purpose of this Sublease, Sublessor and Sublessee
agree that Sublessor's Pro-Rata Share is equal to a fraction, the
numerator of which is the number of Gross Rentable Area of the
Demised Premises, and the denominator of which is the number of
Gross Rentable Office Are of the Building. Sublessee shall also
pay to Sublessor, or Lessor as Additional Rent, all charges for any
additional services provided by Sublessor or Lessor to Sublessee
which Sublesee requests and not provided for or allocated in this
Sublease or int eh Overlease.
6. Building Services, Parking, Security.
(a) Services. Building cleaning services, electrical and
lighting service, water and sewer service, and heating,
ventilation and air-conditioning will be provided to Sublessee
in accordance with Lessor's obligations to Sublessor under
Paragraph 16 of the Overlease. Sublessee shall be allowed
access to the Building and the Demised Premises twenty-four
(24) hours per day, seven (7) days per week. At least one (1)
elevator shall be in use and available for Sublessee's use at
all times. Sublessee shall observe Lessor's requirements
related to moving construction materials, furnishings and
equipment into or out of the Demised Premises and the
Building. Sublessor shall use reasonable efforts to assist
Sublessee in having Lessor provide Sublessee with a listing on
the monument sugn in front and in the Building directory at
Sublessee's expense.
6
<PAGE>
June 1, 1997
(b) Parking. Sublessor shall allocate to and allow
Sublessee to use, at no additional cost to Sublessee, 43
Sublessor's allocation of unreserved parking spaces in the
Building's covered parking structure and/or surface parking
lot. Sublessor shall allocate to and allow Sublessee
exclusive use of the six (6) reserved, covered, and marked
parking spaces allocated to the Sublessor in the parking
structure shown on Exhibit C attached hereto as part of the
parking allocation hereunder at no additional cost to
Sublessee. Sublessor shall use reasonable efforts to assist
Sublessee to obtain from sublessor six (6) reserved parking
signs at Sublessee's expense, if any. The Building parking
structure and lot will be accessible to Sublessee twenty-foru
(24) hours per day, seven (7) days per week.
(c) Security. Sublessor will cause Lessor to provide an
electronic card or key access system for Sublessee's use,
monitored at all Building entrances, and elevators in
accordance with Paragraph 16 of the Overlease. The Sublessor
will provide to Sublessee any such access cards and keys in
their possession at the Sublease commencement date. All
subsequent cards and keys shall be requested from the Lessor
or the Lessor's designee and provided at the Sublessee's
expense. Sublessee shall be responsible for maintaining an
accurate listing of all electronic cards or keys provided to
employees. All costs associated with the granting and
maintaining of the electronic card or key access system shall
be the responsibility of the Sublessee.
7
<PAGE>
June 1, 1997
7. Deposit. Upon execution of this Sublease, Sublessee shall
supply Sublessor with a letter of credit in a form and from an
institution reasonably acceptable to Sublessor in the amount equal
to six (6) months of base rental payments to be held for the
duration of the Sublease Term. Provided, however, that if
Sublessee is not in default at the end of the eighteenth (18th)
month and the Sublessor's net worth at the eighteenth (18) month is
equal to or better than its net worth at the Sublease execution
date, said letter of credit shall be reduced by one-half. The
letter of credit provided herein shall be considered as partial
security for the payment and performance by, Sublessee of all of
Sublessee's obligations, covenants, conditions and agreement under
this Sublease. Whenever Sublessee shall be in default for thirty
(30) days or more, Sublessor shall be entitled to the proceeds from
the letter of credit and to demand a new letter of credit be put
into place.
For purposes of this Sublease, net worth shall mean all amounts in
respect of the Sublessee's capital stock, plus the amounts of
additional paid in capital, retained earnings and other items
designated as part of the Sublessee's stockholders' equity all of
which would appear as such on a consolidated balance sheet of the
Sublessee, less the amounts of goodwill or other intangible assets
of the Sublessor, all as of such date prepared in accordance with
UN Generally Accepted Accounting Principles (GAAP).
The Sublessee shall furnish to the Sublessor, the following
financial statements, reports,
8
<PAGE>
June 1, 1997
And information as of the sublease execution date and at the
eighteenth (18) month:
(a) promptly when available and in any event within 30 days
after the execution date and the end of the eighteenth (18)
month, an unaudited consolidated balance sheet of the
Sublessee and its consolidated subsidiaries certified as to
fairness and accuracy of presentation and compliance and
consistency with GAAP by the chief accounting or financial
officer of the Sublessee.
(b) Simultaneously with the delivery of the financial
statements referred to in a) above, a certificate of
the chief accounting or financial officer of the
Sublessee setting forth in reasonable detail whether
the Sublessee was in compliance with the Net Worth
requirement on the date of such financial statements
and certifying that no default exists on the date of
delivery of such certificate.
8. Use. Sublessee will use and occupy the Demised Premises
solely for general office purposes and ancillary uses and in
accordance with the uses permitted under the Zoning Ordinance of
Fairfax County, Virginia. Without the prior written consent of
Lessor and Sublessor, the Demised Premises will not be used for any
other purposes. Sublessee hereby agrees to use the Demised
Premises in accordance with the Rules and Regulations of the
Overlease appended hereto as Exhibit D and incorporated by this
reference.
9. Subtenant Work and Alterations.
9
<PAGE>
June 1, 1997
(a) Cost of Improvements. Sublessee shall accept
possession of the Demised Premises as their "as is" condition
as of the date of this Sublease. Sublessee shall pay for the
cost of planning, design, demolition and construction of
improvements to the Demised Premises, to include all
architectural and engineering services associated therewith
(the "Subtenant Work"), whether performed by Lessor's or
Sublessor's independent contractors.
(b) Design of Subtenant Work. Following Sublessee's
delivery of plans for the Subtenant Work (the "Subtenant Work
Plan"), Sublessee shall provide a list of proposed contractors
selected by Sublessee to perform the Subtenant Work to
Sublessor and Lessor for approval, Sublessor shall use its
reasonable efforts to obtain written consent from lessor to
perform the Subtenant Work. Sublessee shall pay any fees or
reasonable out of pocket costs incurred in obtaining the
consent from Lessor as contained in the Overlease. The
consent from Lessor will be based upon the Subtenant Work
Plan's conformance to the requirements of the Zoning Ordinance
of Fairfax County, Virginia, the contractors being properly
licensed and experienced, and upon the conditions contained in
the Overlease. The consent of Lessor, once obtained, shall be
deemed to include the consent of Sublessor.
(c) Construction of Subtenant Work. Sublessee shall cause
the Subtenant Work to be constructed in accordance with the
Subtenant Work Plan and the Overlease, and in accordance with
all applicable building codes of the Town of Reston, County of
Fairfax, State of Virginia, and any applicable Federal
10
<PAGE>
June 1, 1997
code including, but not limited to, the American Disabilities Act.
(d) Alterations. Except as otherwise expressly provided in
the Subtenant Work Plan, Sublessee shall not make any
alteration, improvement, or installation other than
corrective, cosmetic or decorative improvements hereinafter
called ("Alterations") in or to the Demised Premises, without
in each instance obtaining the prior written consent of
Sublessor and Lessor (which consent of Sublessor shall not be
unreasonably withheld, conditioned or delayed). With
reasonable notice to Sublessee, Lessor and Sublessor shall at
all times upon reasonable notice during normal business hours
with a Sublessee escort have the right to inspect the work
performed by any contractor selected by Sublessee to perform
the Subtenant Work and any Alterations.
10. Restoration. Upon the expiration of the Term of this
Sublease, Sublessee shall surrender the Demised Premises in good
condition, subject only to reasonable wear and tear.
10. Enforcement of Overlease. Except as otherwise expressly
provided herein, all of the terms, provisions, covenants and
conditions of this Sublease are subject to the Overlease (Exhibit
E). In the event of a conflict between the Terms of this Sublease
agreement and the Overlease, the Terms of the Overlease shall
apply. Sublessor and Sublessee shall each observe and perform all
of the terms, covenants and conditions hereunder. Sublessor shall
observe and perform all applicable terms, covenants and
11
<PAGE>
June 1, 1997
Conditions as tenant under the Overlease with respect to the
Demised Premises; and Sublessee shall observe and perform all
applicable terms, covenant and conditions of the Overlease with
respect to the Demised Premises to which Sublessee at the sole
discretion of Sublessor may be subrogated in performing its
obligations under this Sublease. Sublessee shall obtain and
maintain all insurance types and coverages as specified in the
Overlease to be obtained and maintained by Sublessor as "Tenant" in
amounts not less than those specified in the Overlease. All
policies of Sublessee shall name Lessor and its Agent as additional
insureds thereon in accordance with the Overlease, and Sublessee's
insurance shall be primary over Lessor's, Agent's and Sublessor's.
Except for riders 1 and 2 to the Overlease and as otherwise set out
in this Sublease, Sublessor agrees to subrogate Sublessee to the
rights and privileges of Sublessor under the Overlease, and agrees
to furnish for Sublessee the following services, including, without
limitation, the furnishing of electrical, lighting, heating,
Building standard ventilation and air-condition, water and sewer,
elevator service, cleaning, window washing, and rubbish removal
services, which include all services of which Lessor is obligated
to furnish to Sublessor pursuant to the Overlease. Sublessor shall
use its best efforts to obtain and enforce the full performance by
Lessor pursuant to the terms of the Overlease.
12. Covenants and Warranties.
(a) Sublessor's Covenants. Sublessor covenants,
warrant and agrees not
12
<PAGE>
June 1, 1997
to do or omit to do anything which would constitute a default under
the Overlease, including without limitation anything which
Sublessor is obligated to do under the terms of this Sublease.
(b) Sublessee's Covenants. Sublessee covenants and agrees
not to do or omit to do anything which would constitute a default
under the Overlease, including without limitation anything which
Sublessee is obligated to do under the terms of this Sublease.
(c) Warranty of No Default. Sublessor warrants and
represents to Sublessee that the Overlease has not been amended or
modified except as expressly set forth in the recitals above, that
there is no cross-default or other contractual relationship between
the Overlease and Sublessor's lease covering the Fourth Floor at
the Building, that Sublessor is the tenant by operation of law
under the Overlease and has full capacity to enter into and perform
under this Sublease, that this Sublease will be binding and fully
enforceable against Sublessor, that Sublessor is not now, and as of
the Sublease Commencement Date will not be, in default or breach of
any term, condition or provision of the Overlease, and that
Sublessor has no knowledge of any claim by Lessor that Sublessor is
in default or breach of the Overlease.
13. Brokers. Sublessor and Sublessee hereby represent and
warrant to the other that neither of them has employed or dealt
with any broker in connection with this Sublease for the Demised
Premises other than the firms of Grubb & Ellis of Metropolitan
Washington, D.C. and The Charles E. Smith Companies (representing
Sublessee), and
13
<PAGE>
June 1, 1997
Each hereby agrees to indemnify and hold harmless the other against
any claim by any other broker, agent or finder with whom the
indemnitor has dealt. Sublessor shall be responsible for the
payment of the brokers' commissions to Grubb & Ellis, pursuant to a
separate agreement.
14. Indemnification. Sublessor and Sublessee each shall and
hereby does indemnify and hold the other and Lessor harmless from
and against any and all actions, claims, demands, damages,
liabilities and expenses (including, without limitation, reasonable
attorneys' fees) asserted against, imposed upon or incurred by the
other or Lessor by reason of (a) any violation caused, suffered or
permitted by the indemnitor, its agents, servants, employees or
invitees, of any of the terms, covenants or conditions of the
Sublease or the Overlease and (b) any damage or injury to persons
or property occurring upon or in connection with the Building,
including without limitation, the Demised Premises, except as a
result of the acts or omissions of the indemnitor, or its
respective agents, employees or invitees.
15. Signage. Sublessee shall have the right, at its sole
expense, to install signage on the west side of the Building
viewable from the Dulles Access road and Virginia route 267,
replacing the existing Lucas Sign, subject only to written consent
by Lessor and to any governmental restrictions. Sublessor shall
use reasonable efforts to assist Sublessee to obtain Lessor's
written consent to such signage. Sublessee shall be responsible
for the
14
<PAGE>
June 1, 1997
cost of installing its sign and for the cost of removal of the
Sublessor's sign.
16. Quiet Enjoyment. Sublessor covenants that it has the
right to make this Sublease for the Term and upon all of the terms
and provisions hereof, and that if Sublessee pays the Base Rent and
Additional Rent and performs all of the covenants, terms and
conditions of this Sublease to be performed by Sublessee, then
Sublessee shall, during the Term, freely, peaceably and quietly
occupy and enjoy the full possession of the Demised Premises and
all rights under this Sublease granted to Sublessee, without
molestation or hindrance by Sublessor, Lessor, or any party
claiming through or under either Sublessor or Lessor.
17. Entire Agreement. This Sublease contains all of the covenants,
agreement, terms, provisions, conditions, warranties and understandings
between the parties hereto relating to the subleasing of the Demised
Premises. All understandings and agreement, if any, between the parties are
merged in this Sublease, which alone fully and completely expresses the
agreement of the parties. The failure of Sublessor or Sublessee to insist in
any instance upon the strict observance or performance of any covenant,
agreement, terms, provision or condition of this Sublease or to exercise any
election herein contained shall not be construed as a waiver or
relinquishment for the future of such covenant, agreement, term, provision,
condition or election, but the same shall continue and remain in full force
and effect. No waiver or modification of any covenant, agreement, term,
provision or condition of this Sublease shall be deemed to have been made
unless
15
<PAGE>
June 1, 1997
expressed in writing and signed by Sublessor and Sublessee. No
surrender of possession of the Demised Premises or of any part
thereof or of any remainder of the Term of this Sublease shall
release Sublessor or Sublessee from any of its obligations
hereunder unless accepted by Sublessor and Sublessee in writing.
18. Successors and Assigns. The obligations of this Sublease
shall bind and benefit the successors and permitted assigns of the
parties with the same effect as if mentioned in each instance where
a party hereto is named. Sublessor has the right to assign this
agreement.
19. Notices. Any and all communications delivered hereunder
shall be sent by first-class mail: if to Sublessor, at its offices
at 672 Delaware Avenue, Buffalo, New York 14209, Attention: Mr.
James Zigel or at such other place as Sublessor may designate in
writing; and if to Sublessee, at its offices at 11180 Sunrise
Valley Drive, Suite 300, Reston, Virginia, 20171, Attention:
General Counsel or to such other addresses as either of the above
shall notify the other in writing.
20. Binding Effect. The terms and provisions of this
Sublease will inure to the benefit of, and will be binding upon,
the successors, assigns, personal representatives, heirs, devises
and legatees of the Sublessor and Sublessee.
16
<PAGE>
June 1, 1997
21. Severability. If any term, provision, covenant or
condition of this Sublease is held by a court of competent
jurisdiction to be invalid, void or unenforceable, such term,
provision, covenant or condition shall be interpreted so as to be
enforceable to the fullest extent permitted by law, and the
remaining terms, provisions, covenants and conditions contained
herein shall not be affected thereby.
22. Headings. The headings of the sections and subsections
used in this Sublease are inserted for the convenience of reference
only and are not intended to affect the meaning or interpretation
of this Sublease.
23. Governing Law. This Sublease shall be governed by and
construed in accordance with the laws of the Commonwealth of
Virginia.
24. Lessor's Consent. This Sublease shall be effective upon
the date Sublessee receives written consent to this Sublease by
Lessor. It is hereby acknowledged by Sublessor and Sublessee that
Lessor's consent to this Sublease shall not make Lessor or its
Agent, Carr Real Estate Services Partnership (or Agent's
subcontractor, Carr Real Estate Services, Inc.) a party to this
Sublease, shall not create any contractual liability, privity or
duty on the part of Lessor or its Agent to the Sublessee, and shall
not in any manner increase, decrease, modify or otherwise affect
the rights and obligations of Lessor and Sublessor, as "Tenant"
under the Overlease, in respect to the Demised Property.
17
<PAGE>
June 1, 1997
25. Payment of Fees. In the event either Sublessor or
Sublessee shall commence an action against the other (including
collections under bankruptcy) in respect to this Sublease, the
losing party shall pay the prevailing party all of its reasonable
costs and expenses in connection with such action, including but
not limited to reasonable attorney fees.
IN WITNESS WHEREOF, Sublessor and Sublessee have duly executed
this Sublease under seal as of the day and year first above
written.
SUBLESSOR:
LUCAS INDUSTRIES INC., a Michigan corporation
By: /s/James M. Zigel
---------------------
Name: James M. Zigel
-----------------
Title: President
---------------
18
<PAGE>
June 1, 1997
SUBLESSEE:
PSINET, INC. a New York corporation
By: /s/Harold S. Wills
-------------------
Name: Harold S. Wills
---------------
Title: EVP & COO
---------
This Sublease is consented to by Lessor upon the terms and
conditions acknowledged by Sublessor and Sublessee in the Paragraph
of this Sublease entitled "Lessor's Consent" and in accordance with
the terms and conditions of the Overlease. Lessor's consent shall
be required for an assignment of this Sublease or any further
subleasing of the Demised Premises or any portion thereof.
LESSOR:
CARRAMERICA REALTY CORPORATION, a Maryland
corporation (formerly known as Carr Realty
Corporation, as successor in interest to 3B
Limited Partnership as Landlord under the
Overlease)
By: /s/Paul R. Adkins
-----------------
Name: Paul R. Adkins
--------------
Title: VP/Marketing Officer
--------------------
19
<PAGE>
Exhibit 10.2 The following Exhibits and Schedules have been
omitted, which the Company agrees to furnish
supplementally to the Commission upon request:
Exhibit A: Map of Demised Premises
Exhibit B: Base Rent Schedule
Exhibit C: Parking Structure
Exhibit D: Rules and Regulations
Exhibit E: Description of Signs
Exhibit F: Schedule of Taxes and Operating Costs
Rider 1 Options to Renew
Rider 2 Rent Abatement: First Amendment to Lease
Exhibit A: Third Floor Plan
Exhibit B: Base Rent Schedule
<PAGE>
Exhibit 10.3
MASTER EQUIPMENT/SOFTWARE RENTAL AGREEMENT
MASTER EQUIPMENT/SOFTWARE RENTAL AGREEMENT ("Agreement") dated as of,
1997, between PSINet Inc., 510 Huntmar Park Drive, Herndon, VA 20170
("Lessor") and EarthLink Network, Inc., 3100 New York Drive, Pasadena, CA
91107 ("Lessee").
1. LEASE
-----
Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor,
upon the terms and conditions specified in this Agreement and in one or more
Rental Schedules in the form of Exhibit A attached hereto (including Schedule
A of such Rental Schedule), the Equipment and Software as described in each
applicable Rental Schedule. Each Rental Schedule shall incorporate the terms
of this Agreement and shall constitute a separate lease of the Equipment and
Software (the term "Lease" shall refer collectively to the applicable Rental
Schedule and this Agreement). In the event of a conflict between the
provisions of this Agreement and the provisions of any Rental Schedule, the
provisions of the Rental Schedule shall prevail.
