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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25812
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PSINET INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 (ZIP CODE)
OFFICE)
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(703) 904-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE
RIGHTS
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 2, 1998, based upon the closing price of the Common Stock
on The Nasdaq Stock Market for such date, was approximately $259,336,300.
The number of outstanding shares of the registrant's Common Stock as of
March 13, 1998 was approximately 50,958,300 shares.
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 1998 and to be used in connection with the
Annual Meeting of Shareholders expected to be held on May 20, 1998 are
incorporated by reference in Parts I and II of this Form 10-K.
The Index of Exhibits filed with this Report begins at page 69.
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PSINET INC.
TABLE OF CONTENTS
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PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 30
Item 3. Legal Proceedings...................................... 30
Item 4. Submission of Matters to a Vote of Security-Holders.... 31
PART II
Market for Registrant's Common Equity and Related
Item 5. Stockholder Matters.................................... 32
Item 6. Selected Financial Data................................ 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 34
Item 8. Financial Statements and Supplementary Data............ 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant..... 66
Item 11. Executive Compensation................................. 66
Security Ownership of Certain Beneficial Owners and
Item 12. Management............................................. 66
Item 13. Certain Relationships and Related Transactions......... 66
PART IV
Exhibits, Financial Statement Schedules, and Reports on
Item 14. Form 8-K............................................... 66
Signatures
Exhibit Index
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PART I
ITEM 1. BUSINESS
Certain of the information contained in this Form 10-K, including the
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in Item 7 of this Form 10-K, contain 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 important
factors that could cause actual results to differ materially from such
forward-looking statements, carefully review the discussion of Risk Factors
contained in this Item 1, as well as other information contained in this Form
10-K and in the Company's periodic reports and other documents filed with the
Securities and Exchange Commission (the "SEC" or "Commission").
Certain terms used herein are defined in the Glossary beginning on page 27.
GENERAL
PSINet ("PSINet" or the "Company") is a leading global facilities-based
provider of Internet access services and related products to businesses. The
Company provides dedicated and dial-up Internet connectivity in 90 of the 100
largest metropolitan statistical areas in the U.S. and in nine of the 20
largest international telecommunications markets. The Company also offers
Internet Protocol ("IP")-based value-added services and products to
businesses, including corporate intranets, Web hosting and collocation, remote
user access, multi-currency electronic commerce and security services, that
enable businesses to maximize utilization of their corporate networks and the
Internet. Additionally, the Company provides network backbone services to
other telecommunications carriers and Internet service providers ("ISPs") to
further exploit its network capacity. The Company owns and operates a
technologically advanced, high-speed frame relay network that, as of December
31, 1997, served approximately 26,400 business accounts, including 47 ISPs,
and connected to 350 points of presence ("POPs") in ten countries. The
Company's network is one of the primary backbones that comprise the Internet
and is connected with other large ISPs at 26 public and private peering
points. The Company grows its business through multiple sales channels,
including direct sales as well as resellers, and by acquiring other ISPs and
related businesses in key markets.
RECENT DEVELOPMENTS
Strategic Alliance with IXC. On February 25, 1998, the Company closed its
transaction with IXC Internet Services, Inc. ("IXC"), an indirect subsidiary
of IXC Communications, Inc., to acquire 20-year noncancellable indefeasible
rights of use ("IRUs") in up to 10,000 equivalent route miles of fiber-based
OC-48 network bandwidth (the "PSINet IRUs") in selected portions across the
IXC fiber optic telecommunications network within the United States. The
PSINet IRUs were acquired in exchange for the issuance to IXC of 10,229,789
shares of common stock of the Company (representing approximately 20% of the
issued and outstanding common stock of the Company after giving effect to such
issuance and having an aggregate market value of $78,641,503 based on the
closing market price per share of the Company's common stock as reported by
The Nasdaq Stock Market on such date of $7.6875) (the "IXC Initial Shares").
If the fair market value of the IXC Initial Shares (based on a 20 trading day
volume-weighted average share price) is less than $240 million at the earlier
of one year following delivery and acceptance of the total amount of bandwidth
corresponding to the PSINet IRUs or February 25, 2002 (the "Determination
Date"), the Company will be obligated to provide IXC with additional shares of
its common stock, or at the sole option of the Company, cash or a combination
thereof equal to the shortfall (the "Contingent Payment Obligation"). The
Company has the right to accelerate the Contingent Payment Obligation to any
date (the "Acceleration Date") prior to the Determination Date. In addition,
the right of IXC to receive additional shares of common stock and/or cash
pursuant to the Contingent
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Payment Obligation will terminate on such date as the fair market value of the
IXC Initial Shares (based on a 20 trading day volume-weighted average share
price) is equal to or greater than $240 million. In connection with this
transaction, the Company also entered into a long-term, non-exclusive joint
marketing and services agreement with IXC. Under the marketing agreement, the
Company will be selling its Internet access and value-added services through
IXC.
The acquisition of the PSINet IRUs will increase the capacity of the
Company's current network by approximately 50 times and will significantly
reduce data communications costs per equivalent route mile as customer traffic
is migrated on to the acquired bandwidth from bandwidth currently leased from
IXC and other telecommunications providers. The OC-48 bandwidth will enable
the Company to offer higher-speed Internet connectivity and a wider range of
advanced value-added services, including IP voice and video applications, to a
larger customer base. The Company expects to receive delivery of the first
portion of the bandwidth, approximately 5,000 route miles of OC-12 (equivalent
to 1,250 route miles of OC-48) connecting New York and Los Angeles (and
certain major cities in between), in the second quarter of 1998.
Recent International Acquisitions. In February 1998, PSINet acquired iSTAR
internet inc. ("iSTAR"), one of the leading Canadian providers of Internet
services and solutions for businesses, institutions and individuals, for
approximately $17.9 million representing the excess of the purchase price over
the tangible assets acquired and liabilities assumed. This acquisition
establishes PSINet as the largest ISP in Canada with over 3,900 business and
Web services customers as well as over 50,000 dial-up customer accounts
through over 35 POPs. In October 1997, the Company acquired Serveur
Telematique Internet S.A. (doing business as "CalvaCom"), a leading ISP and
Web hosting company in France, for $3.1 million in cash. The acquisition
established the Company's market presence in France with over 1,500 dedicated
and dial-up customer accounts through 23 POPs. In January 1998, PSINet
acquired Internet Prolink S.A. ("Iprolink"), a leading commercial ISP in
Switzerland, for $3.5 million in cash. The acquisition expanded the Company's
market presence in Switzerland by adding approximately 1,500 dedicated and
dial-up customer accounts and 14 POPs in Switzerland and France.
Address. The Company's principal executive offices are located at 510
Huntmar Park Drive, Herndon, Virginia 20170. The Company's telephone number is
(703) 904-4100 and, for further information, it may be contacted by e-mail at
[email protected]. Unless the context otherwise requires, "PSINet" and the
"Company" reNet Inc. and its subsidiaries.
INDUSTRY OVERVIEW
Internet access services is one of the fastest growing segments of the
global telecommunication services market. According to International Data
Corporation ("IDC"), a market research firm, the number of Internet users
worldwide reached 38 million in 1996 and is forecasted to grow to over 173
million by the year 2000. Internet access services represent the means by
which ISPs interconnect either businesses or individual consumers to the
Internet's resources or to corporate intranets and extranets. Access services
include dial-up access for individuals and small businesses and high-speed
dedicated access used primarily by mid-sized and larger organizations. In
addition to Internet access services, business-focused ISPs are increasingly
providing a range of value-added services, including managed access (i.e.,
intranets), shared and dedicated Web hosting, security services, and advanced
applications such as IP-based voice, fax and video services. These services
are being used by business customers to enhance productivity, ensure
reliability and reduce costs.
The ISP market is segmented into large national or multinational ISPs ("Tier
1 ISPs"), which are typically full-service providers that offer a broad range
of Internet access and value-added services to businesses, and regional and
local ISPs ("Tier 2 ISPs" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers and
may specialize in the provision of one IP-based product or service. Tier 1
ISPs also provide wholesale services by reselling capacity on their networks
to smaller
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regional and local ISPs, thereby enabling these smaller ISPs to provide
Internet services on a private label basis without building their own
facilities. Tier 1 ISPs exchange Internet traffic at multiple public peering
points known as network access points ("NAPs") and through private peering
arrangements. As the number of ISPs have grown, Tier 1 ISPs have increased
their requirements for peering arrangements thereby increasing the barriers to
entry into the top-tier. Tier 2 ISPs and Tier 3 ISPs generally rely on Tier 1
ISPs for Internet access and interconnection. The ISP market is highly
fragmented with over 4,000 providers estimated to be doing business in the
U.S. and Canada alone. Because of the low barriers to entry, there are many
local and regional ISPs entering the market, which has caused the level of
competition to intensify. In addition, there recently have been certain large
acquisitions of ISPs by multinational telecommunications companies seeking to
offer a more complete package of telecommunications products to their
customers.
Since the commercialization of the Internet in the early 1990s, businesses
have rapidly established corporate Internet sites and connectivity as a means
to expand customer reach and improve communications efficiency. Currently,
many businesses are utilizing the Internet as a lower-cost alternative to
certain traditional telecommunications services. For example, many
corporations are connecting their remote locations using intranets to enable
efficient communications with employees, customers and suppliers worldwide,
providing remote access for a mobile workforce, reducing telecommunications
costs by using value-added services such as IP-based fax and
videoconferencing, and migrating legacy database applications to run over IP-
based networks. Businesses of all sizes are demanding advanced, highly
reliable solutions designed specifically to enhance productivity and improve
efficiency.
The Company believes that the business market is particularly attractive due
to its low customer churn characteristics, relatively low penetration and
early stage of development. In addition, the Company believes that within the
business access marketplace there is a significant opportunity to upsell to
higher service levels and provide additional value-added services as
businesses grow from establishing basic Internet connectivity and corporate
Web sites to utilizing the Internet and corporate intranets for more advanced,
mission-critical applications. Further, the Company believes that small and
medium sized businesses will continue to seek to outsource certain information
technology functions to large full-service ISPs to reduce costs and improve
service levels. Moreover, the Company believes that regional and local ISPs
will continue to seek business relationships with large, Tier 1 ISPs that
enable them to sell Internet connectivity services without making significant
investments in facilities.
THE PSINET STRATEGY
PSINet is focused on rapidly growing its businesses through multiple
channels, including direct sales and resellers, and by acquiring other ISPs
and related businesses in key markets. The principal elements of the Company's
business strategy are as follows: (1) pursue internal growth through multiple
sales channels; (2) leverage its market position to drive sales of value-added
services and products; (3) optimize its network to reduce operating costs; (4)
provide superior comprehensive customer service; and (5) accelerate growth
through acquisitions. Key elements of the Company's business strategy are
summarized below:
. Pursue Internal Growth Through Multiple Sales Channels. PSINet is
pursuing growth opportunities through multiple channels consisting of its
direct sales force, a reseller and referral program and strategic
alliances. The Company has built a direct sales force of approximately
200 individuals (almost half of whom are employed outside of the United
States) who have a strong Internet technical background and knowledge of
potential applications of the Internet to meet the needs of targeted
business customers. The Company has forged an authorized reseller and
referral program with selected telecommunications services and equipment
suppliers, networking service companies, systems integrators and computer
retailers, consisting of approximately 470 resellers and referral sources
in the United States and 250 outside of the United States. This program
enables the Company to utilize the sales and marketing resources of its
resellers and referral sources to offer PSINet Internet access services
and products to a broader and more diverse prospect base. The Company
also seeks to establish strategic alliances with selected
telecommunications carriers, such as it has with IXC, which may afford
the Company access to
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the carriers' customer base, offering the Company's IP-based services and
products on a private label or co-branded basis thereby enabling these
carriers to offer their customers an integrated package of
telecommunications and Internet services and products. The Company provides
training and ongoing support to the sales representatives of companies with
which it has reseller, referral and strategic alliance relationships in
order to strengthen the sales representatives' knowledge of the Company's
services and products and brand loyalty to PSINet.
. Leverage Market Position to Drive Sales of Value-Added Services and
Products. PSINet intends to market aggressively value-added services and
products to its existing account base and prospective business customers.
The Company currently offers a number of value-added services that can be
bundled with Internet access services to provide complete, turnkey
solutions. The Company believes that providing value-added services not
only reduces customer churn by increasing customer switching costs but
also improves profitability through the sale of higher margin value-added
products. Further, the Company believes that businesses will increasingly
rely on these value-added products to increase productivity, which will
lead to additional service level upgrades and increase customer
retention. Currently, approximately 40% of the Company's business customer
account base uses more than one service. The Company believes that there is
a significant opportunity within its existing account base to upgrade
service levels and is actively marketing additional services to these
accounts. In addition, the enhanced capacity resulting from the Company's
acquisition of the OC-48 bandwidth from IXC will enable the Company to offer
a wider variety of higher-speed Internet and Internet-related services and
products, such as IP-based multimedia voice and video services, which are
currently under development.
. Optimize Network to Reduce Operating Costs. PSINet remains focused on
reducing costs as a percentage of revenue by maintaining a scalable
network and increasing utilization of and controlling strategic assets,
such as telecommunications bandwidth through IRUs. The Company's flexible
network architecture utilizes advanced ATM, ISDN and SMDS compatible
frame relay equipment, which allows the PSINet network to cost-
effectively scale the number of POPs and the number of users accessing a
POP in response to customer demand. The Company believes that by offering
Internet access services to both businesses and other ISPs, it maximizes
the utilization of its network infrastructure over both daytime and
evening hours. The Company recently enhanced its network significantly by
acquiring 20-year noncancellable IRUs in up to 10,000 equivalent route
miles of state-of-the-art fiber-based OC-48 network bandwidth across the
United States. In addition, the Company recently entered into agreements
to acquire IRUs in certain transatlantic fiber optic bandwidth between
the United States, the United Kingdom and The Netherlands, representing
an important strategic step in its objective to be a leading facilities-
based ISP in the international Internet services market.
. Provide Superior Comprehensive Customer Service. PSINet believes that
superior customer service is a critical element in attracting and
retaining customers, and in deriving incremental revenues by selling an
expanding array of value-added services and greater bandwidth levels to
its business customer base. The Company has made significant investments
in customer service personnel and systems that enhance customer care and
service throughout the complete customer life cycle from order entry and
billing to selling of value-added services. To ensure consistency in the
quality and approach to customer care, both domestic and international
technical support associates attend an extensive technical training and
certification program. The Company monitors and responds to customer
needs by providing 24-hours per day, seven-days per week technical
support and service from its network operations center ("NOC") in Troy,
New York. As part of the Company's international expansion strategy, the
Company anticipates adding a fully redundant NOC in Switzerland during
1998 and, subsequently, a third in Asia. In connection with its customer
services initiatives, the Company seeks to continuously improve systems
that increase productivity and enhance customer satisfaction. The Company
is currently in the process of selecting and implementing improved, cost-
effective and scalable billing systems that are designed to provide
customers with accurate and easy-to-understand invoicing. By maintaining
centralized support services, the Company seeks to increase operational
efficiencies and enhance the quality, consistency and scalability of its
customer care.
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. Accelerate Growth Through Acquisitions. PSINet intends to accelerate its
growth domestically and expand its presence in key markets
internationally by acquiring business-focused ISPs and related businesses
and assets. The Company seeks acquisition targets that, once integrated
into the Company's existing operations, will be accretive to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The
Company intends to acquire smaller local or regional ISPs in markets
where it has an established POP and can benefit from the increased
network utilization and local sales channel. The Company also intends to
make strategic acquisitions in markets where it currently does not have a
presence or where the Company's current presence would be significantly
enhanced. Once an ISP has been acquired, the Company typically integrates
the ISP by migrating its customers on to the PSINet network backbone,
centralizing the back-office billing and customer care functions and
reducing redundant overhead. The Company may also seek to acquire a
competitive local exchange carrier ("CLEC") and other businesses relating
or complementary to the Company's existing business, such as Web hosting
or data center companies. The Company currently has no definitive
agreements or commitments relating to any material acquisitions. The
Company plans to effect future acquisitions through the use of existing
cash, cash generated from current operations and from existing and future
credit facilities, from proceeds of future equity or debt financings
(which the Company presently expects to be able to obtain when needed)
and through issuances of shares of its common stock.
PSINET SERVICES
PSINet offers a broad range of reliable, high-speed Internet access options
and related services in the U.S. and international markets at a variety of
prices designed to meet the requirements of commercial, educational,
governmental and other organizations that link their computers, networks and
information servers to, or otherwise seek to benefit from the use of, the
Internet. The Company provides Internet solutions to help business and other
organizations reduce costs, increase productivity and access new markets.
Access options range from dial-up services to high-speed continuous access
provided by dedicated circuits. The Company believes that its broad range of
competitively priced Internet services and products allows the Company to
compete effectively in the Internet access market for corporate and other
institutional customers. The Company has recently organized its core
operations into three customer-focused business units--Corporate Network
Services, Carrier and ISP Services, and Applications and Web Services--in an
effort to better align its operations with the needs of the emerging Internet
marketplace.
Connectivity Services. PSINet offers global connectivity services, including
a variety of dial-up and dedicated access solutions in bundled and unbundled
packages, which provide high-speed continuous access to the Internet for
businesses' local area networks ("LANs"). The Company provides turnkey
configuration solutions encompassing such services as domain name ("DNS")
registration, line ordering and installation, IP address assignment, router
configuration, installation and management, security planning and management
and technical consultation services. All of the Company's connectivity
customers receive 24-hours per day, seven- days per week technical support.
The Company also offers a full range of customer premise equipment ("CPE")
required to connect to the Internet, including routers, Channel Service
Units/Data Service Units ("CSU/DSUs"), software, and other products, as
needed. Due to its business relationships with a variety of vendors, the
Company is able to offer competitive hardware pricing and bundled service
offerings to its customers.
. Dedicated Access. PSINet offers a broad line of high-speed dedicated
connectivity services which provide business customers with direct access
to a full range of Internet applications. The Company's flagship access
service, InterFrame(R), provides companies with robust, full-time,
dedicated Internet connectivity in a range of access speeds, from 56
kilobits per second ("Kbps") to 10 Megabits per second ("Mbps").
InterFrame is designed to offer comprehensive network security and to
help ensure bandwidth availability for priority business applications.
The Company believes that the traffic-management advantages of the frame
relay technology deployed in its network provide its customers with fully
integrated Internet access and improved performance. For higher bandwidth
needs, the Company provides its InterMAN(R) access service in major U.S.
cities in connection speeds ranging from 1.5 Mbps to 45 Mbps. InterMAN is
a turnkey solution in which the Company provides, installs and maintains
equipment at the customers' premises. InterMAN affords cost advantages
over competitive dedicated access services by utilizing high-speed SMDS
and ATM data transmission technologies.
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. Dial-up Access. The Company's LAN-Dial(R) dial-up services offer a cost-
effective, entry-level Internet solution that provides access to the
Company's advanced network backbone via ordinary telephone lines.
PSINet's LAN-ISDN service provides dial-up access through digital ISDN
lines at speeds more than twice those of currently available advanced
modems.
Value-Added Services. PSINet believes that business customers on a worldwide
basis will continue to increase their use of the Internet as a business tool
and will increasingly rely upon an expanding range of value-added services to
enhance productivity, reduce costs and improve service reliability. The
Company offers a variety of value-added services, including intranets, remote
access, Web hosting, electronic commerce, collocation, security services, and
applications, including fax and electronic mail, designed to meet the diverse
networking needs of businesses. In addition, in order to capitalize on its
technologically advanced, high-capacity network backbone, the Company intends
to continue to develop new IP-based services and products that increase
customer use of the Internet, including bandwidth-intensive multimedia
services such as voice and video conferencing over the Internet.
. Intranets. The Company's IP-optimized network allows it to create private
IP networks (known as "intranets" or "virtual private networks") that are
designed to securely isolate internal network traffic from public
Internet traffic and provide each site on the intranet access to other
sites on the intranet as well as to the Internet. The Company's PSI
IntraNet(R) service integrates an organization's multiple sites in
different countries throughout the world by providing IP connectivity
with access speeds ranging from 56 Kbps to 2 Mbps. By combining the
security and control of a private network with cost-effective
Internet-compatible connectivity, PSI IntraNet provides a turnkey solution
for equipment management support and offers significant savings over
traditional WAN solutions.
. Web Hosting. The Company provides a line of Web hosting and multimedia
streaming services that permit companies to market themselves and their
products on the Internet without having to invest in technology
infrastructure and operations staff. The PSIWeb(R) services are backed by
the industry's only 100% uptime guarantee and by the Company's advanced
network backbone, which provides highly reliable Internet connectivity.
PSIWeb offers options such as complete electronic commerce solutions as
well as "TV on the WEB LIVE," a joint service offering from the Company
and Gardy McGrath International, which is an end-to-end solution for
video broadcasting of live events over the Internet.
. Security Solutions. The proprietary nature of business Internet traffic
demands protection from unauthorized access. The Company delivers a range
of managed security services that were developed in conjunction with
certain strategic partners and are backed by the expertise of the
Company's Security Planning and Response Team ("SPART"). The Company's
RouteWaller(R) service provides cost-effective perimeter defense with
sophisticated remote user authentication that helps to ensure that no
strategic applications or data can be accessed until the user has proven
his or her access clearance. SecureEnterprise(R) is the Company's
management service designed to protect enterprises with a full-featured,
application-layer firewall.
. Remote Access. Today's work force increasingly operates outside the
traditional office setting. The Company's InterRamp(R) Remote Access
service enables mobile personnel to access their corporate network and
systems resources using the Internet from over 2,400 POPs in over 150
countries through the Company's strategic relationship with iPass, an
international data communications network. In most locations where
business is conducted, InterRamp Remote Access offers full Internet
access through a local telephone call. As part of InterRamp Remote Access
service, the Company provides its customers with a special account
management system that enables customers' MIS administrators to control
user access and monitor usage statistics.
. Multi-Currency Electronic Commerce. The Company's PSIWeb eCommerce/SM/
service provides a turnkey solution to create and manage "Virtual
Storefronts" and is designed to give shoppers the ability to make secure
purchases in their local currency using the Web. PSIWeb eCommerce
integrates payment systems engineered for security with virtual store
technology through alliances with CyberCash, Inc. and Mercantec, Inc., to
facilitate a seamless shopping experience. In addition, PSIWeb Worldpay/SM/
provides a
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cost-effective electronic commerce solution for selling goods and services
to an international audience. Developed in association with Worldpay Ltd.,
an electronic commerce transaction clearing house, and National
Westminster Bank PLC, PSIWeb Worldpay enables customers around the world
to make real-time purchases using the Web in over 100 currencies.
. Collocation. The Company's PSIWeb Co-Locate/SM/ Service enables companies
to house business-critical Internet servers in secure off-site facilities
with improved bandwidth management and reliable connections. Collocation
facilities are situated on the highest bandwidth portions of the
Company's infrastructure in order to facilitate optimal performance and
high-speed capabilities.
. Faxing. Since a significant portion of telecommunications traffic
consists of fax transmissions, companies are looking for ways to better
manage fax costs. The Company's InternetPaper/SM/ service supports hard-
copy distribution of electronic documents from desktop PCs to any fax
machine in the world. This service offers centralized management of
document distribution, thereby significantly reducing transmission costs.
. Electronic Mail. PSIMail/SM/ enables customers to outsource their e-mail
service and its management to the Company's highly trained systems
administrators and support staff. For a minimal monthly fee, the Company
establishes accounts, manages the servers and provides full accessibility
to e-mail for its customers while saving them the investment in
additional servers and staff.
Carrier and ISP Services. In 1996, to maximize utilization of its network,
PSINet formed its Carrier and ISP Services business unit to provide dial-up
Internet access to telecommunications carriers and ISPs whose customers
typically access the network during evening hours when business use tends to
be minimal. The Company has recently expanded this business unit to offer
peering and transit services to telecommunications carriers and other ISPs and
to offer its connectivity and value-added services for resale, on a private
label basis, to larger telecommunications carriers and other ISPs that require
high quality business services and products to enhance their product
portfolio. Through such services, which the Company expects will be further
expanded as a result of the increased network capacity provided by its recent
acquisition of OC-48 bandwidth from IXC, the Company has the opportunity to
significantly increase its distribution channel.
. Dial-up Access. The Company provides dial-up access to ISPs enabling them
to expand their geographic reach and network capacity by purchasing from
the Company access to the Company's IP-optimized network through over 220
POPs in the United States as of December 31, 1997. The Company offers
programs that provide smaller ISPs the opportunity to increase their user
base over time and provide larger ISPs the opportunity to cost-
effectively manage their rapid growth.
. Peering and Transit. In order to support the exchange of information
between ISPs, which is critical to the effective operation of the
Internet, the Company offers free private peering for all U.S.-based
ISPs. Private peering allows other ISPs' traffic to directly reach the
Company's customers, which improves network performance and, the Company
believes, thereby promotes customer satisfaction. Furthermore, the
Company offers, for a fee, transit service, which allows an ISP to
transfer traffic through the Company's network to another ISP. Transit
service enables ISPs to reduce their data communications expense by
leasing network utilization from the Company in lieu of leasing point-to-
point circuits from other telecommunications providers.
. Commercial Private Label Services. For companies with which PSINet has
strategic alliances, such as IXC, the Company provides its market-tested
services on a private label basis. This allows these companies to market
and resell the Company's services under their own brand while leveraging
the Company's nationwide network and expertise in service delivery. The
Company assists in training the sales and support staffs of these
companies and provides technical support to facilitate their resale
efforts.
PSINET'S NETWORK
Overview. PSINet owns and operates an international, high capacity, IP-
optimized network which, as of December 31, 1997, was comprised of more than
350 POPs, with over 220 located within the United States and over 130 located
throughout Canada, Europe and Japan. The Company's network design enables
customers to access the Internet through dedicated connections or by using a
modem to call locally and connect to the
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nearest Company POP. The Company remains focused on reducing costs by
maintaining a scalable network and increasing utilization and control of
strategic assets, such as telecommunications bandwidth through IRUs. The
PSINet IRUs acquired from IXC, which will increase the Company's network
capacity by 50 times, and a transatlantic IRU, which the Company has recently
entered into an agreement to acquire, are expected to decrease the Company's
per unit cost of backbone circuits by up to 90% compared with leasing similar
capacity.
Network Infrastructure. PSINet has engineered an IP-optimized network by
integrating advanced Internet routers with high-speed frame relay switching
equipment that is compatible with ATM, ISDN, and SMDS transmission
technologies. The Company has planned for growth by ensuring that the network
is scalable, flexible, fault tolerant, open standards-based and remotely
manageable.
. Scalable. PSINet's flexible, multi-layer network architecture utilizes a
high-speed switching fabric which enables the Company to grow the number
of POPs and the number of users served in an incremental manner that
matches investment with demand. The network's scalability extends beyond
the currently installed base of 400 POPs to allow for growth to 2,000
POPs without fundamental design changes.
. Flexible. PSINet's network architecture consists of an Internet routing
infrastructure overlaid upon a fast packet switching fabric that enables
the Company to provide reliable, high-speed connections and provides its
customers the ability to manage bandwidth by type of application and to
accommodate applications that are delay-sensitive. The Company is able to
use its flexible network architecture in concert with its remote
monitoring capability to accommodate changing customer usage patterns and
patterns of traffic that, if left unmanaged, could otherwise degrade
network performance.
. Fault Tolerant. Redundancy and adaptive technology in PSINet's network
reduces the impact of isolated failures on the customer's experience.
Adaptive technology incorporated into the Company's Internet router
infrastructure compensates automatically for circuit failures that might
otherwise interrupt the flow of customer traffic. Key switching and
router elements are redundantly configured to further reduce the impact
of individual component failures. In addition, the Company has an
uninterruptible power supply at each POP, limiting the impact of local
power outages on the Company's network.
. Open. PSINet's network is based on the open internetworking protocol
standard TCP/IP and on relevant international standards relating to
transmission and modulation technologies. The Company is able to install
a variety of equipment types and capacities without impacting network
interoperability. As a result, the Company's network can be upgraded
incrementally and benefit from multi-vendor supply strategies.
. Manageable. From its NOC, the Company is able to monitor the network
remotely, perform network diagnostics and equipment surveillance, and
initialize customers. As a result of the Company's network architecture
and its experience in Internet network management, these tasks can be
performed remotely regardless of POP location or network status. This
capability allows the Company to respond quickly to network problems and
to control costs associated with on-site network configuration and
repair.
Domestic Growth. As part of PSINet's ongoing efforts to control strategic
assets and further expand and enhance its network, the Company recently
acquired from IXC 20-year IRUs in up to 10,000 equivalent route miles of
fiber-based OC-48 network bandwidth across the United States. The PSINet IRUs,
upon acceptance of the corresponding bandwidth, will increase the Company's
network capacity by approximately 50 times, thereby enabling the Company to
offer a wider variety of higher-speed Internet and Internet-related services
and products to a larger customer base. The Company expects to accept its
first portion of the bandwidth, approximately 5,000 route miles of OC-12
(equivalent to 1,250 route miles of OC-48) connecting New York and Los Angeles
(and certain major cities in between), in the second quarter of 1998 with full
delivery anticipated to be completed no earlier than the first quarter of 2000
and no later than the first quarter of 2001. The Company expects to make use
of its current equipment infrastructure when the first deliveries of bandwidth
from IXC are accepted and intends to continue to evaluate and implement
technologies, such as SONET, as additional capacity is delivered. In key
geographically-dispersed cities along the configuration of the OC-48 bandwidth
(e.g., Atlanta, Chicago, Dallas, Los Angeles and Washington, D.C.), the
Company plans to build 5,000-10,000 sq. ft. data center facilities
specifically designed for application hosting, collocation services and high
capacity access to the Company's network, including peering and transit
connectivity and modems for dial-up access. The Company is also
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investing in primary rate interface ("PRI") circuits, which provide dial-up
access to its POPs, in order to increase the capacity available for its ISP
customers. The Company anticipates that it will significantly increase its
dial-up capacity in 1998 as a result of this investment in PRIs, which the
Company believes will enhance revenue growth in its Carrier and ISP Services
business unit. Approximately 60% of the Company's current dial-up capacity is
accessible at 56 Kbps modem speeds, and the Company plans to upgrade its
remaining dial-up capacity to 56 Kbps. All newly deployed modems will support
this technology. PSINet may use the bandwidth acquired from IXC for any
purpose in connection with the provision of Internet services and at a rate of
DS-3 (45 Mbps) or less for non-Internet telecommunications transport, but is
restricted from using such bandwidth to deliver any private line or long
distance switched telephone services (based on non-Internet telephone
switching technologies) to any third party. In addition, the Company may not
sell, swap, lease or otherwise transfer such bandwidth to any unaffiliated
third party except in connection with the offering of Internet connectivity
service or bona fide financing arrangements. The Company is also considering
the financial, regulatory and operational implications of becoming or
acquiring a CLEC in certain selected cities.
International Expansion. PSINet believes that the market for Internet
services outside of the U.S. will grow more rapidly than the U.S. market over
the next few years. Therefore, the Company expects to expand its network in
Canada, Mexico, Europe and Asia, as well as in other select international
markets, and to acquire fiber-based IRUs in these regions to support demand
growth and reduce costs. The Company is targeting cities with a high
concentration of businesses for international expansion with the objective,
over the long-term, of providing local access to its services and products to
70% of the businesses in those cities. The Company recently entered into an
agreement to acquire an IRU in transatlantic network bandwidth and expects to
acquire IRUs for bandwidth in Canada and for bandwidth throughout Europe
within the next two years. The Company also continues to evaluate alternatives
for transpacific IRU capacity.
Peering Arrangements. PSINet maintains peering relationships with national,
regional and local ISPs by either private peering with the ISPs or by
participation in various public peering locations, known as network access
points ("NAPs"). The Company maintains more than 2,000 Mbps (2 Gbps) of
peering connectivity with 16 private agreements and 10 NAP connections
strategically placed throughout the United States, the UK, Canada, Japan and
Europe. Recently, certain companies that have previously offered peering have
cut back or eliminated peering relations and are establishing new, more
restrictive criteria for peering. The Company expects that, due to its
offering of peering with any of the estimated 4,000 ISPs in the United States
without settlement charges it will substantially increase the number of ISPs
with which it peers over the next two years. The Company believes that by
entering into direct peering relationships with a large number of ISPs, the
Company's business customers will receive better service and the highest
quality network performance.
Global Network Management. PSINet believes that it offers superior network
management capabilities which enhance the Company's customer satisfaction. The
Company has established a 24-hours per day, seven-days per week NOC in the
United States that allows for continuous monitoring of the Company's
international network, managing of traffic, and customer problem resolution.
Back-up operating facilities manned by trained personnel are available at the
Company's offices in Herndon, Virginia and Cambridge, England in the event the
U.S. NOC experiences service interruptions or other difficulties. PSINet is
building its European Technical Center ("ETC") in Switzerland as a second NOC
with global capabilities equivalent to those in the U.S. NOC. Furthermore, the
Company anticipates that as it expands its presence in Asia it will construct
a third NOC in that region.
SALES AND MARKETING
PSINet has built a multi-channel sales and marketing infrastructure in an
effort to respond effectively to the growing opportunities in the business
Internet market. The Company seeks to attract and retain customers by offering
its services and products through its direct sales force and its authorized
reseller and referral program and by seeking to forge strategic relationships
with selected telecommunications carriers. The Company believes that this
multi-channel approach will enable it to utilize the technical skills and
experience of its direct sales force to penetrate the Company's targeted
customer base while utilizing the potentially greater sales and
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marketing resources of the resellers and referral sources and companies with
which the Company has strategic alliances to offer PSINet services and
products to a broader and more diverse potential customer base.
Direct Sales. PSINet has built a direct sales force of approximately 200
individuals (almost half of whom are employed outside the United States) who
have a strong Internet technical background and knowledge of potential
applications of the Internet to meet the critical needs of targeted business
customers. Direct sales tactics include direct contacts with targeted ISPs and
potential significant corporate accounts by the Company's sales
representatives and systems engineers, inbound and outbound telemarketing,
direct mail efforts, seminars and trade show participation. The Company has
developed programs to attract and train high quality, motivated sales
representatives that, in addition to having strong Internet technical skills
and knowledge of potential applications of the Internet, have consultative
sales experience. These programs include technical sales training,
consultative selling technique training, sales compensation plan development
and sales representative recruiting profile identification. Sales
representatives from the Company's U.S. and international operations jointly
attend training programs in order to ensure an integrated sales approach
domestically and internationally.
Reseller and Referral Program. PSINet has forged an authorized reseller and
referral program with selected telecommunications service companies, equipment
suppliers, networking service companies, systems integrators and computer
retailers. This program, through which the Company has established
approximately 470 formal and informal arrangements in the United States and
250 outside the United States, affords the Company an indirect distribution
mechanism in its targeted markets and is designed to enable the Company to
utilize the potentially greater sales and marketing resources of the resellers
and referral sources to offer PSINet services and products to a broader and
more diverse potential customer base. Participants in the Company's reseller
and referral program include Ascend Communications, Inc., a manufacturer and
developer of telecommunications equipment, CompUSA, a computer equipment and
software retailer, and XLConnect Solutions, Inc., a provider of computer
networking consulting services. The Company provides training and ongoing
support to the sales representatives of companies with which it has reseller
and referral relationships in order to strengthen the sales representatives'
knowledge of the Company's services and products and brand loyalty to PSINet.
The Company believes that the reseller and referral program has enabled the
Company to achieve greater market reach with reduced overhead costs and to use
the reseller and referral sources to assist in the delivery of complete
solutions to meet customer needs. The Company has a team of 13 individuals who
pursue reseller and referral arrangements for PSINet.
Strategic Alliances. In 1997, PSINet launched its strategic alliance
program, pursuant to which it seeks to establish strategic alliances with
selected telecommunications carriers which may afford the Company access to
recurring revenue from the carriers' customer base, while enabling the
carriers to offer their customers an integrated package of telecommunications
and Internet services and products. The Company believes that these strategic
alliances may facilitate the cost-effective acquisition of business customers
and increase the Company's network utilization. IXC is the first
telecommunications carrier with which PSINet has entered into a strategic
alliance and the Company presently is pursuing other strategic alliance
opportunities. It is anticipated that, in most cases (such as IXC), the
companies with which the Company has strategic alliances will offer PSINet
services and products on an unbranded or co-branded basis or under only their
own trademark. As with the reseller and referral program, the Company provides
training and ongoing support to the sales representatives of companies with
which it has strategic alliances in order to strengthen the sales
representatives' knowledge of the Company's services and products and brand
loyalty to PSINet.
Marketing. PSINet's marketing program is intended to build national and
local strength and awareness of the PSINet brand. The Company uses radio and
print advertising in targeted markets and publications to enhance awareness
and acquire leads for the Company's direct sales team and companies with which
the Company has resale, referral or strategic alliance relationships. The
Company's print advertisements are placed in trade journals and special-
interest publications. The Company employs public relations personnel in-house
and works with an outside public relations agency to provide broad coverage in
the Internet and computer networking fields. The Company also attempts to
create brand awareness by participating in industry trade shows such as
Networld, Interop, InterNet World and COMDEX, based on the size and vertical
makeup of the trade show audience, and relationships with industry groups and
the media. The Company also uses direct mailings, telemarketing
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programs, Web marketing, co-marketing agreements and joint promotional efforts
to reach new corporate customers. The Company attempts to retain its customers
through active and responsive customer support as well as by continually
offering new value-added services.
CUSTOMERS
The Company had, as of December 31, 1997, approximately 26,400 business
customers, including 47 ISP customers. The Company's customers include
businesses in the aerospace, finance, communications, computer data processing
and related industries, governmental agencies and educational and research
institutions as well as other ISPs pursuant to the Company's recently formed
Carrier and ISP Services business unit.
CUSTOMER SUPPORT
High quality customer service and support is critical to the Company's
objective of retaining and developing its customers. The Company has made
significant investments in customer service personnel and systems that enhance
customer care and service throughout the complete customer life cycle from
order entry and billing to selling of value-added services. The Company's
technical support group consists of over 90 individuals, over 80% of whom have
technical backgrounds and university-level education. To ensure consistency in
the quality and approach to customer care, both domestic and international
associates attend an intensive technical training and certification program at
the Company's U.S. NOC. The Company's U.S. NOC monitors and responds to
customer needs by providing 24-hours per day, seven-days per week technical
support and service. The Company's customer support group utilizes a leading
customer support trouble ticketing and workflow management system from Remedy
Corporation to track, route and report on customer service issues. Network
operations can remotely service customer connections to the Company's network.
In addition, field service personnel are dispatched in the event of an
equipment failure that cannot be serviced remotely. As part of the Company's
international expansion strategy, the Company anticipates adding a fully
redundant NOC in Switzerland during 1998 and, subsequently, a third in Asia.
In connection with its customer care initiatives, the Company seeks to
continuously improve systems that increase productivity and enhance customer
satisfaction. The Company has recently reengineered its customer care program
to address the complex needs of its business customers and is scaling its
customer care resources to keep pace with projected increases in customer
requirements. By maintaining centralized support services, the Company seeks
to increase operational efficiencies and enhance the quality, consistency and
scalability of customer care. The Company is currently in the process of
selecting and implementing high quality, cost-effective and scalable billing
systems to replace its existing systems in order to provide customers on a
global basis with uniform and easy-to-understand invoicing.
COMPETITION
The market for Internet access and related services is highly competitive.
The industry has relatively insignificant barriers to entry and numerous
entities competing for the same customers. The Company expects that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of the Internet access market has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and, to a lesser extent, on-line service
providers. 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. The Company'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.
ISPs. According to industry sources, there are over 4,000 ISPs in the United
States and Canada as of December 31, 1997, consisting of national, regional
and local providers. The Company's current primary
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competitors include other ISPs with a significant national presence which
focus on business customers, such as UUNet Technologies, Inc. ("UUNet"), Bolt,
Beranek & Newman, Inc. ("BBN") and NETCOM On-Line Communications Services,
Inc. ("Netcom"), each of which, as described below, has recently been acquired
by larger telecommunications companies. While the Company believes that its
level of customer service and support and target market focus distinguish it
from these competitors, many of these competitors, because they are owned by
larger telecommunications companies, have greater market share, brand
recognition, and financial, technical and personnel resources than the
Company. The Company also competes with unaffiliated regional and local ISPs
in its targeted geographic regions.
Telecommunications Carriers. The major long distance companies (also known
as interexchange carriers or IXCs), including AT&T Corporation ("AT&T"), MCI
Communications Corp. ("MCI"), and Sprint Corporation ("Sprint"), offer
Internet access services and compete with the Company. The recent reforms in
the federal regulation of the telecommunications industry have created greater
opportunities for incumbent local exchange carriers ("ILECs"), including the
regional Bell operating companies ("RBOCs") and other competitive CLECs, to
enter the Internet connectivity market. In order to address the Internet
connectivity requirements of the business customers of long distance and local
carriers, the Company believes that there is a move toward horizontal
integration by ILECs and CLECs through acquisitions or joint ventures with and
the wholesale purchase of connectivity from ISPs. The WorldCom, Inc.
("WorldCom")/MFS Communications, Inc. ("MFS")/UUNet consolidation (and
WorldCom's pending acquisition of MCI), GTE Corporation's ("GTE") recent
acquisition of BBN and the recent acquisition by ICG Communications, Inc.
("ICG") of Netcom are indicative of this trend. Accordingly, the Company
expects that it will experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers, in
addition to their greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial
customer bases.
Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks.
Continental Cablevision, Inc. and Tele-Communications, Inc. ("TCI") have
recently announced trials to provide Internet cable service to their
residential customers in select areas. Cable companies, however, are faced
with large-scale upgrades of their existing plant equipment and infrastructure
in order to support connections to the Internet backbone via high-speed cable
access devices. Additionally, their current subscriber base and market focus
is residential which requires that they partner with business-focused
providers or undergo massive sales and marketing and network development
efforts in order to target the business sector. Several announcements also
recently have been made by other alternative service companies approaching the
Internet connectivity market with various wireless terrestrial and satellite-
based service technologies. These include Hughes Network Systems' announcement
that it will provide high-speed data through direct broadcast satellite
technology; CAI Wireless Systems Inc.'s ("CAI Wireless") announcement of an
MMDS wireless cable operator launching data services via 2.5 to 2.7 GHz and
high-speed wireless modem technology; and WinStar Communications, a 38 GHz
radio company that wholesales its network capacity to other carriers and now
offers high-speed Internet access to business customers.
On-line Service Providers. The dominant on-line service providers, including
Microsoft Network, America Online, Incorporated ("America Online") and
Prodigy, Inc., ("Prodigy") have all entered the Internet access business by
engineering their current proprietary networks to include Internet access
capabilities. The Company competes to a lesser extent with these service
providers, which currently are primarily focused on the consumer marketplace
and offer their own content, including chat rooms, news updates, searchable
reference databases, special interest groups and shopping. While Compuserve
recently announced it also will target Internet connectivity for the small to
medium-sized business market, this will require a significant transition from
a consumer market focus to a business market focus.
The Company believes that its ability to attract business customers and to
market value-added services are keys to its future success. However, there can
be no assurance that its competitors will not introduce comparable services or
products at similar or more attractive prices in the future or that the
Company will not be required to reduce its prices to match competition.
Recently, many competitive ISPs have shifted their focus from individual
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customers to business customers. Moreover, there can be no assurance that more
of the Company's competitors will not shift their focus to attracting business
customers, resulting in even more competition for the Company. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions. Increased 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. See "Risk Factors--Competition."
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. 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.
REGULATORY MATTERS
In recent years, there have 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 in the Internet
access industry by RBOCs and other companies. The 1996 U.S. Federal
telecommunications legislation contains certain provisions which allow the
RBOCs to provide electronic publishing of information and databases under
certain conditions, which conditions have been successfully challenged in
federal district court. 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 FCC is currently reviewing its regulatory position
on the usage of the basic network and communications facilities by ISPs.
Changes in the regulatory structure and environment affecting the Internet
access market could result in increased costs being imposed on the Company.
In addition, the Company's wholly-owned subsidiary, PSINet Telecom Limited,
has received a license to provide global facilities-based telecommunications
services, subjecting it to regulation as a non-dominant international common
carrier. Further, the Company is also considering the financial, regulatory
and operational implications of becoming or acquiring a CLEC in certain
selected cities. As a result, it is also possible that the Company could
become subject to further regulation by the FCC and/or another regulatory
agency, including state and local entities, as a provider of domestic basic
telecommunications services, particularly competitive local exchange services.
As a general matter, the FCC has chosen not to exercise its statutory power
to closely regulate non- dominant carriers. Nevertheless, non-dominant
carriers are subject to complaints for failure to comply with statutory
requirements or agency regulations or rules. International non-dominant
carriers must maintain tariffs on file with the FCC. Regulation of CLECs
occurs both on a federal and state level, however, CLECs are also considered
non-dominant and subject to relaxed regulatory requirements. The Company
cannot predict the impact, if any, that future regulation may have on its
business.
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EMPLOYEES
As of December 31, 1997, the Company had approximately 775 full-time
employees (543 in the United States and 232 outside of the United States),
including approximately 303 in data communications and operational positions,
302 in sales and marketing and 170 in general and administrative positions.
The Company believes that its relations with its employees are good. None of
the Company's employees are represented by a labor union or covered by a
collective bargaining agreement and the Company has never experienced a work
stoppage.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
SENIOR EXECUTIVE OFFICERS:
William L. Schrader............. 46 Chairman of the Board of Directors,
President and Chief Executive Officer
(Founder)
Harold S. Wills................. 55 Executive Vice President, Chief Operating
Officer and Director
David N. Kunkel................. 54 Senior Vice President, General Counsel,
Secretary and Director
Edward D. Postal................ 42 Senior Vice President and Chief Financial
Officer
John J. Chidester............... 39 Senior Vice President, U.S. Sales and
Marketing
VICE PRESIDENTS:
Anthony A. Aveta................ 51 Vice President and Chief Information
Officer
Mary-Ann Carolan................ 37 Vice President
Charles P. Cary................. 42 Vice President, Product Management and
Development, Corporate Network Services
William P. Cripe................ 47 Vice President, Human Resources
James R. Davin.................. 41 Vice President and Chief Technical Officer
Mark S. Fedor................... 33 Vice President, Engineering
Richard R. Frizalone............ 40 Vice President, Alliances and Business
Development, Corporate Network Services
Harry G. Hobbs.................. 44 Vice President, Customer Administration
Kathleen B. Horne............... 40 Vice President and Assistant General
Counsel
Volker Kleinn................... 58 Vice President, European Operations
John F. Kraft................... 40 Vice President, Carrier and ISP Services
Mitchell Levinn................. 38 Vice President, Network Operations
Michael Mael.................... 41 Vice President, Application and Web
Services
Michael J. Malesardi............ 37 Vice President and Controller
John B. Muletta................. 33 Vice President
</TABLE>
Additional information regarding the Company's Executive Officers is
incorporated by reference to "Executive Officers" in the Company's Proxy
Statement to be used in connection with its 1998 Annual Meeting of
Shareholders and to be filed with the Commission not later than 120 days after
December 31, 1997.
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RISK FACTORS
In addition to the other information in this Annual Report, the following
Risk Factors should be considered in evaluating the Company and its business.
OPERATING DEFICIT; CONTINUING LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING
RESULTS; ISTAR OPERATING LOSSES
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other
things, respond to competitive developments, continue to attract and retain
qualified persons, and continue to upgrade its technologies and commercialize
its network services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such risks and the
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
has experienced revenue growth on an annual basis with revenue increasing from
$38.7 million in 1995 to $84.4 million in 1996 to $121.9 million in 1997, it
has incurred losses and experienced negative EBITDA during each of such
periods. The Company has incurred net losses of $45.6 million, $55.1 million
and $53.2 million and has incurred negative EBITDA of $21.2 million, $28.0
million and $27.9 million for each of the years ended December 31, 1997, 1996
and 1995, respectively. At December 31, 1997, the Company had a retained
deficit of $162.6 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 did
achieve 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 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 of 1997 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 Carrier and ISP Services business
unit strategy which will require it to continue to incur expenses for
marketing, network infrastructure, personnel and the development of new
products and services. Such continued expenses may adversely impact cash flow
and operating performance. The Company also plans to continue to enhance its
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 the Company's control, including, among others,
general economic conditions, specific economic conditions in the Internet
access industry, user demand for Internet services, capital expenditures and
other costs relating to the expansion of operations and the Company network,
the introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes and new product introductions by the Company and its
competitors and delays in obtaining sufficient supplies of sole or limited
source equipment and telecom facilities (i.e., PRIs). 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.
In February 1998, the Company acquired iSTAR, one of the leading Canadian
providers of Internet services and solutions. Prior to its acquisition by the
Company, iSTAR incurred a net loss of $39.1 million and had negative EBITDA of
$20.7 million for the twelve months ended November 30, 1997. While the Company
believes that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations
of iSTAR it will be able to realize significant cost savings on its Canadian
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operations beginning in 1998, there can be no assurance that the Company's
integration of the operations of iSTAR will be accomplished successfully. The
inability of the Company to improve the operating performance of iSTAR's
business or to successfully integrate the operations of iSTAR could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The market for Internet access and related services is highly competitive.
The industry has relatively insignificant barriers to entry and numerous
entities competing for the same customers. The Company expects that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of the Internet access market has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers, and on-line service providers. 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.
The Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and related services at competitive
prices. See "Business--Competition."
As a result of industry competition, the Company has encountered and expects
to continue 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 the Company. 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. The Company 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.
As the Company 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.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCE WITH IXC
The Company is subject to a variety of risks relating to its transactions
with IXC and the acquisition, operation and maintenance of the bandwidth
corresponding to the PSINet IRUs. Such risks include, among other things, the
following: (i) the risk that, if the difference between $240 million and the
fair market value of the IXC Initial Shares as of the Determination Date or
the Acceleration Date (as defined), as applicable, is significant,
satisfaction of the Contingent Payment Obligation by the Company through the
issuance of additional shares of common stock or, at the sole option of the
Company, by a payment of cash, or a combination of stock
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and cash, could result in significant dilution to the Company's other
shareholders and in IXC's owning a significant, or even a controlling, portion
of the outstanding common stock, and/or could necessitate a significant cash
outlay by the Company, which in any such event could have a material adverse
effect on the Company and its shareholders; (ii) the risk that financial,
legal, technical and/or other matters may adversely affect IXC's ability to
perform the operation, maintenance and other services under the IRU Purchase
Agreement with respect to the bandwidth corresponding to the PSINet IRUs,
which may adversely affect the Company's use of such bandwidth; (iii) the risk
that, in the event of a material default by IXC under the IRU Purchase
Agreement at such time as IXC is in bankruptcy, the Company's use of the
bandwidth corresponding to the PSINet IRUs may be materially adversely
affected or curtailed; (iv) the risk that the Company will not have access to
sufficient additional capital and/or financing on satisfactory terms to enable
it to make the necessary capital expenditures to take full advantage of the
PSINet IRUs; (v) the risk that IXC may not continue to have the necessary
financial resources to enable it to complete, or may otherwise elect not to
complete, its contemplated buildout of its fiber optic telecommunications
system or that such buildout may be delayed or otherwise adversely affected by
presently unforeseeable legal, technical and/or other factors; (vi) the risk
that, in the event of a change of control or change in management of IXC,
IXC's successor or new management, as the case may be, may not share IXC's
commitment to the buildout of its fiber optic telecommunications system or may
not otherwise allocate the necessary human, financial, technical and other
resources to satisfactorily meet its obligations to the Company under the IRU
Purchase Agreement that would adversely affect the Company's use of the
bandwidth corresponding to the PSINet IRUs; (vii) the risk that IXC, as the
Company's largest shareholder and through its chairman's seat on the Company's
Board of Directors, could subject the Company to certain conflicts of interest
or could influence the Company's management in a manner that could adversely
affect the Company's business or control of the Company; and (viii) the risk
that future sales by IXC of substantial numbers of shares of common stock
could adversely affect the market price of the common stock and make it more
difficult for the Company to raise funds through equity offerings and to
effect acquisitions of businesses or assets in consideration for issuances of
its common stock. 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.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION
The Company had over 350 POPs as of December 31, 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 strain on the Company's administrative, operational and financial
resources and has increased demands on its systems and controls. The Company
anticipates that its Carrier and ISP Services business unit, as well as other
business growth, may require continued enhancements to and expansion of its
network. Competition for qualified personnel in the Internet services industry
is intense and there are a limited number of persons with the requisite
knowledge of and experience in such 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.
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. The Company expects to
incur capital expenditures through the end of the year 2000 of up to $95
million. In addition, the Company expects to incur on an annual basis
approximately $1.15 million in operation and maintenance fees
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with respect to the PSINet IRUs per each 1,000 equivalent route miles of OC-48
bandwidth accepted under the IRU Purchase Agreement. Other planned capital
expenditures expected to be incurred by the Company over the next four years
include up to $35 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 Carrier and ISP Services agreements, to provide
the ISP 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 ($1.4 million drawn at December 31, 1997). In addition,
the Company may be obligated pursuant to the Contingent Payment Obligation
under the IRU Purchase Agreement to provide IXC with additional shares of
common stock and/or cash, at the Company's sole option, in an amount equal to
the difference between $240 million and the then fair market value of the IXC
Initial Shares on the earlier of one year following delivery and acceptance of
the total bandwidth corresponding to the PSINet IRUs or February 25, 2002.
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 PSINet IRUs, 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 presently 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" in Part II, Item 7 of this Annual Report.
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. 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 practices 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 continue 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
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commonly encountered in strategic alliances with or acquisitions of companies.
Such risks include, among other things, the difficulty of integrating 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, such as the
Company's recently completed transaction with iSTAR, a substantial portion of
the Company's available cash could be used to consummate such 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
Company's recently completed transaction with IXC, shareholders of the Company
could suffer a significant dilution of their ownership interests in the
Company. Many of the businesses that might become attractive acquisition
candidates for the Company may have significant goodwill and intangible
assets, and acquisition of these businesses, if accounted for as a purchase,
would typically result in 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 Internet services 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.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The Company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. The market for Internet access
and related services is relatively new and characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and
frequent new product and service 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 products and services that meet changing customer
needs, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis. There can be no
assurance that the Company will be successful in effectively using new
technologies, developing new services or enhancing its existing services on a
timely basis or that such new technologies or enhancements will achieve market
acceptance. The Company believes that its ability to compete successfully is
also dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. There can
be no assurance that the Company will be able to effectively address the
compatibility and
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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.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business market targeted by the Company. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-
effective, high-speed options, a limited number of local access points for
corporate users, inability to integrate business applications on the Internet,
the need to deal with multiple and frequently incompatible vendors, inadequate
protection of the confidentiality of stored data and information moving across
the Internet, and a lack of tools to simplify Internet access and use. In
particular, numerous published reports have indicated that a perceived lack of
security of commercial data, such as credit card numbers, has significantly
impeded commercial exploitation of the Internet to date, and there can be no
assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints caused by growth in the use of the
Internet may, unless resolved, impede further development of the Internet to
the extent that users experience delays, transmission errors and other
difficulties. Further, the adoption of the Internet for commerce and
communications, particularly by those individuals and enterprises that have
historically relied upon alternative means of commerce and communications,
generally requires the understanding and acceptance of a new way of conducting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of conducting commerce
and exchanging information may be particularly reluctant or slow to adopt a
new strategy that may make their existing personnel and infrastructure
obsolete. The failure of the market for business-related Internet solutions to
continue to develop would adversely impact the Company's business, financial
condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK; REGULATORY
MATTERS
The law relating to liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. A number of
lawsuits have sought to impose such liability for defamatory speech and
infringement of copyrighted materials. In one case, a federal district court
held that an online service provider could be found liable for defamatory
matter provided through its service, on the ground that the service provider
exercised active editorial control over postings to its service. Other courts
have held that online service providers and ISPs may, under certain
circumstances, be subject to damages for copying or distributing copyrighted
materials. Certain provisions of the Communications Decency Act, which imposed
criminal penalties for using an interactive computer service for transmitting
obscene or indecent communications, have been found unconstitutional by the
U.S. Supreme Court. New legislative attempts to curtail obscene or indecent
communications are likely. The imposition upon ISPs or web server hosts of
potential liability for materials 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 resources
or the discontinuation of certain product or service offerings, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition.
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.
Although the Company's Internet operations are not currently subject to
direct regulation by the Federal Communications Commission (the "FCC") or any
other governmental agency (other than regulations applicable to businesses
generally), due to the increasingly widespread use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to
the Internet, covering issues such as content, user pricing,
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privacy, libel, intellectual property protection and infringement, and
technology export and other controls. The FCC is currently reviewing its
regulatory position on the usage of the basic network and communications
facilities by ISPs. Changes in the regulatory structure and environment
affecting the Internet access market, including regulatory changes that
directly or indirectly affect telecommunications costs or increase the
likelihood of competition from RBOCs or other telecommunications companies,
could have an adverse effect on the Company's business. Although the FCC has
decided not to allow local telephone companies to impose per-minute access
charges on ISPs, the impact of this decision on the availability of telephone
service is the subject of a congressionally-mandated report. In addition, some
telephone companies are seeking relief through state regulatory agencies. Such
rules, if adopted, are likely to have a greater impact on consumer-oriented
Internet access providers than on business-oriented ISPs such as the Company.
Nonetheless, the imposition of access charges would affect the Company's costs
of serving dial-up customers and 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 Internet access
providers in relation to information carried or disseminated also is
undergoing a process of development in other 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.
The Company's wholly-owned subsidiary, PSINet Telecom Limited, has received
a license from the FCC to provide global facilities-based telecommunications
services, subjecting it to regulation as a non-dominant international common
carrier. Further, the Company is also considering the financial, regulatory
and operational implications of becoming or acquiring a CLEC in certain
selected cities. As a result, it is also possible that the Company could
become subject to further regulation by the FCC and/or another regulatory
agency, including state and local entities, as a provider of domestic basic
telecommunications services, particularly competitive local exchange services.
The FCC exercises jurisdiction over all facilities of, and services offered
by, telecommunications common carriers to the extent that they involve the
provision, origination or termination of jurisdictionally interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications. In
addition, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.
Generally, the FCC has chosen not to exercise its statutory power to closely
regulate the charges or practices of non-dominant carriers. Nevertheless, the
FCC acts upon complaints against such carriers for failure to comply with
statutory obligations or with the FCC's rules, regulations and policies. The
FCC also has the power to impose more stringent regulatory requirements on the
Company and to change its regulatory classification. The Company believes
that, in the current regulatory environment, the FCC is unlikely to do so.
International non-dominant carriers must maintain tariffs on file with the
FCC. Regulation of CLECs occurs on both a state and federal level, to the
extent CLECs provide interstate exchange access service. Regulatory regimes
vary from state-to state, however, competing local exchange carriers are non-
dominant and are likely to be subject to a relaxed form of regulation.
Nevertheless, there are numerous state and federal proceedings that may impose
regulatory burdens on CLECs. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on the Company.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Certain of 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 holders of
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the Company's capital stock 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.
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 and willingness of its telecommunications providers
to deliver reliable, high-speed telecommunications service through their
networks. While the Company's network has been designed with redundant
circuits among POPs to allow traffic rerouting, lab and field testing is
performed before integrating new and emerging technology into the network, and
the Company engages in capacity planning, there can be no assurance that the
Company will not experience failures or shutdowns relating to individual POPs
or even catastrophic failure of the entire network. The Company carries
property, 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.
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 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
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with the Company. To the extent that these suppliers change their pricing
structures, the Company may be adversely affected. Following the recent
consummation of its transaction with IXC, the Company anticipates that its
dependence upon certain of these suppliers will be decreased as it accepts
delivery of OC-48 bandwidth under the IRU Purchase Agreement. Nevertheless,
until the IXC fiber optic telecommunications system is completed (and IXC is
not obligated under the IRU Purchase Agreement to extend its buildout of the
IXC system beyond approximately 6,640 unique route miles of OC-48 bandwidth)
and, even after such completion, the Company will continue to be dependent
upon such suppliers in certain geographic regions. Moreover, any failure or
delay of IXC to deliver bandwidth under the IRU Purchase Agreement or to
provide operations, 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 (which
connect dial-up customers to the Company's network). 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.
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 the Company'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 the Company's
proprietary technology. In addition, the Company's products may be licensed or
otherwise utilized in foreign countries where laws may not protect the
Company'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
25
<PAGE>
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.
YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000
date are a known risk. The Company has established procedures for evaluating
and managing the risks and costs associated with this problem and believes
that its computer systems are currently Year 2000 compliant. However, many of
the Company's customers maintain their Internet connections on UNIX-based
servers, which may be impacted by Year 2000 complications. The failure of the
Company's customers to ensure that their servers are Year 2000 compliant could
have a material adverse effect on the Company's customers, which in turn could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Date Conversion"
in Part II, Item 7 of this Annual Report.
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.
26
<PAGE>
GLOSSARY
ATM.......................... Asynchronous Transfer Mode. A communications
standard that provides for information transfer
in the form of fixed-length cells of 53 bytes
each. The ATM format can be used to deliver
voice, video and data traffic at varying rates.
Backbone..................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................... The number of bits of information which can
move over a communications medium in a given
amount of time; the capacity of a
telecommunications circuit/network to carry
voice, data and video information. Typically
measured in Kbps and Mbps. Bandwidth from
public networks is typically available to
business and residential end-users in
increments from 56 Kbps to T-3.
Broadband.................... A transmission system that multiplexes multiple
independent signals onto one cable.
CLEC......................... Competitive local exchange carrier.
CSU/DSU...................... Channel Service Unit/Data Service Unit. A
device used in digital transmission for
connecting data terminal equipment, such as a
router, to a digital transmission circuit or
service.
Dedicated circuits........... Telecommunications lines dedicated or reserved
for use by particular customers along
predetermined routes.
Dial up line................. Communications circuit that is established by a
switched-circuit connection using the telephone
network.
DNS.......................... Domain Name System. Distributed name system
used in the Internet.
Electronic mail or e-mail.... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an e-
mail address.
56 Kbps...................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
Firewall..................... A gateway between two networks that buffers and
screens all information and prevents
unauthorized traffic from passing between such
networks.
Frame relay.................. A communications standard that is optimized for
efficient switching of variable-length data
packets.
Gbps......................... Gigabits per second. A measure of digital
transmission rates. One gigabit equals 1,000
megabits.
Host......................... A computer with direct access to the Internet.
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HTML......................... Hypertext Markup Language used to produce Web
pages. It is a method of presenting information
where selected words can be "expanded" to
provide other information about the word.
ILEC......................... Incumbent local exchange carrier.
Internet..................... An open global network of interconnected
commercial, educational and governmental
computer networks which utilize TCP/IP, a
common communications protocol.
Internetworking.............. The process of communicating between and among
networks.
Intranet..................... A TCP/IP based network and Web site which is
securely isolated from the Internet and serves
the internal needs of a company or institution.
IP........................... Internet protocol.
IRUs......................... Indefeasible rights of use in network bandwidth
capacity.
ISDN......................... Integrated Services Digital Network. A network
that provides digital voice and data services
through a single medium.
ISP.......................... Internet service provider.
Kbps......................... Kilobits per second. A measure of digital
information transmission rates. One kilobit
equals 1,000 bits of digital information.
Normally, 10 bits are used for each alpha-
numeric character.
LAN.......................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
LEC.......................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
Mbps......................... Megabits per second. A measure of digital
information transmission rates. One megabit
equals 1,000 kilobits.
Modem........................ A device for transmitting information over an
analog communications channel such as a POTS
telephone circuit.
Multiplexing................. Putting multiple signals on a single channel.
Network...................... A collection of distributed computers which
share data and information through inter-
connected lines of communication.
OC-3......................... OC-3 SONET high capacity optical
telecommunications line capable of transmitting
data at 155.52 Mbps.
OC-12........................ OC-12 SONET high capacity optical
telecommunications line capable of transmitting
data at 622.08 Mbps.
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OC-48........................ OC-48 SONET high capacity optical
telecommunications line capable of transmitting
data at 2488.32 Mbps.
OC-48 Equivalent............. One OC-48, four OC-12s, 16 OC-3s or 48 DS-3s.
OC-48 Equivalent Mile........ One Route Mile of OC-48 capacity, four Route
Miles of OC-12 capacity, 16 Route Miles of OC-3
capacity or 48 Route Miles of DS-3 capacity.
On-line services............. Commercial information services that offer a
computer user access through a modem to a
specified slate of information, entertainment
and communications menus. These services are
generally closed systems, although many are now
offering full Internet access.
Open systems................. A networking system which is based upon non-
proprietary protocols (i.e., protocols which
are in the public domain).
Peering...................... The commercial practice under which nationwide
ISPs exchange each other's traffic, in most
cases, without the payment of settlement
charges.
POPs......................... Points-of-Presence. An interlinked group of
modems, routers and other computer equipment,
located in a particular city or metropolitan
area, that allows a nearby subscriber to access
the Internet through a local telephone call or
using a short-distance permanent data circuit.
POTS......................... Plain Old Telephone Service. Standard analog
telephone service used by many telephone
companies throughout the United States.
PRI.......................... Primary Rate Interface. ISDN interface to
primary rate access.
Protocol..................... A formal description of message formats and the
rules two or more machines must follow in order
to communicate.
RBOC......................... Regional Bell Operating Company.
Router....................... A device that receives and transmits data
packets between segments in a network or
different networks.
Route Mile................... One mile of the actual geographic length of the
high capacity telecommunications fiber route.
Server....................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. The term also refers to the
computer on which server software runs.
SMDS......................... Switched Multimegabit Data Service. A public
packet-switching service offered by telephone
companies in many major metropolitan areas.
SONET........................ Synchronous Optical Network.
TCP/IP....................... Transmission Control Protocol/Internet
Protocol. A compilation of network and
transport-level protocols that allow computers
with
29
<PAGE>
different architectures and operating system
software to communicate with other computers on
the Internet.
T-3 or DS-3.................. A data communications line capable of
transmitting data at 45 Mbps.
UNIX......................... A computer operating system for workstations
and personal computers and noted for its
portability and communications functionality.
WAN.......................... Wide Area Network. A network spanning a wide
geographic area.
Web or World Wide Web........ A network of computer servers that uses a
special communications protocol to link
different servers throughout the Internet and
permits communication of graphics, video and
sound.
Web server................... The computer system that runs Web software,
used to create custom Web sites, Web pages, and
home pages.
Web sites or Web pages....... A site located on the Web, written in the HTML
or SGML language.
ITEM 2. PROPERTIES
PSINet's principal administrative, operational and marketing and sales
facilities total approximately 50,280 square feet and are located in an office
park in Herndon, Virginia. The Company occupies 36,080 square feet of this
space under two leases which expire in September 2003 and include five-year
renewal options. Additionally, 14,200 square feet is occupied pursuant to a
lease which expires in February 1999. The Company also leases approximately
15,000 square feet of office space in a second office park located in Herndon,
Virginia, approximately 48,480 and 13,500 square feet of office space in two
office parks located in Reston, Virginia and approximately 23,760 square feet
of office space for its network operations center in Troy, New York. The
Company leases regional sales and field support offices in Santa Clara,
California; E1 Segundo, California; Orlando, Florida; Tampa, Florida;
Norcross, Georgia; Chicago, Illinois; New York, New York and Dallas, Texas.