Equipment and Software selected or requested by Lessee must be approved
by Lessor prior to each Lease. Lessee acknowledges that its selection of
Software and Equipment is based solely upon its own judgment prior to having
requested Lessor to purchase or license the same for leasing to Lessee and
Lessee expressly disclaims any reliance on statements made by Lessor or its
agents regarding the Software and Equipment.
In return for Lessor paying the Software license fee and Equipment cost
to the vendor or vendors of such Software and Equipment (in each case the
"Vendor") so that the Lessee may acquire the right to use the Software and
the Equipment, Lessee shall pay all Lease payments required under each Lease
to Lessor, as well as comply with all other terms and conditions of each
Lease. Each Lease shall be binding upon Lessor and Lessee from the date of
acceptance and execution by Lessor at its office in Virginia.
Lessee acknowledges that Lessee obtains only a license to use the
software directly for the Vendor and no other ownership rights, and Lessee's
use of the Software shall be subject to the terms and conditions of the
license agreement from such Software Vendor (the "Software License
Agreement").
2. TERM
----
The term of each Lease of Equipment and Software shall commence on the
Commencement Date provided for in the applicable Rental Schedule and, unless
sooner terminated pursuant to the terms of such Lease, shall be for the number
of calendar months set forth in such Rental Schedule, plus the number of days
remaining in any partial calendar month
<PAGE>
if the Commencement Date occurs on a day other than the first day of a month
(the "Lease Term").
3. RENTAL CHARGES AND TAXES
------------------------
Lessee shall pay to Lessor during the Lease Term, without notice or demand,
at the office of Lessor in Herndon, Virginia, or at such other place as Lessor
may designate, the amount specified as the Monthly Rental Charge ("Monthly
Rent") in the Rental Schedules plus applicable state and local sales or use
taxes. Lessee's obligation to pay shall begin on the Commencement Date. Monthly
Rent is due in advance on the first day of each month.
When the Commencement Date is not on the first day of a month, an Interim
Rental Payment, at the daily amount equal to the Monthly Rent times the number
of months per year divided by 360, from and including the Commencement Date to
the end of such month, shall be due and payable upon Lessee's receipt of an
invoice from Lessor.
LESSEE AGREES THAT TIME IS OF THE ESSENCE TO LESSOR IN LESSEE'S MAKING
PAYMENTS OF THE MONTHLY RENT AND THE INTERIM RENTAL PAYMENT, IF ANY, WHEN
SUCH PAYMENTS BECOME DUE.
4. SECURITY INTEREST
-----------------
Lessee hereby grants, assigns, pledges and conveys to Lessor a first
security interest in the Software, the Software License Agreement, all other
rights acquired by Lessee from the Software Vendor relating to the Software,
the Equipment and all other rights and warranties acquired by Lessee from the
Equipment Vendor, together with all options, accessories, replacements,
substitutions, additions, accessions, replacements, upgrades, new releases or
new versions of the Equipment and Software, as the case may be, and all
proceeds thereof, including insurance proceeds, intellectual property rights
and all general intangibles related thereto ("Collateral"), as security for
the payment and performance obligations of Lessee under any Lease.
5. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE
---------------------------------------------------
LESSEE'S OBLIGATION TO PAY ALL MONTHLY RENT (INCLUDING THE INTERIM RENTAL
PAYMENT) AND OTHER SUMS UNDER EACH LEASE, AND THE RIGHTS OF LESSOR IN AND TO
SUCH PAYMENTS, SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT BE SUBJECT
TO ANY ABATEMENT, DELAY, REDUCTION, SET-OFF, DEFENSE, COUNTERCLAIM
INTERRUPTION, DEFERMENT 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
2
<PAGE>
SHALL MAKE ANY CLAIM SOLELY AGAINST THE SOFTWARE AND EQUIPMENT VENDOR, AS THE
CASE MAY BE, AND SHALL, NEVERTHELESS, PAY LESSOR ALL AMOUNTS PAYABLE UNDER
EACH LEASE.
6. TITLE
-----
(a) Software. No ownership, rights in the Software 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 and
automatically become subject to each applicable Lease.
(b) Equipment. The Equipment is and shall remain the sole and exclusive
property of Lessor. Lessee shall have no right, title or interest in the
Equipment, other than the Lessee's right to maintain possession and use of
the Equipment for the full Lease Term, conditioned upon Lessee's compliance
with the terms and conditions of each Lease. If requested by Lessor, Lessee
shall affix to or place on the Equipment plates or markings indicating
Lessor's ownership. If requested by Lessor, Lessee will obtain a waiver, in
recordable form, from all persons with a real property interest in the
premises wherein the Equipment may be located, waiving any claim with respect
thereto.
7. SELECTION AND USE OF SOFTWARE AND EQUIPMENT
-------------------------------------------
Lessee shall be responsible for the 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, nor an agent of any such
Vendor. 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 the
applicable Lease, any warranty applicable to the Software and Equipment, and
authorizes Lessee to obtain the customary service and support furnished by
the Software and Equipment Vendors 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 (INCLUDING ALL UPGRADES, NEW RELEASES OR
NEW VERSIONS OF SUCH SOFTWARE AND RELATED DOCUMENTATION) AND EQUIPMENT,
INCLUDING WITHOUT LIMITATION ANY REPRESENTATION OR WARRANTY WITH RESPECT TO
INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY,
3
<PAGE>
DURABILITY, SUITABILITY, MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE,
CONDITION, OR DESIGN, THE PURPOSES AND USES OF THE LESSEE, THE
CHARACTERIZATION OF EACH LEASE FOR TAX, ACCOUNTING OR OTHER PURPOSES,
COMPLIANCE OF THE EQUIPMENT WITH APPLICABLE GOVERNMENTAL REQUIREMENTS, OR
OTHERWISE. AS TO LESSOR, LESSEE RENTS 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 OR NATURE CAUSED DIRECTLY OR INDIRECTLY
BY ANY EQUIPMENT OR SOFTWARE SUBJECT TO ANY LEASE OR FOR THE USE OR
MAINTENANCE THEREOF, OR FOR THE FAILURE OF OPERATIONS THEREOF, OR FOR THE
REPAIRS, SERVICE, OR ADJUSTMENT THERETO, OR BY ANY DELAY OR FAILURE TO
PROVIDE ANY THEREOF, OR BY ANY INTERRUPTION OF SERVICE OR LOSS OF USE THEREOF
OR FOR ANY LOSS OF BUSINESS OR ANY OTHER DAMAGE WHATSOEVER AND HOWSOEVER
CAUSED.
LESSOR SHALL NOT BE LIABLE TO LESSEE FOR ANY LOSS, DAMAGE OR EXPENSE OF
ANY KIND CAUSED BY OR RELATED TO, DIRECTLY, INDIRECTLY OR CONSEQUENTIALLY,
THE SOFTWARE (INCLUDING ALL UPGRADES, NEW RELEASES OR NEW VERSIONS OF SUCH
SOFTWARE AND RELATED DOCUMENTATION) AND EQUIPMENT OR FOR ANY CONSEQUENTIAL
DAMAGES, ANY LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER COMMERCIAL
LOSS REGARDLESS OF WHETHER LICENSOR WAS ADVISED, HAD REASON TO KNOW, OR IN
FACT KNEW OF THE POSSIBILITY THEREOF.
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
the manner for which they were designed and intended, solely for Lessee's
business purposes, in accordance with all Vendor manuals, instructions and
documentation, including any Software License Agreement, and in compliance
with all applicable laws, regulations and orders. Lessee, at Lessee's own
cost and expense, shall keep the Equipment in good repair, condition and
working order, ordinary wear and tear excepted, and shall furnish all parts,
mechanisms, devices and servicing required therefor and necessary to comply
with all applicable health and safety standards. During the term of each
applicable Lease, Lessee shall maintain in force a maintenance agreement with
respect to the Equipment with the Vendor thereof or such other party as may
be acceptable to Lessor, and the Equipment, if returned to Lessor by Lessee
at the
4
<PAGE>
expiration of the Lease Term, shall qualify for such maintenance program
without additional expense.
(c) ALTERATIONS AND ATTACHMENTS. All replacement parts, repairs,
modifications, revisions, upgrades, as the case may be, at any time made to
or upon the Equipment or Software shall be made only in compliance with
applicable law, provided not in violation of any Vendor warranty or Software
License Agreement, as the case may be, and shall become the property of
Lessor and shall be free and clear of all liens, encumbrances and rights of
others. With respect to the Software, any modifications, unless consented to
by the Software Vendor, shall only be made to a copy of such Software and not
to the Original Software delivered to Lessee. Lessee will not, without the
prior written consent of Lessor, affix or install any accessory, equipment or
device on any Equipment if such addition will impair the originally intended
function or use of such Equipment and Lessee shall not attach or incorporate
the Equipment to, with or in any other property in such a manner that the
Equipment may be deemed to have become an accessory to or part of such other
property. Upon return to Lessor of the Equipment as to which such
alterations, modifications or additions have been made, if Lessee does not
exercise its Purchase Option pursuant to Section 12(b), Lessee shall, at
Lessor's request, remove the same and restore the Equipment to its original
condition, reasonable wear and tear only being excepted, and, if not so
removed, or cannot be readily removed without damaging the function, use or
economic value of the Equipment title thereto shall automatically vest in
Lessor.
(d) ASSIGNMENT BY LESSEE. Lessee shall keep the Equipment free and clear
from all liens, charges, encumbrances, legal process and claims. Lessee shall
not assign, sublet, hypothecate, sell, transfer or part with possession of
the Equipment or Software or any interest in any Lease, and any attempt to do
so shall be null and void and shall constitute a default hereunder. Lessee
shall not move the Equipment or Software from the location noted in the
Rental Schedule without the prior written consent of the Lessor. Lessee
agrees not to waive its right to use and possess the Equipment and Software
in favor of any party other than Lessor and further agrees not to abandon the
Equipment or Software to any party other than the Lessor. So long as Lessee
faithfully performs and meets each and every term and condition to be
performed or met by Lessee under each Lease, Lessee's quiet and peaceful
possession and use of the Equipment will not be disturbed by Lessor or anyone
claiming by, through or on behalf of Lessor.
(e) INSPECTION. Lessor shall have the right from time to time during
normal business hours to enter upon Lessee's premises or elsewhere for the
purpose of confirming the existence, condition and proper maintenance of the
Equipment and Software or for any other reasonable business purpose.
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
5
<PAGE>
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, the Equipment, any Lease or the consummation of the
transactions contemplated in any Lease. If Lessee determines that any item of
Software or Equipment or any Lease or the consummation of the transactions
contemplated in any Lease 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
Lessee's determination. Lessee shall file personal property tax returns 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
------------
At the expiration of each Lease, Lessee shall have the following options:
(a) Return the Software and Equipment of each applicable Lease to the
Lessor. At Lessee's expense, Lessee shall cause the Software and
Equipment to be removed, disassembled, and placed in the same
condition as when delivered to Lessee (reasonable wear and tear
excepted) and properly crate the Equipment and Software for shipment
and deliver to a common carrier designated by Lessor. Lessee will
ship the Equipment and Software, F.O.B. destination, to any address
within the continental United States specified in writing by Lessor.
All additions, alterations and repairs made or placed upon any of
the Software and Equipment, and not removed by Lessee as required
under Section 10(c), shall become part of the Software and Equipment
and shall be the property of the Lessor.
(b) Purchase the Software and Equipment subject to each such Lease from
the Lessor (the "Purchase Option"), in "as is, where is" condition,
for 20% of the original Software and Equipment value as set forth on
each applicable Renal Schedule (the "Original Value").
If, within 15 days of the expiration of any Lease, the Software and Equipment
are not returned and Lessee has not exercised its Purchase Option, the Lessee
will pay to the Lessor one Monthly Rent payment for each complete month or
part thereof until the Software and Equipment are returned to Lessor, or the
Purchase Option is exercised.
13. 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 terminate any Lease upon payment to Lessor of an amount equal to the sum
of (1) the total Monthly Rent and other sums due and unpaid under such Lease
at the date of payment, (2) the Stipulated Loss Value set forth
6
<PAGE>
in Exhibit B as of the date of payment and (3) 20% of the Original Value for
the Equipment and Software subject to such Lease.
In addition Lessee shall, pursuant to Lessor's instructions and at
Lessee's sole expense, cause the Software and Equipment to be removed,
disassembled, and placed in the same condition as when delivered to Lessee
(reasonable wear and tear excepted) and properly crate the Equipment and
Software for shipment and deliver to a common carrier designated by Lessor.
Lessee will ship the Equipment and Software, F.O.B. destination, to any
address within the continental United States specified in writing by Lessor.
All additions, alterations and repairs made or placed upon any of the
Software and Equipment, and not removed by Lessee as required under Section
10(c), shall become part of the Software and Equipment and shall be the
property of the Lessor.
14. RISK OF LOSS
------------
Lessee shall bear the entire risk of loss, theft, destruction and damage
to any Software and Equipment ("Event of Loss") after the Commencement Date
from any and every cause whatsoever, whether or not insured, until the
Software and Equipment is returned to Lessor. If an Event of Loss shall
occur, Lessee shall immediately notify Lessor in writing of such fact and of
all details with respect thereto 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; or
(b) replace the Software and Equipment with like Software and Equipment
in good condition, repair and working order and grant to Lessor
clear title to such Software and Equipment whereupon such property
shall be subject to the applicable Lease and be deemed the Software,
Equipment and Collateral for purposes of such Lease.
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 14, Lessor, upon receipt of invoice therefor, shall pay over to
Lessee out of such insurance proceeds the actual amounts expended by Lessee
under this Section 14 (a) or (b).
15. INSURANCE
---------
Lessee shall, at its own expense, obtain on the Software and Equipment
all risk property damage insurance and public liability insurance, both
personal injury and property damage, in
7
<PAGE>
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 on the Software and Equipment shall not be less than the greater of
the replacement cost or the Stipulated Loss Value of the Software and
Equipment. Each insurance policy shall name Lessee as an insured and Lessor
and its successors and assigns as an additional insured and loss payee and
shall contain a clause requiring the insurer to give Lessor, its successors
and assigns 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.
16. GENERAL INDEMNITY
-----------------
Lessee shall indemnify and hold (and if requested by Lessor, defend)
Lessor, any assignee and any secured party harmless from and against all
claims, actions, suits or proceedings of any kind (including negligence, tort
and strict liability) (collectively, "Claims"), including all costs,
including reasonable attorney's fees and expenses, damages and liabilities
arising out of, connected with, resulting from or related to any Lease,
including, without limitation, the manufacture, ownership, selection,
possession, leasing, renting, purchase, operation, control, use, maintenance,
delivery, return or other disposition of the Software, Equipment and/or the
Collateral (including but not limited to latent and other defects, whether or
note discoverable by Lessor or Lessee, and any claim for patent, trademark,
copyright, software or other intellectual property infringement) or by
operation of law, excluding any Claims which result from the gross negligence
or willful misconduct of Lessor. If any Claim is made against Lessee or
Lessor, the party receiving notice of such Claim shall promptly notify the
other, but the failure of such person receiving notice so to notify the other
shall not relieve the Lessee of any obligation hereunder.
The provisions and the obligations of Lessee under this Section 16 shall
survive the expiration or termination of this Agreement and/or any Lease, and
are expressly made for the benefit of and shall be enforceable by Lessor, its
successors and assigns.
17. REPRESENTATIONS AND WARRANTIES OF LESSEE
----------------------------------------
Lessee represents, warrants and covenants, with the execution of this
Agreement and each Lease that, with respect to this Agreement and/or each
Lease:
(a) the execution, delivery and performance of this Agreement and each
Lease has been and shall be, as the case may be, duly authorized by all
necessary corporate action and shall constitute legal, valid and binding
agreements of Lessee enforceable in accordance with their respective terms;
8
<PAGE>
(b) all financial statements furnished to Lessor are and shall be true and
correct in all material respects, prepared in accordance with generally
accepted accounting principles consistently applied and Lessee shall
furnish Lessor with its quarterly and annual independently reviewed
financial statements and such other financial information as Lessor may
reasonably request;
(c) the Equipment is personal property and will not become a fixture under
applicable law;
(d) Lessee shall be the licensee and registered user of the Software under
the Software License Agreement; and
(e) no approval, consent or withholding of objection or other
authorization of or by any court, administrative agency, other
governmental authority or other entity is required, except such
consents, approvals or other authorizations which have been or shall
be, as the case may be, duly obtained and in full force and effect
( copies of which have been furnished to Lessor), in connection with
the execution, delivery and performance of this Agreement and each
Lease by Lessee and Lessee's possession and use of the Equipment and
Software.
18. ASSIGNMENT/TRANSFER BY LESSOR
-----------------------------
Lessor may sell or otherwise transfer its interest in any 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 Monthly Rent and any other amounts due under any 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.
19. 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.
20. EVENTS OF DEFAULT; NO WAIVER
----------------------------
Lessee shall be in default under this Agreement and any and all Leases
upon the occurrence of any of the following events ("Events of Default"):
9
<PAGE>
(a) Lessee fails to pay any Monthly Rent or other amount required to be
paid under this Agreement or under any Rental Schedule within 5 days after
the due date;
(b) Lessee breaches any of its insurance obligations under the Agreement;
(c) Lessee fails to perform any other provisions under any Lease, and
such failure shall continue unremedied for a period of 10 days after written
notice thereof from Lessor;
(d) Any financial reports delivered to Lessor hereunder and any
representation or warranty made by Lessee in this Agreement, any Lease,
related documents, or pursuant hereto shall at any time prove to be false or
misleading;
(e) Lessee becomes insolvent or ceases to do business as a going concern;
(f) A petition is filed by Lessee under any bankruptcy or insolvency laws;
(g) A petition is filed against Lessee under any bankruptcy or insolvency
laws and Lessee fails to obtain a dismissal of such petition within sixty
(60) days;
(h) If applicable, Lessee makes a bulk transfer subject to the provisions
of the Uniform Commercial Code;
(I) Lessee shall default under any other agreement with Lessor or its
successors or assigns;
(j) Lessee suffers an adverse material change in its financial condition
from the Commencement Date and Lessor deems itself or any of its Collateral
to be insecure; or
(k) Lessee shall be in breach of or in default in the payment or
performance of any obligation owing to any bank, lender, lessor or financial
institution, howsoever arising, present or future, contracted for or
acquired, and whether joint, several, absolute, contingent, secured,
unsecured, matured or unmatured.
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.