The Company's Canadian subsidiary leases approximately 24,000 square feet
and 5,600 square feet in Toronto, Canada under two separate leases which
expire in December 2004 and October 2000, respectively. The Company's
subsidiary in the United Kingdom leases approximately 13,200 square feet in
Cambridge, England under a lease which expires in September 2005. The
Company's subsidiary in Japan leases approximately 7,100 square feet in Tokyo,
Japan under a lease which expires in May 2000. The Company's principal
European administrative, operational, marketing and sales facilities total
approximately 3,900 square feet and are located in Nyon, Switzerland.
Additionally, the Company has European operations in leased facilities in
Brussels, Belgium, Velizy, France, Ismaning, Germany and Amsterdam, The
Netherlands.
The Company leases or is otherwise provided with the right to utilize space
in various geographic locations to provide an operational facility for certain
of its POPs.
The Company believes that these facilities are adequate for its current
needs and that suitable additional space, should it be needed, will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been involved in certain disputes and
threatened with or named as a defendant in lawsuits and administrative claims.
Certain of such disputes, lawsuits and threatened litigation
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<PAGE>
include claims asserting alleged breach of agreements and certain of them
relate to relatively novel or unresolved issues of law arising out of or
relating to the developing nature of the Internet and on-line services
industries. See "Risk Factors--Potential Liability for Information
Disseminated through Network; Regulatory Matters."
On November 25, 1997, Chatterjee Management Company ("Chatterjee") initiated
arbitration proceedings against the Company before the International Chamber
of Commerce, Court of Arbitration, in London, England, with respect to a joint
venture agreement between Chatterjee and the Company. As previously disclosed
by the Company in various filings with the Commission, on September 19, 1996,
the Company and Chatterjee signed an agreement pursuant to which the Company
and an investment group led by Chatterjee would establish a joint venture for
the purposes of building an Internet network across Europe and providing
Internet-related services in Europe. Such investment group was to invest up to
$41 million in the joint venture. No monies were invested by Chatterjee or the
investment group pursuant to the joint venture agreement nor were any other
actions undertaken to implement it. Following the signing of the agreement,
the parties acknowledged structural difficulties associated with the joint
venture as originally contemplated, which prevented implementation of it.
Instead, they sought, for several months, to negotiate a direct investment in
the Company by Chatterjee in lieu of the prior agreement. Those negotiations
were not successful.
In the arbitration proceeding, Chatterjee has now alleged that the Company
breached the joint venture agreement by repudiating its obligations under the
agreement and by breaching a covenant not to compete. In the arbitration,
Chatterjee requests an award declaring that the agreement is still valid and
binding upon the parties and that the Company stands in breach of the
agreement, directing the Company to specifically perform its obligations under
the agreement or, in the alternative, awarding Chatterjee compensatory damages
in an amount not less than $25 million, awarding Chatterjee profits that the
Company has earned or stands to earn in Europe, and awarding Chatterjee the
costs of arbitration, including attorneys' fees, and interest on the award of
damages. The Company believes that Chatterjee's claims are without merit and
intends vigorously to defend itself in the arbitration.
In addition, the Company from time to time receives communications from
third parties asserting alleged infringement of patents, trademarks and
service marks of others. Although there is currently no material litigation
arising out of any alleged infringement of patents, trademarks or service
marks, there can be no assurance that litigation will not be commenced
regarding these or other matters.
The Company is not involved in any other legal proceedings which the Company
believes would, if adversely determined, have a material adverse effect upon
its business, financial condition or results of operations. There can be no
assurance whether these matters will be determined in a manner which is
favorable to the Company or, if adversely determined, whether such
determination would have a material adverse effect upon the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended December 31, 1997.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "PSIX". The following table sets forth for the periods indicated the
high and low bid prices for the common stock as reported during each quarterly
period in 1996 and 1997 on The Nasdaq Stock Market. The prices do not include
retail mark ups, mark downs or commissions.
<TABLE>
<CAPTION>
1996
--------------
HIGH LOW
------- ------
<S> <C> <C>
First Quarter................................................. $22 3/4 $8 3/4
Second Quarter................................................ $19 3/8 $6 3/4
Third Quarter................................................. $13 $8 1/8
Fourth Quarter................................................ $14 1/2 $8 1/2
<CAPTION>
1997
--------------
HIGH LOW
------- ------
<S> <C> <C>
First Quarter................................................. $13 3/8 $6 3/4
Second Quarter................................................ $ 9 1/4 $5 1/2
Third Quarter................................................. $ 9 3/4 $7 3/8
Fourth Quarter................................................ $ 9 1/2 $4 1/4
</TABLE>
The last reported sale price of the Company's common stock on The Nasdaq
Stock Market on March 13, 1998 was $10.25 per share. There were approximately
700 holders of record of the common stock as of March 13, 1998.
COMMON STOCK DIVIDEND POLICY
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends on its common
stock in the foreseeable future, except for dividends payable with respect to
its Series B 8% Convertible Preferred Stock issued by the Company on November
10, 1997 in a private placement exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof, as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure" in Part II, Item 7 of this Annual Report. In
addition, under the terms of the Company's existing credit facilities, the
payment of dividends is prohibited without the lender's consent. See Note 6 of
the Notes to Consolidated Financial Statements set forth in Part II, Item 8.
RECENT SALES OF UNRESTRICTED SECURITIES
On February 25, 1998, the Company issued 10,229,789 shares of its common
stock to IXC as consideration for the acquisition of 20-year noncancellable
IRUs in up to 10,000 equivalent route miles of fiber-based OC-48 network
bandwidth in selected portions across the IXC fiber optic telecommunications
system within the United States pursuant to an IRU and Stock Purchase
Agreement, dated as of July 22, 1997, between the Company and IXC, as amended.
If the fair market value of the shares issued to IXC (based on the volume-
weighted average closing market price per share as reported by The Nasdaq Stock
Market over the 20 trading day period immediately preceding the applicable date
of determination) is less than $240 million at the earlier of one year
following delivery and acceptance of the total amount of bandwidth
corresponding to the IRUs or February 25, 2002, the Company will be obligated
to issue additional shares of Common Stock or at the Company's sole option,
cash or a combination thereof equal to the shortfall. These securities were
issued in a transaction by the issuer not involving any public offering, and
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), was relied
upon to claim exemption from registration under the Act. IXC is an accredited
investor within the meaning of Securities and Exchange Commission Rule 501 and
had adequate access to information about the Company, and appropriate legends
regarding the restricted nature of such securities were affixed to the
certificate representing such securities.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company. The consolidated
balance sheet data and consolidated statement of operations data as of and for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived
from the Company's Consolidated Financial Statements. The following selected
consolidated financial and operating data are qualified by and should be read
in conjunction with the more detailed Consolidated Financial Statements and
notes thereto and the discussion under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Part II, Items 7
and 8 of this Annual Report.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except per share, ratio and operating data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $ 8,665 $15,214 $ 38,722 $ 84,351 $121,902
Other income, net.............. -- -- -- 5,417 --
------- ------- -------- -------- --------
8,665 15,214 38,722 89,768 121,902
Operating costs and expenses:
Data communications and
operations................... 5,320 9,489 32,124 70,102 94,363
Sales and marketing........... 1,845 3,599 23,930 27,064 25,831
General and administrative.... 1,666 3,605 10,569 20,648 22,947
Depreciation and
amortization................. 1,719 3,183 14,778 28,035 28,347
Intangible asset write down... -- -- 9,938 -- --
------- ------- -------- -------- --------
Total operating costs and
expenses..................... 10,550 19,876 91,339 145,849 171,488
------- ------- -------- -------- --------
Loss from operations........... (1,885) (4,662) (52,617) (56,081) (49,586)
Interest expense............... (311) (731) (1,964) (5,025) (5,362)
Interest income................ 37 86 1,625 3,794 3,059
Other income................... -- -- -- 2,863 110
Gain on sale of subsidiary..... -- -- -- -- 5,701
Equity in loss of affiliate.... -- (35) (204) (807) --
------- ------- -------- -------- --------
Loss before income taxes....... (2,159) (5,342) (53,160) (55,256) (46,078)
Income tax benefit............. 246 -- -- 159 476
------- ------- -------- -------- --------
Net loss....................... $(1,913) $(5,342) $(53,160) $(55,097) $(45,602)
======= ======= ======== ======== ========
Return to preferred
shareholders.................. -- -- -- -- (411)
------- ------- -------- -------- --------
Net loss available to common
shareholders.................. $(1,913) $(5,342) $(53,160) $(55,097) $(46,013)
======= ======= ======== ======== ========
Basic and diluted loss per
share......................... $ (0.42) $ (2.01) $ (1.40) $ (1.14)
Shares used in computing basic
and diluted loss per share (in
thousands).................... 12,805 26,485 39,378 40,306
OTHER FINANCIAL DATA:
Cash flows used in operating
activities.................... $ (209) $(1,097) $(30,093) $(32,543) $(15,457)
Cash flows used in investing
activities.................... (3,656) (1,937) (21,958) (7,897) (15,560)
Cash flows provided by (used
in) financing activities...... 5,490 4,527 151,403 (10,529) 12,598
EBITDA(1)...................... (166) (1,479) (27,901) (28,046) (21,239)
Capital expenditures(2)........ 7,043 5,009 45,166 38,390 50,068
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments... $ 1,865 $ 3,358 $102,710 $ 56,390 $ 33,322
Restricted cash and short-term
investments...................... -- -- -- 954 20,690
Total assets...................... 13,821 17,055 201,830 177,112 186,181
Lines of credit and current
portion of long-term debt and
capital lease obligations........ 2,540 3,369 16,643 26,915 39,633
Long-term debt and capital lease
obligations, less
current portion.................. 3,581 4,397 24,130 26,938 33,820
Redeemable preferred and common
stock............................ 6,725 13,617 -- -- --
Shareholders' equity (deficit).... (1,427) (8,283) 143,230 89,783 73,429
OTHER OPERATING DATA:
Number of POPs.................... 68 82 241 350 350
Number of customer accounts....... 2,830 4,220 8,200 17,800 26,400
</TABLE>
- --------
(1) Represents earnings (loss) before depreciation and amortization, interest
income and expense, other income, income tax expense (benefit), gain on
sale of subsidiary, equity in loss of affiliate and intangible asset
write-down. The Company has included information concerning EBITDA because
it understands that such information is used in the Internet services
industry as one measure of a company's operating performance and
historical ability to service debt. EBITDA is not determined in accordance
with generally accepted accounting principles, is not indicative of cash
used by operating activities and should not be considered in isolation or
as an alternative to, or more meaningful than, measures of performance
determined in accordance with generally accepted accounting principles. In
addition, EBITDA, as defined by the Company, may not be comparable to
similarly titled measures used by other companies.
(2) Includes cash expenditures and amounts financed under equipment financing
agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. 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 certain factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors" set forth
in Item 1 to this Annual Report and the Company's periodic reports filed with
the Securities and Exchange Commission.
GENERAL
PSINet is a leading global facilities-based provider of Internet access
services and related products to businesses. The Company provides dedicated
and dial-up Internet connectivity in 90 of the 100 largest metropolitan
statistical areas in the U.S. and in nine of the 20 largest international
telecommunications markets. The Company also offers IP-based value-added
services and products to businesses, including corporate intranets, Web
hosting and collocation, remote user access, multi-currency electronic
commerce and security services, that enable businesses to maximize utilization
of their corporate networks and the Internet. Additionally, the Company
provides network backbone services to other telecommunications carriers and
ISPs to further exploit its network capacity. To meet the growing data
communications needs of its customers, the Company seeks to continually expand
and enhance its network infrastructure. At December 31, 1997, the Company
served approximately 26,400 business accounts, including 47 ISPs, and
connected to more than 350 POPs in ten countries throughout North America,
Asia and Europe.
The Company owns and operates a technologically advanced, high-speed data
communications network with over 220 POPs located in the U.S. and over 130
POPs located internationally. Since the commencement of the Company's
operations in 1989, the Company has undertaken an extensive program of
developing and expanding its data communications network. In connection with
this program, the Company has made significant investments in
telecommunications circuits and equipment to produce a multi-layered,
geographically dispersed, Asynchronous Transfer Mode ("ATM"), Integrated
Services Digital Network ("ISDN"), and Switched Multimegabit Data Service
("SMDS") compatible frame relay network specially designed to optimize
Internet traffic. The Company also continues to expand its sales and
marketing, customer support, network operations and field services commitments
in support 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
34
<PAGE>
percentage of revenue. The nature and amount of these expenses may continue to
fluctuate over time as the Company continues its growth.
STRATEGIC ALLIANCE WITH IXC INTERNET SERVICES, INC.
As part of the Company's ongoing efforts to further expand and enhance its
network, on February 25, 1998, the Company closed its transaction with IXC to
acquire 20-year noncancellable IRUs in up to 10,000 equivalent route miles of
fiber-based OC-48 network bandwidth in selected portions across the IXC fiber
optic telecommunications network within the United States. The PSINet IRUs
were acquired in exchange for the issuance to IXC of 10,229,789 shares of
common stock of the Company (representing approximately 20% of the issued and
outstanding common stock of the Company after giving effect to such issuance
and having an aggregate market value of $78,641,503 based on the closing
market price per share of the Company's common stock as reported by The Nasdaq
Stock Market on such date of $7.6875). If the fair market value of the IXC
Initial Shares (based on a 20 trading day volume-weighted average share price)
is less than $240 million at the earlier of one year following delivery and
acceptance of the total amount of bandwidth corresponding to the PSINet IRUs
or February 25, 2002, the Company will be obligated to provide IXC with
additional shares of its common stock, or at the sole option of the Company,
cash or a combination thereof equal to the shortfall. The Company has the
right to accelerate the Contingent Payment Obligation to any date prior to the
Determination Date. In addition, the right of IXC to receive additional shares
of common stock and/or cash pursuant to the Contingent Payment Obligation will
terminate on such date as the fair market value of the IXC Initial Shares
(based on a 20 trading day volume-weighted average share price) is equal to or
greater than $240 million. In connection with this transaction, the Company
also entered into a long-term, non-exclusive joint marketing and services
agreement with IXC. Under the marketing agreement, the Company will be selling
its Internet access and value-added services through IXC.
INTERNATIONAL OPERATIONS
The Company's revenue from international operations was $18.0 million for
the year ended December 31, 1997 (14.7% of consolidated revenue), an increase
of 165% from the $6.8 million (8% of consolidated revenue) generated in the
previous year.
In February 1998, the Company completed the acquisition of 23.9 million (or
81.4%) of the outstanding common shares of iSTAR, a leading Canadian ISP,
pursuant to the Company's January 6, 1998 cash offer to purchase all of the
outstanding common shares of iSTAR for cash consideration of Cdn. $0.75 (US
$0.52) per share. The excess of the purchase price over the tangible assets
acquired and liabilities assumed was $17.9 million. The Company will record a
charge for in-process research and development of approximately $7.0 million
related to the iSTAR acquisition in the first quarter of 1998.
As part of the Company's continuing strategy to offer Internet-based
business communications services and solutions globally, in January 1998, the
Company acquired Iprolink, an Internet service provider in Switzerland, for
approximately $3.5 million in cash, and, in October 1997, acquired CalvaCom,
an Internet service provider in France, for approximately $3.1 million in
cash.
For the year ended December 31, 1997, the Company's revenue from
international operations increased to $18.0 million (14.7% of consolidated
revenue) from $6.8 million (8% of consolidated revenue) for 1996. On a pro
forma basis, giving effect to the acquisitions of iSTAR, Iprolink and
CalvaCom, approximately 34% of the Company's consolidated revenue was derived
from international operations.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
Revenue. Revenue is derived primarily from the sale of Internet access and
related services to businesses. Revenue increased by 45% to $121.9 million in
1997, from $84.4 million in 1996. The increase was attributable to a number of
factors, including an increase in the number of business customer and ISP
accounts, an increase
35
<PAGE>
in the average annual revenue realized per new customer account and an
increase in sales by the Company's international subsidiaries. The growth was
driven by an expansion of the Company's sales force and greater public
awareness and utilization of the Internet.
In comparison with 1996, revenue for 1997 was affected by the sale in 1996
of the Company's individual consumer accounts and related assets and by the
sale in 1997 of the Company's software subsidiary, which together provided
$15.6 million of revenue in 1996 but only $0.3 million in 1997. If such
revenue was excluded from 1996 revenue, the Company's growth in revenue from
1996 to 1997 would have been 77% instead of 45%. Revenue growth in 1997 was
also impacted by a drop in the customer retention rate from 94% in 1996 to 82%
in 1997, which was attributable in part to an initiative by the Company to
remove certain non-performing accounts.
The Company's customer account base increased by 48% to 26,400 business
customers at December 31, 1997, including 47 ISPs, from 17,800 business
customers, including 22 ISPs, at December 31, 1996. The Company's revenue from
international operations increased by 165% to $18.0 million in 1997 from $6.8
million in 1996, principally as a result of significant growth in the
Company's operations in the United Kingdom, Japan and Canada.
Other Income, Net. The Company did not have other income, net, in 1997,
compared with $5.4 million during 1996, consisting of the consideration
received, net of related asset costs and expenses, relating to the sale of the
Company's individual consumer subscribers and certain related tangible and
intangible assets during the second and third quarters of 1996.
Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance and local circuit costs as
well as personnel and related operating expenses associated with network
operations, customer support and field service. Data communications and
operations expenses were $94.4 million (77.4% of revenue) during 1997, an
increase of $24.3 million from $70.1 million (83.1% of revenue) during 1996.
The increase in expenses related principally to increases in (i) leased long
distance, dedicated customer and dial-up circuit costs, (ii) expenditures for
additional PRIs to support the growth of the Company's Carrier and ISP
Services business, and (iii) personnel costs resulting from the expansion of
the Company's network operations, customer support and field service staff.
Circuit costs relating to the Company's new and expanded POPs and PRIs
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 grows, it anticipates that such expenses will continue to decrease over
time as a percentage of revenue due to decreases in unit costs and continued
increases in network utilization. In particular, the Company anticipates that
costs for data communications and operations as a percentage of revenue will
decrease as the Company accepts delivery of bandwidth from IXC and, in
connection therewith, substitutes this bandwidth for leased circuit
arrangements with IXC as well as with 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 were $25.8 million
(21.2% of revenue) during 1997, a decrease of $1.3 million from $27.1 million
(32.1% of revenue) during 1996. The decrease resulted principally from
reductions in costs following the sale of the Company's individual consumer
subscribers and related infrastructure in 1996 and the sale of its software
operations in 1997, which were offset in part by an increase in sales and
marketing expenses relating to the expansion of the Company's operations. All
advertising and marketing costs are expensed in the period incurred. The
Company expects that as a result of continued emphasis on expanding all of its
lines of business and increasing its business customer base, sales and
marketing expenses will grow, primarily with respect to marketing personnel
costs and advertising, but should continue to decrease as a percentage of
revenue.
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 $22.9 million (18.8% of revenue)
during 1997, an increase of $2.3 million from $20.6 million (24.5% of revenue)
during 1996. The increase resulted from the
36
<PAGE>
addition of management staff and related operating expenses across the
organization, including in conjunction with the Company's expansion outside of
the United States, and increases in the provision for doubtful accounts
receivable. These expenses were in part offset by decreased expenses following
the sale of the Company's individual consumer subscribers and related assets
in 1996 and the sale of its software operations in 1997.
Depreciation and Amortization. Depreciation and amortization costs were
$28.3 million (23.3% of revenue) during 1997, an increase of $0.3 million from
$28.0 million (33.2% of revenue) during 1996. Depreciation costs increased due
to additional capital expenditures associated with network infrastructure
enhancements, which were partially offset by decreases in costs resulting from
the elimination of depreciation and amortization that had been associated with
the individual consumer subscriber and software assets sold in 1996 and 1997,
respectively. The Company anticipates that as the Company accepts delivery of
bandwidth from IXC, and as the operations and assets of companies recently
acquired are integrated with existing operations, the Company's depreciation
and amortization expenses will increase significantly.
Interest Expense. Interest expense was $5.4 million during 1997, an increase
of $0.4 million from $5.0 million in 1996. The increase 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 the international expansion of its network and positions
itself to take advantage of certain anticipated benefits resulting from the
recently completed transaction with IXC, the Company expects, subject to
applicable financing agreements, to incur increased borrowings and capital
lease obligations which will further increase the amount of the Company's
interest expense.
Interest Income. Interest income was $3.1 million during 1997, a decrease of
$0.7 million from $3.8 million in 1996. The decrease was principally due to a
reduction in the amount of cash and short-term, interest-bearing investments
held by the Company.
Gain on Sale of Subsidiary. The gain on the sale of subsidiary of $5.7
million in 1997 relates to the sale in the first quarter of 1997 of the
Company's software subsidiary as discussed above.
Net Loss and Loss Per Share. As a result of the factors discussed above, the
Company's net loss for 1997 was $45.6 million (37.4% of revenue), or $1.14
basic and diluted loss per share, a $9.5 million improvement from a net loss
in 1996 of $55.1 million (65.3% of revenue), or $1.40 basic and diluted loss
per share. The return to preferred shareholders, which comprises the dividends
with respect to the Company's Series B 8% Convertible Preferred Stock ("Series
B Preferred Stock") and accretion of the related conversion premium on the
Series B Preferred Stock, is included in the calculation of the net loss
available to common shareholders used to compute basic and diluted loss per
share. Because inclusion of common stock equivalents is antidilutive, basic
and diluted loss per share are the same for each year presented.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
Revenue. Revenue increased by 118% to $84.4 million in 1996 from $38.7
million in 1995. The increase was attributable to a number of factors,
including an increase in the number of business subscribers facilitated by an
increase in the number of POPs in operation, an expansion of the Company's
sales force, and greater public awareness and utilization of the Internet.
The Company's business account base increased by 117% to 17,800 business
customers including 22 ISPs at December 31, 1996, from 8,200 business
customers at December 31, 1995. The Company's network infrastructure increased
to 350 POPs at December 31, 1996 from 240 POPs at December 31, 1995.
Other Income, Net. Other income, net, was $5.4 million during 1996,
consisting of the consideration received, net of related asset costs and
transfer expenses, relating to the sale of the Company's individual consumer
subscribers and certain related tangible and intangible assets in connection
with the implementation of the Company's Carrier and ISP strategy during the
second and third quarters of 1996. The Company did not have other income, net,
in 1995.
37
<PAGE>
Data Communications and Operations. Data communications and operations
expenses were $70.1 million (83.1% of revenue) during 1996, an increase of
$38.0 million from $32.1 million (83.0% of revenue) during 1995. The increase
in expenses related principally to increases in (i) costs associated with
providing dedicated circuits to the Company's business customers and (ii)
circuit costs relating to the Company's new POPs deployed in late 1995 and
early 1996. The increase also was due, to a lesser extent, to an increase in
personnel costs resulting from the expansion of the Company's network
operations, customer support and field service staff concentrated in late 1995
and early 1996. The number of network operations, customer support and field
service personnel employed by the Company at December 31, 1996 was lower than
the number of such personnel employed at December 31, 1995 due to the transfer
of approximately 75 employees to another ISP in connection with the sale of
the consumer ISP business and entry into the Carrier and ISP Services market.
Sales and Marketing. Sales and marketing expenses were $27.1 million (32.1%
of revenue) during 1996, an increase of $3.2 million from $23.9 million (61.8%
of revenue) during 1995. The increase resulted principally from an increase in
sales and marketing activity relating to the Company's subsidiaries in Canada
and the United Kingdom during such period.
General and Administrative. General and administrative expenses were $20.6
million (24.5% of revenue) during 1996, an increase of $10.0 million from
$10.6 million (27.3% of revenue) during 1995. The increase in 1996 principally
related to increased general and administrative staff and activity as compared
to 1995.
Depreciation and Amortization. Depreciation and amortization costs were
$28.0 million (33.2% of revenue) during 1996, an increase of $13.2 million
from $14.8 million (38.2% of revenue) during 1995. A significant portion of
this increase related to POP expansion and existing POP equipment upgrades as
well as the effect of capital expenditures on facility expansions required as
a result of additional hiring in sales, marketing and administration in 1995
and early 1996. Additionally, a full year of amortization in 1996 on certain
intangible assets recorded in connection with acquisitions completed in 1995
contributed to this increase.
Interest Expense. Interest expense increased to $5.0 million in 1996, an
increase of $3.0 million from $2.0 million in 1995. The increase was
principally due to increased borrowings and capital lease obligations incurred
by the Company to finance network expansion and to fund working capital
requirements.
Interest Income. Interest income was $3.8 million in 1996, an increase of
$2.2 million from $1.6 million in 1995. The increase was principally due to
the investment of proceeds from the Company's public equity offering in
December 1995.
Other Income. Other income of $2.9 million in 1996 relates to the
recognition of realized gains on equity securities that were sold by the
Company, which the Company did not have in 1995.
Net Loss and Loss Per Share. As a result of the factors discussed above, the
Company's net loss for 1996 was $55.1 million (65.3% of revenue), or $1.40
basic and diluted loss per share, $1.9 million higher in amount but better on
a percentage of revenue and per share basis than the net loss of $53.2 million
(137.5% of revenue), or $2.01 basic and diluted loss per share for 1995.
INCOME TAXES
At December 31, 1997, the Company had domestic net operating loss
carryforwards of approximately $123.1 million for federal income tax purposes.
These net operating loss carryforwards may be carried forward in varying
amounts until 2012, and may be limited in their use under Section 382 of the
Internal Revenue Code in the event of significant changes in the Company's
ownership. In accordance with generally accepted accounting principles, the
Company has provided a valuation allowance for net deferred tax assets arising
from these carryforwards since realization of these benefits cannot be
reasonably assured.
38
<PAGE>
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data,
and such data expressed as a percentage of revenue, for the eight quarters
ended December 31, 1997. In the opinion of management, the unaudited financial
information set forth below has been prepared on the same basis as the audited
financial information included elsewhere herein and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
1996 1997
-------------------------------------- -------------------------------------
MAR 31 JUNE 30 SEP 30 DEC 31 MAR 31 JUNE 30 SEP 30 DEC 31
-------- -------- -------- -------- ------- -------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 17,181 $ 20,219 $ 24,147 $ 22,804 $25,639 $ 29,507 $ 32,001 $ 34,755
Other income, net....... -- 2,400 3,017 -- -- -- -- --
-------- -------- -------- -------- ------- -------- -------- --------
17,181 22,619 27,164 22,804 25,639 29,507 32,001 34,755
Operating costs and
expenses:
Data communications and
operations............ 13,942 16,529 19,698 19,933 20,968 22,114 23,765 27,516
Sales and marketing.... 7,844 7,021 6,000 6,199 6,002 5,858 6,210 7,761
General and
administrative........ 5,475 4,228 5,309 5,636 5,481 6,141 5,354 5,971
Depreciation and
amortization.......... 6,182 7,026 8,377 6,450 8,034 6,058 6,557 7,698
-------- -------- -------- -------- ------- -------- -------- --------
Total operating costs
and expenses.......... 33,443 34,804 39,384 38,218 40,485 40,171 41,886 48,946
-------- -------- -------- -------- ------- -------- -------- --------
Loss from operations.... (16,262) (12,185) (12,220) (15,414) (14,846) (10,664) (9,885) (14,191)
Interest expense........ (857) (1,386) (1,411) (1,371) (1,350) (1,297) (1,516) (1,199)
Interest income......... 1,224 943 1,179 448 775 670 550 1,064
Other income............ 1,068 1,776 19 -- (25) (32) 177 (10)
Gain on sale of
subsidiary............. -- -- -- -- 5,701 -- -- --
Equity in loss of
affiliate.............. (100) (107) (100) (500) -- -- -- --
-------- -------- -------- -------- ------- -------- -------- --------
Loss before income
taxes.................. (14,927) (10,959) (12,533) (16,837) (9,745) (11,323) (10,674) (14,336)
Income tax benefit...... 39 40 40 40 476 -- -- --
-------- -------- -------- -------- ------- -------- -------- --------
Net loss................ $(14,888) $(10,919) $(12,493) $(16,797) $(9,269) $(11,323) $(10,674) $(14,336)
======== ======== ======== ======== ======= ======== ======== ========
Return to preferred
shareholders........... -- -- -- -- -- -- -- (411)
-------- -------- -------- -------- ------- -------- -------- --------
Net loss available to
common shareholders.... $(14,888) $(10,919) $(12,493) $(16,797) $(9,269) $(11,323) $(10,674) $(14,747)
======== ======== ======== ======== ======= ======== ======== ========
Basic loss per
share(1)............... $ (0.39) $ (0.28) $ (0.31) $ (0.42) $ (0.23) $ (0.28) $ (0.26) $ (0.36)
======== ======== ======== ======== ======= ======== ======== ========
Diluted loss per
share(1)............... $ (0.39) $ (0.28) $ (0.31) $ (0.42) $ (0.23) $ (0.28) $ (0.26) $ (0.36)
======== ======== ======== ======== ======= ======== ======== ========
Shares used in computing
loss per share
(in thousands)......... 38,178 39,379 39,888 40,085 40,158 40,225 40,407 40,436
======== ======== ======== ======== ======= ======== ======== ========
</TABLE>
- ---------------------
(1) Since there are changes in the weighted average number of shares
outstanding each quarter, the sum of the loss per share by quarter may not
equal the loss per share for 1996 and 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
1996 1997
--------------------------------- ---------------------------------
MAR 31 JUNE 30 SEP 30 DEC 31 MAR 31 JUNE 30 SEP 30 DEC 31
------ ------- ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Other income, net....... -- 11.8 12.5 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
100.0 111.8 112.5 100.0 100.0 100.0 100.0 100.0
Operating costs and
expenses:
Data communications and
operations............ 81.1 81.7 81.6 87.4 81.8 74.9 74.3 79.2
Sales and marketing.... 45.7 34.7 24.8 27.2 23.4 19.9 19.4 22.3
General and
administrative........ 31.9 20.9 22.0 24.7 21.4 20.8 16.7 17.2
Depreciation and
amortization.......... 36.0 34.8 34.7 28.3 31.3 20.5 20.5 22.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating costs
and expenses.......... 194.7 172.1 163.1 167.6 157.9 136.1 130.9 140.8
----- ----- ----- ----- ----- ----- ----- -----
Loss from operations.... (94.7) (60.3) (50.6) (67.6) (57.9) (36.1) (30.9) (40.8)
Interest expense........ (5.0) (6.9) (5.8) (6.0) (5.2) (4.4) (4.7) (3.4)
Interest income......... 7.1 4.7 4.9 2.0 3.0 2.3 1.7 3.1
Other income............ 6.2 8.8 0.1 -- (0.1) (0.1) 0.6 (0.1)
Gain on sale of
subsidiary............. -- -- -- -- 22.2 -- -- --
Equity in loss of
affiliate.............. (0.5) (0.5) (0.5) (2.2) -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Loss before income
taxes.................. (86.9) (54.2) (51.9) (73.8) (38.0) (38.3) (33.3) (41.2)
Income tax benefit...... 0.2 0.2 0.2 0.2 1.8 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net loss................ (86.7)% (54.0)% (51.7)% (73.6)% (36.2)% (38.3)% (33.3)% (41.2)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
39
<PAGE>
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon such factors as the success
of the Company's efforts to expand its customer base, changes in and the
timing of expenditures relating to the continued expansion of the Company's
network, the delivery of the bandwidth corresponding to the PSINet IRUs, the
development of new services, the success of sales and marketing efforts,
changes in pricing policies by the Company or its competitors, and certain
factors relating to the Company's acquisition strategy as further described
under "--Liquidity and Capital Resources."
In view of the significant historical growth of the Company's operations,
the Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance and
that the Company may experience significant period-to-period fluctuations in
operating results in the future. The Company expects to focus in the near term
on building and increasing its customer base and increasing its network
utilization both through internal growth and through acquisitions which may
require it from time to time to increase its expenditures for personnel,
marketing, network infrastructure and the development of new services.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its cash requirements through cash
from operations, through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuance of
equity securities.
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cash flows used in operating activities were $15.5 million, $32.5 million
and $30.1 million for 1997, 1996 and 1995, respectively. Cash flows from
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. In all three years, the Company's net loss was the
primary component of cash used in operating activities, offset by significant
non-cash depreciation and amortization expenses relating to the Company's
network and intangible assets.
Cash flows used in investing activities were $15.6 million, $7.9 million and
$22.0 million for 1997, 1996 and 1995, respectively. The expansion of the
Company's network resulted in capital expenditures of $50.0 million, $38.4
million and $45.2 million for those same three years (which included capital
expenditures financed under equipment financing agreements aggregating $37.4
million, $25.6 million and $29.1 million for the respective periods). Cash
flows used in investing activities for 1997 benefited from the Company's sale
of its software subsidiary for cash consideration of $12.0 million and the
receipt of $8.5 million of repayments of intercompany debt owed by the
subsidiary to the Company. Investing cash flows for 1997 were reduced by the
$19.7 million increase in "restricted cash and short-term investments," $17.5
million of which supported a $15.4 million irrevocable letter of credit issued
by a bank on behalf of PSINet in conjunction with the acquisition of iSTAR.
This restriction was removed in February 1998 when the Company finalized the
funding for this acquisition. During 1997, the Company invested $3.0 million
in equity and debt securities with original maturities of greater than 90 days
and received $7.6 million from the maturity or sale of certain equity
investments held by the Company.