21. REMEDIES
--------
Upon the occurrence of an Event of Default, Lessor may, in its sole
discretion, do any one or more of the following:
(a) terminate any or all of the Leases and Lessee's rights thereunder;
10
<PAGE>
(b) proceed by appropriate court action or actions, either at law or
equity, to enforce performance by Lessee of the applicable terms of any or
all of the Leases or to recover damages for the breach thereof;
(c) recover from Lessee an amount equal to the sum of (i) all accrued and
unpaid amounts under any or all of the Leases and the present value of all
future Monthly Rent to be paid over the terms of each Lease discounted at a
rate equal to five percent (5%), (ii) as liquidated damages for loss of a
bargain and not as a penalty, the Stipulated Loss Value which would have been
due had the Lessee exercised its Early Termination Option pursuant to Section
13 hereof, and (iii) any loss or damage to the Lessor's residual interest in
the Equipment caused by such Event of Default;
(d) personally or by its agents take immediate possession of any or all
of the Collateral from Lessee and, for such purpose, enter upon Lessee's
premises where any of the Collateral is located with or without notice or
process of law and free from all claims by Lessee;
(e) require the Lessee to, and the Lessee shall, assemble the Collateral
and deliver the Collateral in accordance with the terms of Section 13 and,
for each day that Lessee fails to deliver any such Collateral, Lessor may
demand payment of an amount equal to the Interim Rental Payment;
(f) demand Lessee to immediately cease using the Equipment, Software and
any other Collateral.
With respect to Collateral returned to or repossessed by Lessor, if
Lessor has not terminated the Leases, Lessor will, in such manner and upon
such terms as Lessor may determine in its sole reasonable discretion, either
sell such Collateral at one or more public or private sales or re-lease the
Collateral. The proceeds of sale or re-lease shall be applied in the
following order or priority: (i) to pay all Lessor's fees, costs and expenses
(including attorneys' fees, costs and expenses) arising from Lessee's default
and the exercise of Lessor's remedies hereunder, including costs of
repossession, storage, repairs, reconditioning and sale or re-leasing of any
Collateral; (ii) to the extent not previously paid by Lessee to Lessor, to
pay Lessor its liquidated damages hereunder and all other sums then remaining
unpaid hereunder and under any Lease; and (iii) any surplus shall be retained
by Lessor. In the event the proceeds of sale or re-lease are less than the
sum of the amounts payable under (i) and (ii) above, Lessee shall forthwith
pay Lessor such deficiency. The proceeds of a re-lease shall be discounted to
their present value at the rate of 3%. Notwithstanding the foregoing, Lessor
may pursue any other remedy available at law or equity, including seeking
damages, specific performance and injunctive relief.
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 Collateral in mitigation of Lessor's
11
<PAGE>
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.
No express or implied waiver by Lessor of any default shall in any way
be, or be construed to be, a continuing waiver or a waiver of any future or
subsequent default.
22. BANKRUPTCY OF SOFTWARE LICENSORS
--------------------------------
The bankruptcy of the Software or Equipment Vendor, as the case may be,
shall not be a valid cause for Lessee to terminate any Lease payments due to
Lessor under any Lease, including without limitation the Monthly Rent due
under any Lease. 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 Agreement grants Lessee
access to the source code, Lessee shall make written request under the
Bankruptcy Code to the Bankruptcy Trustee to obtain the source code. Lessee
shall take all such 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.
23. MISCELLANEOUS
-------------
(a) NOTICES. Notices hereunder shall be deemed given when delivered
personally, the next business day after delivered to a recognized overnight
delivery service or five (5) days after sent by certified or registered mail,
return receipt requested, to Lessor and Lessee at their respective addresses
set forth at the head of this Agreement. Any party hereto may from time to
time by written notice to the other change the address to which notices are
to be sent to such party.
(b) ENTIRE AGREEMENT. This Agreement and each Lease constitution the
entire agreement between the parties with respect to the Equipment and
Software, 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 Agreement and each Lease shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia.
(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) FURTHER DOCUMENTS. Lessee shall provide Lessor with such documents as
Lessor may reasonably request, including documents relating to preserving the
security and Collateral of Lessor, or financing statements under the Uniform
Commercial Code. To the extent
12
<PAGE>
permitted by law, Lessor may execute Uniform Commercial Code financing
statements for and on behalf of Lessee for the purpose of perfecting Lessor's
interest in the Collateral.
(f) 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.
(g) SURVIVAL OF OBLIGATIONS. All obligations of Lessee to make payments
to Lessor under any Lease or to indemnify Lessor as provided hereunder shall
survive the expiration or other termination of this Agreement and any Lease.
(h) SUCCESSORS. Each 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.
(i) DISPUTES. THE PARTIES CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF
THE STATE AND FEDERAL COURTS IN VIRGINIA IN CONNECTION WITH ANY DISPUTE UNDER
THIS AGREEMENT AND ANY LEASE, AND LESSEE WAIVES ITS RIGHT TO TRIAL BY JURY.
(j) REIMBURSEMENT OF LEGAL COSTS. Lessee shall reimburse and pay to
Lessor for the legal fees and expenses incurred by Lessor in connection with
the preparation and negotiation of this Agreement and the consummation of
transactions contemplated hereunder and under any Lease.
PSINet Inc./ EarthLink Network, Inc.
LESSOR LESSEE
By: /s/ illegible By: /s/ illegible
------------------- ---------------------
Title: SVP/CFO Title: Pres & Sec
------------------- ---------------------
Date: 9/17/97 Date:
------------------- ---------------------
13
<PAGE>
Exhibit 10.3 The following Exhibits and Schedules have been omitted,
which the Company agrees to furnish supplementally to the
Commission upon request:
Exhibit A: Rental Schedule No. 1
Exhibit B: Stipulated Loss Value Schedule to Rental Schedule
Exhibit C: Certificate of Acceptance
Schedule A Description of equipment
Schedule 26 Certificate of Installation
Schedule 27 Certificate of Installation
Schedule 28 Certificate of Installation
Schedule 29 Certificate of Installation
Schedule 30 Certificate of Installation
<PAGE>
(ROYAL BANK LETTERHEAD)
EXHIBIT 10.4
- -----------------------------------------------------------------------------
Royal Bank of Canada
5001 Yonge Street, 2nd Floor
North York, Ontario M2N 6P6
Tele: (416) 512-4567
Fax : (416) 512-4540
September 26, 1997
David Thornley
PSINET LIMITED
100 Sheppard Avenue East, 6th Floor
North York, Ontario
M2N 6N5
Dear David:
Re: Lease 16-66615
------------------
As discussed, enclosed please find the following Lease documentation (in
duplicate) covering the Workstations, Chairs and Keyboard Tables supplied by
Groupe Lacasse:
- -- Leasing Schedule - (full signature)
- -- Appendix "A" - (initials only)
- -- Copies of Invoices - (initials only)
- -- Appendix "B" - Obsolescence - (initials only - 2nd page)
- -- Equipment Acceptance Notice - (full signature)
- -- Personally Approved Payments - Authorization (full signature)
- -- Statement of Insurance - (full signature)
- -- Insurance Requirements - to be faxed to your Insurance Agent
Would you kindly arrange for execution per the attached Resolution and return
all documents to my attention at your very earliest.
I will require the original Invoices, please request same from the supplier,
Groupe Lacasse.
Please note that the funds cannot be disbursed to you until the executed
documents are returned to me. Please do not hesitate to contact me if you
have any questions.
Yours truly,
/s/_______________
Carol Sterioff
Assistant Manager
Business Development
<PAGE>
[LETTERHEAD]
RESOLUTION REGARDING
BANKING AND SECURITY
PSINET LIMITED (the "Company")
- --------------------------------------------------------------
(Name of Company)
Address: 7300 WARDEN AVENUE, SUITE 213, MARKHAM, ONTARIO, L3R 9Z6
----------------------------------------------------------------------
INCORPORATING STATUTE: CANADA BUSINESS CORPORATIONS ACT
--------------------------------------------------------
RESOLVED:
1. That ROYAL BANK OF CANADA (the "Bank") is appointed banker for the
Company.
2. That (a) either the President or Secretary for amounts up to
$20,000.00;
(b) either the Pesident or Secretary together with any one
of the following:
William L. Schrader, David Kunkel, Harold S. Wills
For amounts in excess of $20,000.00
----------------------------------------------------------------
Are authorized on behalf of the Company from time to time:
(a) to withdraw or order transfers of funds from the Company's accounts by
any means including the making, drawing, accepting, endorsing or
signing of cheques, promissory notes, bills of exchange, other orders
for the payment of money or other instruments or giving of other
instructions;
(b) to borrow money and obtain other credit from the Bank in such amounts
and on such terms as may be deemed appropriate, whether by loan,
advance, overdraft or by any other means;
(c) to mortgage, hypothecate, change, pledge, convey, assign, transfer or
create a security interest in any or all of the property, real and
personal, immoveable and moveable, undertaking and rights of the
Company, present and future, to secure the payment and performance of
any or all of the present and future liabilities and obligations of
the Company to the Bank;
(d) to sign any agreements or other documents or instruments with or in
favour of the Bank, including the Bank's general financial services
agreement and contracts relating to products or services provided by
the Bank to the Company;
(e) to do, or to authorize any person or persons to do, any one or more of
the following:
(f) to receive from the Bank any cash or any securities, instruments or
other property of the Company held by the Bank, whether for
safekeeping or as security, or to give instructions to the Bank for
the delivery or other transfer of any such cash, securities,
instruments or other property to any person named in those
instructions;
<PAGE>
[LETTERHEAD]
COMPANIES
LIST OF OFFICERS AND DIRECTORS
To: Royal Bank of Canada
I, the undersigned, Secretary of
PSINET LIMITED
- ------------------------------------------------------------------------------
(Name of Company)
hereby certify that the following are its officers and directors, namely:
OFFICERS (NAMES AND TITLES)
William L. Schrader - Chairman of the Board
Nadir Desai - President
Wesley Roitman - Secretrary & Treasurer
DIRECTORS
Michael G. Beairsto
William L. Schrader
Nadir Desai
Wesley Roitman
David Kunkle
Dated November 25th , 1996
--------------------- ------------ ----------------
(month) (day) (year)
CORPORATE SEAL
(Nova Scotia and
Prince Edward Island)
/s/ Wesley Roitman
---------------------------------
Wesley Roitman - Secretary
<PAGE>
LEASING SCHEDULE Number 16-66615
Royal Bank of Canada, as Lessor, hereby leases to: PSINET LIMITED
as Lessee, the Equipment hereinafter described, in consideration
of the rental and for the term hereinafter set forth, the whole
pursuant to and subject to the terms and conditions set forth in
that certain Leasing Agreement entered into between Lessor and
Lessee as of the 30th day of June 1997
- ------------------------------------------------------------------------------
1. Equipment Quantity Make and Description Model Number Serial Number
81 Complete Workstations, 81 Chairs, 81 Articulated
Keyboard Tables supplied by Groupe Lacasse as more
fully described under the attached Appendix "A"
- ------------------------------------------------------------------------------
2. Term Term 36
----------------------------------------------------------------
Commencement Date of Term Sept. 29, 1997
----------------------------------------------------------------
Termination Date of Term June 28, 2000
----------------------------------------------------------------
- ------------------------------------------------------------------------------
3. Rental Aggregate Rental $150,856.52
----------------------------------------------------------------
Monthly Rental Instalment $4,190.46
----------------------------------------------------------------
Goods & Services Tax $293.33
----------------------------------------------------------------
Provinicial Sales Tax, if any,
at rate current on date hereof $335.24
----------------------------------------------------------------
Total Monthly Rental Instalment $4,819.03
----------------------------------------------------------------
Interim Rental Factor 0
----------------------------------------------------------------
- ------------------------------------------------------------------------------
4. Option to Purchase
Option to Purchase Date Purchase Price
----------------------------------------------------------------
June 28, 2000 $13,465.49
- ------------------------------------------------------------------------------
5. Settlement Value
Twelve Month
Period 1 2 3 4 5 6 7 8 9 10 11 12
--------------------------------------------------------------
Percentage of Net
$134,654.85 Equipment Cost 100% 71% 38% * 0% 0% 0% 0% 0% 0% 0% 0%
----------------------------------------------------------------
*- end of 33 months until end of term - 10%
- ------------------------------------------------------------------------------
6. Place of Use
Ontario
- ------------------------------------------------------------------------------
7. Depreciation Class Number: 8
Capital Cost allowance Rate: 20% declining balance
- ------------------------------------------------------------------------------
The parties hereto have each executed this Leasing Schedule on the respective
dates set forth below and this Schedule shall be deemed to have been executed on
the later of such dates.
ROYAL BANK OF CANADA PSINET LIMITED
- ------------------------------ ---------------------------------
per per /s/ illegible
- ------------------------------ ---------------------------------
per per /s/ illegible
- ------------------------------ ---------------------------------
per per
- ------------------------------ ---------------------------------
<PAGE>
Exhibit 10.4 The following Exhibits have been omitted, which the Company
agrees to furnish supplementally to the Commission upon request:
Appendix A: Leasing Schedule
Appendix B to Leasing Schedule #16-66615
<PAGE>
Exhibit 10.5
July 1, 1997
Mr. Michael J. Malesardi
347 Walker Road
Great Falls, Virginia 22066-3503
Dear Michael:
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 Tuesday, July
1,1997.
1. EMPLOYMENT:
a) The Company agrees to employ you as Vice President and Controller,
reporting to the Chief Financial Officer ("CFO") 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 July 15, 1997, 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 CFO.
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
$130,000per 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.
56
<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 30, 1998. The performance criteria will be
issued separately by the CFO, 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 period (start date through December 31, 1997) will
be a total of up to $38,000. 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 thirty
thousand (30,000) shares of PSINet Inc.'s common stock (the "Options")
pursuant to its Executive Stock Incentive Plan (the "Plan"). Such Options
shall be evidenced by an option agreement in such form as required by the
Plan. Among other terms and provisions prescribed by the Plan, the option
agreement shall provide that (a) the exercise price of the Options shall be
the price per share of the Company's common stock as reported by the NASDAQ
Stock Market at the close of business on your start date, (b) the Options
shall not be exercisable 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.
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 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
57
<PAGE>
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.
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
58
<PAGE>
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 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
59
<PAGE>
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.
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.
60
<PAGE>
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.
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/ Edward D. Postal
-----------------------------------------
Edward D. Postal, Chief Financial Officer
Accepted and Agreed to as of July 1, 1997:
------ ----
By: /s/ Michael J. Malesardi
------------------------
Michael J. Malesardi
<PAGE>
EXHIBIT 10.6
August 2, 1997
Mr. Anthony Aveta
12112 Quorn Lane
Reston, VA 20191
Dear Tony:
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 a final interview
with William Schrader our Chairman/CEO/President, satisfactory completion of
reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until midnight on Tuesday August 5, 1997.
1. EMPLOYMENT:
a) The Company agrees to employ you as Chief Information Officer ("CIO")
and Vice President (subject to Board Approval), reporting to the Chief
Operating Officer ("COO") of the Company, or his designee. 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 August 18, 1997, 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
$125,000 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
<PAGE>
employees, subject to such deductions and withholdings as may be required by
law or by further agreement with you.
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 30, 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 (start date through December 31, 1997) will be a total of
up to $18,750. 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 25,000
shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan (the "Plan"). Such Options shall be evidenced
by an option agreement in such form as required by the Plan. Among other
terms and provisions prescribed by the Plan, the option agreement shall
provide that (a) the exercise price of the Options shall be the price per
share of the Company's common stock as reported by the NASDAQ Stock Market at
the close of business on your start date, (b) the Options shall not be
exercisable 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.
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 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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
Please confirm your agreement with the foregoing 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 August 2, 1997:
By: /s/ Anthony Aveta
----------------------------------------
Anthony Aveta
<PAGE>
EXHIBIT 10.7
August 4, 1997
Mr. Harry Hobbs
17971 Yatton Road
Round Hill, VA 20141
Dear Harry:
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 Tuesday, August
5, 1997.
1. EMPLOYMENT:
a) The Company agrees to employ you as Vice President, subject to Board
Approval, of Customer Administration, reporting to the Chief Operating
Officer ("COO") , or his designee, 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 August 18, 1997, 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
$160,000 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
<PAGE>
employees, subject to such deductions and withholdings as may be required by
law or by further agreement with you.
b) BONUS COMPENSATION. The Company will pay you a bonus of $50,000 per year
(prorated for 1997) split into two equal sections, one for your direct
performance in the Customer Administration function, and another for overall
contribution to the corporation, these will be based upon the successful
completion of the objectives established for your performance, which will be
measured on or about January 30, 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.
c) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet
Inc. shall grant you options, subject to Board approval, to purchase 50,000
shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan (the "Plan"). Such Options shall be evidenced
by an option agreement in such form as required by the Plan. Among other
terms and provisions prescribed by the Plan, the option agreement shall
provide that (a) the exercise price of the Options shall be the price per
share of the Company's common stock as reported by the NASDAQ Stock Market at
the close of business on your start date, (b) the Options shall not be
exercisable 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. There will be further grant of 50,000
shares available to you at the end of February 1998, based upon the
successful completion of the business objectives established for the function.
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 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
2
<PAGE>
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.
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
3
<PAGE>
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 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
4
<PAGE>
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.
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
5
<PAGE>
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.
Please confirm your agreement with the foregoing 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 August 4, 1997:
By: /s/ Harry G. Hobbs
- --------------------------------------------
Harry G. Hobbs
6
<PAGE>
Exhibit 10.8
[Letterhead]
September 30, 1997
Mr. Edward D. Postal
Chief Financial Officer
PSINet Inc.
510 Huntmar Park
Herndon, VA 20170
Dear Ed:
Reference is hereby made to the Amended and Restated Credit Agreement, as
amended, (the "Agreement") made as of the 10th day of November, 1995 by and
between PSINet Inc. (f/k/a Performance Systems International, Inc.) ("PSI") and
Fleet National Bank (f/k/a Fleet National Bank of Connecticut, successor by
merger to Fleet Bank of Massachusetts, N.A.) (the "Bank"). PSI has requested
that the Bank amend several financial covenants as follows:
Section 4.22 Quick ratio - For the quarter ending September 30, 1997 a ratio
not to be less than 1.15:1.00; for the quarter ending December 31, 1997 and
thereafter a ratio not to be less than 1.25:1.00.
Section 4.23 Tangible Net Worth - For the quarter ending September 30, 1997
the requirement shall equal or exceed $55,000,000; for quarter ending December
31, 1997 the requirement shall equal or exceed $75,000,000; for quarter ending
March 31, 1998 the requirement shall equal or exceed $70,000,000; for the
quarter ending June 30, 1998 and thereafter, the requirement shall equal or
exceed $67,500,000. The foregoing shall be increased by (i) 80% of all positive
net income earned during the applicable fiscal quarter, plus (ii) 50% of the net
tangible proceeds in excess of $40,000,000 received from the sale by PSI of any
shares of its capital stock during the fiscal quarter ending December 31, 1997;
and 50% of all such net tangible proceeds commencing with the fiscal quarter
ending March 31, 1998.
Section 4.24 Consolidated EBITDA - For the quarter ending September 30, 1997
the requirement shall be not less than negative $4,000,000; for the quarters
ending December 31, 1997, March 31, 1998, June 30, 1998, AND September 30, 1998
the requirement shall be not less than $1, $1,000,000 and $2,500,000, and
$5,000,000 respectively.
1
<PAGE>
Section 4.25 Leverage Ratio - For the quarter ending September 30, 1997 a ratio
not to exceed 1.65:1.00; for the quarter ending December 31, 1997 a ratio not to
exceed 1.25:1.00; for the quarter ending March 31, 1998 and thereafter,
a ratio not to exceed 1.50:1.00, subject to the proviso in section 4.25. Total
liabilities as defined under section 4.25 shall exclude any obligations to
deliver additional securities, cash or a combination thereof (at the option of
PSI) pursuant to the bandwidth transaction with IXC Communications Inc.
Section 4.26 Debt Service Ratio - The ratio of Consolidated EBITDA to Debt
Service shall, as of the last day of each fiscal quarter commencing with the
fiscal quarter ending December 31, 1998 equal or exceed 1.25:1.00. Debt service
as defined under section 4.26 shall exclude any interest accreting as a result
of any obligations to deliver additional securities, cash or a combination
thereof (at the option of PSI) pursuant to the bandwidth transaction with IXC
Communications, Inc. There shall be no debt service ratio applicable prior to
the fiscal quarter ending December 31, 1998.
In addition, PSI requests that the Bank extend the Revolving Credit Maturity
Date until December 31, 1997.
In accordance with the amendments detailed herein PSI shall remit to the Bank an
amendment fee of $12,500.
The Bank hereby consents to these changes. Nothing herein shall be deemed to
constitute a waiver, release or amendment of any other terms of the Agreement.
PSI represents and warrants that the execution of this amendment has been duly
authorized by PSI by all necessary corporate and other action and that the
execution will not conflict with, violate the provisions of, or cause a default
or cause an event which, with the passage of time or giving of notice or both,
could cause a default on the part of PSI under its charter documents or by-laws
or under any contract, agreement, law, rule, order, ordinance, franchise,
instrument or other document, or result in the imposition of any lien or
encumbrance on any property or asset of PSI.
PSI further represents that this letter represents legal, valid and binding
obligations of PSI, enforceable against PSI in accordance with their respective
terms. In addition, the statements, representations and warranties made in the
Agreement continue to be correct as of the date hereof, except for those
representations which relate to a specific date which are true and correct as of
such date, and PSI is in compliance with all terms of the Agreement. Except as
expressly affected hereby, the Agreement remains in full force and effect as
heretofore.
2
<PAGE>
Ed, we again look forward to continuing our relationship with PSI. Please sign
below to evidence your acceptance of this amendment, whereupon this amendment
shall be a biding agreement between us.
Yours sincerely
Fleet National Bank.
/s/ Thomas W. Davies
- -----------------------------------
By: Thomas W. Davies
Title: Senior Vice President
Agreed and Accepted /s/ Edward D. Postal Date:
------------------------------- ---------------------
Edward D. Postal
Chief Financial Officer
3
<PAGE>
ALLONGE TO PROMISSORY NOTE
The maturity date of the attached Promissory Note dated November 30, 1994 (As
Amended and Restated through November 10, 1995) for $5,000,000 is hereby
extended to December 31, 1997 from September 30, 1997.
This Allonge will be governed by the terms and conditions of the Amended and
Restated Credit Agreement, as amended (the "Agreement"), made as of the 10th day
of November, 1995 by and between PSINet Inc. (f/k/a Performance Systems
International, Inc.) and Fleet National bank (f/k/a Fleet National Bank of
Connecticut, successor by merger to Fleet Bank of Massachusetts, N.A.). Nothing
herein shall be deemed to constitute a waiver, release or amendment of any terms
of the Agreement.
/s/ Edward D. Postal
- ----------------------------------- -------------------------------
Witness Name: Edward D. Postal
Title: CFO
PSINet Inc.
Date: 9/30/97
/s/ [Illegible] /s/ Thomas W. Davies
- ----------------------------------- -------------------------------
Witness Thomas W. Davies
Senior Vice President
Fleet National Bank
Date: 9/30/97
4
<PAGE>
Exhibit 10.9
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Among
PSINET INC.,
LEHMAN BROTHERS INC.
SBC WARBURG DILLON READ INC.,
KA INVESTMENTS, LDC
and
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
______________________________
As of November 10, 1997
______________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
-----
<S> <C> <C>
ARTICLE I PURCHASE AND SALE OF PREFERRED STOCK;
CLOSING; CERTAIN DEFINITIONS....................................... -1-
1.1 The Closing........................................................ -1-
1.2 Preferred Stock.................................................... -2-
1.3 Certain Definitions................................................ -2-
ARTICLE II REPRESENTATIONS AND WARRANTIES..................................... -5-
2.1 Representations and Warranties of the Company...................... -5-
2.2 Representations and Warranties of the Purchasers................... -11-
ARTICLE III OTHER AGREEMENTS OF THE PARTIES.................................... -13-
3.1 Transfer Restrictions.............................................. -13-
3.2 Acknowledgement of Dilution........................................ -15-
3.3 Furnishing of Information.......................................... -15-
3.4 Copies and Use of Disclosure Materials............................. -15-
3.5 Blue Sky Laws...................................................... -16-
3.6 Integration........................................................ -16-
3.7 Increase in Authorized Shares...................................... -16-
3.8 Listing of Underlying Shares....................................... -16-
3.9 Use of Proceeds.................................................... -17-
3.10 Notice of Breaches................................................. -17-
3.11 Conversion Obligations of the Company.............................. -17-
3.12 Participation Right................................................ -17-
3.13 IXC Transaction.................................................... -19-
3.14 Shareholder Rights Plan............................................ -19-
3.15 Rights and Warrants................................................ -20-
3.16 Standstill Agreement............................................... -20-
3.17 Merger Event....................................................... -20-
ARTICLE IV CONDITIONS......................................................... -21-
4.1 Conditions Precedent to the Obligation of the Purchasers to
Purchase the Preferred Stock..................................... -21-
4.2 Conditions Precedent to the Obligation of the Company to Sell the
Preferred Stock.................................................. -22-
ARTICLE V MISCELLANEOUS...................................................... -22-
5.1 Fees and Expenses.................................................. -23-
5.2 Entire Agreement; Amendments....................................... -23-
5.3 Notices............................................................ -23-
5.4 Amendments; Waivers................................................ -24-
</TABLE>
-i-
<PAGE>
<TABLE>
Page
-----
<S> <C> <C>
5.5 Headings........................................................... -25-
5.6 Successors and Assigns............................................. -25-
5.7 No Third-Party Beneficiaries; Obligations Several.................. -25-
5.8 Governing Law...................................................... -25-
5.9 Survival........................................................... -25-
5.10 Execution.......................................................... -25-
5.11 Publicity.......................................................... -25-
5.12 Severability....................................................... -26-
5.13 Interpretation..................................................... -26-
5.14 Schedules.......................................................... -26-
</TABLE>
Exhibit A - Certificate of Amendment
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Legal Opinion
-ii-
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CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of November 10,
1997 (this "Agreement"), among PSINet Inc., a New York corporation (the
"Company"), Lehman Brothers Inc., a Delaware corporation ("Lehman"), SBC Warburg
Dillon Read Inc., a Delaware corporation ("SBC"), KA Investments, LDC, a
corporation organized and existing under the laws of the British Virgin Islands
("KA Investments"), and Brown Simpson Strategic Growth Fund, L.P., a New York
limited partnership ("Brown Simpson Strategic Growth Fund"). Each of Lehman,
SBC, KA Investments and Brown Simpson Strategic Growth Fund is a "Purchaser" and
collectively they are referred to herein as the "Purchasers."
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers
severally and not jointly desire to purchase from the Company an aggregate
amount of 600,000 shares of the Company's Series B 8% Convertible Preferred
Stock, $.01 par value per share (the "Preferred Stock"), which is convertible
into shares of the Company's common stock, $.01 par value per share.
IN CONSIDERATION of the mutual covenants and agreements set forth herein
and for good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK;
CLOSING; CERTAIN DEFINITIONS
1.1 The Closing.
(a) The Closing. Subject to the terms and conditions set forth
herein, the Company shall issue and sell to the Purchasers and the Purchasers
severally and not jointly shall purchase from the Company the Preferred Stock
for an aggregate purchase price of $30,000,000 (the "Purchase Price"). The
number of shares of Preferred Stock to be purchased by each Purchaser, and the
aggregate purchase price therefor, is as set forth in Schedule 1 attached
hereto. The closing of the purchase and sale of the Preferred Stock (the
"Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn
& Berman LLP, 1290 Avenue of the Americas, New York, New York 10104, immediately
following the execution hereof or such later date as the parties shall agree.
The date of the Closing is hereinafter referred to as the "Closing Date."
(b) Deliveries at the Closing. At the Closing, (i) the Company
shall deliver to the Purchasers (A) certificates for the Preferred Stock,
registered in the names of the Purchasers as set forth in Schedule 1, (B) the
legal opinion of Nixon, Hargrave, Devans & Doyle LLP, special counsel to the
Company (the "Legal Opinion"), substantially in the
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form of Exhibit C attached hereto, and (C) all other documents, instruments and
writings required to have been delivered at or prior to the Closing by the
Company pursuant to this Agreement; and (ii) each Purchaser shall deliver to the
Company (A) the aggregate Purchase Price for the shares of Preferred Stock being
purchased by it, in immediately available funds by wire transfer to an account
designated in writing by the Company for such purpose on or prior to the Closing
Date and (B) all documents, instruments and writings required to have been
delivered at or prior to the Closing by such Purchaser pursuant to this
Agreement.
1.2 Preferred Stock. The Preferred Stock shall have the rights,
preferences and privileges set forth in Exhibit A attached hereto, and shall be
incorporated into a Certificate of Amendment ("Certificate of Amendment") to the
Certificate of Incorporation of the Company, in form and substance approved by
the Company, the Purchasers and their respective counsel.
1.3 Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
An "Affiliate" of a Person shall mean any Person controlled by, under
common control with or controlling such Person.
"Business Day" shall have the meaning set forth in Exhibit A.
"Brown Simpson Asset Management" shall have the meaning set forth in
Section 2.1(l) of this Agreement.
"Certificate of Amendment" shall have the meaning set forth in Section
1.2 of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder as in effect on the date hereof.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the common stock, $.01 par value, of the
Company.
"Company" shall have the meaning set forth in the first paragraph of
this Agreement.
"Conversion Date" shall have the meaning set forth in Exhibit A.
"Conversion Price" shall have the meaning set forth in Exhibit A.
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"Disclosure Materials" shall have the meaning set forth in Section
2.1(j) of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Five Day Average Market Price" shall have the meaning set forth in
Exhibit A.
"IXC" shall have the meaning set forth in Section 2.1(t) of this
Agreement.
"IXC Transaction" means the transactions contemplated by the IRU and
Stock Purchase Agreement dated as of July 22, 1997, between the Company and IXC,
as the same may be amended from time to time, on terms substantially similar to
the terms in effect on the date hereof or as such terms are contemplated to be
amended on the date hereof as disclosed to the Purchasers.
"Liens" shall have the meaning set forth in Section 2.1(d) of this
Agreement.
"Material Adverse Effect" shall have the meaning set forth in Section
2.1(a) of this Agreement.
"Merger Event" shall have the meaning set forth in Exhibit A.
"Other Registration Rights Agreements" shall have the meaning set
forth in Exhibit B.
"Original Issue Date" shall have the meaning set forth in Exhibit A.
"Per Share Market Value" shall have the meaning set forth in Exhibit
A.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"Purchaser" and "Purchasers" shall have the meanings set forth in the
first paragraph of this Agreement.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement in the form attached hereto as Exhibit B among the Company and the
Purchasers.
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"Required Approvals" shall have the meaning set forth in Section
2.1(f) of this Agreement.
"SEC Documents" shall have the meaning set forth in Section 2.1(j) of
this Agreement.
"Securities" shall mean the Preferred Stock and the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Stated Value" shall have the meaning set forth in Exhibit A.
"Strategic Transaction" shall have the meaning set forth in Section
3.12 of this Agreement.
"Subsidiaries" shall have the meaning set forth in Section 2.1(a) of
this Agreement.
"Thirty Day Average Market Price" shall have the meaning set forth in
Exhibit A.
"Trading Day" shall have the meaning set forth in Exhibit A.
"Transaction Documents" shall mean this Agreement, the Certificate of
Amendment and the Registration Rights Agreement.
"Underlying Shares" shall mean the shares of Common Stock issuable on
conversion of the Preferred Stock.
"Underlying Shares Registration Statement" shall mean a registration
statement under the Securities Act required to be filed with respect to the
resale of the Underlying Shares pursuant to the Registration Rights Agreement.
"Voting Securities" shall have the meaning set forth in Exhibit A.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Purchasers:
(a) Organization and Qualification. The Company is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of New York, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no "significant subsidiaries" within the meaning of
Rule 12b-2 promulgated under the Exchange Act other than as set forth in
Schedule 2.1(a) attached hereto (collectively, the "Subsidiaries"). Each of the
Subsidiaries is a corporation, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, with the
requisite corporate power and authority to own and use its properties and assets
and to carry on its business as currently conducted. Each of the Company and
the Subsidiaries is duly qualified to transact business and is in good standing
as a foreign corporation in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
except where the failure to be so qualified or in good standing, as the case may
be, could not, individually or in the aggregate, (x) adversely affect the
legality, validity or enforceability of the Preferred Stock or any of the
Transaction Documents, (y) have a material adverse effect on the business,
results of operations, assets, or financial condition of the Company and the
Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to
perform fully on a timely basis its obligations under any Transaction Document
(any of the foregoing, a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by this Agreement and the other Transaction Documents and otherwise
to carry out its obligations hereunder and thereunder. The execution and
delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of the Company.
Each of the Transaction Documents has been duly executed by the Company and when
delivered in accordance with the terms hereof shall constitute the valid and
legally binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its certificate of incorporation, by-laws or other organizational documents.
(c) Capitalization. The authorized, issued and outstanding capital
stock of the Company is set forth in Schedule 2.1(c). Except as set forth in
Schedule 2.1(c), no
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shares of Common Stock are entitled to preemptive or similar rights nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or, except as a result of the purchase and
sale of the Preferred Stock hereunder, securities, rights or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any Subsidiary is, or
upon the occurrence or nonoccurrence of specified events or the passage of time
or both would be, bound to issue additional shares of Common Stock or securities
or rights convertible or exchangeable into shares of Common Stock. To the
knowledge of the Company, except as specifically disclosed in the SEC Documents
or Schedule 2.1(c), no Person or group of Persons beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Exchange Act) or has the
right to acquire, beneficial ownership of in excess of 5% of the Common Stock.
(d) Issuance of Preferred Stock. The Preferred Stock is duly
authorized and, when issued and paid for in accordance with the terms hereof,
shall be validly issued, fully paid and nonassessable, subject to Section 630 of
the New York Business Corporation Law, free and clear of all liens, encumbrances
and rights of first refusal of any kind granted by or binding upon the Company
(collectively, "Liens"). The Company has an adequate reserve of duly authorized
shares of Common Stock to enable it to perform its conversion and other
obligations under this Agreement and the Certificate of Amendment, which number
of reserved and available shares of Common Stock is equal to at least the number
of shares of Common Stock as is issuable upon conversion in full of the
Preferred Stock. When issued in accordance with the terms of the Preferred
Stock and the Certificate of Amendment, the Underlying Shares will be duly
authorized, validly issued, fully paid and nonassessable, subject to Section 630
of the New York Business Corporation Law, free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or violate any provision of its certificate of incorporation or bylaws
(each as amended through the date hereof), (ii) subject to obtaining the
consents referred to in Section 2.1(f), conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument (evidencing a Company
debt or otherwise) to which the Company is a party or by which any property or
asset of the Company is bound or affected, (iii) result in a violation of any
law, rule, regulation, order, judgment, injunction, decree or other restriction
of any court or governmental authority to which the Company is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company is bound or affected, and (iv) assuming that
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each Purchaser is not otherwise and will not otherwise be a "Beneficial Owner"
(as such term is defined in the Rights Agreement dated as of May 8, 1996 between
the Company and First Chicago Trust Company of New York, as amended (the "Rights
Plan")) of any securities of the Company other than the Preferred Stock to be
acquired by such Purchaser on the Closing Date or in payment of dividends
thereon or the Underlying Shares relating to such Preferred Stock and is not
acquiring the Preferred Stock and will not acquire any Underlying Shares as, and
will not in the future act together with any other Person (including, without
limitation, one or more Purchasers or any of their respective "Associates" or
"Affiliates" (as such terms are defined in the Rights Plan)) as, a "group" (as
such term is described in Rule 13d-5(b) promulgated under the Exchange Act) with
respect to any of the Company's securities, result in any Purchaser being deemed
to be an "Acquiring Person" (as such term is defined in the Rights Plan); except
in the case of each of clauses (ii) and (iii), as could not, individually or in
the aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental authority, except for violations which, individually and in
the aggregate, do not have a Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth in
Schedule 2.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, give any notice to or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) the filing of the Certificate of Amendment, (ii) the filing of one or more
Underlying Shares Registration Statements with the Commission, (iii) the
application for the listing of the Underlying Shares on the Nasdaq National
Market ("Nasdaq") (and with any other national securities exchange or market on
which the Common Stock is then listed), and (iv) other than, in all other cases,
where the failure to obtain such consent, waiver, authorization or order, or to
give such notice or make such filing or registration, could not have or result
in, individually or in the aggregate, a Material Adverse Effect (together with
the consents, waivers, authorizations, orders, notices, filings and
registrations referred to in Schedule 2.1(f), the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in
Schedule 2.1(g) or in the SEC Documents, there is no action, suit, written
notice of violation, or proceeding or written notice of investigation pending
or, to the knowledge of the Company, threatened against or affecting the Company
or any of its Subsidiaries or any of their respective properties before or by
any court, governmental or administrative agency or regulatory authority
(Federal, state, county, local or foreign) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of any indenture, loan or credit
agreement or any other
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agreement or instrument to which it is a party or by which it or any of its
properties is bound, (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is in violation of any statute, rule or
regulation of any governmental authority, except in the case of any of clauses
(i), (ii) or (iii) as could not have or result in, individually or in the
aggregate, a Material Adverse Effect.
(i) Private Offering. Neither the Company nor any Person acting on
its behalf has taken or will take any action which might subject the offering,
issuance or sale of the Securities to the registration requirements of Section 5
of the Securities Act or that would make the transactions contemplated herein
ineligible under Rule 506 promulgated under the Securities Act.
(j) SEC Documents; Financial Statements; No Adverse Change. The
Company has filed all reports required to be filed by it under the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials, to the extent filed with
the Commission on or after March 31, 1997, being collectively referred to herein
as the "SEC Documents" and, together with the Schedules to this Agreement, the
"Disclosure Materials") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Documents prior to the expiration
of any such extension. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Documents, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the SEC Documents, when filed, complied in all material respects
with applicable accounting requirements and the rules and regulations of the
Commission with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved, except as may be otherwise
specified in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end audit
adjustments. Since the date of the financial statements included in the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997,
except as specifically set forth in Schedule 2.1(j), there has been no event,
occurrence or development that has had or resulted in a Material Adverse Effect
or that could (other than those affecting any industry in which the Company or
any Subsidiary operates or the economy in general) reasonably be expected to
have or result in a Material Adverse Effect.