Cash flows provided by (used in) financing activities were $12.6 million for
1997, ($10.5) million for 1996, and $151.4 million for 1995. In November 1997,
the Company completed a private placement of 600,000 shares of its Series B
Preferred Stock for gross proceeds of $30.0 million. In 1997, 1996 and 1995,
the Company made repayments aggregating $27.7 million, $19.8 million and $5.8
million, respectively, on its capital lease obligations and financing
facilities and received proceeds from the issuance of notes payable of $6.4
million, $8.3 million and $8.3 million, respectively. Additionally, in 1995,
the Company had net proceeds from three separate common and preferred stock
offerings totaling $146.9 million.
As of December 31, 1997, the Company had $54.0 million of cash, cash
equivalents, restricted cash and short-term investments.
40
<PAGE>
CAPITAL STRUCTURE
The Company's capital structure consists of lines of credit, capital lease
obligations and notes payable, preferred stock and common stock.
Total borrowings at December 31, 1997 were $73.4 million, which included
$5.6 million under operating lines of credit and $67.8 million under capital
lease obligations and notes payable. The Company also had $16.4 million of
letters of credit (including the iSTAR-related letter of credit) outstanding
as of December 31, 1997. As of that date, the aggregate unused portion under
the Company's various financing arrangements for purchases of equipment and
other fixed assets was $24.6 million. The aggregate unused portion of the
Company's operating lines of credit (some of which are subject to a borrowing
base formula) was $0.6 million.
The Company's bank financing arrangements in the United States, 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 cash dividends and the repurchase of capital stock of the Company without
the lender's consent. In particular, the Company is required to maintain: a
ratio of consolidated cash and accounts receivable to debt of at least 0.9 to
1.0 for the quarters ending March 31, 1998, June 30, 1998 and September 30,
1998 and of at least 1.0 to 1.0 for each fiscal quarter thereafter;
consolidated tangible net worth of at least $70.0 million for the quarter
March 31, 1998, plus 80% of all positive net income earned after September 30,
1997 plus 50% of the cumulative net tangible proceeds of the sale of capital
stock after September 30, 1997, excluding the proceeds of the sale of Series B
Preferred Stock completed on November 10, 1997; EBITDA of not less than
negative $12.5 million, negative $5.0 million, and positive $4.0 million for
each of the fiscal quarters ending March 31, 1998, June 30, 1998, and
September 30, 1998, respectively; a ratio of consolidated total liabilities
(other than deferred service contract revenue and the Contingent Payment
Obligation to IXC) to tangible net worth of no more than 1.75 to 1.0, 1.75 to
1.0 and 1.50 to 1.0 for the quarters ending March 31, 1998, June 30, 1998, and
September 30, 1998, respectively, and a ratio of EBITDA to consolidated debt
service payments (exclusive of any interest accreting in respect of the
Company's Contingent Payment Obligation to IXC) in respect of any fiscal
quarter commencing with the quarter ending December 31, 1998 of at least 1.25
to 1.0. The Company was in compliance with all such covenants at December 31,
1997.
Additionally, in November 1997, the Company completed a private placement of
600,000 shares of its Series B Preferred Stock for gross proceeds of $30.0
million. Each share of Series B Preferred Stock has a stated value of $50.00
per share. The Series B Preferred Stock accrues dividends at an annual rate of
8%, payable quarterly in cash or, at the Company's option, the Company's
Series B Preferred Stock. The Series B Preferred Stock is convertible into a
number of shares of the Company's common stock equal to the stated value of
the Series B Preferred Stock at a conversion price of $10 per share of common
stock during the first year. The conversion price may be reset at the end of
the first and second anniversary dates, under certain circumstances, to the
stock's then current market value. At the third anniversary date, the
conversion price may be reset under certain circumstances, to 95% of the
stock's then current market value. To reflect the nature of the conversion
rights, preferred stock has been reduced by $1,500,000 with a corresponding
increase to capital in excess of par value. The Series B Preferred Stock may
be redeemed, at the Company's option, under certain circumstances commencing
on the third anniversary of original issuance. So long as any Series B
Preferred Stock remains outstanding, except for any payment which may be made
pursuant to the IRU Purchase Agreement, neither the Company nor any subsidiary
will (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 distribution on securities issuable pursuant to any rights
under the Company's shareholder rights plan) upon, nor will any distribution
(other than certain dividends or distributions or a distribution on securities
issuable pursuant to any rights pursuant to the rights plan) 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 plan); provided, however, that
the Company may redeem, purchase or otherwise acquire and set aside funds for
and apply funds to the purchase, redemption or acquisition of
41
<PAGE>
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 November 10, 1997 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 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 Purchase Agreement, provided that immediately after giving effect
thereto, the Company's consolidated shareholders' equity will not be less than
$20 million.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of December 31, 1997, the Company had commitments to certain
telecommunications vendors totaling $31.2 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 December 31, 1997, the Company was obligated
to make future minimum lease payments of $22.2 million on non-cancelable
operating leases expiring in various years through 2005. The Company is
obligated, under the terms of one of its Carrier and ISP Services agreements,
to provide the ISP 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. At December 31, 1997, the Company had provided $1.4
million of equipment under this facility.
In February 1998, the Company completed the acquisition of 81.4% of the
outstanding shares of iSTAR. The excess at the purchase price over the
tangible assets acquired and liabilities assumed was $17.9 million. Financing
for the acquisition of iSTAR was provided by a $20,000,000 facility from Fleet
National Bank ("Fleet"), which matures on the earlier of (i) the consummation
of a public offering by the Company of its debt or equity securities or (ii)
July 31, 1998. The loan provides for interest on the outstanding balance at a
rate per annum equal to the prime rate plus 1.375%. Additionally, the loan has
been incorporated into the Company's existing credit facility with Fleet and
is secured by substantially all of the Company's assets, including a pledge of
certain of its subsidiaries' stock (including, without limitation, the
acquired iSTAR common shares).
In order to take full advantage of the bandwidth 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 million. Such capital expenditures are expected to be incurred in the
deployment of high activity POPs throughout the United States and abroad
designed and located with the objective of optimizing the efficient use of the
bandwidth. These POPs are expected to contain switching, routing and modem
equipment, together with any computing equipment as may be necessary to
address the increase in customer demand anticipated as a result of the
enhanced capacity provided by the PSINet IRUs. In addition, the Company
expects to incur on an annual basis approximately $1.15 million in operation
and maintenance fees with respect to the PSINet IRUs for each 1,000 equivalent
route miles of OC-48 bandwidth accepted from IXC. Other planned capital
expenditures expected to be incurred by the Company over the next four years
include up to $35 million in connection with the Company's anticipated
buildout of its international Internet network and a network operations center
in Switzerland. In connection with the buildout of its international network,
the Company has recently entered into agreements to acquire IRUs in certain
transatlantic fiber optic bandwidth between the United States, the United
Kingdom and Europe, for which it has secured financing.
The Company presently believes, based on the flexibility it expects to have
in the timing of its orders of bandwidth corresponding to the PSINet IRUs, in
outfitting its POPs with appropriate telecommunications and computer
equipment, and in controlling the pace and scope of its anticipated buildout
of its international Internet network, that 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
PSINet IRUs, together with other working capital from operations, from
existing credit
42
<PAGE>
facilities, from capital lease financings, and from proceeds of future equity
or debt financings (which the Company presently expects to be able to obtain
when needed), will be sufficient to meet the currently 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. See "Risk Factors--
Need for Additional Capital to Finance Growth and Capital Requirements."
As more fully described under "--Strategic Alliance with IXC," the Company
could be obligated in accordance with the Contingent Payment Obligation to
provide IXC with additional shares of the Company's common stock and/or cash,
at the Company's sole option, as of the Determination Date or the Acceleration
Date, as applicable. In the event the Contingent Payment Obligation to IXC
becomes payable, the Company presently believes that, because it may be
satisfied by the Company, at its sole option, by delivery of additional shares
of common stock or cash or a combination thereof, the Company will have
sufficient flexibility to satisfy the Contingent Payment Obligation. There can
be no assurance, however, that satisfaction of the Contingent Payment
Obligation will not have a material adverse effect on the Company. See "Risk
Factors--Risks Associated with Strategic Alliance with IXC."
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
The Company anticipates that it will continue to seek to develop
relationships with strategic partners both domestically and internationally
and to acquire assets (including, without limitation, additional
telecommunications bandwidth) and businesses principally relating to or
complementary to PSINet's existing business. Certain of these strategic
relationships may involve other telecommunications companies that desire to
enter into joint marketing and services arrangements with the Company pursuant
to which the Company would provide Internet and Internet-related services to
such companies, which transactions, if deemed appropriate by the Company, may
also be effected in conjunction with an equity and/or debt investment by such
companies in the Company. Such relationships and acquisitions may require
additional financing and may be subject to the consent of the Company's
lenders and other third parties.
YEAR 2000 DATE CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational systems.
Based upon a review of its technology and software, the Company has concluded
that there are no material issues regarding its Year 2000 compliance that will
not be resolved through normal software upgrades and replacements that will be
made through 1999. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no guarantee that the
systems of other companies on which the Company's systems and operations rely
will be converted on a timely basis and will not have a material adverse
effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which the Company implemented for its December 31, 1997 consolidated
financial statements. SFAS No. 128 requires the Company to report both basic
and diluted earnings per share ("EPS") calculations as well as provide a
reconciliation between basic and diluted EPS computations. All prior-period
EPS data presented has been restated to conform with the provisions of SFAS
No. 128.
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.
43
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements:
Financial Statements:
Report of Independent Accountants....................................... 45
Consolidated Balance Sheets as of December 31, 1996 and 1997............ 46
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... 47
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997....................... 48
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... 49
Notes to Consolidated Financial Statements.............................. 50
Financial Statement Schedules:
II--Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 1997......................................... 65
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
The quarterly results (unaudited) for the eight quarters ended December 31,
1997 are included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results" in Part II, Item 7 of
this Annual Report.
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of PSINet Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of PSINet Inc. and its subsidiaries at December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Washington, D.C.
February 6, 1998, except as to the first three paragraphs of Note 11, which
are as of February 25, 1998
45
<PAGE>
PSINET INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................. $ 51,741 $ 33,322
Restricted cash and short-term
investments............................... 954 20,690
Short-term investments and marketable
securities................................ 4,649 --
Accounts receivable, net of allowances of
$1,909,000 and $2,101,000................. 17,421 11,022
Notes receivable........................... 747 7,224
Prepaid expenses........................... 1,963 1,478
Other current assets....................... 4,836 5,162
--------------- ---------------
Total current assets..................... 82,311 78,898
--------------- ---------------
Property and equipment, net.................. 72,061 95,619
Goodwill and other intangibles, net of
accumulated amortization of $9,778,000 and
$2,057,000.................................. 16,673 4,675
Other assets and deferred charges............ 6,067 6,989
--------------- ---------------
Total assets............................. $ 177,112 $ 186,181
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Lines of credit............................ $ 2,000 $ 5,648
Current portion of long-term debt.......... 24,915 33,985
Trade accounts payable..................... 19,868 25,031
Accrued payroll and related expenses....... 3,098 4,636
Other accounts payable and accrued
liabilities............................... 3,632 2,382
Deferred revenue........................... 5,612 5,944
--------------- ---------------
Total current liabilities................ 59,125 77,626
--------------- ---------------
Long-term debt............................... 26,938 33,820
Deferred income taxes........................ 476 --
Other liabilities............................ 790 1,306
--------------- ---------------
Total liabilities........................ 87,329 112,752
--------------- ---------------
Commitments and contingencies (Notes 11 and
12)
Shareholders' equity:
Preferred stock, $.01 par value; 29,324,858
shares authorized; no shares issued and
outstanding............................... -- --
Convertible preferred stock, $.01 par
value; $50.00 stated value; 675,142 shares
authorized; 600,000 shares issued and
outstanding............................... -- 28,135
Common stock, $.01 par value; 100,000,000
shares authorized; 40,212,790 and
40,577,342 shares issued.................. 402 406
Capital in excess of par value............. 208,000 210,162
Retained deficit........................... (116,636) (162,649)
Treasury stock, 99,556 shares, at cost..... (2,005) (2,005)
Cumulative foreign currency translation
adjustment................................ 22 (620)
--------------- ---------------
Total shareholders' equity............... 89,783 73,429
--------------- ---------------
Total liabilities and shareholders'
equity.................................. $ 177,112 $ 186,181
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue..................................... $ 38,722 $ 84,351 $121,902
Other income, net........................... -- 5,417 --
--------- --------- ----------
38,722 89,768 121,902
Operating costs and expenses:
Data communications and operations........ 32,124 70,102 94,363
Sales and marketing....................... 23,930 27,064 25,831
General and administrative................ 10,569 20,648 22,947
Depreciation and amortization............. 14,778 28,035 28,347
Intangible asset write-down............... 9,938 -- --
--------- --------- ----------
Total operating costs and expenses...... 91,339 145,849 171,488
--------- --------- ----------
Loss from operations........................ (52,617) (56,081) (49,586)
Interest expense............................ (1,964) (5,025) (5,362)
Interest income............................. 1,625 3,794 3,059
Other income................................ -- 2,863 110
Gain on sale of subsidiary.................. -- -- 5,701
Equity in loss of affiliate................. (204) (807) --
--------- --------- ----------
Loss before income taxes.................... (53,160) (55,256) (46,078)
Income tax benefit.......................... -- 159 476
--------- --------- ----------
Net loss.................................... $(53,160) $ (55,097) $ (45,602)
========= ========= ==========
Return to preferred shareholders............ -- -- (411)
--------- --------- ----------
Net loss available to common shareholders... $(53,160) $ (55,097) $ (46,013)
========= ========= ==========
Basic loss per share........................ $ (2.01) $ (1.40) $ (1.14)
========= ========= ==========
Diluted loss per share...................... $ (2.01) $ (1.40) $ (1.14)
========= ========= ==========
Shares used in computing basic and diluted
loss per share (in thousands).............. 26,485 39,378 40,306
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------------
CUMULATIVE
PREFERRED STOCK COMMON STOCK FOREIGN TOTAL
------------------- ------------------ CAPITAL IN UNREALIZED CURRENCY SHAREHOLDERS'
OUTSTANDING OUTSTANDING PAR EXCESS RETAINED TREASURY GAIN ON TRANSLATION EQUITY
SHARES AMOUNT SHARES VALUE OF PAR VALUE DEFICIT STOCK INVESTMENT ADJUSTMENT (DEFICIT)
----------- ------- ----------- ----- ------------ --------- -------- ---------- ----------- -------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1994........ -- $ -- 11,202,791 $112 $ -- $ (8,379) $ -- $-- $ (16) $ (8,283)
Accretion of
redeemable
common and
convertible
preferred
stock.......... (1,377) (1,377)
Issuance of
common stock to
employees under
revenue bonus
plan........... 18,300 77 77
Issuance of
common stock
for
acquisitions... 4,514,304 45 43,509 43,554
Conversion of
redeemable
preferred stock
into common
stock.......... 10,042,680 100 26,671 26,771
Expiration of
redemption
rights on
redeemable
common stock... 1,838,475 18 402 420
Initial public
offering, net
of expenses.... 4,370,000 44 47,229 47,273
Issuance of
common stock
pursuant to
exercise of
stock
warrants....... 1,384,863 14 2,390 (2,005) 399
Issuance of
common stock
pursuant to
exercise of
stock options.. 493,003 5 759 (49) 715
Public offering,
net of
expenses....... 4,000,000 40 86,599 86,639
Employee stock
option loan
program........ (224) (224)
Issuance of
common stock in
escrow for
acquisition of
World Online... 50,516 1 1
Unrealized gain
on investment.. 813 813
Foreign currency
translation
adjustment..... (388) (388)
Net loss........ (53,160) (53,160)
------- ------- ---------- ---- -------- --------- ------- ---- ----- --------
BALANCE, DECEMBER
31, 1995........ -- -- 37,914,932 379 206,035 (61,539) (2,054) 813 (404) 143,230
Issuance of
common stock
pursuant to
exercise of
stock
warrants....... 1,362,604 14 (14)
Issuance of
common stock
pursuant to
exercise of
stock options.. 803,330 9 1,806 1,815
Issuance of
common stock in
escrow for
acquisition of
World Online... 32,368
Repayments under
employee stock
option loan
program........ 232 232
Interest under
employee stock
option loan
program........ (10) (10)
Retirement of
treasury
stock.......... (49) 49
Unrealized gain
on investment.. (813) (813)
Foreign currency
translation
adjustment..... 426 426
Net loss........ (55,097) (55,097)
------- ------- ---------- ---- -------- --------- ------- ---- ----- --------
BALANCE, DECEMBER
31, 1996........ -- -- 40,113,234 402 208,000 (116,636) (2,005) -- 22 89,783
Issuance of
common stock
pursuant to
exercise of
stock
warrants....... 164,185 2 3 5
Issuance of
common stock
pursuant to
exercise of
stock options.. 283,251 3 659 662
Issuance of
Series B
convertible
preferred
stock, net of
expenses....... 600,000 28,064 1,500 29,564
Return to
preferred
shareholders... 71 (411) (340)
Cancellation of
common stock
for acquisition
of World
Online......... (82,884) (1) (1)
Foreign currency
translation
adjustment..... (642) (642)
Net loss........ (45,602) (45,602)
------- ------- ---------- ---- -------- --------- ------- ---- ----- --------
BALANCE, DECEMBER
31, 1997........ 600,000 $28,135 40,477,786 $406 $210,162 $(162,649) $(2,005) $ -- $(620) $ 73,429
======= ======= ========== ==== ======== ========= ======= ==== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (53,160) $ (55,097) $ (45,602)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 14,778 28,035 28,347
Gain on sale of investments............ -- (2,863) (20)
Gain on sale of InterCon............... -- -- (5,701)
Gain on sale of assets to MindSpring... -- (5,417) --
Provision for allowances............... 724 3,130 5,426
Equity in loss of affiliate............ 204 807 --
Intangible asset write-down............ 9,938 -- --
(Increase) decrease in accounts
receivable............................ (2,394) (14,320) 430
Increase in notes receivable........... -- (56) (5,648)
(Increase) decrease in prepaid expenses
and other current assets.............. (5,733) 311 296
Increase in other assets and deferred
charges............................... (779) (509) (258)
Increase in accounts payable and
accrued liabilities................... 5,640 11,545 6,568
Increase in deferred revenue........... 71 2,367 635
Decrease in deferred taxes............. (37) (159) (476)
Increase (decrease) in other
liabilities........................... 655 (317) 546
---------- ---------- ----------
Net cash used in operating
activities.......................... (30,093) (32,543) (15,457)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment,
net..................................... (16,095) (12,814) (12,613)
Purchases of investments................. -- (17,167) (3,000)
Proceeds from maturity or sale of
investments............................. -- 15,769 7,649
Proceeds from sale of assets to
MindSpring.............................. -- 8,451 691
Proceeds from sale of InterCon, net...... -- -- 20,353
Loan to affiliate........................ -- (311) --
Capitalized software costs............... (435) (816) --
Investments in subsidiaries, net of cash
acquired................................ (5,142) -- (2,982)
Investments in certain businesses........ (286) (69) (5,569)
Restricted cash and short-term
investments............................. -- (954) (19,736)
Other.................................... -- 14 (353)
---------- ---------- ----------
Net cash used in investing
activities.......................... (21,958) (7,897) (15,560)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds (payments) on lines of
credit.................................. 1,159 (1,012) 3,702
Proceeds from issuance of debt........... 8,250 8,281 6,408
Repayments of debt....................... (1,441) (4,654) (5,670)
Principal payments under capital lease
obligations............................. (4,379) (15,117) (22,071)
Proceeds from issuance of Series B
preferred stock......................... -- -- 29,564
Proceeds from issuance of Series E
redeemable preferred stock.............. 12,197 -- --
Proceeds from issuance of common stock... 52 -- --
Proceeds from initial public offering,
net..................................... 47,273 -- --
Proceeds from public offering, net....... 87,390 -- --
Proceeds from exercise of common stock
warrants................................ 400 -- 5
Proceeds from exercise of common stock
options................................. 502 1,815 662
Proceeds from repayment of employee notes
receivable.............................. -- 232 --
Other.................................... -- (74) (2)
---------- ---------- ----------
Net cash provided by (used in)
financing activities................ 151,403 (10,529) 12,598
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................... 99,352 (50,969) (18,419)
Cash and cash equivalents, beginning of
year...................................... 3,358 102,710 51,741
---------- ---------- ----------
Cash and cash equivalents, end of year..... $ 102,710 $ 51,741 $ 33,322
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations--PSINet Inc. (the "Company") was
organized in October 1989. PSINet is a leading global facilities-based
provider of Internet access services and related products to businesses. The
Company provides dedicated and dial-up Internet connectivity in 90 of the 100
largest metropolitan statistical areas in the U.S. and in nine of the 20
largest international telecommunications markets. The Company also offers
Internet protocol ("IP")-based value-added services and products to
businesses, including corporate intranets, Web hosting and collocation, remote
user access, multi-currency electronic commerce and security services, that
enable businesses to maximize utilization of their corporate networks and the
Internet. Additionally, the Company provides network backbone services to
other telecommunications carriers and Internet Service Providers ("ISPs") to
further exploit its network capacity.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual and prospective competition by entities with
greater financial and other resources, risks associated with the development
of the Internet market, risks associated with growth and domestic and global
expansion, risks associated with acquisitions, risks associated with limited
experience in the carrier and ISP market, technology and regulatory risks, and
dependence upon sole and limited source suppliers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition--Revenue and related direct costs from customer
contracts are recognized ratably over the terms of the contracts, which are
generally three to 12 months. Cash received in advance of revenues earned is
recorded as deferred revenue. In 1996 and 1995, when the Company's offerings
included connectivity software products, revenue from the sale of software,
including sales to distributors, resellers and original equipment
manufacturers, was recognized when software products were shipped. Revenue
from separate post-contract customer support agreements was recognized over
the contract period.
Advertising and Customer Acquisition Costs--The Company expenses all
advertising and customer acquisition costs in the period incurred.
Cash and Cash Equivalents--All highly liquid investments with an original
maturity of three months or less at the date of acquisition are classified as
cash equivalents.
Restricted Cash and Short-Term Investments--Restricted cash and short-term
investments represent amounts that are restricted as to their use in
accordance with capital lease obligations and other financing arrangements.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents, short-term investments and marketable securities
and accounts and notes receivable. The Company's cash and investment policies
limit investments to short-term, investment grade instruments. Concentrations
of credit risk with respect to accounts receivable are limited due to the
large number of customers comprising the Company's customer base.
Concentrations of credit risk with respect to notes receivable relate
primarily to two customers, which are monitored closely by the Company.
50
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of
three to five years. Leasehold improvements, including labor and overhead
costs of POP installations, are amortized over the shorter of the term of the
related lease or the estimated useful lives of the assets, which is generally
five years.
Equipment Under Capital Lease--The Company finances most of its data
communications equipment and other fixed assets under capital lease
agreements. The assets and liabilities under capital leases are recorded at
the lesser of the present value of aggregate future minimum lease payments,
including estimated bargain purchase options, or the fair value of the assets
under lease. Assets under these capital leases are depreciated over their
estimated useful lives of three to five years, which are generally longer than
the terms of the leases.
Goodwill and Other Intangibles--The Company continually reviews goodwill and
other intangibles to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the
period in which a permanent diminution in value is determined. Goodwill and
other intangibles are amortized over their estimated useful lives of three to
ten years.
Other Assets and Deferred Charges--Other assets and deferred charges are
principally comprised of debt issue costs, long term asset acquisition costs
and notes receivable. Additionally in 1996, the Company held an investment
accounted for under the equity method in which the investment, originally
recorded at cost, was adjusted to recognize the Company's share of the
affiliate's net earnings or losses as they occurred. This investment was sold
in 1997 and at December 31, 1997, the Company had no equity method
investments.
Income Taxes--The Company accounts for income taxes under the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized.
Stock Compensation--The Company accounts for its stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." In 1996, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," for disclosure purposes.
Foreign Currency--Gains and losses on translation of the accounts of the
Company's foreign operations where the local currency is the functional
currency are accumulated and reported as a separate component of shareholders'
equity. Transaction gains and losses are recorded in the statement of
operations.
Loss Per Share--The Company adopted SFAS No. 128, "Earnings per Share," in
1997 and accordingly has restated prior year loss per share amounts to reflect
the provisions of this new statement. Basic loss per share is computed using
the weighted average number of shares of common stock outstanding during the
year. Diluted loss per share is computed using the weighted average number of
shares of common stock, adjusted for the dilutive effect of common stock
equivalent shares of common stock options and warrants and contingently
issuable shares of common stock. Common stock equivalent shares are calculated
using the treasury stock method. All stock options and warrants outstanding
have been excluded from the computation of diluted loss per share as their
effect would be antidilutive and accordingly, there is no reconciliation
between basic and diluted loss per share for each of the years presented.
Fair Value of Financial Instruments--The Company discloses the fair value of
its financial instruments for which it is practicable to estimate fair value.
In cases where quoted market prices are not available for identical or
comparable financial instruments, fair values are based on estimates using the
present value of estimated cash flows or other valuation techniques. The
resulting fair values can be significantly affected by the assumptions used,
including the discount rate and estimates as to the amounts and timing of
future cash flows. In this regard,
51
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the derived fair value estimates cannot be substantiated by comparisons to
independent markets and, therefore, the fair values may not represent actual
values of the financial instruments that could have been realized as of year
end or that will be realized in the future. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair value.
Restricted cash and short-term investments. The carrying amount
approximates fair value.
Short-term investments. The carrying amount approximates fair value.
Notes receivable. The fair value of notes receivable is estimated by
discounting at market interest rates the future cash flows under the notes.
Borrowings. The fair value of borrowings, including capital lease
obligations and other obligations, is estimated by discounting the future
cash flows using estimated borrowing rates at which similar types of
borrowing arrangements with the same remaining maturities could be obtained
by the Company.
Reclassifications in Financial Presentation--Certain prior year information
has been reclassified to conform to the current year presentation.
Nonmonetary Exchanges--The Company exchanges capacity on its network for
capacity on the network of another ISP. The Company records such exchange
agreement at the fair value of either the services provided or received,
whichever is more readily determinable. For the twelve months ended December
31, 1997, the Company recognized $2,400,000 of revenue and data communications
and operations expense relating to such exchange.
Recent Pronouncements--In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for the 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.
Also 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 2--NOTES RECEIVABLE
Under the terms of an agreement with one of its customers, receivables from
the customer may be deferred until July 31, 1998 on amounts of up to
$5,000,000 for services provided by the Company. At December 31, 1997, amounts
due from this customer totaling $4,892,000 had been deferred under this
agreement and are reflected as current notes receivable.
On June 28, 1996, the Company entered into an agreement with MindSpring
Enterprises, Inc., ("MindSpring") an ISP, pursuant to which the Company agreed
to transfer to MindSpring substantially all of its individual subscriber
accounts and related tangible and intangible assets and rights in connection
with the consumer dial-up Internet access services operated by the Company in
the United States, for $12,929,000 in cash and non-interest bearing notes
receivable through 1997 and 1998. The gain from this sale of $5,417,000 has
been recorded as other income, net in the Company's consolidated statement of
operations. The balance of the note receivable from MindSpring at December 31,
1997 and 1996 was $2,078,000 and $2,769,000, respectively.
52
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, other notes receivable consist of an amount due from a
third party, of which $254,000 is scheduled to be repaid in 1998 and $509,000
in 1999. At December 31, 1997 and 1996, notes receivable approximated their
estimated fair value.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Data communications equipment............ $ 24,095 $ 32,108
Purchased software....................... 2,989 3,920
Office and other equipment............... 3,108 4,451
Leasehold improvements................... 6,313 9,204
--------------- ---------------
36,505 49,683
Less accumulated depreciation and amorti-
zation.................................. (12,331) (28,217)
--------------- ---------------
24,174 21,466
--------------- ---------------
Leased data communications equipment..... 60,979 96,059
Leased office and other equipment........ 3,241 3,521
--------------- ---------------
64,220 99,580
Less accumulated depreciation............ (16,333) (25,427)
--------------- ---------------
47,887 74,153
--------------- ---------------
Property and equipment, net.............. $ 72,061 $ 95,619
=============== ===============
</TABLE>
Total depreciation and leasehold amortization expense in 1997, 1996 and 1995
was $25,099,000, $16,572,000, and $6,462,000, respectively.
NOTE 4--GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Goodwill................................... $12,763 $ 5,671
Tradename.................................. 4,050 --
Customer relations......................... 1,155 --
Software costs............................. 6,370 304
Other...................................... 2,113 757
--------------- ---------------
26,451 6,732
Less accumulated amortization.............. (9,778) (2,057)
--------------- ---------------
Goodwill and other intangibles, net........ $16,673 $ 4,675
=============== ===============
</TABLE>
Total amortization expense in 1997, 1996 and 1995 was $2,712,000,
$11,104,000 and $8,227,000, respectively.
53
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As more fully described in Note 11, during 1997 the Company sold its
software subsidiary. Goodwill and other intangibles of $11,080,000 were offset
against the proceeds received from the sale.
In December 1995, a pretax charge of $9,938,000 was recorded related to the
permanent impairment of certain intangible assets which resulted from the
Company's plan, adopted in the first quarter of 1996, to merge the operations
of two of the Company's acquired subsidiaries. As part of the plan, the
Company no longer marketed certain products using an acquired tradename and
certain software products were abandoned. This charge, which had no immediate
cash effect, recognized the permanent impairment in the value of certain
intangibles including a tradename, a non-compete agreement, certain software
costs and goodwill recorded in connection with the acquisitions.
NOTE 5--LINES OF CREDIT
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
$5,000,000 less the aggregate face value of all letters of credit outstanding,
or 75% of qualified accounts receivable which secure the loan less 100% of the
maximum outstanding liability under any letters of credit issued, less 20% of
the aggregate principal of certain term credit advances. This revolving line
of credit agreement expires on March 31, 1998. Interest is payable monthly in
arrears at a rate of prime plus 1.5%. The maximum principal amount available
to the Company at December 31, 1997 was $4,013,000, of which $3,900,000 was
outstanding at that date at an interest rate of 10%. Letters of credit issued
and outstanding at December 31, 1997 relating to this credit agreement totaled
$987,000.
The Company also has a secured revolving agreement with a Canadian bank
under which the Company may borrow up to a maximum principal amount of
approximately $1,850,000, of which $1,748,000 was outstanding at December 31,
1997. The line of credit is repayable on demand, generally bears interest at
prime plus 0.5% and is secured by restricted cash on deposit with the bank.
The Company has an overdraft facility with a bank in the United Kingdom for
approximately $413,000. No amounts were outstanding at December 31, 1997.
NOTE 6--LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Notes payable with a bank, interest at
prime plus 2.5%......................... $ 7,966 $ 8,864
Other notes payable at interest rates
ranging from 7.50% to 20.00%............ 3,623 2,586
Capital lease obligations at interest
rates ranging from 5.66% to 15.84%...... 40,264 56,355
--------------- ---------------
51,853 67,805
Less current portion..................... (24,915) (33,985)
--------------- ---------------
Long-term portion........................ $ 26,938 $ 33,820
=============== ===============
</TABLE>
Borrowings under the notes payable with a bank are repayable in 36 monthly
installments from the dates of issue and are secured by a lien on the
equipment purchased with the proceeds. Interest is payable monthly at a rate
of prime plus 2.5%; the interest rate was 11.00% at December 31, 1997. The
notes payable and certain capital lease obligations contain certain provisions
which, among other things, require the maintenance of certain financial ratios
and restrict the payment of dividends.
54
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has various financing arrangements accounted for as capital
leases for the acquisition of equipment and other fixed assets. During 1997,
1996 and 1995, the Company incurred capital lease obligations under these
arrangements of $37,455,000, $25,576,000 and $29,071,000, respectively, upon
the execution of leases for new data communications equipment and other fixed
assets. The Company's capital lease obligations are generally repayable in 36
monthly installments from the dates of acquisition. At December 31, 1997, the
aggregate unused portion under these arrangements totaled $24,611,000.
Future minimum lease payments under capital leases and annual maturities of
other long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OTHER LONG-
DECEMBER 31, LEASES TERM DEBT
------------ ----------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
1998..................................... $ 31,752 $ 6,665
1999..................................... 19,743 3,734
2000..................................... 11,863 993
2001..................................... -- 58
2002..................................... -- --
----------- -----------
63,358 $ 11,450
===========
Less amount representing interest........ (7,003)
-----------
Present value of future minimum lease
payments................................ $ 56,355
===========
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, cash paid for
interest was $5,559,000, $5,083,000 and $1,869,000, respectively.
At December 31, 1997 and 1996, the estimated fair value of the capital lease
obligations was approximately $55,565,000 and $40,730,000, respectively, and
other long-term debt was approximately $11,370,000 and $12,189,000,
respectively.
NOTE 7--CAPITAL STOCK
On January 23, 1998, at a Special Meeting of Shareholders, the Company's
shareholders granted the Board of Directors authority to amend the Company's
Certificate of Incorporation to increase the number of the Company's
authorized shares of capital stock from 130,000,000 shares to 280,000,000
shares and to increase the number of the Company's authorized shares of Common
Stock from 100,000,000 shares to 250,000,000 shares. The Board of Directors
has authority to issue up to 30,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof without any further vote or action by shareholders.
PREFERRED STOCK RIGHTS PLAN
On May 8, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan ("Rights Plan") pursuant to which preferred stock purchase rights
("Rights") were granted as a dividend to shareholders of record at the rate of
one Right for each outstanding share of common stock held of record as of the
close of business on June 5, 1996. The Rights will also be attached to certain
future issuances of common stock. Subject to certain exceptions, each Right,
when exercisable, will entitle the registered holder to buy one one-thousandth
of a share of a newly created Series A Junior Participating Preferred Stock,
par value $.01 per share, of the Company (the "Series A Junior Preferred
Stock") at an exercise price of $75 per Right.