(k) Investment Company. The Company is not, and is not controlled
by, an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
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(l) Certain Fees. No fees or commissions will be payable by the
Company to any broker, financial advisor, finder, investment banker, or bank
with respect to the transactions contemplated hereby other than fees payable to
Brown Simpson Asset Management, LLC ("Brown Simpson Asset Management") for due
diligence and attorneys fees pursuant to Section 5.1. The Purchasers shall have
no obligation with respect to such fees or with respect to any claims made by or
on behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated hereby, except that
the Purchasers shall be responsible for fees payable to Brown Simpson Asset
Management. The Company shall indemnify and hold harmless each Purchaser, its
respective employees, officers, directors, agents, and partners, and their
respective Affiliates (as such term is defined under Rule 405 promulgated under
the Securities Act), from and against all claims, losses, damages, costs
(including the reasonable costs of preparation and reasonable attorney's fees)
and expenses suffered in respect of any such claimed or existing fees other than
fees payable by the Company to Brown Simpson Asset Management.
(m) Solicitation Materials. The Company has not (i) distributed any
offering materials in connection with the offering and sale of the Securities
other than the Disclosure Materials and any amendments and supplements thereto
or (ii) solicited any offer to buy or sell the Securities by means of any form
of general solicitation or advertising.
(n) Form S-3 Eligibility. The Company is, and at the Closing Date
will be, eligible to register securities for resale with the Commission under
Form S-3 promulgated under the Securities Act.
(o) Exclusivity. The Company shall not issue or sell Preferred Stock
to any Person other than the Purchasers.
(p) Listing and Maintenance Requirements Compliance. The Company has
not in the two years preceding the date hereof received written notice from any
stock exchange, market or trading facility on which the Common Stock is or has
been listed (or on which it has been quoted) to the effect that the Company is
not in compliance with the listing or maintenance requirements of such exchange,
market or trading facility. The Company believes that it meets such maintenance
requirements.
(q) Patents and Trademarks. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, service mark applications, trade names, copyrights, licenses, trade
secrets and other intellectual property rights (collectively, "Intellectual
Property Rights") which are necessary for use in connection with its business or
which the failure to so have would have a Material Adverse Effect (the "Company
Intellectual Property Rights"). To the knowledge of the Company, none of the
Company Intellectual Property Rights infringe on any rights of any other Person,
and the Company either owns or has duly licensed or otherwise acquired all
necessary rights with respect to the Company Intellectual Property Rights. To
the knowledge of the Company, no other Person is infringing the Company
Intellectual Property Rights. The Company has not
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received any notice from any third party of any pending claim of infringement by
the Company of any Intellectual Property Rights of such third party which, if
determined adversely to the Company, would have a Material Adverse Effect.
(r) Compliance with Laws; Governmental Permits and Licenses. Except
as disclosed in the SEC Documents, the conduct by the Company of its business
does not violate any applicable United States Federal, state, local or foreign
law, statute, order, license or other governmental authorization, rule or
regulation, in each case in a manner which, when taken together with other
similar or related violations, could have a Material Adverse Effect, and the
Company has not received any written notice that any such violation is alleged.
The Company has all licenses, permits, approvals and other authorizations from
governmental authorities necessary for the Company to conduct its business as
now being conducted, except for such licenses, permits, approvals and other
authorizations the failure to obtain or maintain which taken together, could not
result in a Material Adverse Effect.
(s) Other Registration Rights. Except as set forth in Schedule
2.1(s), the Company has not granted to any person other than the Purchasers the
right to (i) require the Company to file a registration statement under the
Securities Act with respect to Common Stock or other securities of the Company
held by them or which they have a right to acquire, other than such rights as
have heretofore been exercised and satisfied, or (ii) include any shares of
Common Stock or other securities of the Company held by them or which they have
a right to acquire in any registration statement filed by the Company for any
other person, including without limitation in any Underlying Shares Registration
Statement. Schedule 2.1(s) also sets forth a listing and description of all
registration statements filed by the Company with respect to any securities
issued by the Company which are either currently effective or have been filed
and are subject to review by the Commission pending a declaration of
effectiveness.
(t) IXC Transaction. The issuance of the Preferred Stock as
contemplated in the Transaction Documents shall not result in an adjustment to
the number of shares issuable to IXC Internet Services, Inc. ("IXC") pursuant to
the IXC Transaction.
(u) ERISA. Schedule 2.1(u) sets forth a true and complete list of
all funded "employee benefit plans" (within the meaning of Section 3(3) of
ERISA) with respect to which the Company or any of the Subsidiaries is a party
in interest (within the meaning of Section 3(14) of ERISA) or disqualified
person (within the meaning of Section 4975 of the Code). In reliance upon and
subject to the accuracy of the representations of the Purchasers contained in
Section 2.2(g) hereof, the execution and delivery of this Agreement and the
other Transaction Documents and the consummation of the transactions
contemplated hereby or thereby, including the sale of the shares of Preferred
Stock to be purchased by the Purchasers and the conversion of the Preferred
Stock into Common Stock, is not a prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) on the part of the Company or
any of its
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Subsidiaries. Each "employee benefit plan" (within the meaning of Section 3(3)
of ERISA) established or maintained by the Company or any of its Subsidiaries is
in compliance in all material respects with all applicable provisions of ERISA
and the Code; no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the Company or any
Related Person (as hereinafter defined) would have any material liability;
neither the Company nor any Related Person has incurred or expects to incur
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 (whether or nor waived)
or 4971 of the Code; with respect to each "pension plan" for which the Company
or any Related Person would have any liability that is intended to be qualified
under Section 401(a) of the Code, the plan is a standardized prototype plan for
which the prototype sponsor has received a favorable determination letter and
the Company has no knowledge of any event which would cause the loss of such
qualification; neither the Company nor any Related Person has incurred, nor
expects to incur, any liability to a multiemployer plan (within the meaning of
Section 3(37) of ERISA); and there have been no prohibited transactions (within
the meaning of Section 406 of ERISA or Section 4975 of the Code) that could
subject the Company or any Related Person to any material tax or penalty under
Section 4975 of the Code or 502(i) or (l) of ERISA. "Related Person" shall mean
any trade or business (whether or nor incorporated) which is under common
control (as defined in Sections 414(b) and (c) of the Code) with the Company or
any of its Subsidiaries within the meaning of Section 4001(b) of the Code.
(v) Seniority. No class of equity securities of the Company is
senior to the Preferred Stock in right of payment, whether with respect to
dividends or upon liquidation, dissolution or otherwise.
(w) Disclosure. All information relating to or concerning the
Company set forth in the Transaction Documents including the Schedules hereto is
true and correct in all material respects and does not fail to state any
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, severally and not jointly, makes the following representations and
warranties to the Company.
(a) Organization; Authority. Such Purchaser is an entity organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and to carry out its obligations hereunder and thereunder. The
execution and delivery of this Agreement and the other Transaction Documents to
which such Purchaser is a party and the acquisition of the Securities to be
acquired hereunder by such Purchaser has been duly authorized by all necessary
action on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement has been duly executed and delivered by such
Purchaser and constitutes the valid and legally binding obligation of such
Purchaser, enforceable against it in
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accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity.
(b) Investment Intent. Such Purchaser is acquiring the Securities to
be acquired hereunder by such Purchaser for its own account for investment
purposes only and not with a view to or for distributing or reselling such
Securities or any part thereof or interest therein, without prejudice, however,
to such Purchaser's right, subject to the provisions of this Agreement and the
Registration Rights Agreement, at all times to sell or otherwise dispose of all
or any part of such Securities pursuant to an effective registration statement
under the Securities Act or under an exemption from such registration and, in
each case, in compliance with applicable state securities laws.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities to be acquired hereunder by such Purchaser, it was, at the date
hereof, it is, and at the Closing Date, it will be, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Such Purchaser either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such Purchaser
acknowledges that the Securities are speculative investments and involve a high
degree of risk and such Purchaser is able to bear the economic risk of an
investment in the Securities to be acquired hereunder by such Purchaser, and, at
the present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges receipt and
review of the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning the
terms and conditions of the offering of the Securities, and the merits and risks
of investing in the Securities, (ii) access to information about the Company and
the Company's financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment and
(iii) the opportunity to obtain such additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the investment
and to verify the accuracy and completeness of the information contained in the
Disclosure Materials. Neither such inquiries nor any other investigation
conducted by or on behalf of such Purchaser or its representatives or counsel
shall modify, amend or affect such Purchaser's right to rely on the Company's
representations and warranties contained in the Transaction Documents.
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(g) Prohibited Transactions. Each Purchaser represents and warrants
to the Company that the shares of Preferred Stock to be purchased by it are not
being acquired, directly or indirectly, with the assets of any "employee benefit
plan", within the meaning of Section 3(3) of ERISA (a "Benefit Plan") or, if the
assets of a Benefit Plan are being used, directly or indirectly, for such
acquisition, no part of the funds to be used to purchase the Shares constitutes
assets of any Benefit Plan listed on Schedule 2.1(u) of this Agreement.
(h) Reliance. Such Purchaser understands and acknowledges that (i)
the Securities to be acquired by it hereunder are being offered and sold to it
without registration or qualification under the Securities Act or any state
securities or "blue sky" laws in a private placement that is exempt from the
registration provisions of the Securities Act and (ii) the availability of such
exemption, depends in part on, and the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and such Purchaser hereby
consents to such reliance.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to
the Company, or pursuant to an available exemption therefrom or in a
transaction not subject to the registration requirements thereof. In
connection with any transfer of any Securities other than pursuant to an
effective registration statement or to the Company, the Company may require
the transferor thereof to provide to the Company an opinion of counsel
selected by the transferor, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration under the Securities Act. Except as otherwise
expressly provided herein, the Preferred Stock may not be sold, hypothecated
(other than pursuant to a bona fide loan arrangement with a financial
institution), transferred or otherwise conveyed by any Purchaser or any
direct or indirect permitted transferee thereof without the prior written
consent of the Company, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, the Company hereby consents to and agrees to
register on its books and records (i) any transfer of Securities by one
Purchaser to another Purchaser, (ii) any transfer by any Purchaser to (A) an
Affiliate which controls such Purchaser or is controlled by such Purchaser
(other than any such controlling or controlled Affiliate which is a
telecommunications company or Internet service provider company) or (B) a
controlling or controlled Affiliate of another Purchaser (other than any such
controlling or controlled Affiliate which is a telecommunications company or
Internet service provider company), and (iii) any transfers among any such
controlling or controlled Affiliates (other than any such controlling or
controlled Affiliate which is a telecommunications company or Internet
service provider company) (each of the transfers described in (i), (ii) and
(iii) above is referred to herein as a "Purchaser Transfer").
Notwithstanding the foregoing, (i) such consent shall be deemed granted only
with respect to up to three Purchaser Transfers in the
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aggregate by each Purchaser and such Purchaser's Affiliates, (ii) no such
consent shall be deemed granted by the Company for any Purchaser Transfer which
results in any Purchaser or any controlling or controlled Affiliate of any
Purchaser beneficially owning in excess of 19.999% of the Common Stock and (iii)
neither this Section 3.1 nor any other provision of this Agreement shall
constitute a waiver of any provision of the Rights Plan. With respect to any
Purchaser Transfer, no documentation shall be required other than (i) executed
transfer documents and (ii) an executed instrument of such transferee pursuant
to which such Transferee makes representations and warranties to the Company to
the same effect as those set forth in Section 2.2(b) through (g) hereof and
agrees to be bound by this Agreement and the Registration Rights Agreement and,
to the extent not already so bound, agrees to be bound by any then existing
agreement with the Company with respect to confidential information to the
extent such information is delivered to such transferee. Such documentation
shall also be required in connection with any transfers of the Preferred Stock
other than Purchaser Transfers. Any transferee of Preferred Stock pursuant to
this Section 3.1(a) shall have the rights and obligations of a Purchaser under
this Agreement and of a "Holder" under the Registration Rights Agreement.
Notwithstanding any of the foregoing, no transfers of Preferred Stock or
Underlying Shares shall be made pursuant to Regulation S under the Securities
Act.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
THESE SECURITIES ARE SUBJECT TO THE TERMS OF A CONVERTIBLE
PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF NOVEMBER 10, 1997 WITH
THE COMPANY, A COPY OF WHICH IS ON FILE AND AVAILABLE FOR INSPECTION
AT THE PRINCIPAL CORPORATE OFFICE OF THE COMPANY.
Underlying Shares shall not contain the legend set forth above if the
conversion of Preferred Stock or other issuance of such Underlying Shares occurs
at any time while an Underlying Shares Registration Statement is effective under
the Securities Act
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or, in the event there is not an effective Underlying Shares Registration
Statement at such time, if in the opinion of counsel to the Company such legend
is not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company agrees that it will provide each Purchaser, upon
request, with a certificate or certificates representing the Preferred Stock or
Underlying Shares, free from such legend at such time as such legend is no
longer required hereunder. The Company may not make any notation on its records
or give instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section 3.1.
3.2 Acknowledgement of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon conversion of the Preferred Stock may
result in dilution of the outstanding shares of Common Stock, which dilution may
be substantial under certain market conditions. The Company further
acknowledges that, subject to the terms of the Certificate of Amendment and
applicable law, after the Closing its obligation to issue Underlying Shares in
accordance with the Preferred Stock is unconditional and absolute regardless of
the effect of any such dilution.
3.3 Furnishing of Information. As long as the Purchasers own Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. If at any time prior to the date on which the Purchasers may
resell all of their Underlying Shares without volume restrictions pursuant to
Rule 144(k) promulgated under the Securities Act (as determined by counsel to
the Company, which may be counsel employed by the Company, pursuant to a written
opinion letter to such effect, if necessary, addressed and acceptable to the
Company's transfer agent for the benefit of and enforceable by the Purchasers)
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchasers and make publicly available information in
accordance with Rule 144(c) promulgated under the Securities Act. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time
to enable such Person to sell Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including providing the legal opinion
referenced above in this Section (if required by the Company's transfer agent);
provided, however, that the Company shall be entitled to be reimbursed for any
reasonable expenses it incurs in connection with its compliance with the
provisions of this Section 3.3 insofar as it relates to more than three
Purchaser Transfers in the aggregate by each Purchaser and such Purchaser's
Affiliates. Upon the request of any such Person, the Company shall deliver to
such Person a written certification of the Company executed by a duly authorized
officer on behalf of the Company as to whether it has complied with such
requirements of Rule 144(c).
3.4 Copies and Use of Disclosure Materials. The Company consents to the
use of the Disclosure Materials, any reports filed by the Company under the
Exchange Act after the
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date hereof and any information provided by the Company pursuant to Section 3.3
of this Agreement, and any amendments and supplements thereto, by the Purchasers
in connection with resales of the Securities other than pursuant to an effective
registration statement. The Company makes no representation or warranty as to
the continued completeness or accuracy of any of the Disclosure Materials or any
such reports and undertakes no obligations to update any of the Disclosure
Materials or any such reports after the Closing Date except as and to the extent
required under the Exchange Act and Registration Rights Agreement with respect
to the SEC Documents.
3.5 Blue Sky Laws. In accordance with the Registration Rights Agreement,
the Company shall qualify the Underlying Shares under the securities or Blue Sky
laws of such jurisdictions as the Purchasers may request and shall continue such
qualification at all times through the third anniversary of the Closing Date;
provided, however, that neither the Company nor its Subsidiaries shall be
required in connection therewith to qualify as a foreign corporation where they
are not now so qualified or to take any action that would subject the Company to
general service of process in any such jurisdiction where it is not then so
subject.
3.6 Integration. The Company shall not and shall use its reasonable best
efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers
to buy or otherwise negotiate in respect of any security (as defined in Section
2 of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the issue or sale of the Securities to the Purchasers.
3.7 Increase in Authorized Shares. At such time as the Company would be,
if a notice of conversion were to be delivered on such date, precluded from
converting the then outstanding Preferred Stock by reason of an insufficient
number of authorized shares of Common Stock then being authorized for issuance,
the Board of Directors of the Company shall take the actions set forth in
Section 5(e) of the Certificate of Amendment.
3.8 Listing of Underlying Shares. The Company shall (1) on or prior to
the Closing Date prepare and file with Nasdaq (as well as any other national
securities exchange or market on which the Common Stock is then listed) an
additional shares listing application covering 8,086,580 shares of Common
Stock, (2) use its reasonable best efforts to take all steps necessary to
cause such shares of Common Stock to be approved for listing on Nasdaq (as
well as on any other national securities exchange or market on which the
Common Stock is then listed) as soon as possible thereafter, and (3) provide
to the Purchasers evidence of such listing, and the Company shall use its
reasonable best efforts to maintain the listing of its Common Stock on such
exchange or market. In addition, if at any time the number of shares of
Common Stock then issuable on conversion of all then issued shares of
Preferred Stock and the shares of Preferred Stock reserved for issuance upon
payment of dividends is greater than the number of shares of Common Stock
theretofore listed with Nasdaq (and any such other national securities
exchange or market), the Company shall promptly take such action (including
the actions described in the preceding sentence) to file an additional shares
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listing application so that a number of shares equal to the number of
Underlying Shares as would then be issuable upon conversion of all then
issued shares of Preferred Stock and the shares of Preferred Stock reserved
for issuance upon payment of dividends shall have been listed with Nasdaq
(and any such other national securities exchange or market).
3.9 Use of Proceeds. The Company shall use all of the proceeds from the
sale of the Securities for working capital and general corporate purposes and
not for the satisfaction of any portion of Company debt (other than the
reduction of amounts outstanding under the Company's revolving credit facility)
or to redeem Company equity or equity-equivalent securities. Pending
application of the proceeds of this placement in the manner permitted hereby the
Company will invest such proceeds in interest bearing accounts and/or
short-term, investment grade interest bearing securities.
3.10 Notice of Breaches. Each of the Company and each Purchaser shall give
prompt written notice to the other of any breach by it of any agreement
contained in any Transaction Document, as well as any events or occurrences
arising after the date hereof, which would reasonably be likely to cause any
agreement of such party contained in the Transaction Document to be breached.
However, no disclosure by any party pursuant to this Section shall be deemed to
cure any breach of any agreement contained in any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall promptly
notify the Purchasers of any written notice or claim that it receives from any
lender of the Company to the effect that the consummation of the transactions
contemplated by the Transaction Documents violates or would violate any written
agreement or understanding between such lender and the Company, and the Company
shall promptly furnish by facsimile to the holders of the Preferred Stock a copy
of any written statement in support of or relating to such claim or notice.
3.11 Conversion Obligations of the Company. The Company shall honor
conversions of the Preferred Stock and shall deliver Underlying Shares in
accordance with the respective terms and conditions and time periods set forth
in the Certificate of Amendment. Each of the parties to this Agreement
acknowledges and agrees that the other parties would be damaged irreparably in
the event that the provisions of this Section 3.11 are not performed in
accordance with their specific terms or otherwise are breached. Accordingly,
each of the parties hereto agrees that the other parties shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this Section
3.11 and to enforce specifically this Section 3.11 and the terms and provisions
of this Section 3.11 in any action instituted in any court of the United States
or any state thereof having jurisdiction over the parties to this Agreement and
the matter, in addition to any other remedy to which they may be entitled, at
law or in equity.
3.12 Participation Right. (a) If the Company shall sell, grant any
option to purchase, or otherwise dispose of any of its Common Stock or Common
Stock equivalent
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securities where the acquisition price of the Common Stock is, on the face
thereof or implied therein, less than the Five Day Average Market Price for
such Common Stock on the date of such sale, grant or other disposition (a
"Subsequent Financing") at any time during the six month period immediately
after the Closing Date, other than in connection with (i) the granting or
assumption of options or warrants to employees, officers, consultants (other
than a consultant whose primary business is securities trading or investing)
and directors of the Company, any subsidiary of the Company or any Person
acquired by the Company or any such subsidiary, and the issuance of shares
upon exercise of such options or warrants, (ii) the exercise of any currently
outstanding warrants and upon conversion of any currently outstanding
convertible preferred stock in each case disclosed in Schedule 2.1(c), (iii)
the conversion of the Preferred Stock in accordance with the terms of the
Preferred Stock, (iv) an underwritten public offering or Rule 144A offering
of the Company's securities, (v) a transaction or relationship (a "Strategic
Transaction") where the Company issues, directly or indirectly, such
securities to a Person with which the Company or a subsidiary of the Company
is engaged in one or more strategic transactions, other than a transaction
where the Company is issuing securities and the proceeds are substantially
all in cash, (vi) the IXC Transaction; (vii) any grant or distribution of any
rights under the Rights Plan, or any exercise thereof or conversion of
securities in connection therewith; and (viii) any issuance of securities to
Chatterjee Management Company (doing business as The Chatterjee Group) or any
of its designees (collectively, "Chatterjee") arising from or relating to any
relationship or transaction which existed between the Company and Chatterjee
prior to the date hereof, which relationship or transaction has been
disclosed in a Schedule to this Agreement or otherwise disclosed in writing
to the Purchasers; then (A) the Company shall, prior to effecting such
Subsequent Financing, deliver to each Purchaser who is then a record owner of
Preferred Stock a written notice (the "Subsequent Financing Notice") of its
intention to effect such Subsequent Financing, which Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Financing is intended to be
effected, together with a term sheet or similar document relating thereto,
each Purchaser hereby agreeing to maintain in confidence all information
received pursuant to or in connection with any such Subsequent Financing
Notice, and (B) each Purchaser so notified by the Company shall notify the
Company by 5:00 p.m. (New York City time) on the fifth (5th) Trading Day (or
the sixth (6th) Trading Day if there is not a Saturday and Sunday subsequent
to such notice and prior to such fifth (5) Trading Day) after its receipt of
the Subsequent Financing Notice of its willingness to participate in such
Subsequent Financing, subject to completion of documentation substantially on
the terms set forth in the Subsequent Financing Notice and mutually agreed
upon by the Company and the Person or Persons with whom such Subsequent
Financing is to be effected. If a Purchaser elects to participate in such
Subsequent Financing then such Purchaser shall be able to participate in such
Subsequent Financing up to the dollar value obtained by multiplying (i) the
amount equal to the product of the Stated Value of the Preferred Stock and
the amount of shares of Preferred Stock outstanding (excluding Preferred
Stock issued in payment of dividends on the Preferred Stock) on the date of
the Subsequent Financing Notice and (ii) the percentage equal to such
Purchaser's percentage ownership of the Preferred Stock outstanding on the
date of the
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Subsequent Financing Notice, provided that the Company, in its sole discretion,
may allow the Purchasers who are participating in such Subsequent Financing to
participate on a pro rata basis in excess of such amount. If no Purchaser so
notifies the Company within such time period, the Company may effect the
Subsequent Financing substantially upon the terms and with the Persons (or
Affiliates of such Persons) set forth in the Subsequent Financing Notice;
provided, that the Company shall provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers shall again have the right to participate
in such Subsequent Financing on the terms set forth above in this paragraph (a)
if the Subsequent Financing subject to the initial Subsequent Financing Notice
shall not have been consummated for any reason on the terms set forth in such
Subsequent Financing Notice within ninety (90) Trading Days after the date of
the initial Subsequent Financing Notice with the Person (or an Affiliate of such
Person) identified in the Subsequent Financing Notice.
(b) Except Underlying Shares and other "Registrable Securities" (as
such term is defined in the Registration Rights Agreement) to be registered in
accordance with the Registration Rights Agreement and other than Company
securities to be registered for resale pursuant to or in connection with (i) the
Other Registration Rights Agreements, (ii) the transactions permitted pursuant
to paragraph (a)(i), (a)(ii) and (a)(vii) of this Section 3.12, (iii) any
Company registration statement on Form S-4 or Form S-8 under the Securities Act
and (iv) any Strategic Transactions, the Company shall not, without the prior
written consent of the Purchasers, (i) issue or sell any of its equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register for resale any securities of the Company, in
each case for a period beginning on the date hereof and ending 90 days after the
date that the Underlying Shares Registration Statement is declared effective by
the Commission. Any days that a Purchaser is unable to sell Underlying Shares
under the Underlying Securities Registration Statement by reason of the
applicability of the last paragraph of Section 3 of the Registration Rights
Agreement shall be added to such period.
3.l3 IXC Transaction. Purchasers agree that the consummation of the IXC
Transaction (including, without limitation, the issuance of Common Stock, the
reincorporation of the Company by means of a merger into a Delaware subsidiary
and the adoption of corporate organizational documents for such subsidiary)
shall not require the consent or approval of the Purchasers or any other holder
of Preferred Stock pursuant to the Certificate of Amendment or any of the
Transaction Documents and hereby waive, on behalf of themselves and any
subsequent holder of Preferred Stock, the right to give, withhold or abstain
from any such consent or approval; provided, that the IXC Transaction is
consummated upon substantially the same terms as contemplated on the date of
this Agreement.
3.14 Shareholder Rights Plan. The Company shall not amend the Rights Plan
in a manner which would result in any Purchaser becoming an Acquiring Person
thereunder as a result of the acquisition of Securities pursuant to the terms of
the Transaction Documents.
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3.15 Rights and Warrants. If the Company, at any time while the Preferred
Stock is outstanding, shall issue any rights and/or warrants, except rights
under the Rights Plan, to all of the holders of the Common Stock as a class
allowing them to subscribe for or purchase shares of Common Stock, then the
Purchasers shall receive an amount of such rights and/or warrants equal to the
number of rights and/or warrants they would have received, at the time of the
issuance of such rights and/or warrants, if they then held the Underlying Shares
that they were then allowed to acquire.
3.16 Standstill Agreement. Each of the Purchasers, severally and not
jointly, covenants that, until the earlier of (i) one year after all of the
Preferred Stock shall have been converted and (ii) the date such Purchaser does
not beneficially own (within the meaning of Section 13(d) of the Exchange Act
and the rules thereunder) any Preferred Stock or Underlying Shares, neither such
Purchaser nor any of its controlled Affiliates will, without the prior approval
of the Board of Directors of the Company, (a) either alone or as a member of a
"group" (within the meaning of Rule 13d-5(b) under the Exchange Act), acquire or
attempt to acquire control of the Company or (b) become a "participant" in any
"solicitation" of proxies relating to the election or removal of directors of
the Company (as such terms are used or defined in Regulation 14A or Schedule 14A
under the Exchange Act) or deposit any Voting Securities of the Company in a
voting trust or subject any such Voting Securities to a voting or similar
arrangement in respect of any such election or removal. Notwithstanding the
foregoing, this Section 3.16 shall not constitute a waiver of the Rights Plan or
any provision thereof.
3.17 Merger Event. The Purchasers, severally and not jointly, hereby agree
that if the terms governing a Merger Event (i) require the Company to call for
redemption all outstanding Preferred Stock in accordance with Section 6(a) of
the Certificate of Amendment, (ii) do not provide for the alteration of the
terms, rights or preferences of the Preferred Stock prior to the effectiveness
of such Merger Event and (iii) provide that the terms of Section 6(a) of the
Certificate of Amendment, including, without limitation, the penultimate
sentence of Section 6(a) of the Certificate of Amendment, shall govern the
redemption of outstanding Preferred Stock in connection with such Merger Event,
or do not restrict the terms of Section 6(a) in any way from so governing, then
(A) such Merger Event shall not, and shall not be deemed to, (x) "adversely
affect" the Purchasers within the meaning of Sections 804(a)(2) and 903(a)(2) of
the New York Business Corporation Law or (y) subordinate the rights of holders
of Preferred Stock within the meaning of Section 804(a)(3) of the New York
Business Corporation Law regardless of whether, in connection with such Merger
Event, there shall exist or shall be created authorized shares having
preferences which would be in any respect superior to rights of holders of
Preferred Stock and (B) the Preferred Stock will not be entitled to vote as a
series or class in respect of such Merger Event. The provisions of this Section
3.17 shall be binding upon the Purchasers and any subsequent holder of Preferred
Stock. This Section 3.17 shall not limit, modify or impair the validity,
applicability or effect of Section 612 of the New York Business Corporation Law
in respect of such Merger Event.
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ARTICLE IV
CONDITIONS
4.1 Conditions Precedent to the Obligation of the Purchasers to Purchase
the Preferred Stock. The obligation of each Purchaser hereunder to acquire and
pay for the Preferred Stock is subject to the satisfaction or waiver by the
Purchasers, at or before the Closing Date, of each of the following conditions:
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company contained herein and in the
Registration Rights Agreement shall be true and correct in all material respects
as of the date when made and as of the Closing Date, as though made on and as of
such date.
(b) Performance by the Company. The Company shall have performed,
satisfied and complied with all covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or, to the best of the Company's knowledge, injunction shall have
been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits, and no proceeding has been
commenced seeking to prohibit, the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement relating to
the issuance or conversion of any of the Securities or which could have a
Material Adverse Effect.
(d) Listing of Common Stock. The Common Stock shall be listed for
trading on Nasdaq.
(e) No Suspensions of Trading in Common Stock. The trading in the
Common Stock shall not have been suspended by the Commission or on Nasdaq
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company).
(f) Legal Opinion. The Company shall have delivered to the Purchaser
the Legal Opinion dated the Closing Date.
(g) Required Approvals. All Required Approvals required to be
obtained on or prior to the Closing Date shall have been obtained.
(h) Shares of Common Stock. On or prior to the Closing Date, the
Company shall have reserved for issuance, and shall have filed an additional
listing
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application with Nasdaq with respect to, the amount of Common Stock required by
this Agreement to be reserved for issuance.
(i) Delivery of Stock Certificates. The Company shall have delivered
to each Purchaser or such Purchaser's designee the stock certificate(s)
representing the Preferred Stock being purchased at the Closing, registered in
the name of such Purchaser, each in form satisfactory to such Purchaser.
(j) Filing of Certificate of Amendment. On or prior to the Closing
Date, the Certificate of Amendment shall have been filed by the Secretary of
State of the State of New York and shall be in full force and effect.
(k) Registration Rights Agreement. On or prior to the Closing
Date, the Company shall have executed and delivered the Registration Rights
Agreement.
(l) Closing Certificate. The Chief Executive Officer of the Company
shall deliver, on behalf of the Company, to the Purchasers a closing certificate
dated the Closing Date certifying that the conditions in (a), (b), (c), (d),
(e), (g), (h) and (j) have occurred or have been satisfied.
4.2 Conditions Precedent to the Obligation of the Company to Sell the
Preferred Stock. The obligation of the Company hereunder to sell the Preferred
Stock is subject to the satisfaction or waiver by the Company, at or before the
Closing Date, of each of the following conditions:
(a) Accuracy of the Purchasers Representations and Warranties. The
representations and warranties of the Purchasers contained herein shall be true
and correct in all material respects as of the date when made and as of the
Closing Date, as though made on and as of such date.
(b) Performance by the Purchasers. The Purchasers shall have
performed, satisfied and complied with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Purchasers at or prior to the Closing Date, including payment of the
Purchase Price.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or, to the best of such Purchaser's knowledge, injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits, and no proceeding has been
commenced seeking to prohibit, the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement relating to
the issuance or conversion of any of the Securities or which could have a
Material Adverse Effect.
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(d) Registration Rights Agreement. On or prior to the Closing Date,
the Purchasers shall have executed and delivered the Registration Rights
Agreement.
(e) Closing Certificate. Each Purchaser shall deliver to the Company
a closing certificate dated the Closing Date certifying that the conditions in
(a), (b) and (c) have occurred or have been satisfied.
ARTICLE V
MISCELLANEOUS
5.1 Fees and Expenses The Company has paid Brown Simpson Asset Management
$35,000 for expected reasonable attorneys' fees and due diligence fees to be
incurred in connection with this transaction. If Brown Simpson Asset
Management's expenses exceed such $35,000, the Company shall reimburse Brown
Simpson Asset Management for such reasonable additional expenses as the Company
and Brown Simpson Asset Management shall agree. Other than the amounts
contemplated by the immediately preceding sentence, and except as set forth in
the Registration Rights Agreement, each party shall pay the fees and expenses of
its advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay
all stock transfer stamp taxes levied in connection with the issuance of the
Preferred Stock pursuant hereto. The Purchasers shall be responsible for their
own respective tax liability that may arise as a result of the investment
hereunder or the transactions contemplated by this Agreement.
5.2 Entire Agreement; Amendments. This Agreement, together with the
Exhibits and Schedules hereto and the Preferred Stock, the Certificate of
Amendment and the Registration Rights Agreement contain the entire understanding
of the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
except that (i) the indemnification provisions of the letter agreement between
Brown Simpson Asset Management and the Company dated September 30, 1997,
(ii) the confidentiality provisions of the letter agreement between Brown
Simpson LLC and the Company dated June 27, 1997 and (iii) the confidentiality
provisions of each of the letter agreements between the Company and each of
Lehman, SBC and KA Investments dated November 7, 1997, November 7, 1997 and
November 4, 1997, respectively.
5.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of
23
<PAGE>
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of delivery to a
nationally recognized overnight courier service if so sent, or (iv) upon actual
receipt by the party to whom such notice is given. The address for such notices
and communications shall be as follows:
If to the Company: PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 20170
Facsimile No.: (703) 904-1608
Attn: Chief Financial Officer
With copies to: PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 20170
Facsimile No.: (703) 904-9527
Attn: General Counsel
and to: Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022
Facsimile No: (212) 940-3111
Attn: Richard F. Langan, Jr, Esq.
If to any Purchaser or the Purchasers, to the address set forth on Schedule
1 hereto.
With copies to (for
notices to any
Purchaser): Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person. Non-delivery of copies of any notice as specified above
shall not affect the validity of any notice given to any party to this Agreement
in accordance with the terms of this Agreement.
5.4 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchasers; or, in the case of a waiver, by the party
against whom
24
<PAGE>
enforcement of any such waiver is sought. No waiver of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of either party
to exercise any right hereunder in any manner impair the exercise of any such
right accruing to it thereafter.
5.5 Headings. The headings herein and in the Schedules hereto are for
convenience only, do not constitute a part of this Agreement and shall not be
deemed to limit or affect any of the provisions hereof.
5.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns,
including any persons to whom any Purchaser transfers Preferred Stock in
accordance with Section 3.1 hereof. The Company may not assign this Agreement
or any rights or obligations hereunder without the prior written consent of the
Purchasers. The assignment by a party of this Agreement or any rights hereunder
shall not affect the obligations of such party under this Agreement.
5.7 No Third-Party Beneficiaries; Obligations Several. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and, other than with respect to permitted assignees, is
not for the benefit of, nor may any provision hereof be enforced by, any other
person. The obligations of the Purchasers under this Agreement and the other
Transaction Documents are several and not joint and no Purchaser shall be
responsible for any obligations of any other Purchaser.
5.8 Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
5.9 Survival. The representations, warranties, agreements and covenants
contained in this Agreement shall survive until the second anniversary of the
completion of the conversion of all of the Preferred Stock, unless by their
terms, they expire on an earlier date.
5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
5.11 Publicity. The Company and the Purchasers shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the
25
<PAGE>
transactions contemplated hereby and no party shall issue any such press release
or otherwise make any such public statement without the prior written consent of
the other parties, which consent shall not be unreasonably withheld, delayed or
conditioned, except that no prior consent shall be required if such disclosure
is required by law or applicable stock exchange or Nasdaq rule, in which such
case the disclosing party shall use its reasonable best efforts to provide the
other parties with prior notice of such public statement; provided that with
respect to the initial press release relating to this Agreement and the
transactions contemplated hereby, only the consent of the Company and Brown
Simpson Asset Management shall be required. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser without the prior
written consent of such Purchaser, except that no prior consent shall be
required if the disclosure of such Purchaser's name is required by law or
applicable stock exchange or Nasdaq rule, in which case the Company shall
provide such Purchaser with prior notice of such public disclosure; provided
that with respect to the initial press release relating to this Agreement and
the transactions contemplated hereby, only the consent of the Company and Brown
Simpson Asset Management shall be required.
5.12 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
5.13 Interpretation. The parties acknowledge and agree that (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision, (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement, and (iii) the terms and
provisions of this Agreement shall be construed fairly as to both parties
hereto, regardless of which party was generally responsible for the preparation
of this Agreement or any provision hereof.
5.14 Schedules. The inclusion of any information in any Schedule hereto
shall not be deemed to be an admission by the Company that such information is
material, adverse or outside the ordinary course of business.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Preferred Stock Purchase Agreement to be duly executed by their respective
authorized persons as of the date first indicated above.
PSINET INC.
By: /s/ William L. Schrader
------------------------------------
Name: William L. Schrader
Title: Chairman, President & CEO
LEHMAN BROTHERS INC.
By: /s/ Skye Lucas
------------------------------------
Name: Skye Lucas
Title: Managing Director
SBC WARBURG DILLON READ INC.
By: /s/ Ryan Primmer
------------------------------------
Name: Ryan Primmer
Title: Director
By: /s/ Daniel Coleman
------------------------------------
Name: Daniel Coleman
Title: Managing Director
KA INVESTMENTS, LDC
By: /s/ Kelly Ireland
------------------------------------
Name: Kelly Ireland
Title: Assistant Manager/Mutual Funds
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
By: /s/ James R. Simpson
------------------------------------
Name: James R. Simpson
Title: Principle
<PAGE>
Schedule 1
Brown Simpson Strategic Growth Fund, L.P
152 West 57th Street, 40th Floor
New York, New York 10019
212-247-8200
212-247-1329 (Fax)
Attn: Jim Simpson
Purchase Price = $250,000
Shares = 5,000
KA Investments, LDC
Bank of Butterfield International (Cayman) Ltd.
Butterfield House
Fort Street, George Town
Grand Cayman, Cayman Islands
With a copy to:
1712 Hopkins Cross Road
Minnetonka, MN 55305
612-542-4243
612-542-4284 (Fax)
Attn: Bruce Lieberman
Purchase Price = $4,750,000
Shares = 95,000
Lehman Brothers Inc.
200 Vesey Street
New York, New York 10285
212-526-7255
212-528-8941 (Fax)
Attn: Steve Weinstein
Purchase Price = $10,000,000
Shares = 200,000
SBC Warburg Dillon Read Inc.