55
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subject to certain exceptions, the Rights will become exercisable upon the
occurrence of certain specified events, including an announcement that a
person or group of affiliated or associated persons ("Acquiring Person") has
acquired beneficial ownership of 20% or more of the outstanding common stock.
In such event, each holder of a Right (other than Rights beneficially owned by
the Acquiring Person) will thereafter have the right, subject to certain
exceptions, to receive upon exercise thereof that number of one one-
thousandths of a share of Series A Junior Preferred Stock or, at the
discretion of the Company's Board of Directors, a number of additional shares
of common stock as set forth in the Rights Plan.
For purposes of the Rights Plan, the Company's Board of Directors has
designated 1,000,000 shares of Series A Junior Preferred Stock, which amount
may be increased or decreased by the Board of Directors. All Rights expire on
June 5, 2006, unless the Rights are earlier redeemed or exchanged by the
Company in accordance with the Rights Plan or expire earlier upon the
consummation of certain transactions as set forth in the Rights Plan.
CONVERTIBLE PREFERRED STOCK 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 $29,564,000, net of issuance costs. The Series B
Preferred Stock accrues dividends at an annual rate of 8%, payable quarterly
in cash or, at the Company's option, in Series B Preferred Stock and is non-
voting.
The Series B Preferred Stock is convertible into the Company's common stock
at $10 per share during the first year. The conversion price may be reset at
the end of the first and second anniversary dates, under certain
circumstances, to the stock's then current market value. At the third
anniversary date, the conversion price may be reset, under certain
circumstances, to 95% of the stock's then current market value. To reflect the
nature of the conversion rights, preferred stock has been reduced by
$1,500,000 with a corresponding increase to capital in excess of par value.
Such amount will be accreted as an additional return to preferred shareholders
over a period of three years. The Company also has the right to call the
Series B Preferred Stock for redemption under certain circumstances 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.
NOTE 8--MANDATORILY REDEEMABLE EQUITY SECURITIES
The Company entered into several securities purchase agreements with
investors in prior years. Pursuant to these agreements, the investors
purchased shares of convertible participating preferred stock for cash or in
exchange for shares of mandatorily redeemable common stock.
<TABLE>
<CAPTION>
PAR PURCHASE SHARES
CLASS VALUE DATE ISSUED
- ----- ----- -------- ----------
<S> <C> <C> <C>
Series A.............................................. $ .01 1993 2,727,000
Series B.............................................. $ .01 1993 1,105,125
Series C.............................................. $ .01 1993 1,020,000
Series D.............................................. $ .01 1994 2,000,000
Series E.............................................. $ .01 1995 3,190,555
----------
10,042,680
==========
</TABLE>
Immediately prior to the completion of the Company's initial public offering
on May 1, 1995, all issued and outstanding shares of redeemable convertible
preferred stock were converted into 10,042,680 shares of
56
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock. In addition, all redemption rights of the holders of redeemable
common stock (1,838,475 shares) expired upon the completion of the offering.
Activity with respect to redeemable convertible preferred and common stock
for the year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE REDEEMABLE
PREFERRED COMMON
STOCK STOCK
---------------- --------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Balance, December 31, 1994................ $ 13,218 $ 399
Issuance of 3,190,555 shares of
redeemable Series E convertible
preferred stock........................ 12,197
Accretion of redeemable convertible
preferred and common stock............. 1,356 21
Conversion of redeemable convertible
preferred stock into common stock...... (26,771)
Expiration of redemption rights on
redeemable common stock................ (420)
---------------- -------------
Balance, December 31, 1995................ $ -- $ --
================ =============
</TABLE>
NOTE 9--STOCK COMPENSATION AND RETIREMENT PLANS
EXECUTIVE STOCK INCENTIVE PLAN
The Company's Executive Stock Incentive Plan provides for a maximum of
10,000,000 shares to be available for award thereunder to employees and
consultants of the Company and its subsidiaries. Awards under the plan may be
in the form of incentive stock options, non-qualified stock options, stock
appreciation rights or restricted stock awards. The purchase price of shares
covered by options cannot be less than the fair value on the date of grant.
Each option granted under the plan becomes exercisable based on a schedule
determined by the Compensation Committee at the date of grant. All options
expire ten years after the date of grant. At December 31, 1997, there were
9,795,874 shares reserved for issuance under the plan and options with respect
to 5,952,108 and 1,537,091 shares of common stock were outstanding and
exercisable, respectively.
DIRECTORS STOCK INCENTIVE PLAN
The Directors Stock Incentive Plan provides for awards with respect to up to
100,000 shares in the aggregate to directors of the Company and its
subsidiaries who are not also employees or consultants of the Company and who
do not serve on the Board as a representative of a shareholder. Awards under
the plan are in the form of non-qualified stock options. The purchase price of
shares covered by options cannot be less than the fair value on the date of
the grant. Options granted under the plan when a director is first elected to
the Board become exercisable quarterly over four years. Subsequent options
granted under the plan become exercisable with respect to one half of the
subject shares at each of the first and second anniversaries of the date of
grant. All options expire ten years after the date of grant. At December 31,
1997, there were 100,000 shares reserved for issuance under the plan and
options with respect to 24,000 and 7,500 shares of common stock were
outstanding and exercisable, respectively.
STRATEGIC STOCK INCENTIVE PLAN
The Strategic Stock Incentive Plan provides for awards with respect to an
aggregate of 3,500,000 shares of the Company's common stock to employees and
consultants of the Company and its subsidiaries in connection with
acquisitions, mergers, strategic alliances and other business combinations and
transactions by the Company
57
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or its subsidiaries. Awards under the plan may be in the form of incentive
stock options, non-qualified stock options, stock appreciation rights or
restricted stock awards. The purchase price of shares covered by options
cannot be less than the fair value on the date of grant. Each option granted
under the plan becomes exercisable based on a schedule determined by the
Compensation Committee at the date of grant. All options expire ten years
after the date of grant. At December 31, 1997, there were 3,500,000 shares
reserved for issuance under the plan and options with respect to 324,141 and
167,155 shares of common stock were outstanding and exercisable, respectively.
EXECUTIVE STOCK OPTION PLAN AND OTHER OPTION PLANS AND GRANTS
Prior to 1994, the Company granted non-qualified stock options to its
employees as directed by the Company's Board of Directors. In March 1994, the
Company established the 1994 Executive Stock Option Plan under which it is
authorized to grant up to 1,250,000 of either incentive stock options or non-
qualified stock options to its employees. The purchase price of shares covered
by options cannot be less than the fair value on the date of grant. Options
become exercisable over one to six years following the date of grant. All
options expire ten years after the date of grant. At December 31, 1997, there
were 1,918,546 shares reserved for issuance under the plan and under ad hoc
grants. Options with respect to 1,891,496 and 968,994 shares of common stock
were outstanding and exercisable, respectively.
In connection with the Company's acquisition of InterCon Systems Corporation
("InterCon") in June 1995, options outstanding under each of the InterCon 1992
Incentive Stock Plan and the InterCon 1994 Stock Option Plan became
exercisable (subject to original vesting schedules; generally vesting over
four years) for shares of the Company's common stock pursuant to the terms of
the plans. As of December 31, 1997, the options outstanding under the 1992
plan consist of incentive stock options with respect to 104,569 shares of
common stock and the options outstanding under the 1994 plan consist of non-
qualified stock options with respect to 39,547 shares of common stock. At
December 31, 1997, options with respect to 144,116 shares were exercisable. No
additional options in respect of shares will be granted under either plan. In
connection with the sale of InterCon, vesting on options with respect to
112,229 shares was accelerated and compensation expense of $214,000 was
recognized in 1997.
In connection with the Company's acquisition of Software Ventures
Corporation ("Software Ventures") in July 1995, options outstanding under the
Software Ventures 1994 Stock Option Plan became exercisable (subject to
original vesting schedules; generally, one-half vesting after one year and
one-half over four years) for shares of the Company's common stock pursuant to
the terms of such plan. At December 31, 1997, options with respect to 25
shares under the plan were outstanding and exercisable. No additional options
in respect of shares will be granted under the plan.
STOCK OPTION REPRICING
Effective April 5, 1996, the Company's Board of Directors approved a
repricing of certain employee stock options. Accordingly, options with respect
to 2,520,555 shares of the Company's common stock whose exercise price was
greater than $9.375, the closing market price of the Company's common stock on
that date, were cancelled and new options with respect to the same number of
shares were granted with an exercise price of $9.375. Other terms and
conditions of the options remained the same.
FAIR VALUE OF STOCK OPTIONS
For disclosure purposes under SFAS No. 123, the fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options granted in 1997, 1996 and 1995, respectively: no annual
dividends for any year, expected
58
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
volatility of 76%, 80% and 80%, risk-free interest rate of 6.36%, 5.98% and
6.85% and expected life of 5.0 years, 5.0 years and 6.5 years. The weighted-
average fair value of the stock options granted in 1997, 1996 and 1995, was
$4.88, $4.89 and $6.90, respectively.
Under the above model, the total value of stock options granted in 1997,
1996 and 1995, was $23,616,000, $28,624,000 and $10,572,000, respectively,
which would be amortized on a pro forma basis over the option vesting period.
Had the Company determined compensation cost for these plans in accordance
with SFAS No. 123, the Company's pro forma loss and pro forma basic and
diluted loss per share would have been $53,113,000 and $1.32 in 1997,
$63,897,000 and $1.62 in 1996 and $54,760,000 and $2.07 in 1995. The SFAS No.
123 method of accounting does not apply to options granted prior to January 1,
1995, and accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
STOCK WARRANTS
The Company has issued warrants to certain investors, a lease provider and
consultants to purchase shares of the Company's common stock. Warrants issued
to certain investors and a lease provider vested immediately and vesting with
respect to warrants issued to consultants was contingent upon the performance
of services. Compensation expense recorded with respect to warrants issued to
consultants was $275,000 and $199,000 in 1996 and 1995, respectively. These
warrants expire at various dates through 2003. At December 31, 1997, there
were 224,274 shares reserved for issuance under stock warrant agreements of
which warrants with respect to 224,274 shares of common stock were outstanding
and exercisable.
STOCK OPTION AND WARRANT ACTIVITY
The following table summarizes stock option and warrant activity under all
plans for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK WEIGHTED-
---------------------- PRICE AVERAGE
OPTIONS WARRANTS PER SHARE EXERCISE PRICE
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, December 31,
1994..................... 2,340,950 3,752,400 $ .50 -$4.15 $ 1.72
Granted................. 1,559,891 833 4.15-25.25 9.16
Assumed................. 543,414 -- .01-6.13 4.18
Exercised............... (494,719) (1,484,419) .50-6.13 1.60
Forfeited............... (105,868) (184,307) 2.00-25.25 4.50
---------- ----------
Balance, December 31,
1995..................... 3,843,668 2,084,507 .01-25.25 3.42
Granted................. 5,853,949 167 4.15-16.75 10.81
Exercised............... (819,256) (1,659,000) .01-9.38 2.36
Forfeited............... (1,319,951) -- 1.60-25.25 8.72
Cancelled............... (2,520,555) -- 9.56-25.25 13.61
---------- ----------
Balance, December 31,
1996..................... 5,037,855 425,674 .05- 13.50 6.24
Granted................. 4,846,300 -- 5.38-11.25 7.36
Exercised............... (288,529) (201,400) .05-8.13 1.83
Forfeited............... (1,259,740) -- 2.00-13.13 8.33
---------- ----------
Balance, December 31,
1997..................... 8,335,886 224,274 $ .05-$13.50 $ 6.81
========== ==========
Exercisable, December 31,
1995..................... 973,625 2,054,507 $ .05-$13.88 $ 1.44
========== ==========
Exercisable, December 31,
1996..................... 1,584,068 425,674 $ .05-$10.01 $ 3.60
========== ==========
</TABLE>
59
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the shares outstanding and
exercisable for options and warrants at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ .05-$5.88............. 2,110,114 4.65 $ 2.62 1,295,342 $ 1.81
$6.13-6.88.............. 224,776 9.06 $ 6.46 56,754 $ 6.24
$6.94-7.00.............. 2,460,822 9.11 $ 7.00 446,649 $ 7.00
$7.25-9.38.............. 3,110,449 8.56 $ 8.77 983,074 $ 9.12
$9.56-13.50............. 653,999 8.62 $10.49 267,336 $10.39
--------- ---------
$.05-$13.50............. 8,560,160 7.77 $ 6.81 3,049,155 $ 5.76
========= =========
</TABLE>
Under the terms of the Company's Employee Retirement Savings Plan,
participants are eligible to receive discretionary Company matching
contributions each year of 100% of the first $1,000 of employee salary
deferral and 25% of amounts thereafter up to the maximum allowable deferral
under IRS regulations. All contributions to a participant's plan account are
100% vested after two years of service with the Company. The total
contributions made by the Company under the Plan totalled $525,000, $622,000
and $131,000 during 1997, 1996 and 1995, respectively.
NOTE 10--INCOME TAXES
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Gross deferred tax assets:
Net operating losses (domestic)......... $ 35,755 $ 50,470
Net operating losses (foreign).......... 3,344 7,834
Other................................... 1,866 1,515
--------------- ---------------
40,965 59,819
--------------- ---------------
Gross deferred tax liabilities:
Depreciation/amortization............... (6,741) (8,740)
Acquired intangibles.................... (2,377) --
Other................................... -- --
--------------- ---------------
(9,118) (8,740)
--------------- ---------------
Net deferred tax assets................... 31,847 51,079
Valuation allowance....................... (32,323) (51,079)
--------------- ---------------
$ (476) $ --
=============== ===============
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets
of its operations since realization of these benefits cannot be reasonably
assured. The change in the valuation allowance for net deferred tax assets was
an increase of $18,756,000, $20,948,000 and $8,936,000 in 1997, 1996 and 1995,
respectively. The changes primarily relate to additional losses in those
years.
At December 31, 1997, the Company had domestic net operating loss
carryforwards of approximately $123,099,000 for income tax purposes. These net
operating loss carryforwards may be carried forward in varying
60
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts until 2012 and may be limited in their use in the event of significant
changes in the Company's ownership, and their use is limited to future
earnings of the Company. In addition, at December 31, 1997, the Company had
net operating loss carryforwards for tax purposes in various jurisdictions
outside the United States amounting to approximately $21,464,000. The majority
of the foreign loss carryforwards will expire in varying amounts until 2004.
Some of the foreign loss carryforwards will never expire under local country
tax rule.
A capital tax loss of $807,000 resulting from the sale of one of the
Company's investments was incurred in 1997. The loss may be carried forward
for five years. The Company recognized a deferred tax benefit of $476,000 in
1997 and $159,000 in 1996.
No cash was paid for income taxes in 1997, 1996 or 1995.
NOTE 11--STRATEGIC ALLIANCES, ACQUISITIONS AND DISPOSITIONS
AGREEMENTS WITH IXC INTERNET SERVICES, INC.
As part of the Company's ongoing efforts to further expand and enhance its
network, on February 25, 1998, the Company closed its transaction with IXC
Internet Services, Inc. ("IXC"), an indirect subsidiary of IXC Communications,
Inc., to acquire 20-year noncancellable indefeasible rights of use ("IRUs") in
up to 10,000 equivalent route miles of fiber-based OC-48 network bandwidth
(the "PSINet IRUs") in selected portions across the IXC fiber optic
telecommunications network within the United States. The PSINet IRUs were
acquired in exchange for the issuance to IXC of 10,229,789 shares of common
stock of the Company (representing approximately 20% of the issued and
outstanding common stock of the Company after giving effect to such issuance
and having an aggregate market value of $78,641,503 based on the closing
market price per share of the Company's common stock as reported by The Nasdaq
Stock Market on such date of $7.6875) (the "IXC Initial Shares"). If the fair
market value of the IXC Initial Shares (based on a 20 trading day volume-
weighted average share price) is less than $240,000,000 at the earlier of one
year following delivery and acceptance of the total amount of bandwidth
corresponding to the PSINet IRUs or February 25, 2002 (the "Determination
Date"), the Company will be obligated to provide IXC with additional shares of
its common stock, or at the sole option of the Company, cash or a combination
thereof equal to the shortfall (the "Contingent Payment Obligation"). The
Company has the right to accelerate the Contingent Payment Obligation to any
date prior to the Determination Date. In addition, the right of IXC to receive
additional shares of common stock and/or cash pursuant to the Contingent
Payment. Obligation will terminate on such date as the fair market value of
the IXC Initial Shares (based on a 20 trading day volume-weighted average
share price) is equal to or greater than $240,000,000.
The bandwidth will be delivered over a period of two to three years after
the closing. The agreement permits the Company to use the OC-48 bandwidth to
deliver private line or long distance services based on non-Internet
telecommunications transport at a rate of DS-3 or less. In addition, the
Company expects to incur on an annual basis approximately $1,150,000 in
operations and maintenance fees with respect to the PSINet IRUs to be acquired
from IXC for each 1,000 equivalent route miles of OC-48 bandwidth accepted
under the agreement. The Company also signed a long-term non-exclusive joint
marketing and services agreement with IXC under which IXC and its resellers
will be able to bundle the Company's Internet access and value added services
with IXC's long distance and other telephone services to their customers
throughout the United States.
ISTAR INTERNET INC.
Between January 30, 1998 and February 12, 1998, the Company acquired
approximately 23,900,000 (or 81.4%) of the outstanding common shares of iSTAR
internet inc. ("iSTAR"), a Canadian ISP. The excess of the purchase price over
the tangible assets acquired and liabilities assumed was $17,900,000. This
acquisition
61
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
will be accounted for as a purchase business combination and accordingly the
assets and liabilities and results of operations of iSTAR will be included in
the Company's financial statements from the date of acquisition. At December
31, 1997, the Company has a note receivable from iSTAR in the amount of
$3,526,000 which is recorded in other assets and deferred charges.
Additionally, at December 31, 1997, the Company had a $15,400,000 letter of
credit outstanding with respect to this transaction which was secured by
$17,500,000 in cash. On January 29, 1998, the Company obtained a $20,000,000
acquisition credit facility from a bank to finance this transaction and its
letter of credit expired. This facility matures on the earlier of the
consummation of a public offering by the Company of its debt or equity
securities or July 31, 1998. The loan provides for interest on the outstanding
balance at an annual rate of prime rate plus 1.375%. Additionally, the loan
has been incorporated into the Company's existing credit facility with the
bank and is secured by substantially all of the Company's assets, including a
pledge of certain of its subsidiaries' stock (including the acquired capital
stock of iSTAR).
CALVACOM AND IPROLINK
In October 1997 and January 1998 a wholly-owned subsidiary of the Company
acquired all of the issued and outstanding shares of common stock of Serveur
Telematique Internet S.A., ("STI") an ISP in France and Internet Prolink S.A.
("Iprolink"), an ISP in Switzerland, for approximately $3,100,000 and
$3,500,000, respectively, in cash. The acquisition of STI included the rights
to use the tradename "CalvaCom." These transactions are or will be accounted
for as purchase business combinations and accordingly, the net assets and
results of operations are included in the Company's financial statements from
the respective dates of acquisition.
EUNET GB LIMITED
On July 21, 1995, the Company purchased from The University of Kent at
Canterbury all of the issued and outstanding ordinary shares of EUnet GB
Limited, an English corporation, for approximately $3,986,000 in cash and
42,011 shares of its common stock. This transaction was accounted for as a
purchase business combination. The fair value of the cash, shares of the
Company's common stock exchanged and liabilities assumed at acquisition was
approximately $7,126,000.
INTERCON SYSTEMS CORPORATION AND SOFTWARE VENTURES CORPORATION
On June 16, 1995 and July 11, 1995, the Company issued approximately 921,612
and 762,208 shares of its common stock in exchange for all of the issued and
outstanding capital stock of InterCon and Software Ventures, respectively.
These transactions were accounted for as purchase business combinations. Both
acquired companies developed and marketed standards-based connectivity
software products. The aggregate fair value of the shares of the Company's
common stock exchanged, options granted and liabilities assumed was
approximately $35,519,000.
In the first quarter of 1996, the Company merged the operations of Software
Ventures and InterCon into one Internet software subsidiary known as InterCon.
On February 1, 1997, the Company sold all of the issued and outstanding
capital stock of InterCon to Ascend Communications, Inc. ("Ascend") in
exchange for $12,000,000 in cash pursuant to a Stock Acquisition Agreement
between the Company and Ascend. In addition, in connection with the sale, the
Company received $8,500,000 in cash from Ascend as repayment of intercompany
debt owed by InterCon to the Company. The Company recognized a gain of
$5,700,000 in 1997 in connection with the sale.
62
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PSINET PIPELINE NEW YORK, INC.
On February 7, 1995, the Company issued an aggregate of approximately
2,690,218 shares of its common stock in exchange for all of the outstanding
common stock and preferred stock of PSINet Pipeline New York, Inc. (formerly
The Pipeline Network Inc., "Pipeline"). This transaction was accounted for as
a purchase business combination. The fair value of the shares of the Company's
common stock exchanged and liabilities assumed was approximately $12,129,000.
As further described in Note 2, the Company transferred substantially all of
its individual subscriber accounts and related tangible and intangible assets
relating to the Company's consumer dial-up Internet access services including
those acquired from the acquisition of Pipeline to MindSpring in the second
and third quarters of 1996.
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has guaranteed monthly usage levels of data and voice
communications with certain of its telecommunications vendors. In addition,
the Company leases certain of its facilities under non-cancelable operating
leases expiring in various years through 2006. The operating lease on one of
the office facilities includes scheduled base rent increases over the term of
the lease. The total amount of base rent is being charged to expense on the
straight-line method over the term of the lease. Total rent expense for all
operating leases amounted to $4,968,000, $3,601,000 and $2,077,000 in 1997,
1996 and 1995, respectively.
At December 31, 1997 commitments to telecommunications vendors and future
minimum lease payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TELECOMMUNICATIONS OPERATING LEASES
- ------------ ------------------ ----------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
1998........................................ $ 10,218 $ 4,368
1999........................................ 7,987 4,160
2000........................................ 5,942 3,877
2001........................................ 4,360 3,425
2002........................................ 2,667 3,407
Thereafter.................................. -- 2,913
-------- --------
$ 31,174 $ 22,150
======== ========
</TABLE>
Under the terms of an agreement with one of its customers, the Company is
obligated to provide the customer with a rental facility of up to $5,000,000
for telecommunications equipment owned or leased by the Company and deployed
in the customer's network. As of December 31, 1997, the Company had provided
$1,426,000 of equipment to the customer under three year operating leases.
CONTINGENCIES
The Company is subject to certain claims and legal proceedings that arose in
the ordinary course of its business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these
matters may be decided unfavorably to the Company. Management believes that
any liability that may ultimately result from the resolution of these matters
will not have a material adverse effect on the financial condition or results
of operations of the Company.
On September 19, 1996, the Company and Chatterjee Management Company
("Chatterjee") signed an agreement pursuant to which the Company and an
investment group led by Chatterjee would establish a joint venture for the
purpose of building an Internet network across Europe and provide Internet-
related services in Europe. Such investment group was to invest up to $41
million in a joint venture. No monies were invested by
63
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Chatterjee or the investment group pursuant to the joint venture agreement nor
were any other actions undertaken to implement it. Following the signing of
the agreement, the parties acknowledged structural difficulties associated
with the joint venture as originally contemplated, which prevented its
implementation. Instead, they sought for several months to negotiate a direct
investment in the Company by Chatterjee in lieu of the initial agreement.
Those negotiations were not successful.
On November 25, 1997, Chatterjee initiated arbitration proceedings against
the Company before the International Chamber of Commerce, Court of
Arbitration, in London, England, with respect to the joint venture agreement
previously entered into by Chatterjee and the Company.
In the arbitration proceeding, Chatterjee has now alleged that the Company
breached the joint venture agreement by repudiating its obligations under the
agreement and by breaching a covenant not to compete. In the arbitration,
Chatterjee requests an award declaring that the agreement is still valid and
binding upon the parties and that the Company stands in breach of the
agreement, directing the Company to specifically perform its obligations under
the agreement or, in the alternative, awarding Chatterjee compensatory damages
in an amount not less than $25 million, awarding Chatterjee profits that the
Company has earned or stands to earn in Europe, and awarding Chatterjee the
costs of arbitration, including attorney's fees and interest on the award of
damages. The Company believes that Chatterjee's claims are without merit and
intends to vigorously defend itself in the arbitration.
NOTE 13--INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company operates in one principal industry segment, as a provider of
Internet solutions, and markets its services internationally through foreign
subsidiaries. The Company's services are provided primarily to corporate
customers.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Revenue:
United States............................. $ 38,029 $ 78,132 $ 104,254
International............................. 2,470 6,781 17,950
Eliminations.............................. (1,777) (562) (302)
---------- ---------- ----------
Consolidated.............................. $ 38,722 $ 84,351 $ 121,902
========== ========== ==========
Loss from Operations:
United States............................. $ (50,153) $ (47,035) $ (38,472)
International............................. (1,317) (8,861) (11,285)
Eliminations.............................. (1,147) (185) 171
---------- ---------- ----------
Consolidated.............................. $ (52,617) $ (56,081) $ (49,586)
========== ========== ==========
Identifiable Assets:
United States............................. $ 195,920 $ 169,082 $ 156,474
International............................. 9,307 11,314 29,770
Eliminations.............................. (3,397) (3,284) (63)
---------- ---------- ----------
Consolidated.............................. $ 201,830 $ 177,112 $ 186,181
========== ========== ==========
</TABLE>
Intersegment sales and transfers are not material. Revenue is based on the
location of the entity providing services. Loss from operations represents
total revenue less operating costs and expenses, and does not include interest
(expense)/income, other (expense)/income or income taxes. Identifiable assets
of geographic areas are those tangible and intangible assets used in the
Company's operations in each area.
64
<PAGE>
SCHEDULE II--VALUATION ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO BALANCES BALANCE
BEGINNING COSTS AND OF ACQUIRED AT END OF
OF PERIOD EXPENSES SUBSIDIARIES DEDUCTIONS PERIOD
---------- ---------- ------------ ---------- ---------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995
Allowances for doubt-
ful accounts and re-
turns................ $ 127 $ 724 $252 $ (228) $ 875
Deferred tax valuation
allowance............ 2,439 8,936 -- -- 11,375
Year ended December 31,
1996
Allowances for doubt-
ful accounts and re-
turns................ 875 3,130 -- (2,096) 1,909
Deferred tax valuation
allowance............ 11,375 20,948 -- -- 32,323
Year ended December 31,
1997
Allowances for doubt-
ful accounts and re-
turns................ 1,909 5,424 16 (5,248) 2,101
Deferred tax valuation
allowance............ 32,323 18,756 -- -- 51,079
</TABLE>
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1998 Annual
Meeting of Shareholders and to be filed with the Securities and Exchange
Commission (the "Commission") not later than 120 days after December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1998 Annual
Meeting of Shareholders and to be filed with the Commission not later than 120
days after December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1998 Annual
Meeting of Shareholders and to be filed with the Commission not later than 120
days after December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Company's Proxy Statement to be used in connection with its 1998 Annual
Meeting of Shareholders and to be filed with the Commission not later than 120
days after December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Documents filed as a part of this report.
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page 44.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statement Schedules on page 44.
3. EXHIBITS
See Index to Exhibits on page 69.
66
<PAGE>
b. Reports on Form 8-K.
On December 17, 1997, the Company filed a Current Report on Form 8-K, dated
November 25, 1997, relating to the initiation of arbitration proceedings by
the Chatterjee Management Company against the Company.
On January 7, 1998, the Company filed a Current Report on Form 8-K, dated
December 23, 1997, relating to the execution of a Pre-Acquisition Agreement
for the acquisition of all of the outstanding common stock of iSTAR internet
inc. by the Company.
On January 22, 1998, the Company filed a Current Report on Form 8-K, dated
January 21, 1998, which included as an Exhibit a press release issued by the
Company relating to a proposal received by the Company's Board of Directors
from USinternetworking Inc.
On February 12, 1998, the Company filed a Current Report on Form 8-K, dated
January 30, 1998, relating to the acquisition of certain of the common shares
of iSTAR internet inc.
On March 10, 1998, the Company filed a Current Report on Form 8-K, dated
February 25, 1998, relating to the closing of its transaction pursuant to the
IRU and Stock Purchase Agreement dated as of July 22, 1997 with IXC Internet
Services, Inc.
67
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Date: March 19, 1998
/s/ Edward D. Postal
By: _________________________________
EDWARD D. POSTAL
Senior Vice President and Chief
Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ William L. Schrader Chairman, President, March 19, 1998
- ------------------------------------- Chief Executive
WILLIAM L. SCHRADER Officer and
Director (Principal
Executive Officer)
/s/ Harold S. Wills Executive Vice March 19, 1998
- ------------------------------------- President, Chief
HAROLD S. WILLS Operating Officer
and Director
/s/ David N. Kunkel Senior Vice March 19, 1998
- ------------------------------------- President, General
DAVID N. KUNKEL Counsel, Secretary
and Director
/s/ Edward D. Postal Senior Vice March 19, 1998
- ------------------------------------- President and Chief
EDWARD D. POSTAL Financial Officer
(Principal
Financial Officer)
/s/ Michael J. Malesardi Vice President and March 19, 1998
- ------------------------------------- Controller
MICHAEL J. MALESARDI (Principal
Accounting Officer)
/s/ William H. Baumer Director March 19, 1998
- -------------------------------------
WILLIAM H. BAUMER
/s/ Ian P. Sharp Director March 19, 1998
- -------------------------------------
IAN P. SHARP
/s/ Ralph J. Swett Director March 19, 1998
- -------------------------------------
RALPH J. SWETT
/s/ William A. Wilson Director March 19, 1998
- -------------------------------------
WILLIAM A. WILSON
68
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
2.1 Asset Purchase Agreement dated Incorporated by reference from
as of June 28, 1996 between the Exhibit 2 to the Company's Quarterly
Company and MindSpring Report on Form 10-Q for the quarter
Enterprises, Inc. ended June 30, 1996 located under
Securities Exchange Commission File
No. 0-25812 ("June 1996 10-Q")
2.2 Amendment No. 1 to Asset Incorporated by reference from
Purchase Agreement and Network Exhibit 2 to the Company's Quarterly
Services Agreement entered into Report on Form 10-Q for the quarter
as of June 28, 1996 by and ended September 30, 1996 located
between the Company and under Securities Exchange Commission
MindSpring Enterprises, Inc. File No. 0-25812 ("September 1996
10-Q")
2.3 Amendment No. 2 to Asset Incorporated by reference from
Purchase Agreement entered into Exhibit 10.8 to the September 1996
as of September 1, 1996 by and 10-Q
between the Company and
MindSpring Enterprises, Inc.