677 Washington Blvd.
P.O. Box 120305
Stamford, CT 06912-0305
800-428-0124
706-327-6030 (Fax)
Attn: Daniel Coleman
Purchase Price = $15,000,000
Shares = 300,000
<PAGE>
Exhibit 10.10
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of November 10, 1997, among PSINet Inc., a New York corporation
(the "Company"), Lehman Brothers Inc., a Delaware corporation ("Lehman"), SBC
Warburg Dillon Read Inc., a Delaware corporation ("SBC"), KA Investments, LDC, a
corporation organized and existing under the laws of the British Virgin Islands
("KA Investments"), and Brown Simpson Strategic Growth Fund, L.P., a New York
limited partnership ("Brown Simpson Strategic Growth Fund"). Each of Lehman,
SBC, KA Investments and Brown Simpson Strategic Growth Fund is a "Purchaser" and
collectively they are referred to herein as the "Purchasers."
WHEREAS, this Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
WHEREAS, the Company has previously granted or agreed to grant
registration rights to certain other holders of the Company's securities
pursuant to the Other Registration Rights Agreements.
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 Other Registration Rights Agreements.
WHEREAS, certain defined terms are set forth in Section 1 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 Company and the
Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used but not otherwise defined herein and defined in
the Purchase Agreement shall have the meanings given such terms in the Purchase
Agreement. As used in this Agreement, the following terms shall have the
following meanings:
"Advice" shall have meaning set forth in Section 3(n).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the
<PAGE>
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of such Person, whether through the ownership of
voting securities, by contract or otherwise; and the terms of "affiliated,"
"controlling" and "controlled" have meanings correlative to the foregoing.
"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.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which The Nasdaq National Market is closed.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, $.01 par value, of the Company.
"Demand Date" means the date on which the Demand Notice is delivered
to the Company.
"Demand Notice" means the notice given to the Company by the Holders
of Registrable Securities holding at least the Required Demand Percentage
demanding that the Company register their Registrable Securities under the
Securities Act in accordance with the terms of this Agreement, provided,
however, that a Demand Notice may not be given prior to December 31, 1997.
"Effectiveness Date" means, with respect to the Registration Statement
to be filed with respect to the Preferred Stock, the date which (subject to the
last paragraph of Section 3) is the earlier of (i) the fifth day after the
Company is advised by the Commission that the Commission has no additional
comments to the Registration Statement and (ii) the fifth day after the Company
receives a no review notice from the Commission, or, if such date in (i) or (ii)
above is not a Business Day, the next Business Day following such date.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the date (subject to the last paragraph of Section
3) which is the 75th day after the Demand Date, or, if such date is not a
Business Day, the next Business Day following such 75th day.
"Holder" or "Holders" means any record holder of Preferred Stock or of
Common Stock issued upon conversion of Preferred Stock who is a party to this
Agreement or is otherwise entitled to the benefits of this Agreement. When this
Agreement specifies a percentage or proportion of the Registrable Securities
required to take some action, each
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<PAGE>
Holder of Preferred Stock, as such, shall be deemed to be a Holder of the number
of shares of Common Stock into which such Preferred Stock is convertible.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"IXC" means IXC Internet Services, Inc.
"IXC Agreement" means the IRU and Stock Purchase Agreement, dated as
of July 22, 1997 between the Company and IXC.
"IXC Registration Rights Agreement" means the Registration Rights
Agreement proposed to be entered into between the Company and IXC in
substantially the form of Exhibit N to the IXC Agreement, for so long as the
same may be in effect.
"Losses" shall have the meaning set forth in Section 5(a).
"Other Registration Rights Agreements" shall mean the Amended and
Restated Registration Rights Agreement, the Registration Rights Agreement dated
February 8, 1995 between the Company and the parties thereto, the Registration
Rights Agreement dated June 16, 1995 between the Company and the parties
thereto, the Registration Rights Agreement dated July 11, 1995 between the
Company and the parties thereto, the Registration Rights Agreement dated
September 19, 1996 between the Company and the parties thereto, the IXC
Registration Rights Agreement and the agreements granting registration rights
contained in the Warrants listed on Schedule 2.1(s) of the Schedules to the
Purchase Agreement, as each of the same may be amended from time to time, for so
long as the same may be in effect.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Stock" means the Company's Series B 8% Convertible
Preferred Stock, $.01 par value per share, issued pursuant to the Purchase
Agreement.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
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<PAGE>
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" at any time means (i) the shares of Common
Stock issued before that time pursuant to conversion of Preferred Stock,
provided such shares are held by a Holder, and (ii) the shares of Common Stock
that are issuable at that time upon conversion of Preferred Stock by a Holder
thereof (regardless of whether a conversion notice has been given) or are
issuable upon conversion of Preferred Stock to be issued in payment of dividends
declared in shares of Preferred Stock but not theretofore paid.
"Registration Statement" means the registration statements
contemplated by Section 2(a) (and any additional Registration Statements
contemplated in the definition of Registrable Securities), including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be incorporated
by reference in such registration statement.
"Required Demand Percentage" means 51% of the number of Registrable
Securities outstanding on the date of the Demand Notice.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any one firm of special counsel to the
Holders.
"Underwritten Offering" means an offering in which Registrable
Securities are sold to one or more underwriters for resale to the public
pursuant to an effective registration statement, provided that the managing
underwriter executes and delivers to the Company a confidentiality agreement in
form and substance reasonably satisfactory to the Company.
2. Demand Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an
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<PAGE>
offering to be made on a continuous basis pursuant to Rule 415. The
Registration Statement shall be on Form S-3 (or if the Company is not then
eligible to register the Registrable Securities for resale on Form S-3, such
registration shall be on another appropriate form in accordance herewith, which
form shall be reasonably acceptable to the Holders). Subject to the last
paragraph in Section 3 of this Agreement, the Company shall use its reasonable
best efforts to cause the Registration Statement to be declared effective under
the Securities Act as promptly as possible after the filing thereof, but in any
event no later than the Effectiveness Date, and to keep such Registration
Statement continuously effective under the Securities Act until the date which
is three years after the Original Issue Date or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144 as determined by
counsel to the Company (which may be counsel employed by the Company) (the
"Effectiveness Period"). If an additional Registration Statement is required to
be filed because the actual number of shares of Common Stock into which the
Preferred Stock is convertible exceeds the number of shares of Common Stock
initially registered in respect of the Preferred Stock, the Company shall have
30 Business Days to file such additional Registration Statement. Once a
Registration Statement filed pursuant to this Section 2(a) is declared effective
by the Commission, the holders of the Preferred Stock shall not have the right
to make any additional demands for registration under this Section 2(a), other
than demands to register additional shares of Common Stock in the circumstances
set forth in the preceding sentence.
(b) If the Holders of a majority of the Registrable Securities so
elect, the offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering, certain costs
and expenses of which will be paid in accordance with Section 4(b) hereof. The
Company will not be required to effect more than one Underwritten Offering under
this Agreement and shall not be required to effect an Underwritten Offering
unless at the time of a written request of the Holders electing an Underwritten
Offering the average daily trading volume of the Common Stock on The Nasdaq
National Market (or any other market or quotation system on which the Company's
Common Stock is then quoted or listed) during the period of 60 days immediately
prior to such request shall be less than 50,000 shares. In such event, and if
the managing underwriters advise the Company and such Holders in writing that in
their opinion the amount of Registrable Securities proposed to be sold in such
Underwritten Offering exceeds the amount of Registrable Securities which can be
sold in such Underwritten Offering, there shall be included in such Underwritten
Offering the amount of such Registrable Securities which in the opinion of such
managing underwriters, including any securities to be sold in accordance with
the Other Registration Rights Agreements, can be sold, and such amount shall be
allocated pro rata among the Holders proposing to sell Registrable Securities in
such Underwritten Offering and the holders of the other securities required to
be included in such registration statement pursuant to the Other Registration
Rights Agreements.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the managing underwriter that will administer the
offering (which managing underwriter shall be of national standing and
reputation) will be selected by the participating
-5-
<PAGE>
Holders upon consultation with the Company. No Holder may participate in any
Underwritten Offering hereunder unless such Person (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
arrangements. No Holder may participate in any registration hereunder unless
such Holder executes and delivers an agreement not to divulge any proprietary or
confidential information of the Company or any of its subsidiaries which becomes
known to such Holder in connection with any such registration.
3. Registration Procedures
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission a Registration Statement in
accordance with Section 2(a). Not less than seven (7) Business Days (or such
longer period as may be reasonably practicable) prior to the intended filing
date of the Registration Statement or any related Prospectus or any amendment or
supplement thereto (excluding any document that would be incorporated or deemed
to be incorporated therein by reference), the Company shall (i) furnish to the
Holders, their Special Counsel and any managing underwriters copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Holders, their Special Counsel and such managing underwriters, and (ii) cause
its officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the reasonable opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object in writing within four (4) Business Days of their
receipt thereof, in which case the Company shall revise the Registration
Statement and Prospectus substantially in accordance with the reasonable
comments of the Holders of a majority of the Registrable Securities, their
Special Counsel, or any managing underwriters until such person or entity
approves the Registration Statement and Prospectus for filing. If the Company
is unable to file the Registration Statement with the Commission by the Filing
Date solely because of the additional time necessary to address such comments,
then the Filing Date shall be extended by the amount of time reasonably
necessary for the Company to make the necessary revisions to the Registration
Statement and Prospectus in order to receive filing approval from such person or
entity.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
Registrable Securities for the
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<PAGE>
Effectiveness Period; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or
amended to be filed pursuant to Rule 424 (or any similar provisions then in
force) promulgated under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and promptly provide the Holders
true and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and (iv) comply with the provisions of
the Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as practicable (and,
in the case of (i)(A) below, not less than three (3) days prior to such filing)
and (if requested by any such Person) confirm such notice in writing no later
than two (2) Business Days following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (v) of the occurrence of any event that makes any statement made in
the Registration Statement or Prospectus or any document incorporated or deemed
to be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Company need not provide the
Holders with the details of any such event if the last paragraph of this Section
3 shall be applicable to such event.
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, as soon as reasonably practicable.
-7-
<PAGE>
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information
concerning the manner of distribution of Registrable Securities as such managing
underwriters and such Holders reasonably agree should be included therein and
(ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law or be materially
detrimental to the business prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
reasonable best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free, to the extent
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<PAGE>
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request at least two Business
Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), except as contemplated by the last paragraph of this Section 3, as
promptly as reasonably practicable, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(k) Use its reasonable best efforts to cause all Registrable
Securities relating to such Registration Statement to be listed on The Nasdaq
National Market and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in Underwritten Offerings) and
take all such other actions in connection therewith (including those
reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not
an underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the
same if and when reasonably requested; (ii) in the case of an Underwritten
Offering obtain and deliver copies thereof to the managing underwriters, if
any, of opinions of counsel to the Company and updates thereof addressed to
each such managing underwriter, in form, scope and substance reasonably
satisfactory to any such managing underwriters and Special Counsel to the
selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be
reasonably requested by such Special Counsel and underwriters; (iii)
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, obtain and deliver copies to
the Holders and the managing underwriters, if any, of "cold comfort" letters
and updates thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by
the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to each
selling Holder and each of the underwriters, if any, in form and substance as
are customary in connection with Underwritten Offerings; (iv) if an
underwriting agreement is
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entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the underwriters, if
any, than those set forth in Section 6 (or such other provisions and
procedures acceptable to the Company, the managing underwriters, if any, and
holders of a majority of Registrable Securities participating in such
Underwritten Offering); and (v) deliver such documents and certificates as
may be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause 3(l)(i) above and to evidence compliance with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that such records, documents,
properties and information requested to be inspected or supplied are of the kind
necessary to be inspected or obtained by the selling Holders in connection with
the disposition of the Registrable Securities; provided, further, that any
information that is determined in good faith by the Company in writing to be of
a confidential nature at the time of delivery of such information shall be kept
confidential by such Persons, unless (i) disclosure of such information is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities; (ii) disclosure of such information, in the
opinion of counsel to such Person, is required by law; (iii) such information
becomes generally available to the public other than as a result of a disclosure
or failure to safeguard by such Person; or (iv) such information becomes
available to such Person from a source other than the Company and such source is
not known by such Person, after due inquiry, to be bound by a confidentiality
agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
such shorter periods as is consistent with the requirements of Rule 158.
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The Company may require each selling Holder to furnish to the Company
such information, including information regarding the distribution of such
Registrable Securities, as is required by law to be disclosed in the
Registration Statement and the Company may exclude from such registration the
Registrable Securities of any such Holder who fails to furnish such information
within a reasonable time after receiving such request. The failure by the
Company to file the Registration Statement by the Filing Date, to cause it to
become effective by the Effectiveness Date or to maintain its effectiveness for
the Effectiveness Period, if due to the breach of a Holder's obligations under
this Section, shall not be deemed a breach of the Company's obligations under
this Agreement or the Purchase Agreement with respect to such Holder, however,
the Company's obligations to Holders that timely furnish such information shall
remain in full force and effect.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable Securities
that (i) it will not sell any Registrable Securities under the Registration
Statement until it has received copies of the Prospectus as then amended or
supplemented as contemplated in Section 3(g) and notice from the Company that
such Registration Statement and any post-effective amendments thereto have
become effective as contemplated by Section 3(c) and (ii) it will comply with
the prospectus delivery requirements of the Securities Act as applicable to them
in connection with sales of Registrable Securities pursuant to the Registration
Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
If (a) there is material non-public information regarding the
Company which the Company's senior management or Board of Directors
reasonably determines not to be in the Company's best interest to disclose
and which the Company is not otherwise required to disclose, or (b) there is
a significant business opportunity or event (including but not limited to the
acquisition or disposition of assets or any merger, consolidation, tender
offer, joint venture, strategic alliance or other similar transaction)
available to the Company which the Company's senior management or Board of
Directors reasonably determines not to be in the
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Company's best interest to disclose, then the Company may postpone or suspend
filing or effectiveness of a registration statement, prospectus, prospectus
supplement or any report, form or statement incorporated by reference or to be
incorporated by reference into any of the foregoing, or any amendment to any of
the foregoing, and, upon delivery of written notice from the Company of any such
postponement or suspension, Holders shall cease and be prohibited from making
any offers or sales of Registrable Securities pursuant thereto.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the extent
specified in Section 4(b), be borne by the Company whether or not pursuant to an
Underwritten Offering and whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. The fees and expenses referred to in
the foregoing sentence shall include, without limitation, (i) all registration
and filing fees (including, without limitation, fees and expenses (A) with
respect to filings required to be made with The Nasdaq National Market and each
other securities exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, reasonable fees and disbursements of
counsel for the Holders in connection with Blue Sky qualifications of the
Registrable Securities or exemptions from such qualification and determination
of the eligibility of the Registrable Securities for investment under the laws
of such jurisdictions as the managing underwriters, if any, or the Holders of a
majority of Registrable Securities may reasonably designate)), (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the managing underwriters, if any, or by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) reasonable messenger, telephone and delivery expenses, (iv)
reasonable fees and disbursements of counsel for the Company and one firm of
Special Counsel for the Holders, in the case of the Special Counsel, to a
maximum amount of $10,000 for the initial registration statement required to be
filed pursuant to this Agreement and $5,000 for any additional registration
statement filed pursuant to the penultimate sentence of Section 2(a), (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and expenses
in connection
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therewith, except for the fees and disbursements of the Underwriters (including
any underwriting commissions and discounts) and their legal counsel and
accountants.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, reasonable costs of
preparation and reasonable attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (i) such untrue statements or omissions are based solely upon information
regarding such Holder furnished in writing to the Company by such Holder
expressly for use therein or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder for
use in the Registration Statement, such Prospectus or such form of Prospectus or
in any amendment or supplement thereto (including, without limitation, any
information incorporated therein pursuant to Section 3(e) hereof) and/or (ii)
such losses arise directly from the failure of a Holder to comply with the
prospectus delivery requirements applicable to it (provided that the Company has
timely prepared all necessary prospectus supplements or amendments and provided
them to the Holders or their representatives in accordance with the terms of
this Agreement and otherwise done all things required of it in this Agreement so
as not to adversely affect the ability of any Holder to timely comply with such
Holder's delivery requirements). The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from
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and against all Losses arising (i) (as determined by a court of competent
jurisdiction in a final judgment not subject to appeal or review) solely out of
or based solely upon any untrue statement of a material fact contained in the
Registration Statement, any Prospectus, or any form of prospectus, or arising
solely out of or based solely upon any omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading to
the extent, but only to the extent, that such untrue statement or omission is
contained in any information furnished in writing by such Holder to the Company
expressly for use therein or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder for
use in the Registration Statement, such Prospectus or such form of Prospectus,
and (ii) directly from the failure of a Holder to comply with the prospectus
delivery requirements applicable to it (provided that the Company has timely
prepared all necessary prospectus supplements or amendments and provided them to
the Holders or their representatives in accordance with the terms of this
Agreement and otherwise done all things required of it in this Agreement so as
not to adversely affect the ability of any Holder to timely comply with such
Holder's delivery requirements). In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume in the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses reasonably incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel in writing that a conflict of interest is
likely to exist if the same counsel were to represent such Indemnified Party and
the Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to
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employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party); provided that
if more than one Indemnified Party is seeking indemnification with respect to
the same Proceeding, the Indemnifying Party shall not be required to pay for
more than one separate counsel for all such Indemnified Parties as a group. The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld, delayed or
conditioned, effect any settlement of any pending Proceeding in respect of which
any Indemnified Party is a party.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 20 Business
Days of written notice thereof to the Indemnifying Party (regardless of whether
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party because of a failure or refusal
of a governmental authority to enforce such indemnification in accordance with
its terms (by reason of public policy or otherwise), then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission of a material fact, has been
taken or made by, or relates to information supplied by, such Indemnifying Party
or Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the
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immediately preceding paragraph. Notwithstanding the provisions of this Section
5(d), no Holder shall be required to contribute, in the aggregate, any amount in
excess of the amount of proceeds actually received by such Holder. No Person
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.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may otherwise
have to the Indemnified Parties.
6. Miscellaneous
(a) 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 the Holders under this Agreement; provided,
however, that the Holders hereby consent and agree that (i) the Company may
grant in other agreements to other holders of securities of the Company
registration rights which rank ratably with the registration rights granted
hereunder to the Holders and (ii) the Company may make such grants in connection
with the IXC Transaction, to the extent that such registration rights rank
ratably with the registration rights granted hereunder to the Holders.
(b) Remedies. In the event of a breach by the Company or by a Holder
of any of its obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled,
to the extent permitted by applicable law, to specific performance of its rights
under this Agreement. The Company and each Holder agree that monetary damages
would not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect of
such breach, it shall waive the defense that a remedy at law would be adequate.
(c) Piggy-Back Registrations. If at any time prior to the third
anniversary of the date of this Agreement when there is not an effective
Registration Statement the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each Holder written notice of such
determination and, if within twenty (20) days after receipt of such notice, any
such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Registrable Securities such Holder
requests to be registered; provided, however, that the Company shall not be
required to
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register any Registrable Securities pursuant to this paragraph that are eligible
for sale pursuant to Rule 144(k) of the Commission.