2.4 Amendment No. 3 to Asset Incorporated by reference from
Purchase Agreement and Exhibit 10.74 to the Company's
Amendment No. 1 to Convertible Report on Form 10-K for the fiscal
Note entered into as of January year ended December 31, 1996 located
24, 1997 by and between the under Securities and Exchange
Company and MindSpring Commission File No. 0-25812 ("1996
Enterprises, Inc. Form 10-K")
2.5 Joint Venture Agreement dated Incorporated by reference from
as of September 19, 1996 Exhibit 2 to Amendment No. 1 to the
between the Company and Company's Quarterly Report on Form
Chatterjee Management Company 10-Q for the quarter ended September
30, 1996 located under Securities
Exchange Commission File No. 0-25812
("September 1996 10-Q-A/1")
2.6 Stock Acquisition Agreement, Incorporated by reference from
dated as of February 1, 1997, Exhibit 2 to the Company's Current
between Ascend Communications, Report on Form 8-K dated February
Inc., a Delaware corporation, 14, 1997 located under Securities
and the Company, a New York Exchange Commission File No. 0-25812
corporation, with respect to
all outstanding capital stock
of InterCon Systems
Corporation, a Delaware
corporation and a wholly-owned
subsidiary of the Company
2.7 IRU and Stock Purchase Incorporated by reference from
Agreement dated as of July 22, Exhibit 2.1 to Amendment No. 2 to
1997 between IXC Internet the Company's Quarterly Report on
Services, Inc. and the Company Form 10-Q for the quarter ended June
30, 1996 located under Securities
Exchange Commission File No. 0-25812
("June 1997 10-Q/A2")
2.8 First Amendment to IRU and Incorporated by reference from
Stock Purchase Agreement dated Exhibit A to the Company's Proxy
as of July 22, 1997 between IXC Statement on Schedule 14A dated
Internet Services, Inc. and the December 19, 1997 located under
Company Securities Exchange Commission File
No. 0-25812 ("December 1997 Proxy
Statement")
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
2.9 Second Amendment to IRU and Incorporated by reference from
Stock Purchase Agreement dated Exhibit A to the December 1997 Proxy
as of July 22, 1997 between IXC Statement
Internet Services, Inc. and the
Company
2.10 Agreement dated as of November Incorporated by reference from
10, 1997 between iSTAR internet Exhibit 2 to the Company's Quarterly
inc. and the Company Report on Form 10-Q for the quarter
ended September 30, 1997 located
under Securities Exchange Commission
File No. 0-25812 ("September 1997
10-Q")
2.11 Pre-Acquisition Agreement Incorporated by reference from
between the Company and iSTAR Exhibit 10.1 to the Company's
internet inc., dated December Current Report on Form 8-K dated
23, 1997 January 7, 1998 located under
Securities Exchange Commission File
No. 0-25812 ("January 7, 1998 8-K")
3.1 Certificate of Incorporation, Incorporated by reference from
as amended Exhibit 3.1 to the Company's
Registration Statement on Form S-1
declared effective on May 1, 1995
located under Securities and
Exchange Commission File No. 33-
90154 ("May 1995 Registration
Statement")
3.2 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the Company's
dated April 25, 1995 Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995
located under Securities Exchange
Commission File No. 0-25812 ("June
1995 10-Q")
3.3 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.2 to the June 1995 10-Q
dated May 5, 1995
3.4 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the Company's
dated November 11, 1995 Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995
located under Securities Exchange
Commission File No. 0-25812
("September 1995 10-Q")
3.5 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3 to the June 1996 10-Q
dated May 18, 1996
3.6 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the September 1997
dated as of November 6, 1997 10-Q
3.7 Certificate of Amendment of Filed herewith
Certificate of Incorporation
dated February 5, 1998
3.8 Amended and Restated By-laws of Incorporated by reference from
the Company Exhibit 3.5 to the September 1995
10-Q
4.1 Form of Common Stock Incorporated by reference from
Certificate Exhibit 4.1 to the May 1995
Registration Statement
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
4.2 Form of Common Stock Incorporated by reference from
Certificate (name change) Exhibit 4.1A to the Company's
Registration Statement on Form S-1
declared effective on December 14,
1995 located under Securities
Exchange Commission File No. 33-
99610 ("December 1995 Registration
Statement")
4.3 Articles Fourth, Fifth, Sixth, See Exhibits 3.2, 3.3, 3.4, 3.5, 3.6
Ninth and Tenth of the and 3.7
Certificate of Incorporation of
the Company, as amended
4.4 Article I of the Amended and See Exhibit 3.8
Restated By-laws of the
Company, as amended
4.5 Forms of Rights Agreement, Incorporated by reference from
dated as of May 8, 1996, Exhibit 1 to the Company's
between the Company and First Registration Statement on Form 8-A
Chicago Trust Company of New dated June 3, 1996 located under
York, as Rights Agent, which Securities Exchange Commission File
includes as Exhibit A-- No. 0-25812
Certificate of Amendment;
Exhibit B--Form of Rights
Certificate; and Exhibit C--
Summary of Rights to Purchase
Shares of Preferred Stock
4.6 Amendment No. 1, dated as of Incorporated by reference from
July 21, 1997, to Rights Exhibit 4.1.1 to the Company's
Agreement, dated as of May 8, Current Report on Form 8-K dated
1996, between the Company and August 1, 1997 located under
First Chicago Trust Company of Securities Exchange Commission File
New York, as Rights Agent. No. 0-25812
4.7 Amendment No. 2, dated as of Incorporated by reference from
July 31, 1997, to Rights Exhibit 4.1.2 to the Company's
Agreement, dated as of May 8, Current Report on Form 8-K dated
1996, between the Company and August 20, 1997 located under
First Chicago Trust Company of Securities Exchange Commission File
New York, as Rights Agent. No. 0-25812
10.1 Lease Agreement dated July 1, Incorporated by reference from
1990 between the Company and Exhibit 10.1 to the May 1995
Rensselaer Polytechnic Registration Statement
Institute, amended by Lease
Renewal Agreement dated as of
July 1, 1993, Letter Agreement
dated November 14, 1994 and
Letter Agreement dated February
1, 1995
10.2 Lease Agreement dated February Incorporated by reference from
8, 1995 between the Company and Exhibit 10.2 to the May 1995
Rensselaer Polytechnic Registration Statement
Institute
10.3 Amendment to Lease Agreement Incorporated by reference from
dated July 1, 1995 between the Exhibit 10.2A to the December 1995
Company and Rensselaer Registration Statement
Polytechnic Institute
10.4 Lease Agreement dated as of Incorporated by reference from
April 30, 1993 by and between Exhibit 10.3 to the May 1995
Vingarden Limited Partnership Registration Statement
and the Company
10.5 Lease Agreement dated April Incorporated by reference from
1995 by and between Brit Exhibit 10.3A to the December 1995
Limited Partnership and the Registration Statement
Company
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
10.6 Sublease dated September 20, 1995 Incorporated by reference from
by and between The Medical Exhibit 10.3B to the December 1995
Sciences Research Institute and Registration Statement
the Company and Lease Agreement
dated October 6, 1993 by and
between Vingarden Associates
Limited Partnership and The
Medical Sciences Research
Institute
10.7 Lease Agreement dated October 31, Incorporated by reference from
1995 between Oakfern Properties Exhibit 10.4A to the December 1995
Limited and the Company Registration Statement
10.8 Amendment to Deed of 460 Spring Incorporated by reference from
Park Technology Center dated as Exhibit 10.1 to the September 1997
of June 12, 1997 between 10-Q
JBG/Spring Park Limited
Partnership and the Company
10.9 Sublease Agreement dated as of Incorporated by reference from
June 2, 1997 between LUCAS Exhibit 10.2 to the September 1997
INDUSTRIES, INC. and the Company 10-Q
and Office Lease Agreement
between 3B Limited Partnership
and Lucas Industries Inc. dated
as of September 12, 1989
10.10 Sublease Agreement dated January Filed herewith
22, 1998 between the Company and
Unisys Corporation, as amended
10.11 Lease Agreement dated February Filed herewith
20, 1998 between the Company and
CarrAmerica Realty Corporation
10.12 Lease Agreement dated October Incorporated by reference from
1994 between the Company and Exhibit 10.4 to the May 1995
Cascade Communications, Inc. Registration Statement
10.13 Master Lease Agreement dated July Incorporated by reference from
19, 1994 between the Company and Exhibit 10.5 to the May 1995
Technology Credit Corporation Registration Statement
10.14 Lease Agreement dated as of July Incorporated by reference from
9, 1993 between Applied Exhibit 10.6 to the May 1995
Telecommunications Technologies, Registration Statement
Inc. and the Company
10.15 Lease Agreement dated as of Incorporated by reference from
February 10, 1994 between Applied Exhibit 10.7F to the December 1995
Telecommunications Technologies, Registration Statement
Inc. and the Company
10.16 Lease Agreement dated as of March Incorporated by reference from
14, 1994 between Applied Exhibit 10.7G to the December 1995
Telecommunications Technologies, Registration Statement
Inc. and the Company
10.17 Lease Agreement dated as of June Incorporated by reference from
9, 1994 between Applied Exhibit 10.7H to the December 1995
Telecommunications Technologies, Registration Statement
Inc. and the Company
10.18 Lease Agreement dated as of Incorporated by reference from
September 21, 1994 between Exhibit 10.7 to the May 1995
Applied Telecommunications Registration Statement
Technologies, Inc. and the
Company
10.19 Master Equipment Lease Agreement Incorporated by reference from
dated as of June 23, 1995 between Exhibit 10.1 to the September 1995
the Company and Forsythe/McArthur 10-Q
Associates, Inc. ("FMA")
10.20 Master Lease Line Commitment Incorporated by reference from
Agreement dated as of June 23, Exhibit 10.2 to the September 1995
1995 between the Company and FMA 10-Q
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
10.21 Amendment Agreement dated as of Incorporated by reference from
August 1, 1995 between the Exhibit 10.8 to the September 1995
Company and Technology Credit 10-Q
Corporation
10.22 Master Equipment Lease Incorporated by reference from
Agreement No. 620-0004602-000 Exhibit 10.44A to the December 1995
dated November 1995 between the Registration Statement
Company and Siemens Credit
Corporation
10.23 Amendment to Master Lease Incorporated by reference from
Agreement No. 1753 dated Exhibit 10.77 to the 1995 Form 10-K
January 26, 1996 between the
Company and Technology Credit
Corporation
10.24 Master Equipment Lease Incorporated by reference from
Agreement, dated December 15, Exhibit 10.78 to the 1995 Form 10-K
1995 between the Company and
Financing for Science
International, Inc.
10.25 Security Agreement dated as of Incorporated by reference from
March 20, 1996 between the Exhibit 10.79 to the 1995 Form 10-K
Company and USL Capital
Corporation
10.26 Master Software/Equipment Lease Incorporated by reference from
Agreement dated as of September Exhibit 10.4 to the September 1996
20, 1996 between the Company 10-Q
and LPI Software Funding Group,
Inc.
10.27 Master Lease Agreement dated as Incorporated by reference from
of January 27, 1997 between Exhibit 10.77 to the Company's
Cascade Communications Corp. Annual Report on Form 10-K for the
and the Company fiscal year ended December 31, 1996
located under Securities and
Exchange Commission File No. 0-25812
("1996 Form 10-K")
10.28 Master Equipment/Software Incorporated by reference from
Rental Agreement dated as of Exhibit 10.3 to the September 1997
September 11, 1997 between 10-Q
PSINet and Earthlink Network,
Inc. and Change Order Amendment
Master Equipment dated as of
September 22, 1997
10.29 Equipment lease dated as of Incorporated by reference from
June 30, 1997 between Royal Exhibit 10.4 to the September 1997
Bank of Canada and PSINet 10-Q
Limited
10.30 Master Lease Agreement dated as Filed herewith
of October 10, 1997 between
Cisco Systems Capital
Corporation and the Company
10.31 Master Lease Agreement No. A212 Filed herewith
dated as of October 30, 1997
between 3Com Credit Corporation
and the Company, as amended
10.32 Master Lease of Personal Filed herewith
Property No. 3402, dated
December 12, 1997 between the
Company and Charter Financial,
Inc., as amended
*10.33 Executive Stock Option Plan of Incorporated by reference from
the Company Exhibit 10.10 to the May 1995
Registration Statement
*10.34 Executive Stock Incentive Plan Incorporated by reference from
of the Company, as amended Exhibit 10.12 to the December 1995
Registration Statement
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
*10.35 Directors Stock Incentive Plan Incorporated by reference from
of the Company, as amended Exhibit 10.13 to the December 1995
Registration Statement
*10.36 Strategic Stock Incentive Plan Incorporated by reference from
of the Company Exhibit 10 to the June 1995 10-Q
*10.37 1996 Performance Bonus Plan of Incorporated by reference from
the Company Exhibit 10.25 to the 1996 Form 10-K
*10.38 InterCon Systems Corporation Incorporated by reference from
1992 Incentive Stock Plan Exhibit 99.1 to the Company's
Registration Statement on Form S-8
which became effective on October
18, 1995 located under Securities
Exchange Commission File No. 33-
98316 ("S-8 No. 16")
*10.39 InterCon Systems Corporation Incorporated by reference from
1994 Stock Option Plan Exhibit 99.2 to the S-8 No. 16
*10.40 Software Ventures Corporation Incorporated by reference from
1994 Stock Option Plan Exhibit 99 to the Company's
Registration Statement on Form S-8
which became effective on October
18, 1995 located under Securities
Exchange Commission File No. 33-
98314 ("S-8 No. 14")
*10.41 Employment Agreement dated June Incorporated by reference from
21, 1995 between the Company Exhibit 10.26 to the December 1995
and David N. Kunkel Registration Statement
*10.42 Employment Agreement dated Incorporated by reference from
February 9, 1996 between the Exhibit 10.42 to the 1995 Form 10-K
Company and Mary-Ann Carolan
*10.43 Employment Agreement dated Incorporated by reference from
February 13, 1996 between the Exhibit 10.19 to the Company's
Company and Mitchell Levinn Annual Report on Form 10-K for the
fiscal year ended December 31, 1995
located under Securities and
Exchange Commission File No. 0-25812
("1995 Form 10-K").
*10.44 Employment Agreement dated Incorporated by reference from
April 3, 1996 between the Exhibit 10.2 to the June 1996 10-Q
Company and Harold S. Wills
*10.45 Employment Agreement dated Incorporated by reference from
October 1, 1996 between the Exhibit 10.2 to the September 1996
Company and Edward D. Postal 10-Q
*10.46 Employment Agreement dated Incorporated by reference from
October 9, 1996 between the Exhibit 10.3 to the September 1996
Company and Richard R. 10-Q
Frizalone
*10.47 Employment Agreement dated Incorporated by reference from
February 12, 1997 between the Exhibit 10.78 to the December 31,
Company and David L. Hudson 1996 Form 10-K
*10.48 Employment Agreement dated July Incorporated by reference from
1, 1997 between the Company and Exhibit 10.5 to the September 1997
Michael Malesardi 10-Q
*10.49 Employment Agreement dated Incorporated by reference from
August 2, 1997 between the Exhibit 10.6 to the September 1997
Company and Anthony Aveta 10-Q
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
*10.50 Employment Agreement dated Incorporated by reference from
August 4, 1997 between the Exhibit 10.7 to the September 1997
Company and Harry Hobbs 10-Q
*10.51 Employment Agreement dated Filed herewith
November 17, 1997 between the
Company and John J. Chidester
*10.52 Employment Agreement dated Filed herewith
January 8, 1998 between the
Company and William Cripe
*10.53 Employment Agreement dated Filed herewith
January 18, 1998 between the
Company and Kathleen B. Horne
*10.54 Employment Agreement dated Filed herewith
February 16, 1998 between the
Company and John Muleta
10.55 Form of Indemnification Incorporated by reference from
Agreement Exhibit 10.21 to the May 1995
Registration Statement
10.56 Amended and Restated Incorporated by reference from
Registration Rights Agreement Exhibit 10.29 to the May 1995
dated as January 17, 1995 by and Registration Statement
among the Company and the
several parties signatory
thereto
10.57 Registration Rights Agreement Incorporated by reference from
dated as of February 8, 1995 by Exhibit 10.30 to the May 1995
and among the Company and the Registration Statement
several parties signatory
thereto
10.58 Registration Rights Agreement Incorporated by reference from
dated as of June 16, 1995 among Exhibit 10.39 to the December 1995
the Company and Stockholders of Registration Statement
InterCon Systems Corporation
10.59 Registration Rights Agreement Incorporated by reference from
dated as of July 11, 1995 among Exhibit 10.40 to the December 1995
the Company and Stockholders of Registration Statement
Software Ventures Corporation
10.60 Registration Rights Agreement Incorporated by reference from
made as of September 19, 1996 by Exhibit 10.1 to the September 1996
and between the Company and The 10-Q
Chatterjee Management Company
10.61 Registration Rights Agreement Incorporated by reference from
dated as of November 11, 1997 Exhibit 10.10 to the September 1997
between the Company and the 10-Q
purchasers of Series B 8%
Convertible Preferred Stock
10.62 Registration Rights Agreement Filed herewith
dated as of February 25, 1998
between the Company and IXC
Internet Services, Inc.
10.63 Amended and Restated Credit Incorporated by reference from
Agreement dated as of November Exhibit 10.41 to the December 1995
10, 1995 between the Company, Registration Statement
Software Ventures Corporation,
InterCon Systems Corporation and
Fleet Bank of Massachusetts,
N.A. ("Fleet")
10.64 Revolving Credit Note as amended Incorporated by reference from
and restated as of November 10, Exhibit 10.41A to the December 1995
1995 of the Company payable to Registration Statement
the order of Fleet
10.65 Amended and Restated Security Incorporated by reference from
Agreement dated as of November Exhibit 10.41B to the December 1995
10, 1995 by and between the Registration Statement
Company and Fleet
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
10.66 Amended and Restated Security Incorporated by reference from
Agreement dated as of November Exhibit 10.41C to the December 1995
10, 1995 by and between PSINet Registration Statement
Pipeline New York, Inc.
("Pipeline") and Fleet
10.67 Amended and Restated Guaranty Incorporated by reference from
Agreement dated as of November Exhibit 10.41F to the December 1995
10, 1995 between Pipeline and Registration Statement
Fleet
10.68 Pledge Agreement dated as of Incorporated by reference from
November 10, 1995 between the Exhibit 10.41I to the December 1995
Company and Fleet Registration Statement
10.69 First Amendment dated as of Incorporated by reference from
August 13, 1996 to the Amended Exhibit 10.3 to the June 1996 10-Q
and Restated Credit Agreement
between the Company and Fleet
Bank of Massachusetts, N.A.
10.70 Pledge Agreement dated as of Incorporated by reference from
October 1, 1996 between the Exhibit 10.72 to the December 31,
Company and Fleet 1996 Form 10-K
10.71 Amendment No. 1 to Pledge Incorporated by reference from
Agreement dated as of November Exhibit 10.73 to the December 31,
18, 1996 between the Company and 1996 Form 10-K
Fleet
10.72 Second Amendment to Amended and Incorporated by reference from
Restated Credit Agreement dated Exhibit 10.79 to the December 31,
February 1, 1997 between the 1996 Form 10-K
Company, and Fleet
10.73 Letter agreement dated September Incorporated by reference from
10, 1997 between the Company and Exhibit 10.8 to the September 1997
Fleet National Bank 10-Q
10.74 Third Amendment dated January Filed herewith
29, 1998 to Amended and Restated
Credit Agreement dated as of
November 30, 1994 between the
Company and Fleet National Bank
10.75 Deposit Pledge Agreement dated Filed herewith
as of December 31, 1997, between
the Company and Fleet National
Bank
10.76 Warrant to purchase 174,274 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.37 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
Applied Telecommunications
Technologies, Inc. ("ATTI")
10.77 Warrant to purchase up to 25,000 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.39 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
William H. Baumer
10.78 Warrant to purchase up to 25,000 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.40 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
William H. Baumer
10.79 Joint Venture Agreement dated as See Exhibit 2.5
of September 19, 1996 between
the Company and Chatterjee
Management Company
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
10.80 Stock Acquisition Agreement, See Exhibit 2.6
dated as of February 1, 1997,
between Ascend Communications,
Inc., a Delaware corporation, and
the Company, a New York
corporation, with respect to all
outstanding capital stock of
InterCon Systems Corporation, a
Delaware corporation and a
wholly-owned subsidiary of the
Company
10.81 Asset Purchase Agreement dated as See Exhibit 2.1
of June 28, 1996 between the
Company and MindSpring
Enterprises, Inc.
10.82 Amendment No. 1 to Asset Purchase See Exhibit 2.2
Agreement and Network Services
Agreement entered into as of June
28, 1996 by and between the
Company and MindSpring
Enterprises, Inc.
10.83 Convertible Note dated as of June Incorporated by reference from
28, 1996 between the Company and Exhibit 10.4 to the June 1996 10-Q
MindSpring Enterprises, Inc.
10.84 Amendment No. 2 to Asset Purchase See Exhibit 2.3
Agreement entered into as of
September 1, 1996 by and between
the Company and MindSpring
Enterprises, Inc.
10.85 Amendment No. 3 to Asset Purchase See Exhibit 2.4
Agreement and Amendment No. 1 to
Convertible Note entered into as
of January 24, 1997 by and
between the Company and
MindSpring Enterprises, Inc.
10.86 Amendment No. 2 to Network Incorporated by reference from
Services Agreement entered into Exhibit 10.75 to the December 31,
as of January 1, 1997 by and 1996 Form 10-K
between the Company and
MindSpring Enterprises, Inc.
10.87 Convertible Note of MindSpring Incorporated by reference from
Enterprises, Inc. in the Exhibit 10.76 to the December 31,
principal amount of $3,078,324 1996 Form 10-K
due December 31, 1998
10.88 IRU and Stock Purchase Agreement See Exhibit 2.7
dated as of July 22, 1997 between
IXC Internet Services, Inc. and
the Company Company
10.89 First Amendment to IRU and Stock See Exhibit 2.8
Purchase Agreement dated as of
July 22, 1997 between IXC
Internet Services, Inc. and the
Company
10.90 Second Amendment to IRU and Stock See Exhibit 2.9
Purchase Agreement dated as of
July 22, 1997 between IXC
Internet Services, Inc. and the
Company
10.91 Joint Marketing and Services Incorporated by reference from
Agreement dated as of July 22, Exhibit 10.1 to the June 1997 10-
1997 between IXC Internet Q/A/1
Services Inc. and the Company
10.92 Stock Purchase Agreement dated as Incorporated by reference from
of November 11, 1997 between the Exhibit 10.9 to the September 1997
Company and the Purchasers of 10-Q
Series B 8% Convertible Preferred
Stock
10.93 Agreement dated as of November See Exhibit 2.10
10, 1997 between iSTAR Internet
Inc. and the Company
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
10.94 Pre-Acquisition Agreement between the Company See Exhibit 2.11
and iSTAR internet inc., dated December 23,
1997
10.95 Security Agreement and Assignment dated as of Filed herewith
February 25, 1998 between the Company and IXC
Internet Services, Inc.
10.96 Collocation and Interconnection Agreement Filed herewith
between the Company and IXC Internet Services,
Inc.
11.1 Calculation of Basic and Diluted Loss Per Filed herewith
Share and Weighted Average Shares for the Year
Ended December 31, 1997
11.2 Calculation of Basic and Diluted Loss Per Filed herewith
Share and Weighted Average Shares for the Year
Ended December 31, 1996
11.3 Calculation of Basic and Diluted Loss Per Filed herewith
Share and Weighted Average Shares for the Year
Ended December 31, 1995
21 Subsidiaries of the Company Filed herewith
23 Consent of Price Waterhouse LLP Filed herewith
**27 Financial Data Schedule
</TABLE>
- --------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(a)(3).
** 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.
78
<PAGE>
EXHIBIT 3.7
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 with
------
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 amendment 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, (i) to
increase the aggregate number of shares and common shares that the
Corporation shall have authority to issue to an aggregate of Two
Hundred Eighty Million (280,000,000) shares, of which Two Hundred
Fifty Million (250,000,000) shares shall be Common Stock, $.01 par
value per share, and Thirty Million (30,000,000) shares shall be
Preferred Stock, $.01 par value per share, by authorizing for issuance
an additional One Hundred Fifty Million (150,000,000) shares, all of
which shares shall be Common Stock, $.01 par value per share.
FOURTH: To effect the foregoing:
------
(a) The second and third sentences of Paragraph FOURTH are hereby
amended to read in their entirety as follows:
<PAGE>
FOURTH: The total number of shares of capital stock that the
Corporation is authorized to issue is Two Hundred Eighty Million
(280,000,000). The total number of shares of Common Stock that the
Corporation shall have authority to issue is Two Hundred Fifty Million
(250,000,000).
FIFTH: The foregoing amendments and changes to the Certificate of
-----
Incorporation were authorized by the affirmative vote of the members of the
Board of Directors of the Corporation at a meeting duly called and held on
November 6, 1997 followed by the affirmative vote of the holders of a majority
of all outstanding shares of the Corporation entitled to vote thereon at a
meeting of the Corporation's shareholders duly called and held on January 23,
1998, at which a quorum was at all times present and acting.
IN WITNESS WHEREOF, we have made and subscribed this Certificate and hereby
affirm under the penalties of perjury that its contents are true this 5th day
of February, 1998.
/s/ William L. Schrader
------------------------
William L. Schrader, President
/s/ Teresa Zazonczkoski
------------------------
Teresa Zajonczkoski, Assistant Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINET INC.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
FILED BY:
NIXON, HARGRAVE, DEVANS & DOYLE LLP
437 MADISON AVENUE
NEW YORK, NEW YORK 10022
-3-
<PAGE>
EXHIBIT 10.10
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (this "Sublease") is made and entered into this 22nd of
January, 1998, by and between PSINet, Inc., a New York corporation (the
"Sublessee") and Unisys Corporation, a Delaware corporation, (the "Sublessor").
WHEREAS, by lease dated March 29, 1990 (the "Lease"), Sublessor leased from JBG
Real Estate Associates XVI, Inc., successor to UMT Reston, Inc. (the "Lessor")
certain premises consisting of the Land, Improvements, fixtures and other
interests related to approximately two hundred fifty-seven thousand eight
hundred ninety-two (257,892) rentable square feet contained in two (2) buildings
(the "Buildings") located at 12010 Sunrise Valley Drive, Fairfax County, Reston,
Virginia (collectively, the "Premises"); and
WHEREAS, Sublessor has agreed to sublease a portion of the Premises, consisting
of forty-eight thousand four hundred eighty-two (48,482) rentable square feet on
the 1st Floor ("Space A") in the Phase I building (the "Building") as depicted
on Exhibit "A1" (the "Subleased Premises") to Sublessee on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the rents, covenants, agreements,
stipulations and provisions contained herein to be paid, kept and performed by
both Sublessee and Sublessor, the parties do hereby agree as follows:
1. TERM: Sublessor does hereby demise and sublease the Subleased Premises to
----
Sublessee and Sublessee does hereby sublease the Subleased Premises from
Sublessor for a period of eighty-six (86) months commencing on the 1st day
of February, 1998 (the "Commencement Date") and ending on the 31st day of
March, 2005 (the "Expiration Date") unless sooner terminated pursuant to
any provision hereof (the "Term").
2. USE: The Subleased Premises shall be used for Sublessee's of fice use, data
---
center, computer integration/staging, equipment storage and customer
presentations, and for no other use whatsoever.
3. RENT: Sublessee covenants and agrees to pay to Sublessor, without deduction
----
or set off, minimum rental for the Term (the "Base Rent") as set forth on
Exhibit C attached hereto. In the event any payment of Base Rent or
Additional Rent (as defined below) is not paid within five (5) business
days following the date due, Sublessee shall pay to Sublessor, upon demand,
a late charge equal to five cents for each dollar overdue.
4. SECURITY DEPOSIT: Concurrently with the execution hereof, Sublessee shall
----------------
deliver to Sublessor an acceptable unconditional, irrevocable letter of
credit in the amount of One Hundred Fifty-Three Thousand Five Hundred
Twenty-Six and 33/ 100 Dollars ($153,526.33) issued by a bank acceptable to
Sublessor and having an expiration date of no earlier than sixty (60) days
of following the end of the Term, as the same may be extended (the
"Security Deposit") to ensure the timely and faithful performance of each
of the terms and conditions hereof by Sublessee. Sublessor shall hold the
Security Deposit and shall have the right, but not the obligation, to use
the same to cure any default by Sublessee hereunder or to repair any damage
to the Subleased Premises caused by Sublessee, its employees, agents or
invitees. In the event the original letter of credit expires prior to the
expiration of the Term, Sublessee shall provide Sublessor with a
replacement letter of credit at least sixty (60) days prior to its
expiration. In the
<PAGE>
event (i) Sublessee notifies Sublessor at least sixty (60) days prior to
the expiration of any letter of credit that Sublessee does not intend to
replace such letter of credit, or (ii) Sublessee does not notify Sublessor
and does not provide Sublessor with a replacement letter of credit as
required in this Paragraph 4, Sublessor may, at Sublessor's sole option,
convert any existing letter of credit into a cash deposit in the full
amount thereof and Sublessor shall have the right to commingle said funds
with other funds of Sublessor. In the absence of any default or damage to
the Subleased Premises, Sublessor shall repay any such cash deposit,
without interest, to Sublessee within sixty (60) days following the end of
the Term, as the same may be extended. In the event Sublessor applies the
Security Deposit or any portion thereof in accordance with this Paragraph
4, Sublessee shall be obligated immediately to restore the Security Deposit
to its original amount.
5. TIME AND PLACE OF PAYMENT: All payments of Base and Additional Rent
-------------------------
(collectively, the "Rent") shall be made, in advance, without notice, on
the first (1st) day of each month during the Term, payable to the order of
"UNISYS CORPORATION" and addressed to Unisys Corporation, P.O. Box 5585,
Bismarck, North Dakota 585025585 ATTN: Lease Administration or to such
other person or at such other place as Sublessor may from time to time
designate in writing.
6. OPERATING EXPENSE AND REAL PROPERTY TAX REIMBURSEMENT AND METHOD OF
-------------------------------------------------------------------
PAYMENT: On and after the Commencement Date, Sublessee shall be obligated
-------
to reimburse Sublessor for Sublessee's Proportionate Share of the Building
or Premises (as defined below) of any rent escalation assessed by Sublessor
under the terms of this Sublease, including, without limitation,
escalations with respect to real property taxes and operating expenses.
Rent escalation amounts and all other sums, except Base Rent, which
Sublessee is obligated to pay to Sublessor hereunder are collectively
"Additional Rent". For purposes of calculating Operating Expenses, where an
operating expense is incurred by Sublessor solely for the Building,
Operating Expenses hereunder shall be calculated for the Building. Where an
operating expense is incurred by Sublessor for the Premises, which applies
to any part of the Premises used in common other than solely attributable
to the Building, or which applies to all or part of the Premises for which
the portion allocable to the Building cannot be reasonably determined,
Operating Expenses shall be calculated for the Premises.
For purposes of calculating Additional Rent, Sublessor and Sublessee
acknowledge and agree that "Sublessee's Proportionate Share of the Building
shall be 44.3%, which percentage is equal to a fraction, the numerator of
which is forty-eight thousand four hundred eighty-two (48,482) rentable
square feet in the Subleased Premises, and the denominator of which is one
hundred nine thousand four hundred seventy-three (109,473) rentable square
feet in the Building. Sublessor and Sublessee also acknowledge and agree
that "Sublessee's Proportionate Share of the Premises" shall be 18.8%,
which percentage is equal to a fraction, the numerator of which is forty-
eight thousand four hundred eighty-two (48,482) rentable square feet in the
Subleased Premises, and the denominator of which is two hundred fifty-seven
thousand eight hundred ninety-two (257,892) rentable square feet in the
Premises.
"Additional Rent" shall include Sublessee's Proportionate Share of
increases in Operating Expenses (as that term is hereinafter defined) for
each calendar year during the Term of this Sublease above Sublessor's
Operating Expenses for calendar year
-2-
<PAGE>
1998. Sublessor and Sublessee acknowledge and agree that Sublessor shall
charge Sublessee for increases in Operating Expenses based on either
Sublessee's Proportionate Share of the Building or Sublessee's
Proportionate Share of the Premises, as appropriate.
As used herein, the term "Operating Expenses" shall mean the expenses that
are reasonable, actual, necessary, out-of-pocket, obtained at competitive
prices paid or incurred by Sublessor during the Term that are directly
attributable to the operation, maintenance and repair of the Premises which
are incurred during the calendar year or portion thereof, in accordance
with sound property management principles and which shall be determined in
accordance with generally accepted accounting principles consistently
applied. Operating Expenses based on Sublessee's Proportionate Share of the
Building or the Premises, as the case may be, shall mean:
(a) Wages, salaries and fringe benefits of all employees and third parties
to the extent actually engaged (though not necessarily physically
located on the Premises) in the operation, maintenance, administration
and/or security of the Building or the Premises, including, without
limitation, employer's share of FICA and any other taxes which may be
levied on such wages and salaries;
(b) All janitorial and office supplies and materials used in the operation
and maintenance of the Building or the Premises;
(c) Cost of all maintenance and service agreements on equipment throughout
the Building or the Premises, including, without limitation, window
cleaning, elevator maintenance, fire protection systems maintenance
and heating, ventilating and air-conditioning maintenance;
(d) Taxes for the Building or the Premises;
(e) Charges for the usage of gas, common use electricity (HVAC electricity
and common area electricity) and other fuels and utilities consumed or
used by Sublessor in the operation and maintenance of the Building or
the Premises;
(f) Expenses of maintenance and repair of exterior areas of the Buildings,
including, but not limited to, all exteriors of the Buildings, parking
lot and roadway repair and resurfacing;
(g) Expenses of maintenance of common areas of the Building or the
Premises;
(h) Other reasonable expenses incurred and paid to fulfill Sublessor's
maintenance and repair obligations at the Building or the Premises
under the Lease; and
(i) Insurance premiums for the Building or the Premises.
Anything to the contrary herein notwithstanding, Operating Expenses shall
(i) not include (without limitation) submetered electricity pursuant to
Paragraph 11 herein or any other tenant electric; leasing commissions and
all other costs, disbursements and expenses incurred for leasing,
renovating or improving space for tenants; costs for improving, renovating
or painting tenant space; depreciation or amortization of the Building;
costs incurred because of tenant violations of a lease; overhead and profit
-3-
<PAGE>
paid to subsidiaries or affiliates of Sublessor for management or other
services to the extent they exceed competitive costs for such services;
services and utilities to the extent they are provided exclusively for a
tenant and the cost is reimbursed by that tenant; interest on debt or
amortization payments on mortgages, deeds of trust or other debt; repairs
or work needed because of fire, windstorm or other insurable casualty;
costs, fines or penalties incurred because Sublessor has violated any
governmental rule or authority; costs for tests, surveys, cleanup,
containment, removal, abatement, or other similar activities to remove
hazardous substances (including, without limitation, asbestos-containing
materials) from the Premises unless such hazardous substances are in or on
the Premises because of Sublessee's negligence or willfil misconduct, but
(ii) shall include costs of a capital nature (including, without
limitation, capital repairs, capital improvements, capital equipment and
capital tools) as determined under generally accepted accounting principles
consistently applied, but only the annual amortization of such costs over
their respective useful lives with a reasonable salvage value on a
straight-line basis, and with respect to capital improvements only those
improvements required by any changes in applicable laws, rules or
regulations of any governmental authorities enacted after the Commencement
Date.
No less than thirty (30) days prior to January 1st of each calendar year,
Sublessor shall furnish to Sublessee a statement setting forth in
reasonable detail, the projected Operating Expenses for the subsequent
twelve (12) month period. Sublessee shall pay to Sublessor in twelve (12)
monthly installments its share of increases in the projected Operating
Expenses on the first day of each calendar month during the Term commencing
January 1, 1999. Within ninety (90) days after the end of each calendar
year of the Term, Sublessor shall furnish to Sublessee a statement setting
forth in reasonable detail the actual Operating Expenses for the prior
calendar year. Within thirty (30) days following the delivery of such
statement to Sublessee, either (i) Sublessee shall pay to Sublessor its
share of the amount by which the actual Operating Expenses for said
calendar year exceeded the projected Operating Expenses for said calendar
year or (ii) Sublessor shall pay to Sublessee the amount by which
Sublessee's payments toward increases in the projected Operating Expenses
for said calendar year exceeded Sublessee's share of increases in the
actual Operating Expenses for said calendar year.
Sublessor's failure to timely render a statement with respect to the
Operating Expenses for any calendar year shall not prejudice Sublessor's
right to thereafter render a statement with respect thereto (provided that
Sublessor renders such statement within one (1) year of the subject twelve
(12) month period) or with respect to any other calendar year. Sublessee
shall have the right to request supportive documentation from Sublessor
within ninety (90) days of Sublessee's receipt of the statement from
Sublessor, and if an error is found, Sublessor shall apply a credit against
Sublessee's next Rent payment due hereunder.
Additional Rent for any partial calendar year during the Term shall be
prorated based upon a 365-day year to reflect the portion of said calendar
year during which this Sublease was in full force and effect. Sublessee's
obligation with respect to the payment of Base Rent and Additional Rent due
for the Term of this Sublease shall survive the expiration or earlier
termination of this Sublease.
-4-
<PAGE>
As used herein, the Term "Taxes" shall mean all real property taxes, and
currently due assessments, levies and other charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, of any kind and nature
whatsoever (but not including taxes on the net income of Sublessor or
Lessor), which shall or may be during the Term assessed, levied, charged,
confirmed or imposed upon or become payable out of or become a lien on the
Premises and the reasonable expense and advice concerning the potential
contesting of (to the extent that such contest reduces tax expense) the
amount, or validity of any such taxes, charges or assessments (including,
without limitation, attorneys' fees and costs).
Anything to the contrary herein notwithstanding, "Taxes" shall not include
income taxes, personal property taxes, franchise taxes, gift taxes,
transfer taxes, excise taxes, taxes on capital stock, estate taxes,
successor or inheritance taxes or any penalties, fines or interest for the
late payment of Taxes.
7. BUSINESS PRIVILEGE TAXES. BUSINESS USE TAXES AND OCCUPANCY TAXES: Sublessee
----------------------------------------------------------------
agrees to pay any revenue tax or charge, occupancy tax, business privilege
tax, business use tax or any other tax that may be levied against the
Subleased Premises or Sublessee's use or occupancy thereof during the Term.
8. RIGHT OF ENTRY: Following the date of this Sublease and prior to the
--------------
Commencement Date, Sublessee shall have access to the Subleased Premises,
upon reasonable prior notice to Sublessor, for the purpose of evaluating
what alterations, repairs or improvements are needed to modify the
Subleased Premises for its use. Sublessee may not commence any such
alteration, repair or improvement until Sublessor and Lessor shall have
consented thereto pursuant to Paragraph 10 and Lessor shall have consented
to this Sublease. Sublessee's access to the Subleased Premises prior to the
Commencement Date shall be subject to all of the terms and conditions of
this Sublease, except for the payment of Rent. Sublessee hereby agrees to
indemnify and hold harmless Sublessor and Lessor from any and all
liability, claims, demands, expenses, damages and judgments arising as a
result of Sublessee's access to the Subleased Premises pursuant to this
Paragraph 8.
9. ACCEPTANCE AND SURRENDER OF SUBLEASED PREMISES: Sublessee agrees to accept
----------------------------------------------
the Subleased Premises in its present "as is" condition at the date of this
Sublease, it being both parties intent that Sublessee shall bear the full
cost and expense of modifying or renovating the Subleased Premises for its
use. Provided Sublessee is not in default hereunder, Sublessor agrees to
provide Sublessee with an annual tenant improvement allowance in the amount
of Twenty-Four Thousand Two Hundred Forty and 96/100 Dollars ($24,240.96)
during the initial Term which shall be applied as a waiver toward Base
Rent. Provided Sublessee is not in default under any terms and conditions
of this Sublease, commencing March 15, 1998 Sublessor agrees to waive
payment of Two Thousand Twenty and 08/100 Dollars ($2,020.08) of monthly
Base Rent due in each and every month of the initial Term. If at any time
during the initial Term Sublessee shall be in default beyond any applicable
cure period in the observance and performance of any other terms, covenants
and conditions of this Sublease on Sublessee's part to be observed and
performed, then the total sum of the Base Rent so conditionally excused by
operation of the foregoing provision of this Paragraph 9 may at Sublessor's
sole option become immediately due and payable by Sublessee to Sublessor.
Until said default is cured, Sublessor shall revoke all future waived
monthly amounts.
-5-
<PAGE>
Notwithstanding the foregoing, Sublessor shall, at Sublessor's sole cost
and expense, on or before February 15, 1998, complete the alterations and
improvements required to demise the Subleased Premises from the remainder
of the Building (the 4Sublessor's Work"). In addition, Sublessor shall be
responsible to (i) provide barrier free access in accordance with the
Americans with Disabilities Act ("ADA.) to all common areas of the Building
and to two (2) of the four (4) sets of rest rooms in the Subleased
Premises, and (ii) add fire alarm strobe lights in the Subleased Premises.
Sublessor will solely bear the cost to submeter electric utility usage to
the Subleased Premises while Sublessee will solely bear the cost to make
any other improvements to the Subleased Premises, including any other
required improvements under the ADA during the Term hereof. Notwithstanding
the foregoing, Sublessee shall, at Sublessee's sole cost and expense,
secure all necessary occupancy permits and certificates as may be required
for Sublessee's occupancy and shall promptly provide copies to Sublessor
prior to occupancy.
Sublessor and Sublessee agree to reasonably coordinate Sublessee's
occupancy of the Subleased Premises so that any permits required to be
obtained by Sublessor for Sublessor's Work do not delay the Commencement
Date and Sublessee's occupancy does not violate any jurisdictional code.
Prior to the Commencement Date, Sublessor shall perform any required
maintenance on the supplemental free-standing cooling units in the
Subleased Premises and deliver same in good working order to Sublessee.
Sublessee shall, at the end of the Term or upon sooner termination of this
Sublease pursuant to the terms hereof, promptly surrender the Subleased
Premises in good order and condition and in conformity with the applicable
provisions of this Sublease and the Lease, excepting only reasonable wear
and tear.
10. ALTERATIONS AND MODIFICATIONS: Sublessee agrees to obtain Sublessor's and
-----------------------------
Lessor's (if required under the Lease) prior written approval of
alterations, modifications, repairs or renovations made to the Subleased
Premises. Sublessor agrees that it shall promptly review plans and drawings
submitted and that it will not unreasonably delay or deny approval with
respect to non-structural alterations. Notwithstanding the foregoing,
Sublessor's consent to such alterations shall be subject to Lessor's
consent thereto if required. Any alterations, modifications or renovations
of or to the Subleased Premises shall be limited to partition changes
(nonbearing walls), electrical, mechanical and plumbing alterations,
telephone relocations, and decorating. The structural integrity of the
Building shall not be disturbed in any way. Sublessee shall provide
Sublessor with partial releases of liens commencing with receipt of the
second progress payment and a final release of liens upon completion of any
alterations or modifications to the Subleased Premises executed by all
contractors or subcontractors who performed such alterations or
modifications. In addition, Sublessee agrees that all work performed upon
the Subleased Premises shall be done in a good and workmanlike manner and
shall be in accordance with all applicable law. All alterations,
modifications and renovations, upon completion of construction thereof,
shall become part of the Subleased Premises and the property of Sublessor
without payment therefore by Sublessor and shall be surrendered to
Sublessor at the end of the Term or upon sooner termination of this
Sublease pursuant to the terms hereof; provided, however, that, if
requested by Sublessor at the time Sublessor grants its approval therefor,
Sublessee shall, at Sublessee's sole cost and expense, remove all such
alterations, modifications and renovations, or any part or parts thereof
specified by Sublessor, from the Subleased Premises and shall repair all
damage caused by such installation and removal.
-6-
<PAGE>
Notwithstanding anything to the contrary contained in this Paragraph 10,
Sublessee will secure Sublessor's approval for all work performed by
Sublessee to the Subleased Premises, including but not limited to,
design/space planning specifications, architectural and construction
specifications and contracts, and contractors and subcontractors performing
work in the Subleased Premises. Sublessee shall be responsible to reimburse
Sublessor for the reasonable hourly cost of Sublessor's architect to review
all Sublessee's plans and specifications in conjunction with Sublessor's
consent thereto. Notwithstanding the foregoing, Sublessor's consent shall
create no liability or responsibility of any kind on the part of Sublessor
for the completeness, design sufficiency, or compliance with any laws,
ordinances, directions, codes, regulations or requirements of governmental
agencies or authorities as related to Sublessee's drawings, specifications
or work. Sublessee shall have the responsibility, at Sublessee's sole cost
and expense, for obtaining all approvals and permits from the governmental
authorities having jurisdiction over the Subleased Premises for the
construction of all alterations and related improvements in the Subleased
Premises. Prior to commencing construction of any alterations, Sublessee
shall be responsible for (a) obtaining builder's risk and all other
insurance as required, naming Sublessor and Lessor as additional insureds,
and (b) indemnifying and holding harmless both Sublessor and Lessor and
their respective agents, representatives and employees from and against all
liability, claims, demands, expenses, damages and judgments arising from
property damage or injury to third parties (including wrongful death)
during the construction of any alterations unless due to the gross
negligence or willful misconduct of Sublessor or Lessor or their respective
agents, representatives or employees. Said insurance and indemnity shall be
in full force and effect for the period beginning with the commencement of
construction and ending on the completion of construction. During such
period, the risk of loss for damage to the alterations occurring because of
fire or any other casualty relating to Sublessee's work on the Subleased
Premises shall be absolutely borne by Sublessee, except to the extent
caused by the gross negligence or willful misconduct of Sublessor, its
agents, employees or contractors.
Sublessee shall cause the Subleased Premises and all related improvements
to be constructed free of any mechanic's or materialmans' lien, claim or
charge and shall indemnify Sublessor and Lessor absolutely against any and
all such liability that may arise after the Commencement Date on account of
the construction, improvements and alterations for which Sublessee is
responsible. Sublessee shall cause the general contractor and subcontractor
to file lien waivers and releases as work commences and progresses in
accordance with procedures and practices in the Commonwealth of Virginia
Sublessee shall, and shall cause all general contractors and subcontractors
performing alterations in the Subleased Premises, at all times to use its
and their reasonable efforts to conduct its and their activities in a
manner which will not interfere with either Sublessor's use of the Building
or its business thereon, or Sublessor's use of the Premises or its business
therein. Sublessee shall be responsible for the removal of debris and
cleaning of space during the construction of any alterations.
11. REPAIRS/MAINTENANCE/UTILITIES: With the exception of Sublessee's personal
-----------------------------
property and equipment (desks, chairs, systems furniture and telephones) in
the Subleased Premises and services relating thereto, and subject to
Sublessee's obligation to pay Base Rent and Additional Rent, Sublessor
shall at all times, as an
-7-
<PAGE>
Operating Expense subject to Paragraph 6 hereof, maintain in good order,
condition and repair the Subleased Premises and every part thereof and all
fixtures and improvements therein and thereon, through regular inspections
and servicing, and make replacements to such equipment, systems and
building components as reasonably necessary throughout the Term, including,
without limitation, (i) all plumbing and sewage facilities; (ii) all
windows, doors, entrances and plate glass; (iii) all electrical facilities
and all equipment including all lighting fixtures, lamps, bulbs and tubes,
fans, vents, exhaust equipment and systems; (iv) all fire extinguisher
equipment; (v) the landscaping; (vi) the parking areas; (vii) the exterior,
floors and roof of the Building; (viii) all HVAC equipment which serves the
Subleased Premises; and (vix) janitorial services to the Building as
outlined in Exhibit "D" attached hereto. Sublessor shall also remove all
debris (including, without limitation, snow and ice) from all sidewalks,
curbs, parking areas and roadways located upon or adjacent to the Subleased
Premises. Notwithstanding the foregoing, Sublessee shall be obligated to
pay Sublessor as Additional Rent for all janitorial services provided in
Space B, if any.
Sublessee shall, throughout the Term, at its sole cost and expense, keep
the Subleased Premises clean, keep waste and drain pipes open and generally
keep the Subleased Premises and the improvements now or hereafter
comprising all or any part of the Subleased Premises and the fixtures and
appurtenances thereto in good order, repair and condition normal wear and
tear only excepted. In addition, Sublessee shall, at its sole cost and
expense, promptly repair all damage or injury to the Subleased Premises,
making replacements, if necessary, caused by (a) the negligence or willful
misconduct of Sublessee or its employees, agents, invitees, licensees,
subtenants or contractors; (b) the act of moving in or out of the Subleased
Premises; and/or (c) the installation and/or removal of any furniture,
fixtures or other property.
Electricity to the Subleased Premises for Sublessee's equipment and
lighting shall be separately metered and usage invoiced monthly to
Sublessee as Additional Rent, provided, however, that electricity payments
shall be made in arrears based on metered use. Such usage shall be invoiced
monthly to Sublessee at the metered rate (without any additional charges
added thereon) as Additional Rent beginning on the Commencement Date.
Sublessee shall pay the charges for such utility services directly to
Sublessor within thirty (30) days of receipt of Sublessor's invoice. In the
event Sublessee fails to pay its charges for electricity when due,
Sublessor shall have the right thereafter to require Sublessee to pay to
Sublessor one-twelfth (1/12th) of the estimated annual electricity costs
concurrently with the payment of each monthly payment of Base Rent due
hereunder. In the event Sublessor exercises its right to require the
payment of electricity charges each month on an estimated basis, promptly
upon receipt of actual electricity cost figures for the calendar year,
Sublessor shall, in the case of any overpayment by Sublessee, credit such
overpayment to the next installment(s) of Base Rent payable hereunder. In
the case of any underpayments by Sublessee, Sublessee shall pay such sums
to Sublessor within thirty (30) days of receipt of an invoice from
Sublessor setting forth the amount due.
12. LEASE CONTROLLING: Except as herein provided and to the extent any
-----------------
provisions of the Lease apply solely to Lessor and to Sublessor as both
Lessee and Seller thereunder, Sublessee agrees to comply with all of the
terms and conditions set forth in the Lease (a copy of which is attached
hereto as Exhibit "B" and made a part hereof) as are to be performed by
Sublessor as Lessee thereunder. All of the terms and conditions of the
Lease shall apply in the same manner to Sublessee as they are expressed
therein to apply to Sublessor as Lessee thereunder except Sections 2.3, 5,
-8-
<PAGE>
8.3,9.1 (as it relates to Lessee's obligation to rebuild), 16, 37, 42, 43,
44,45.4, 45.5 and 48 of the Lease and as modified or deleted pursuant to
the terms of this Sublease. Notwithstanding the foregoing, in the event of
any conflict between any of the provisions of this Sublease and any of the
provisions of the Lease, the provisions of this Sublease shall be
controlling.
13. LEASE IN EFFECT: Sublessor warrants and represents, to the best of
---------------
Sublessor's knowledge, information and belief, that the Lease is subsisting
and is in full force and effect, Sublessor is not in default thereunder,
and all rents, additional rents and charges due thereunder are and will be
paid.
14. SUBLETTING OR ASSIGNMENT: Sublessee covenants that it will not assign its
------------------------
interest in this Sublease, in whole or in part, or permit the subletting of
the Subleased Premises or any part thereof without the prior written
consent of Lessor and Sublessor, which consent of Sublessor shall not be
unreasonably withheld or delayed. In the event of any permitted assignment
or subletting at a rental rate in excess of that being charged to Sublessee
hereunder, Sublessee shall pay to Sublessor, as collected, fifty percent
(50%) of such excess rents, less the actual reasonable out-of-pocket costs
of Sublessee in making such sublease for (a) customary brokerage fees,
attorneys' fees, and advertising costs, (b) improvement and alteration
costs to prepare the premises for such sublease, not to exceed prevailing
market terms, and (c) the amortized cost of any special fixtures or the
cost of any extra services which Sublessee is providing to such sublessee.
Notwithstanding the foregoing, Sublessee shall have the right to sublease
or assign all or a portion of the Subleased Premises to an affiliate or
subsidiary of Sublessee without Sublessor's consent, provided that
Sublessee provides Sublessor prior written notice thereof and Sublessee
furnishes Sublessor with a copy of any such sublease or assignment within
thirty (30) days of such sublease or assignment.
15. INSURANCE AND INDEMNITY: Sublessee agrees to indemnify and hold harmless
-----------------------
both Sublessor and Lessor from and against c 11 liability, claims, demands,
expenses, damages and judgments arising from property damage or injury to
third parties (including wrongful death) upon the Subleased Premises during
the Term or any extension thereof, unless due to the gross negligence or
willful misconduct of Sublessor. Sublessee agrees, at its own cost and
expense, to keep the Subleased Premises insured under a public liability
policy against claims for property damage and personal injury to third
parties (including wrongful death). Such insurance shall be combined single
limit policy in an amount not less than $3,000,000 per occurrence. Upon
execution of this Sublease by Sublessee and at least thirty (30) days prior
to the expiration date of such policies, Sublessee shall furnish to Lessor
and Sublessor a certificate or certificates of insurance confirming that
the required insurance is in full force and effect with all premiums paid
current. Sublessee further agrees to indemnify and hold harmless Sublessor
and Lessor from all liability arising out of the filing of any mechanic's
or materialman's lien against the Subleased Premises by reason of any act
or omission of Sublessee. Sublessor and Sublessee agree to waive any and
all right of recovery against the other for each and every insured property
loss under the terms of any policy or related policies hereto.
16. PERSONAL PROPERTY: Sublessee agrees to assume full responsibility for its
-----------------
personal property located at the Subleased Premises, and to indemnify and
hold harmless Sublessor and Lessor against damage sustained by fire, theft
or other casualty loss. Sublessee is hereby advised that Sublessor does
not maintain for the benefit of
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<PAGE>
Sublessee, nor shall Sublessor at any time hereafter maintain for the
benefit of Sublessee, any insurance upon Sublessee's personal property,
fixtures, furnishings and equipment, business interruption, sprinkler
leakage or glass breakage. Sublessee shall, at its own cost and expense,
procure all such insurance as Sublessee shall desire for its own benefit.
17. NOTICES: All notices required shall be given by registered or certified
-------
mail, postage prepaid, return receipt requested. Notice to the Sublessee
shall be addressed to:
- PSINet, Inc. 510 Huntmar Park Drive
- Herndon, VA 20170
- Attn: Real Estate Department
Notice to Sublessor shall be addressed to:
- Unisys Corporation
- P.O. Box 500
- Blue Bell, PA 19424
- ATTN: Real Estate Lease Administration
All notices shall be deemed received upon receipt or refusal.
18. HOLD OVER: Notwithstanding any provision of law or any judicial decision to
---------
the contrary, no notice shall be required to terminate the Term on the date
herein specified as the end of the term, and the Term shall expire on the
date herein mentioned without notice being required from either party. In
the event that Sublessee remains beyond the expiration date of the Term, it
is the intention of the parties and it is hereby agreed that a tenancy at
sufferance shall arise at a monthly rent equal to one hundred fifty percent
( 150%) the monthly Minimum Rent in effect at the expiration of the Term
plus any amounts charged against Sublessor as Lessee under the Lease for
holdover rent or penalty. It is further agreed that Sublessee shall
indemnify and hold harmless Sublessor from and against any and all
liability, claims, demands, expenses, damages and judgments incurred by
Sublessor as a result of Sublessee's retaining possession.
19. SUBLESSEE DEFAULT: The occurrence of any one or more of the following
-----------------
events shall constitute a default under this Sublease by Sublessee:
a The abandonment of the Subleased Premises by Sublessee.
b. The failure by Sublessee to make any payment of Minimum Rent,
Additional Rent or any other payment required to be made by Sublessee
hereunder on the date due where such failure continues for five (5)
days after Sublessor's written notice thereof.
c. The failure by Sublessee to observe or perform any of the covenants,
conditions or provisions of this Sublease other than as described in
the immediately preceding paragraph and/or the failure by Sublessee
to observe or perform any of the covenants, conditions or provisions
of the Lease to which Sublessee has agreed to be bound pursuant to
the terms of this Sublease, where such failure
-10-
<PAGE>
shall continue for a period of fifteen ( 15) days after written notice
thereof from Sublessor to Sublessee, provided, however, that if the
nature of Sublessee's default is such that more than fifteen (15) days
are reasonably required for its cure, then Sublessee shall not be
deemed to be in default if Sublessee commences such cure with said
fifteen ( 15) day period and thereafter diligently prosecutes such
cure.
d. The making by Sublessee of any general arrangement or assignment for
the benefit of creditors; Sublessee becomes a "debtor" as defined in
11 U.S.C. 101 or any successor statute thereto (unless, in the case of
a petition filed against Sublessee, the same be dismissed within sixty
(60) days); the appointment of a trustee or receiver to take
possession of all or substantially all of Sublessee's assets or of
Sublessee's interest in this Sublease, where possession is not
restored to Sublessee within thirty (30) days; or the attachment,
execution or other judicial seizure of all or substantially all of
Sublessee's assets or of Sublessee's interest in this Sublease, where
such seizure is not discharged within thirty (30) days.
In the event of the failure by Sublessor, after thirty (30) days prior
written notice thereof, to perform any of the provisions, covenants,
agreements or conditions of this Sublease on its part to be performed,
Sublessee may, in addition to any remedies available to it at law or in
equity, perform the same for and on behalf of Sublessor, the cost of which
performance, upon the proper payment thereof, shall be paid to Sublessee by
Sublessor.
20. REMEDIES: In the event of any such default by Sublessee, Sublessor may at
--------
any time thereafter, without limiting Sublessor in the exercise of any
right or remedy which Sublessor may have by reason of such default or
breach:
a. Terminate Sublessee's right to possession of the Subleased Premises by
any lawful means, in which case this Sublease shall terminate and
Sublessee shall immediately surrender possession of the Subleased
Premises to Sublessor. In such event, Sublessor shall be entitled to
recover from Sublessee all damages permitted to be recovered by a
landlord pursuant to the laws of the jurisdiction where the Subleased
Premises are located, together with all damages incurred by Sublessor
by reason of Sublessee's default, including, but not limited to, the
cost of recovering possession of the Subleased Premises, reasonable
attorneys fees, and any real estate commission actually paid.
b. Maintain Sublessee's right to possession in which case this Sublease
shall continue in effect whether or not Sublessee shall have vacated
or abandoned the Subleased Premises. In such event, Sublessor shall be
entitled to enforce all of Sublessor's rights and remedies under this
Sublease, under the laws of the jurisdiction where the Subleased
Premises are located at law and equity, including the right to recover
the Minimum Rent, Additional Rent, and all other sums due hereunder as
the same become due.
c. Declare the entire balance of Minimum Rent, Additional Rent and all
other sums payable hereunder during the remaining Term of this
Sublease to be immediately due, payable and in arrears as if by the
terms and provisions of
-11-
<PAGE>
this Sublease said balance of Minimum Rent, Additional Rent and other
sums were on that date payable in advance on a present value basis.
Any such acceleration by Sublessor shall not constitute a waiver of
any right or remedy of Sublessor.
d. Pursue any other remedy now or hereafter available to Sublessor under
the laws of the jurisdiction where the Subleased Premises are located
or in equity.
e. Pursue any remedy enforceable by Lessor under the Lease.
To the extent not prohibited by law, all remedies available to Sublessor
hereunder shall be cumulative and concurrent. No waiver or delay in
enforcement by Sublessor of any breach of Sublessee's obligations hereunder
shall constitute a waiver of any such breach or any subsequent breach.
21. INTEREST: In the event that any sums due and payable to Sublessor pursuant
--------
to the terms of this Sublease are not paid when due, such sums shall bear
interest at the rate of twelve percent (12%) per year, from the due date
until actually paid, unless that rate is usurious as applied to Sublessee
in which event the rate shall be reduced to the highest non-usurious rate.
Neither the accrual nor the payment of interest shall cure any default by
Sublessee under this Sublease.
22. BROKERS: Sublessor and Sublessee represent, warrant and agree that each has
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not dealt with any broker, agent, finder or other intermediary in
connection with the subletting of the Subleased Premises except Spaulding
and Slye Services Limited Partnership, Inc. (the "Listing Broker") and The
Charles E. Smith Companies (the "Participating Broker"). Sublessor shall be
solely liable for any commission due to the Listing Broker. The Listing
Broker shall be solely liable for any commission due to the Participating
Broker. Sublessor and Sublessee agree to indemnify, defend and hold the
other harmless from and against any claims against the other resulting from
a breach or inaccuracy of the foregoing representation, warranty and
agreement which shall survive expiration, cancellation or other termination
of this Sublease.
23. COMPLIANCE WITH LAWS: Except as required of Sublessor herein, Sublessee
--------------------
shall, throughout the Term of this Sublease, observe and comply with all
statutes, laws, ordinances, notices, orders, rules, regulations and
requirements of all federal, state and municipal governments and
appropriate departments, commissions, boards and officers thereof, and
notices, orders, rules and regulations of the National Board of Fire
Underwriters, or any other body now or hereafter constituted exercising
similar functions, foreseen or unforeseen, ordinary as well as
extraordinary, related to Sublessee's use or manner of use of the Subleased
Premises, or to fixtures and equipment thereof, and to the extent of any
alterations or improvements constructed by Sublessee at the Premises at
Sublessee's sole cost and expense.
24. AUTHORITY: The parties executing this Sublease represent and warrant that
---------
they have the full right and lawful authority to execute this Sublease for
the Term, in the manner and upon the conditions and provisions herein
contained.
25. FURTHER DOCUMENTS: Each party agrees to execute and deliver to the other
-----------------
all instruments which may reasonably be required to carry out all terms and
provisions of this Sublease.
-12-
<PAGE>
26. RECOVERY OF FEES: If either party is successful in enforcing or defending
----------------
against the other any legal or equitable action or suit for a breach of any
provision of this Sublease, the successful party shall be entitled to
recover its expenses and reasonable attorney's fees as determined by the
court as part of the judgment or decree.
27. BINDING EFFECT: This Sublease shall be binding upon the successors and
--------------
permitted assigns of Sublessee and Sublessor.
28. INTEGRATED DOCUMENT: This instrument embodies all of the agreements between
-------------------
the parties with respect to the Subleased Premises, and no oral agreements,
prior correspondence or other prior writings shall be held to vary the
provisions hereof. Any subsequent changes or modifications shall become
effective only by a written instrument duly executed by Sublessee and
Sublessor.
29. LESSOR'S CONSENT: This Sublease is contingent upon, and shall have no force
----------------
or effect until receipt of, the Lessor's written consent hereto.
30. HOURS OF OPERATION: Sublessor shall provide utility service to the
------------------
Subleased Premises 24-hours a day, seven (7) days a week with the exception
of annual maintenance shut down and loss of utility service from providers.
Sublessor shall give Sublessee no less than fourteen (14) days prior
written notice of annual maintenance shut downs and said shut downs shall
not continue for more than eight (8) hours. Notwithstanding the foregoing,
Sublessor will use its reasonable efforts to minimize the duration of such
annual shut downs. Sublessor shall provide heating, ventilation and air-
conditioning (HVAC) to the Subleased Premises between the hours of 8:00AM
and 6:00PM, Monday through Friday and between the hours of 9:00AM and
1:00PM on Saturday. No HVAC service will be provided on Sundays or
holidays. Sublessor shall provide Building HVAC to the Subleased Premises
at other times subject to a charge to be paid by Sublessee to Sublessor at
the rate of $50.00 per hour as Additional Rent.
31. COMMON FACILITIES: It is understood by the parties hereto that the
-----------------
cafeteria located at the Premises is operated by a third party franchisee.
The parties hereto agree that during the Term both Sublessor and Sublessee,
their employees and invitees, shall have equal access during the times of
operation as so designated by the respective franchisee. Any fees or costs
associated with the individual use of this facility shall be borne by the
individual users of same. Notwithstanding the foregoing, Sublessor shall
not be obligated to provide a cafeteria at the Premises and Sublessor shall
not be deemed in default hereunder in the event the cafeteria is
temporarily or permanently closed.
32. CASUALTY DAMAGE: If the Subleased Premises are damaged in part or whole
---------------
from any cause and can be substantially repaired and restored within one
hundred twenty (120) days from the date of the damage using standard
working methods and procedures, Sublessor shall, at its expense, promptly
and diligently repair and restore the Subleased Premises to substantially
the same condition as existed before the damage. This repair and
restoration shall be made within said one hundred twenty (120) days unless
the delay is due to causes beyond Sublessor's control.
If the Subleased Premises cannot be repaired and restored within said one
hundred twenty (120) days, then either party may, within then (10) days
after determining that such repairs and restoration cannot be made within
the one hundred twenty (120) day
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period, cancel this Sublease by written notice to the other party;
provided, however, that Sublessee shall not be able to cancel this Sublease
if the damage was caused by Sublessee's negligence or willful misconduct.
Unless said damage is caused by Sublessee's negligence or willful
misconduct, the Base Rent and Additional Rent shall abate in proportion to
that part of the Premises that is unfit for use in Sublessee's business.
The abatement shall continue from the date of the damage until the earlier
of ten (10) business days after Sublessor completes repairs and restoration
and notice to the Sublessee of completion, or until Sublessee again uses
the Subleased Premises or the part rendered unusable.
33. CONDEMNATION: In the event that the entire Subleased Premises or the
------------
portions of the Subleased Premises required for reasonable access to, or
the reasonable use of the Subleased Premises are taken by eminent domain,
this Sublease shall automatically end on the earlier of the date of such
taking or the date when Sublessee is dispossessed. In the event that a
portion of the Subleased Premises is taken and such taking materially
interferes with Sublessee's ability to continue its business operations in
substantially the same manner, Sublessee may end this Sublease on the
earlier of the date of such taking or the date when Sublessee is
dispossessed. If there is a partial taking of the Subleased Premises and
the Sublease continues, the Sublease shall end as to the part taken and the
Base Rent and Additional Rent shall abate in proportion to the part of the
Subleased Premises taken and Sublessee's pro rata share shall be equitably
reduced. If part or all of the Subleased Premises are condemned for a
limited period of time not to exceed one hundred twenty (120) days (a
"Temporary Condemnation"), this Sublease shall remain in effect. The Base
Rent and Additional Rent and Sublessee's obligations for the part of the
Subleased Premises taken shall abate during the Temporary Condemnation in
proportion to the part of the Subleased Premises that Sublessee is unable
to use in its business operations as a result of the Temporary
Condemnation.
34. RULES AND REGULATIONS: Sublessee covenants and agrees that Sublessee, its
---------------------
employees, agents, invitees, licensees and other visitors shall observe
faithfully, and comply strictly with, any reasonable rules and regulations
as Sublessor may, after notice to Sublessee, from time to time adopt;
provided, however, that in the event of a conflict between the terms of
such rules and regulations and the terms of this Sublease, the terms of
this Sublease shall prevail. Sublessee acknowledges that no smoking is
permitted in the Building (including all common areas and stairwells).
Sublessee agrees to communicate this "no smoking" rule to its employees,
agents, invitees, licensees and other visitors, and agrees to enforce this
rule. Nothing in this Sublease contained shall be construed to impose upon
Sublessor any duty or obligation to enforce the rules and regulations or
terms, covenants or conditions in any other sublease as against any other
sublessee, and Sublessor shall not be liable to Sublessee for violation of
the same by any other sublessee, its servants, employees, agents, invitees,
licensees or other visitors.
35. PERFORMANCE OF SUBLESSEE'S COVENANTS: If Sublessee fails to perform any
------------------------------------
covenant or observe any condition to be performed or observed by Sublessee
hereunder or acts in violation of any covenant or condition thereof beyond
any applicable cure period, so long as Sublessee is not proceeding
diligently to correct or cure such default, Sublessor may, but shall not be
required to on behalf of Sublessee,
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<PAGE>
perform such covenant and/or take such steps, including, without
limitation, entering upon the Subleased Premises, as may be necessary or
appropriate to meet the requirements of any such covenant or condition,
provided that Sublessor shall have given Sublessee at least ten (10) days
prior written notice of Sublessor's intention to do so, unless an emergency
situation exists, in which case the Sublessor shall have the right to
proceed immediately; and al costs and expenses incurred by Sublessor in so
doing, including reasonable legal fees, shall be paid by Sublessee to
Sublessor upon demand, plus interest at the rate of twelve percent (12%)
per year from the date of expenditure(s) by Sublessor. Sublessor's
proceeding under the rights reserved to Sublessor under this Paragraph 35
shall not in any way prejudice or waive any rights which Sublessor might
otherwise have against Sublessee by reason of Sublessee's default.
36. ENVIRONMENTAL: Sublessee shall not dispose of, store, deposit, bury, dump,
-------------
spill, leak, place, release or inject into the Subleased Premises or the
Premises, any Hazardous Waste (as hereinafter defined) in any manner which
would violate any of the Environmental Statutes (as hereinafter defined).
For purposes of this Sublease, the term "Environmental Statutes" shall mean
all federal, state or local laws, ordinances, rules, regulations or
policies, now or hereafter existing, which govern or otherwise relate to
the use, storage, treatment, transportation, manufacture, refinement,
handling, production or disposal of any Hazardous Waste as defined in the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. S 9, 601 et seq.) ("CERCLA") or any other applicable federal, state
or local statute. For purposes of this Sublease, the term "Hazardous Waste"
shall mean any flammable substance, explosive, radio active material,
hazardous material, hazardous waste, toxic substance, pollutant, pollution
or any related materials or substances specified in any of the
Environmental Statutes, including, but not limited to, asbestos, PCB's and
any hazardous substance as defined in CERCLA.