(d) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company or
a controlled Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
certain Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(e) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be delivered and deemed effective in accordance with the terms of
Section 5.3 of the Purchase Agreement. Notices shall be sent to the parties
hereto to there addresses for notice set forth in the Purchase Agreement except
that with respect to any other registered Holder who is not a party to this
Agreement, to the address of such Holder as it appears in the stock transfer
books of the Company, or such other address as may be designated in writing
hereafter, in the same manner, by such Person.
(f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.
(g) Assignment of Registration Rights. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by the Holder to any permitted assignee or transferee
of all or a portion of the Registrable Securities if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment the further disposition of such securities
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by the transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to the Holder (and to subsequent) permitted
successors and assigns.
(h) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(i) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
(j) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(k) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(l) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(m) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its controlled Affiliates shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
(n) Prior and Other Registration Rights Agreements. Notwithstanding
any provision of this Agreement, it is the intention of the parties hereto that
the provisions of this
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Agreement shall rank ratably with the registration rights granted or to be
granted under the Other Registration Rights Agreements, and, to the extent the
provisions of this Agreement conflict with or are inconsistent with any such
registration rights granted or to be granted pursuant to the Other Registration
Rights Agreements, such conflict or inconsistency shall be resolved in a manner
which affords the holders of registration rights under the Other Registration
Rights Agreements the ratable benefits of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
PSINET INC.
By: William L. Schrader
--------------------------------
Name: William L. Schrader
Title: Chairman, President & CEO
LEHMAN BROTHERS INC.
By: /s/Skye Lucas
--------------------------------
Name: Skye Lucas
Title: Managing Director
SBC WARBURG DILLON READ INC.
By: /s/Ryan Primmer
--------------------------------
Name: Ryan Primmer
Title: Director
By: /s/Daniel Coleman
--------------------------------
Name: Daniel Coleman
Title: Managing Director
KA INVESTMENTS, LDC
By: /s/Kelly Ireland
--------------------------------
Name: Kelly Ireland
Title: Assistant Manager/Mutual Funds
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
By: /s/James R. Simpson
--------------------------------
Name: James R. Simpson
Title: Principle
<PAGE>
Exhibit 11.1
PSINet Inc.
and Subsidiaries
Calculation of Loss per Share (Unaudited) (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................................................... 40,395,773
Weighted average shares issued during the three months
ended September 30, 1997 (36,567 shares).................................................... 11,189
------------------
40,406,962
------------------
------------------
Net loss...................................................................................... $ (10,674,000)
------------------
------------------
Loss per share (unaudited).................................................................... $ (0.26)
------------------
------------------
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) For a discussion of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
24
<PAGE>
Exhibit 11.2
PSINet Inc.
and Subsidiaries
Calculation of Loss per Share (Unaudited) (1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................................................. 40,113,234
Weighted average shares issued during the nine months ended September 30, 1997
(245,972 shares).......................................................................... 150,385
------------------
40,263,619
------------------
------------------
Net loss...................................................................................... $ (31,265,000)
------------------
------------------
Loss per share (unaudited).................................................................... $ (0.78)
------------------
------------------
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) For a discussion of loss per share, see Note 2 of the Notes to the
Consolidated Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,510
<SECURITIES> 3,000
<RECEIVABLES> 15,612
<ALLOWANCES> 2,608
<INVENTORY> 526
<CURRENT-ASSETS> 66,617
<PP&E> 127,437
<DEPRECIATION> 45,291
<TOTAL-ASSETS> 154,035
<CURRENT-LIABILITIES> 68,645
<BONDS> 25,335
0
0
<COMMON> 405
<OTHER-SE> 58,412
<TOTAL-LIABILITY-AND-EQUITY> 154,035
<SALES> 87,147
<TOTAL-REVENUES> 87,147
<CGS> 66,847
<TOTAL-COSTS> 66,847
<OTHER-EXPENSES> 55,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,162
<INCOME-PRETAX> (31,741)
<INCOME-TAX> 476
<INCOME-CONTINUING> (31,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,265)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</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. Capitalized terms used in this Exhibit 99.1 but not otherwise defined
herein should have the respective meanings ascribed thereto in the periodic
report with which this Exhibit 99.1 is filed.
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 with revenue increasing from
$15.2 million in 1994 to $38.7 million in 1995 to $84.4 million in 1996 and
$87.1 million for the first nine months of 1997, it has incurred losses and
experienced negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") during each of such periods. The Company has
incurred net losses of $5.3 million, $53.2 million and $55.1 million and has
incurred negative EBITDA of $1.5 million, $27.9 million and $28.0 million for
each of the years ended December 31, 1994, 1995 and 1996, respectively.
Additionally, the Company has incurred net losses of $10.7 million and $31.3
million and negative EBITDA of $3.3 million and $14.7 million for the three
and nine months ended September 30, 1997, respectively. At September 30,
1997, the Company had a retained deficit of $147.9 million. In its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, the Company
reported that it would achieve positive EBITDA sometime during the second
quarter of 1997 and would be profitable by the first quarter of 1998 or prior
thereto. The Company has achieved breakeven EBITDA in certain months of the
second and third quarters of 1997, but as a result of several factors that
arose subsequent to the date of the Company's filing of its Form 10-K for
fiscal 1996, the Company was unable to meet certain of its prior objectives.
Principal among these factors adversely affecting the Company's operating
performance were delivery delays for Primary Rate Interface ("PRI")
telecommunications facilities required to meet customer demand, accelerated
investment by the Company in its overseas operations in order to respond to
rapidly developing markets, and lower than expected growth during the third
quarter in the demand for its domestic Internet services. The Company expects
to focus in the near term on continuing to increase its corporate customer
base and expanding its wholesale network services strategy which will require
it to continue to incur expenses for marketing, network infrastructure,
personnel and the development of new services and software. Such continued
expenses may adversely impact cash flow and operating performance. The
Company also plans to continue to enhance PSINet's network and the
administrative and operational infrastructure necessary to support its
Internet access service domestically and internationally.
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 introduction of new services by the Company or its competitors,
the mix of services sold and the mix of
29
<PAGE>
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 that could have a material adverse effect on the
Company's business, results of operations and cash flow.
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
quality of service, reliability, price, 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.
The Company's current and prospective competitors generally may be divided
into: (1) other Internet access providers, including local providers, such as
The Internet Access Company, Inc. ("TIAC"), or national providers, such as Epoch
Internet, and (2) telecommunications companies, such as AT&T Corp. ("AT&T"), GTE
Corp., recent acquirer of Bolt, Beranek & Newman Inc. ("BBN") ), MCI
Communications Corporation ("MCI") (which recently announced an agreement to
merge with WorldCom, Inc.), WorldCom, Inc., through mergers with UUNET
Technologies, Inc. ("UUNET"), Sprint, Inc., regional Bell operating companies
("RBOCs") and various cable television companies. 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 marketing or competitive
disadvantage.
Recent Federal Communications Commission ("FCC") regulations may increase
competitive activity by RBOCs and other companies in the Internet access
business. The 1996 Federal telecommunications legislation also contains certain
provisions which allow the RBOCs to provide electronic publishing of information
and databases. These regulations and legislation may result in additional
competitive pressures on the Company or have a material adverse effect on the
Company's business, results of operations and financial condition.
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. For example, the
1996 mergers of UUNET with MFS Communications Co., Inc. ("MFS") and of MFS with
WorldCom, Inc., as well as GTE Corp.'s recently consummated acquisition of BBN,
ICG Communications, Inc.'s recently announced merger with NETCOM On-Line
Communications Services, Inc. and MCI's recently announced merger with WorldCom,
Inc., 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.
30
<PAGE>
As PSINet continues to expand 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 and others. 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.
Entry Into Wholesale Network Services Business
The Company altered its strategy in mid-1996 to include providing wholesale
network services to Internet service providers ("ISPs") and telecommunications
companies in the United States. The wholesale network services business
supplements the Company's core business. At September 30, 1997, the Company
provided wholesale network services to 41 ISPs. The ISPs are subject to a
number of business risks, including, without limitation, those arising from the
intense competition in their market, which could impact the Company's wholesale
network services business. In addition, growth in the Company's wholesale
network services business has recently been constrained by delivery delays for
Primary Rate Interface ("PRI") telecommunications facilities (which connect
dial-up customers to the Company's network) required to meet customer demand.
During the period ended September 30, 1997, the Company's need for such
facilities increased significantly over the same period in fiscal 1996, while
actual delivery by RBOCs of the facilities required to meet this need lagged
significantly behind, resulting in lower than projected revenues from this
business. The Company has been working with certain RBOCs to expedite delivery
of PRI orders to enable the Company to accommodate more efficiently the growing
demand for its wholesale network services. For the foregoing reasons, there can
be no assurance that the Company's wholesale network services will provide
significant revenue in the future.
Risks of Growth and Expansion
The Company had more than 350 POPs as of September 30, 1997 and plans to
continue to expand the capacity of existing POPs as customer-driven demand
dictates. The Company's rapid growth has placed, and in the future may continue
to place, a significant strain on the Company's administrative,
31
<PAGE>
operational and financial resources and has increased demands on its systems and
controls. The Company anticipates that its wholesale network service, 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 existing
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.
Risks Associated With Strategic Alliances With IXC Internet Services, Inc.
On July 22, 1997, the Company entered into an IRU and Stock Purchase
Agreement, as amended on October 1, 1997, with IXC Internet Services, Inc.
("IXC"), an indirect subsidiary of IXC Communications, Inc., to acquire a
20-year noncancellable indefeasible right of use ("IRU") in up to 10,000
equivalent route miles of fiber-based OC-48 network bandwidth across the IXC
fiber optic telecommunication network within the United States in exchange for
an approximately 20 percent (post-issuance) common stock interest in the
Company. The Company also signed a long-term marketing agreement with IXC.
Under the marketing agreement, the Company will be selling its Internet access
and value-added services through IXC. The non-exclusive marketing agreement
provides for IXC and its resellers to be able to offer all of the Company's
Internet services with long distance and other telephone services to IXC
customers throughout the United States.
In connection with this transaction, IXC will receive common stock at closing
equal to approximately 20 percent of the issued and outstanding shares of the
Company, after giving effect to the IXC issuance (the "Initial Shares"). In
addition, if the fair market value of the Initial Shares is less than $240.0
million at the earlier of one year following delivery and acceptance of the
total bandwidth or the fourth anniversary of the closing of the transaction, the
Company has agreed to provide IXC with additional stock and/or cash, at the
Company's sole option, in an amount equal to the difference between $240.0
million and the then fair market value of such shares (the "Contingent Payment
Obligation"). The Company has the right to accelerate its Contingent Payment
Obligation to deliver additional stock and/or cash to IXC at any date after the
closing of this transaction. In addition, the right of IXC to receive the
Contingent Payment Obligation will terminate on such date the Initial Shares
value, as defined, is equal to or greater than $240.0 million. The agreement
permits PSINet to use the OC-48 bandwidth for any purpose in connection with the
provision of Internet services, but restricts PSINet and its customers from
using the OC-48 bandwidth to deliver private line or long distance telephone
services to any third party. The agreement contemplates that the total amount of
OC-48 bandwidth will be delivered to the Company in specified minimum increments
every six months during the two year period following the closing of the
transaction. In addition, after the closing of this transaction, the Company
expects to incur on an annual basis approximately $1.15 million in operation and
maintenance fees with respect to the IRUs to be acquired from IXC per each 1,000
route miles of OC-48 bandwidth accepted under the purchase agreement with IXC.
The transaction with IXC is expected to close prior to March 31, 1998, subject
to approval by the Company's shareholders and other closing conditions. In
addition, the Company's Board of Directors has approved certain modifications to
the Company's Preferred Stock Purchase Rights Plan in connection with this
transaction.
32
<PAGE>
In the event the Company closes the transaction with IXC, the Company may
continue to be subject to a variety of risks relating to this transaction and
the acquisition, operation and maintenance of the associated bandwidth. Such
risks include, without limitation: risks associated with IXC's ability to
build out its fiber optic telecommunication network and deliver to PSINet and
thereafter service 10,000 equivalent route miles of fiber-based OC-48 network
bandwidth, including financial, legal and technical risks associated with
IXC's ability to perform its contractual obligation to PSINet; risks
associated with any change in control or change in management of IXC; risks
associated with the possible significant dilution of the stock ownership of
PSINet's other shareholders and/or the possible significant cash outlay
required of PSINet as a result of PSINet's contractual requirement pursuant
to the Contingent Payment Obligation to deliver to IXC, as of prescribed
date, additional stock and/or cash in an amount equal to the difference
between $240.0 million and the then fair market value of the shares delivered
to IXC at closing; risks associated with IXC's sale of substantial numbers of
shares of PSINet stock; and other matters. There can be no assurance that
the Company will be successful in overcoming these risks or any other
problems encountered in connection with its strategic alliance with IXC.
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. In order to take full advantage
of the bandwidth being acquired from IXC, in addition to other planned capital
expenditures, the Company expects to incur capital expenditures through the end
of the year 2000 of up to $95.0 million. In addition, after the closing of the
IXC transaction, the Company expects to incur on an annual basis approximately
$1.15 million in operation and maintenance fees with respect to the IRUs to be
acquired from IXC per each 1,000 route miles of OC-48 bandwidth accepted under
the IRU Agreement. Other planned capital expenditures expected to be incurred
by the Company over the next four years include up to $35.0 million in
connection with the Company's anticipated buildout of its pan-European Internet
network. The Company is also obligated, under the terms of one of its Wholesale
Network Services Agreements, to provide the wholesale customer with a rental
facility of up to $5.0 million for telecommunications equipment ($1.4 million
drawn at September 30, 1997) for deployment in the customer's network. In
addition, the Company may be obligated in accordance with the Contingent Payment
Obligation under the IRU Agreement with IXC to provide IXC with additional stock
and/or cash, at the Company's sole option, in an amount equal to the difference
between $240.0 million and the then fair market value of such shares on the
earlier of one year following delivery and acceptance of the total bandwidth to
be acquired from IXC or the fourth anniversary of the closing of the
transaction. The Company has the right to accelerate its Contingent Payment
Obligation to deliver additional stock and/or cash to IXC at any date after
the closing of the transaction.
The Company believes it will have a reasonable degree of flexibility to
adjust the amount and timing of its capital expenditures in response to the
Company's then existing financing capabilities, market conditions, competition
and other factors. The Company believes that working capital generated from the
use of bandwidth corresponding to the IRUs to be acquired from IXC, together
with other working capital from operations, from existing credit facilities,
from capital lease financings and from proceeds of future equity or debt
financings (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 operations. Additionally, on November 10, 1997,
the Company completed a private offering of 600,000 shares of its Series B 8%
Convertible Preferred Stock for proceeds of $30.0 million, before expenses. In
the event the Company's Contingent Payment Obligation to IXC becomes payable,
such obligation may be satisfied by the delivery of additional shares of common
stock or, at the Company's sole option, cash or a combination thereof, and the
Company presently believes that it will have sufficient flexibility to satisfy
such obligation.
33
<PAGE>
The Company may seek to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses, or to develop new products or otherwise respond to
changing business conditions or unanticipated competitive pressures. There can
be no assurance that the Company will be able to raise such funds on favorable
terms. In the event that the Company 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 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 in doing business on an international level, such as unexpected changes
in regulatory requirements, tariffs, 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 joint ventures or
other strategic relationships with one or more third parties in order to conduct
its foreign operations successfully. 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. 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.
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, such as the IXC and
iSTAR transactions, shareholders of the Company could suffer a significant
dilution of their interests in the
34
<PAGE>
Company. The Company's shareholders also are subject to substantial dilution
upon conversion of the Series B Preferred Stock. 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
increases in 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 expenses of integrating the
business of the acquired company or the strategic alliance with the Company's
business. 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. 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 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 providers of Internet access 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 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
35
<PAGE>
countries. Decisions, laws, regulations and other activities regarding
regulation and content liability may significantly affect the development and
profitability of companies offering on-line and Internet access services,
including 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. These
financing arrangements require that the Company satisfy certain financial
covenants and currently prohibit the payment of dividends and the repurchase of
capital stock of the Company without, in each case, the lender's consent. The
Company's secured lenders would be entitled to foreclose 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
In recent years, there has been U.S. and foreign legislation and other
initiatives to impose criminal liability on persons sending or displaying in a
manner available to minors indecent material on an interactive computer service
such as the Internet as well as on entities knowingly permitting facilities
under its control to be used for such activities. These initiatives 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.
Recent FCC regulations may increase competitive activity by RBOCs and other
companies in the Internet access business. The 1996 Federal telecommunications
legislation also contains certain provisions which allow the RBOCs to provide
electronic publishing of information and databases. These regulations and
legislation may result in additional competitive pressures on the Company or
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company presently is
considered an enhanced services provider and, therefore, is not currently
subject to direct regulation or access charges imposed by the FCC or any other
agency for such operations, other than regulations applicable to businesses
generally. The Company could become subject in the future to access charges and
FCC regulation and/or regulation by other regulatory commissions as a provider
of basic telecommunications services. The FCC recently issued a Notice of
Inquiry in which it seeks comment on whether it should distinguish between
different categories of enhanced services, and announced that it will address
issues about the continued viability of its current regulatory division between
basic and enhanced services in a future proceeding. If the FCC determines that
such a distinction is appropriate, this could result in increased costs being
imposed upon the Company.
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 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, particularly if such events
occur within a high traffic location of the network. The Company is also
dependent upon the ability of its telecommunications
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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,
POP equipment and business interruption insurance with basic policy limitations
of $4.0 million, $5.0 million and $5.0 million, respectively, subject to
deductibles, exclusions and self-insurance retention amounts. Such coverage may
not be adequate or available to compensate the Company for all losses that may
occur. In addition, the Company generally 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 customers.
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
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.
Network Security Risks; Risks Associated with Providing Security Services
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 customers and
adversely affect existing customer relationships. Security problems represent an
ongoing threat to public and private data networks. Attacks upon the security
of Internet sites and infrastructure continue to be reported to organizations
such as the CERT Coordination Center at Carnegie Mellon University, which
facilitates responses of the Internet community to computer security events.
Addressing problems caused by computer viruses, break-ins or other problems
caused by third parties could have a material adverse effect on 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
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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 contractual 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. In the
event that the IXC transaction is consummated, the Company anticipates that its
dependence upon certain of these suppliers will be decreased. Nevertheless,
until the IXC system is completed and, in certain geographic areas, even after
such completion, the Company will continue to be dependent upon such suppliers.
Moreover, even if the IXC transaction closes, any failure or delay of IXC to
deliver bandwidth corresponding to the PSINet IRUs or to provide operations and
maintenance and other services with respect to such bandwidth in a timely or
adequate fashion could adversely affect the Company. The Company is also
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 and telecommunications facilities, including, most
recently, delays in delivery of PRI telecommunications facilities. 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 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
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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. Nevertheless, 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. 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.
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, strategic alliances and/or acquisitions
involving competitors of the Company 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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