Sublessee shall protect, indemnify and save Sublessor harmless from and
against any and all liability, laws, damage, cost or expense that Sublessor
may suffer or incur as a result of any claims, demands, damages, losses,
liabilities, costs, charges, suits, orders, judgments or adjudications
asserted, assessed, filed or entered against Sublessor by any third party,
including any governmental authority, arising from the alleged deposit,
storage, disposal, burial, dumping, injecting, spilling, leaking or other
use, placement or release in, on or affecting the Subleased Premises or the
Premises by Sublessee of a Hazardous Waste in violation of any of the
Environmental Statutes during the Term of this Sublease, including, but not
limited to, liability for costs and expenses of abatement, correction or
clean-up, fines, damages, response costs or penalties, or liability for
personal injury or property damage.
Sublessor shall protect, indemnify and save Sublessee harmless from and
against any and all liability, laws, damage, cost or expense that Sublessee
may suffer or incur as a result of any claims, demands, damages, losses,
liabilities, costs, charges, suits, orders, judgments or adjudications
asserted, assessed, filed or entered against Sublessee by any third party,
including any governmental authority, arising from the alleged deposit,
storage, disposal, burial, dumping, injecting, spilling, leaking or other
use, placement or release in, on or affecting the Subleased Premises or the
Premises of a Hazardous Waste in violation of any of the Environmental
Statutes by Sublessor, or
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by any third party existing prior to the term of this Sublease, including,
but not limited to, liability for costs and expenses of abatement,
correction or clean-up, fines, damages, response costs or penalties, or
liability for personal injury or property damage.
37. TERMINATION OPTIONS: Provided Sublessee is not in default hereunder at the
-------------------
time such option is exercised and such option commences, Sublessee shall
have the following options to terminate this Sublease:
(a) Sublessee shall have the right to terminate this Sublease in the event
that Sublessee is unable to connect to fiber optic service, provided
(i) Sublessee has used commercially reasonable efforts to obtain such
services, (ii) Sublessor receives written notice from Sublessee
exercising such option on or before the date which is sixty (60) days
from the execution of this Sublease by Sublessee and Sublessor, and
(iii) Sublessee accompanies its notice with a payment to Sublessor
comprised of Ninety-One Thousand Nine Hundred Seventy-Three and 67/
100 Dollars ($91,973.67) plus an amount equal to Sublessor's
transaction costs to consummate this Sublease, as reasonably
determined by Sublessor, including, but not limited to, demising and
electrical submetering costs and architectural or engineering costs
related thereto, legal fees, cost of obtaining Lessor's consent and
any brokers' commissions related to Paragraph 22 of this Sublease to
the extent they have been paid; and
(b) Sublessee shall have the right to terminate this Sublease effective
September 30, 2003, provided (i) Sublessor receives written notice
thereof from Sublessee on or before December 31, 2002, and (ii)
Sublessee accompanies its notice with a payment to Sublessor comprised
of Three Hundred Forty Thousand Thirty-Three and 76/100 Dollars
($340,033.76) plus an amount equal to Sublessor's unamortized
"transaction costs" amortized over the Sublease Term at an interest
rate of ten percent (10%).
38. RIGHT OF FIRST OFFER: Provided that Sublessee is not in default at the time
--------------------
such option is exercised and such option commences, Sublessee shall have
the right of first offer for leasable premises in the Buildings during the
Sublease Term. If all or any portion of the Buildings becomes available to
lease, Sublessor shall first offer, in writing, to lease such space to
Sublessee. The location of the space shall be determined by Sublessor in
its sole but reasonable discretion. Such offer to Sublessee shall be upon
terms and conditions as shall be mutually agreed to by the parties at the
time such space becomes available. Sublessee shall have thirty (30) days
following receipt of Sublessor's notice in which to negotiate mutually
acceptable terms and to elect, in writing, to lease such space on such
mutually acceptable terms from Sublessor.
In the event Sublessee shall fail to exercise such option with such thirty
(30) day period, Sublessor hereafter may lease such space to any third
party without any additional notice to Sublessee at a rent and upon such
terms and conditions as Sublessor may determine and Sublessee shall have no
further rights under this Paragraph 38 to such space or any future space.
Notwithstanding the foregoing, if Sublessor shall desire to lease such
space to a third party at terms at least ten percent (10%) less than those
offered to Sublessee under this Paragraph 38, Sublessor shall re-offer such
space to Sublessee at such lesser terms and Sublessee shall have five (5)
days in which to exercise such second offer.
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In the event Sublessee exercises any of the rights set forth herein,
Sublessor and Sublessee shall execute an appropriate amendment to this
Sublease. In the event Sublessee leases all of the Building in its entirety
from Sublessor, Sublessee's termination option set forth in Paragraph 37
(b) hereto shall become null and void and of no further force and effect.
39. OPTION TO RENEW: Provided Sublessee is not in default hereunder and
---------------
Sublessor exercises Sublessor's option to renew the Lease, Sublessee shall
have the option to renew this Sublease for Sublessor's renewal term upon
all of the terms and conditions of this Sublease as then in effect, except
that Sublessee's Base Rent and base year for purposes of Operating Expenses
shall be adjusted, provided that Sublessee's Base Rent during the renewal
term shall not exceed ten percent ( 10%) above Sublessor's costs during the
initial year of the renewal term. In the event Sublessee desires to renew
this Sublease, it shall give written notice to Sublessor of its intention
to renew this Sublease at least twelve (12) months prior to the Expiration
Date. Sublessor shall provide Sublessee with written notice of its election
to renew the Lease simultaneous with Sublessor's notice to Lessor.
40. SIGNS: (a) Subject to Sublessor's receipt of all necessary approvals and
-----
permits, Sublessee shall have the non-exclusive right to have Sublessor
install, at Sublessee' s sole expense, Sublessee's corporate name and/or
logo on a monument sign on or adjacent to Sublessor's existing sign located
at the main Sunrise Valley Drive entrance to the Premises. Subject to the
Lease, the location and size of said monument signage shall be within
Sublessor's sole discretion and Sublessor shall diligently pursue Lessor's
consent to such monument sign pursuant to this Paragraph 40(a).
(b) Subject to Sublessee's receipt of all necessary approvals and permits,
Sublessee shall have the exclusive right to erect, at Sublessee's sole
expense, a monument sign near the South entrance to the Building and to
install, at Sublessee's sole expense, its corporate logo on the glass
entrance doors to the South lobby of the Building, pursuant to the site
plan, detail drawings and specifications as depicted on Exhibit "E"
attached hereto.
41. PARKING: Sublessor shall provide unreserved parking, free of charge, at a
-------
ratio of three (3) spaces per 1,000 rentable square feet on the adjacent
surface lots to the Building. Included in this ratio shall be five (5)
spaces proximate to the South lobby of the Building, which shall be
designated for Sublessee's visitors.
42. GENERATORS: Sublessee shall have the right to install up to three (3)
----------
generators and associated equipment at the Premises on the Land as provided
on Exhibit "F" attached hereto subject to Sublessee's submission to
Sublessor and Lessor of detailed plans and specifications for Sublessor's
and Lessor's consent. In the event Sublessee proposes to have the
generators located on the roof of the lower level space and the roof needs
structural modifications to accommodate such generators, said structural
modifications shall be done at Sublessee's sole cost and expense. Sublessee
shall also have the right, subject to Sublessor's consent, which shall not
be unreasonably withheld or delayed and any Lessor consent as may be
required, to place for no more than one hundred eighty (180) days from the
Commencement Date a thirty (30) foot aluminum trailer beside the lower
level space and wire the generator contained in the trailer into the
Subleased Premises. Notwithstanding the foregoing, in the event the
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trailer is not removed within such one hundred eighty (180) days, Sublessor
shall have the right to charge Sublessee One Thousand and No/ 100 Dollars
($1,000.00) per day as Additional Rent for every day the trailer remains at
the Premises, and Sublessee shall indemnify Sublessor and give Sublessor
the right to remove the trailer at Sublessee's sole cost and expense.
43. SECURITY: Sublessor shall provide Sublessee with sensor card key access to
--------
the Building with three (3) sensor cards per one thousand (1,000) rentable
square feet leased at no charge. Sublessor and Sublessee shall reasonably
coordinate for the Building security staff to (a) use the rest rooms
located in the Subleased Premises; (b) walk daily through the Subleased
Premises (non-disclosure required); (c) provide periodic ingress and egress
reports as reasonably requested by Sublessee; and (d) deactivate terminated
employees' access cards upon Sublessee's written request.
44. TRENCHING RIGHTS: Sublessee shall have the right to lay conduit on the Land
----------------
subject to Sublessee's submission to Sublessor and Lessor (if required by
the Lease) of detailed plans and specifications of Sublessee's proposed
installation of trenching for conduit for Sublessor's approval which shall
not be unreasonably withheld or delayed and for Lessor's approval if
required under the Lease.
45. ROOF RIGHTS: (a) Sublessee shall have the right, pursuant to any conditions
-----------
of limitation as provided herein or pursuant to law, to furnish, install,
maintain and operate on the roof of the Building (hereinafter referred to
as the "Roof") two (2) satellite dishes with a screened enclosure if
requested by Sublessor (referred to as the "Antennae:") including
appurtenant lines to any offices located within the Building, and provided
that the furnishing, installation, maintenance and operation of the
Antennae and the electrical power supply and use thereof shall be subject,
in all respects, to all the covenants, agreements, terms, provisions and
conditions contained in this Sublease. Sublessee understands and agrees
that access to the Roof is obtained only through the assistance of
Sublessee's designated personnel and, if desired during other than normal
business hours, Sublessee shall pay to Sublessor a reasonable charge for
the additional services required thereby. Sublessee understands and agrees
to accept such portion of the Roof, or the Building in "as-is" condition.
(b) Sublessee, at Sublessee's cost and expense and at the sole Ask of
Sublessee, shall, after the Commencement Date, if and to the extent
permitted by law and subject to Sublessor's and Lessor's approval, as
required herein, furnish, install, maintain and operate the Antennae on the
Roof and provided, however, that the Antennae and each and every part and
component thereof (including, but not limited to, all electrical
connections and outlets and lightening arresters and conductors) shall be
furnished and installed in accordance with plans as approved by a certified
professional engineer licensed by the Commonwealth of Virginia and by
Sublessor and Lessor, and maintained and operated in accordance with sound
engineering principles and in compliance with all rules, orders,
regulations, requirements and laws of all governmental authorities
applicable to the Premises and to Sublessee's installations and operations
thereon and therefrom. The furnishing and installation of the Antennae by
Sublessee shall include such safeguards as may be necessary for the
servicing of same, including, if deemed reasonably necessary by Sublessor,
the construction of a platform and handrails.
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(c) Prior to the furnishing, installation and maintenance of the Antennae,
Sublessee shall submit plans and specifications relating to any such
furnishing, installation and maintenance and shall request Sublessor's and
Lessor's approval therefor, and no such furnishing, installation and/or
maintenance shall be undertaken, started or begun by Sublessee unless and
until Sublessee has received the prior written approval from Sublessor and
Lessor, including, but not limited to, approval as to the location of the
portion of the Roof where the Antennae are to be so installed, it being
expressly understood and agreed by Sublessee that any such approval
required from Sublessor may be withheld if in Sublessor's judgment the
installation or operation of the Antennae would adversely affect the use,
enjoyment or occupancy by any tenant or occupant of the Building or would
adversely affect the operation of any Building equipment; Sublessor will
not accept any responsibility for the plans as a result of its review and
approval.
(d) Sublessee, at Sublessee's expense, shall keep the Antennae in good
order and condition and Sublessee shall, at Sublessee's expense, make all
repairs and replacements thereto and to the Building, ordinary or
extraordinary, structural or otherwise, foreseen or unforeseen, when
necessary by reason of the furnishing, installation, maintenance or
operation of the Antennae or any replacements, and Sublessee will comply
with all applicable rules, laws and regulations and will bear all expenses
of complying with them.
(e) Sublessee, at Sublessee's expense, shall on or before the expiration or
other termination of the term of this Sublease, remove the Antennae and any
replacements thereof and shall repair all damage and injury to the
Building, including the Roof, caused by the removal of the Antennae or any
replacements thereof and shall restore the Building, including the Roof, to
the condition existing prior to the installation of the Antennae.
(f) Sublessee, at Sublessor's expense, shall, upon written request of
Sublessor, within forty-five (45) days, relocate the Antennae to such other
useable location on the Premises in any such case, as may be designated by
Sublessor if Sublessor deems any such relocation necessary or desirable for
the efficient operation or maintenance of the Building or any Building
equipment.
(g) Sublessee covenants and agrees that at no time (i) will the Antennae be
used or operated in any manner so as to interfere with any operation of the
Building or of any tenant, occupant or licensee of the Building, and (ii)
will the Antennae interfere in any way with the functioning of any
electronic gear, mechanism, computer or system utilized in the Building
such as, but not limited to, the electronic elevator control system.
(h) Nothing contained herein shall be deemed or construed to constitute a
representation or guarantee by Sublessor that the Antennae may, as a matter
of law, be so installed, maintained or operated by Sublessee.
(i) Sublessee, recognizing that the Premises has been developed and is
being maintained as a location for an outstanding type of business
occupancy, and as a special inducement to Sublessor to grant this right,
covenants and agrees that at all times the appearance, quality and utility
of all equipment used by Sublessor under
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this Paragraph 45 will be only such as meets with Sublessor's approval and
if at any time reasonably disapproved by Sublessor, Sublessee shall remove
the reasonable basis for such disapproval in such manner and within such
reasonable time as may be specified by Sublessor in a written notice given
by it to Sublessee for such purpose.
(j) Sublessee agrees that it will not during installation, maintenance or
removal of the Antennae, either directly or indirectly, use any contractors
and/or labor and/or materials if the use of such contractors and/or labor
and/or materials would or will create any difficulty with other contractors
and/or labor engaged by Sublessor or others in the construction,
maintenance and/or operation of the Premises or any part thereof. Sublessee
represents that the Antennae will not require any structural modifications
to the Building. In the event structural modifications are necessary,
Sublessee shall be responsible for same. Sublessee agrees to utilize a non-
penetrating roof mounting method for the Antennae and to use the existing
pitch pockets on the Roof for the installation of cabling from the
Antennae. In the event that use of any existing pitch pocket is not
technically feasible, Sublessee shall use Sublessor's designated roofing
contractor to make al roof penetrations. In the event that a roof
penetration is made pursuant to the foregoing and Sublessee discovers that
the roofing materials contain asbestos, Sublessor agrees to reimburse
Sublessee for the additional cost incurred by Sublessee, if any, to install
the Antennae on the Roof of the Building resulting from the presence of
asbestos requiring special handling under applicable law.
(k) Sublessee shall, and Sublessee covenants and agrees to, indemnify and
save harmless Sublessor against and from any and all claims by or on behalf
of any person or persons, firm or firms, corporation or corporations
arising out of and/or in connection with Sublessee's installation and
operation of the Antennae and activities related thereto in and on the
Building and arising from or in connection with the use of or from any work
or thing whatsoever done (other than by Sublessor or its agents or
employees) in or on the Building or any part thereof by Sublessee related
to the Antennae during the term of this Sublease, and further indemnify and
save Sublessor harmless against and from any and all claims, liabilities
and penalties imposed by any governmental authority by reason of the
installation or operation of the Antennae or arising from any condition or
use of, or any work or thing whatsoever done in or on, the Building or any
part thereof due to or arising from any default of Sublessee in the
performance of any of its obligations under this paragraph or from any act
or negligence of Sublessee or any of its agents or employees, and from and
against all costs, expenses and liabilities incurred in or in connection
with any such claim or claims or action or proceeding brought thereon.
(l) If any governmental license or permit shall be required for the proper
and lawful operation of Sublessee's Antennae, Sublessee, at Sublessee's
expense, shall duly procure and thereafter maintain such license or permit
and submit the same to inspection by Sublessor. Sublessee, at Sublessee's
expense, shall at all times comply with the terms and conditions of each
such license or permit.
(m) Sublessee covenants and agrees that neither its rights under this
paragraph nor any interest therein shall be assigned, mortgaged, pledged,
encumbered or otherwise transferred (whether voluntarily, by operation of
law or otherwise) without the prior written consent to Sublessor.
Notwithstanding anything else to the contrary, nothing herein shall operate
to affect Sublessee's interest hereunder in the event of any merger or
consolidation of Sublessee.
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(n) Whenever at any time during the term of this Sublease a charge
adjustment for additional electrical current required for operation of the
Antennae shall be incurred by Sublessor, Sublessor shall furnish to
Sublessee a statement in writing of Sublessor's determination of the
appropriate amount of said adjustment in said monthly charge payable by
Sublessee, said statement to include sufficient detail to enable Sublessee
to verify Sublessor's determination of the amount of the adjustment for
inspection by Sublessee, such cost and other records of Sublessor as were
used by it as the basis for its computation.
(o) In the event that Sublessee shall require additional electrical energy
in excess of such reasonable quantity to be furnished as herein provided
and if, in Sublessor's judgment, such excess requirements can not be
furnished unless additional risers, conduits, feeders, switchboards and/or
appurtenances are installed in the Building, mechanical penthouse or on the
Roof, Sublessor, upon written request of Sublessee, will proceed with
reasonable diligence to install such additional risers, conduits, feeders,
switchboards and/or appurtenances provided the same and the use thereof
shall be permitted by applicable laws and insurance regulations and shall
not cause permanent damage or injury to the Building, mechanical penthouse,
or Roof, or cause or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations or repairs or interfere with or
disturb other tenants or occupants of the Building, mechanical penthouse or
Roof, and Sublessee agrees to pay all costs and expenses incurred by
Sublessor in connector with such installation.
(p) In order that Sublessor may at all times have all necessary information
which it requires in order to maintain and protect its equipment, Sublessee
agrees that Sublessee will not make any alterations to the electrical
equipment and/or appliances in or on the Building or Roof related to the
Antennae except as permitted hereunder.
(q) The failure of Sublessor to insist in any one or more instances upon
the strict performance of any one of the covenants, agreements, terms,
provisions or conditions of this paragraph 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
elector, but the same shall continue and remain in full force and effect.
No waiver by Sublessor of any covenant, agreement, term, provision or
condition of this paragraph shall be deemed to have been made unless
expressed in writing and signed by Sublessor.
46. MISCELLANEOUS: (a) Sublessor shall have two (2) business days following
-------------
Sublessee's execution of this Sublease to countersign the Sublease and
forward it to Lessor for Lessor's consent. In the event Sublessor's
execution is delayed, the Commencement Date and Base Rent commencement date
shall be delayed one (1) day for each day beyond the second (2nd) business
day which the Sublease is not executed by Sublessor. Sublessor shall use
its reasonable efforts to obtain Lessor's consent to this Sublease within
seventeen (17) days of Sublessee's execution thereof, and (b) any
capitalized terms used herein and not otherwise defined shall have the same
meaning as defined in the Lease.
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IN WITNESS WHEREOF, the parties hereto have executed this Sublease Agreement as
of the day any year first above written.
WITNESS: SUBLESSEE:
PSINET, INC.
By: /s/ Cheri L. Clark By: /s/ Harold S. Wills
------------------------------- -----------------------------
Title: Chief Operating Officer
---------------------------
WITNESS: SUBLESSOR:
UNISYS CORPORATION
By: /s/ M. Kurnel By: /s/ Gregory T. Fischer
----------------------- -----------------------------
Gregory T. Fischer
Vice President
Facilities & Asset Management
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February 17, 1998
VIA FEDERAL EXPRESS
- -------------------
Ms. Diana J. Sperle
Unisys Corporation
Township Line & Union Meeting Roads
P.O. Box 500
Blue Bell, Pennsylvania 19424-0001
Re: Proposed Sublease by and between Unisys Corporation ("Tenant") and PSINet,
Inc. ("Subtenant")
Dear Ms. Sperle:
In accordance with the terms of Section 12 of the Lease dated as of March
29, 1990 (the "Master Lease") by and between Tenant and TrizecHahn Reston Unisys
I LLC and TrizecHahn Reston II LLC ("Landlord"), as successor in interest to UMT
Reston, Inc., Landlord is willing to consent to the proposed Sublease by and
between Tenant and Subtenant, a copy of which is attached hereto as Exhibit "A"
and made a part hereof (hereinafter the "Proposed Sublease"), upon the terms and
conditions set forth below, NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE
PROPOSED SUBLEASE. The Proposed Sublease as modified by this letter is
hereinafter referred to as the "Sublease".
1. Subtenant shall indemnify Landlord and its agents against all claims,
damages, costs and expenses arising out of Subtenant's failure to perform or
observe any of the terms and conditions of the Master Lease which relate to the
premises which are the subject of the Sublease (hereinafter the "Subleased
Premises"), and further agrees that if Subtenant breaches any of such terms and
conditions, Landlord shall have all remedies against Subtenant available to
Tenant thereunder, except as hereinafter provided. The Sublease is in all
respects subject and subordinate to the Master Lease. The last sentence of
Paragraph 12 of the Proposed Sublease is hereby deleted and the following
language is inserted in lieu thereof:
"Notwithstanding the foregoing, in the event of any
conflict between any of the provisions of this Sublease
and any of the provisions of the Lease, (i) as between
Sublessee and Sublessor, the provisions of this
Sublease shall be controlling, and (ii) as between
Sublessee and Lessor, to the extent that any provision
of this Sublease imposes an obligation on Lessor that
does not exist in the Master Lease or makes an
obligation of Lessor that exists in the Master Lease
more burdensome to Lessor than it would
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 2
have been in the absence of the Sublease, then, in
either of such events, the provision of the Lease shall
be controlling."
2. Tenant and Subtenant shall provide written notice to Landlord of (i)
any extension of the Sublease in accordance with the terms of Paragraph 39
thereof prior to the commencement of any such additional term, and (ii) any
acceptance by Subtenant of an offer of additional space by Tenant to Subtenant
pursuant to Paragraph 38 thereof.
3. During the term of the Sublease, Landlord shall send to Subtenant
copies of any and all notices of default of any kind or nature which are sent to
Tenant, simultaneously with the transmittal of such notices to Tenant, and
Landlord shall accept a full cure by Subtenant of any such default during the
period provided in the Master Lease for the cure thereof as if it had been fully
cured by Tenant during such period.
4. Subtenant shall obtain and at all times during the term of the
Sublease maintain, at its sole cost and expense, policies of insurance covering
its fixtures, property and equipment installed and located in the Subleased
Premises, in such amounts as are set forth in the Master Lease; provided,
however, that Section 8.3 of the Master Lease shall not apply to Subtenant.
Subtenant shall provide and keep in force during the term of the Sublease with a
company or companies approved by the Landlord a comprehensive general liability
insurance policy as set forth in the Proposed Sublease. All such policies of
insurance shall name Tenant, Landlord and Landlord's management agent as
additional insureds.
5. Subtenant agrees that it will not assign or encumber, or permit to be
encumbered, its right or interests under the Sublease, nor sublet the whole or
any part of the Subleased Premises, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed.
6. No provision of the Sublease may be amended except in a writing signed
by Tenant and Subtenant and consented to by Landlord, which consent shall not be
unreasonably denied, conditioned or delayed; provided, however, that so long as
an amendment does not, and would not have the effect of, increasing any of
Landlord's obligations or abridging any of Landlord's rights under the Master
Lease, Landlord's consent shall not be required with respect to any amendment of
(a) Paragraph 1 of the Proposed Sublease if the same does not have the effect of
causing the term of the Proposed Sublease to extend beyond the expiration of the
term of the Master Lease, or (b) Paragraphs 3, 4, 5, 6, 7, 8, 9, 11, 13, 16, 17,
18, 20, 21, 22, 24, 26, 27, 28, 30, 31, 32, 33, 34, 35, 37 and 43 of the
Proposed Sublease.
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 3
7. Neither the Master Lease nor the Sublease shall be deemed to grant
Subtenant any rights whatsoever against Landlord. Subtenant acknowledges and
agrees that its sole remedy for any alleged or actual breach of its rights in
connection with the Sublease shall be solely against Tenant.
8. The Sublease shall not release Tenant from any existing or future
duty, obligation or liability to Landlord pursuant to the Master Lease, nor
shall the Sublease change, modify or amend the Master Lease in any manner. In
particular, the Sublease shall not absolve (a) Tenant from the requirements set
forth (i) in Section 7.5 of the Master Lease that Tenant obtain Landlord's prior
written approval, to the extent Landlord's prior written approval is required by
the terms and conditions of said Section 7.5, for alterations, improvements and
additions to the building(s) or the land on which the Subleased Premises is
situated ("Alterations"), as applicable, including, but not limited to, those
contemplated by Paragraphs 9, 10, 11, 42, 44 and 45 and Exhibit F to the
Proposed Sublease, and that any such Alterations comply with the requirements
set forth in said Section 7.5, and (ii) in Section 12 of the Master Lease that
Tenant obtain Landlord's prior written approval for any further subleases, (b)
Tenant from reimbursing Landlord for all of Landlord's expenditures made in
connection with any Alterations, pursuant to Section 7.5 (b) of the Master
Lease, or (c) Subtenant from the obligation to vacate the Subleased Premises in
the event that Landlord exercises any of its termination rights under Section
9.3 and from the requirements set forth in Sections 14, 25, 28, 29 and 46 of the
Master Lease. Further, Tenant and Subtenant acknowledge and agree that the
granting of Landlord's consent to any of the work referred to in clause (a)(i)
above shall not be deemed a representation or warranty by Landlord of the
sufficiency of the plans therefor, the quality or character of any such work,
its compliance with all applicable building codes, or otherwise. Landlord agrees
that Subtenant shall have no liability or obligation to Landlord under Section
45 of the Master Lease, in consideration for which Subtenant agrees that its
indemnification obligation under Section 36 of the Sublease shall also include
an indemnification of Landlord by Subtenant, upon the same terms and conditions
as are set forth in said Section 36 of the Sublease.
9. In the event Tenant is in default under any of the terms and
conditions of the Master Lease, Landlord may elect to receive directly from
Subtenant all sums due or payable to Tenant by Subtenant pursuant to the
Sublease, and upon receipt of Landlord's notice which states that Tenant is in
default under the Master Lease and which directs Subtenant to pay all such sums
directly to Landlord, Subtenant shall thereafter pay Landlord any sums becoming
due or payable under the Sublease, and Tenant shall receive from Landlord a
corresponding credit for such sums against any and all payments then due or
thereafter becoming due from Tenant. Neither the service of such written notice
nor the receipt of such direct payments shall cause Landlord to assume any of
Tenant's duties, obligations and/or liabilities under the
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 4
Sublease, nor shall such event impose upon Landlord the duty or obligation to
honor the Sublease. Tenant hereby consents to the provisions of this Paragraph 9
and hereby indemnifies Subtenant, and holds Subtenant harmless, against and from
any and all liability, losses, costs, damages and expenses (including, but not
limited to, court costs and reasonable attorneys' fees) resulting from
Subtenant's fullfillment of its obligations under this Paragraph 9.
10. Tenant and Subtenant agree to indemnify and hold harmless Landlord and
its agents, including Landlord's management agent, against and from any loss,
cost, expense, damage or liability, including reasonable attorneys' fees,
incurred as a result of a claim by any person or entity (i) that it is entitled
to a commission, finder's fee or like payment in connection with the Sublease or
(ii) relating to or arising out of the Sublease or any related agreement or
dealing.
11. Landlord shall not be obligated to lease Subtenant any parking spaces
in the building's parking facilities, other than such parking spaces as Tenant
would be entitled to lease under the Master Lease, it being agreed that
Subtenant's rights pursuant to Paragraph 41 of the Proposed Sublease relate
solely to parking spaces currently leased by Tenant.
12. In accordance with Section 12.4 of the Master Lease, Tenant is
responsible for all actual attorney' fees incurred by Landlord in connection
with the Sublease; provided, however, that Tenant's responsibility for such
attorney' fees shall not exceed One Thousand Dollars ($1,000.00).
13. In addition to Subtenant's requirement, pursuant to Paragraph 9 of the
Proposed Sublease, to provide Tenant with all occupancy permits and certificates
as may be required for Subtenant's occupancy of the Subleased Premises prior to
Subtenant's occupancy thereof (such permits and certificates are hereinafter
collectively referred to as "Occupancy Permits"), Subtenant shall provide
photocopies of all Occupancy Permits to Landlord prior to Subtenant's occupancy
of the Subleased Premises.
14. In addition to Subtenant's requirement, pursuant to Paragraph 10 of
the Proposed Sublease, to provide Tenant with (i) partial releases of liens,
commencing with the second progress payment, and (ii) upon completion of any
Alterations, a final release of liens executed by all contractors and
subcontractors who performed such Alterations (the releases referred to in
clauses (i) and (ii) of this Paragraph are hereinafter collectively referred to
as "Lien Releases"), Subtenant, upon its receipt of such Lien Releases, shall
promptly provide photocopies of same to Landlord.
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 5
15. Pursuant to Section 32 of the Master Lease, any placement of
Subtenant's signage on the Premises (as such term "Premises" is defined in the
Master Lease) shall be subject to Landlord's prior written consent, which may be
withheld in Landlord's reasonable discretion; if approved by Landlord, such
signage shall comply with applicable laws. In furtherance of the foregoing, and
not in limitation thereof:
(i) Landlord hereby approves the signage pursuant to Paragraph
40(a) of the Sublease and as shown on Exhibit B to this
letter agreement, provided that (a) Subtenant's right to
place its name on such sign monument at the main Sunrise
Valley Drive entrance shall be limited to the use of the
existing monument in its existing location (which Subtenant
shall have no right to relocate), (b) neither Tenant nor
Subtenant shall have any right to construct a second sign
monument at such main entrance to the Premises or to use any
new sign monument which may be constructed by Landlord, and
(c) the signage shown on Exhibit B hereto shall be no larger
than the signage existing in such location on the date
hereof, shall use the existing monument color, and the color
of lettering and logo on such sign shall, in the case of
Subtenant, be the same color of blue as is used in all of
Subtenant's exterior signage generally at premises which it
owns or leases (the "Subtenant's Standard Color") and, in
the case of Tenant, be the same color red as is used in all
of Tenant's exterior signage at the Premises, and
(ii) Landlord hereby approves the signage pursuant to Paragraph
40(b) and Exhibit E of the Sublease, in the location shown
on said Exhibit E, provided that (a) such signage shall (i)
be no larger than the signage existing in such location on
the date hereof, and (ii) use the existing monument color,
and (b) the color of Subtenant's lettering and logo on such
sign shall be the Subtenant's Standard Color. Subtenant
shall have no right to relocate the existing sign monument.
Notwithstanding the foregoing, Landlord hereby acknowledges
that Tenant intends to relocate the existing sign monument
closer to the building known as "Building #2", subject to
Landlord's reasonable approval as to its location. Landlord
hereby approves white lettering for Subtenant's name on the
glass doors to the Building.
16. Subtenant shall have no rights pursuant to Section 47 of the Master
Lease.
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 6
If the Tenant and Subtenant are in agreement with the foregoing, as
evidence of such agreement, please countersign and return a copy of this letter
to the undersigned, Upon receipt of a fully executed countersigned copy of this
letter, Landlord shall be deemed to have granted its consent to the Sublease.
Sincerely yours,
TrizecHahn Reston Unisys I LLC, a
Virginia limited liability company
By: /s/ Brian P. Coulter
---------------------------------
Name: Brian P. Coulter
-------------------------------
Its: Senior Vice President
--------------------------------
TrizecHahn Reston II LLC, a Virginia limited
liability company
By: /s/ Brian P. Coulter
---------------------------------
Name: Brain P. Coulter
-------------------------------
Its: Senior Vice President
--------------------------------
<PAGE>
Ms. Diana J. Sperle
Unisys Corporation
February 17, 1998
Page 7
Accepted and Agreed:
Tenant:
UNISYS CORPORATION, a Delaware corporation
By: /s/ Gregory T. Fischer
----------------------------------------------------
Its: Vice President- Facilities & Asset Management
----------------------------------------------
Subtenant:
PSINET, INC., a New York corporation
By: /s/ Harold S. Wills
----------------------------------------------------
Its: Chief Operations Officer
----------------------------------------------
<PAGE>
(Attachment to Exhibit 10.10)
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 C-Monthly Base Rent
Exhibit D- Janitorial Specifications
Exhibit E-Sinage
Exhibit F-Generators
<PAGE>
Exhibit B
Exhibit 10.10
DEED OF LEASE
AND
SPECIAL NET LEASE
BETWEEN
UMT RESTON, INC.
A DELAWARE CORPORATION
AND
UNISYS CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1 PARTIES.................................................... 1
SECTION 2 PREMISES................................................... 1
2.1 Land................................................. 1
2.2 Improvements......................................... 1
2.3 Fixtures............................................. 1
2.4 Other Interests...................................... 2
SECTION 3 TERM....................................................... 2
3.1 Term................................................. 2
SECTION 4 RENT....................................................... 2
4.1 Description.......................................... 2
4.2 Rent Adjustment...................................... 3
4.3 Rent................................................. 4
SECTION 5 RIGHT OF FIRST REFUSAL..................................... 4
5.1 Right of First Refusal............................... 4
5.2 Certificate.......................................... 6
SECTION 6 USE........................................................ 7
6.1 Use.................................................. 7
6.2 Compliance with Law.................................. 7
6.3 Acceptance of Possession and
Condition of Premises................................ 7
SECTION 7 MAINTENANCE, REPAIRS AND ALTERATIONS....................... 8
7.1 Lessee's Obligations................................. 8
7.2 Surrender............................................ 9
7.3 Lessor's Rights...................................... 10
7.4 Lessor's Obligations................................. 10
7.5 Alterations, Improvements
and Additions........................................ 11
SECTION 8 INSURANCE INDEMNITY........................................ 13
8.1 Insuring Party....................................... 13
8.2 Liability Insurance.................................. 14
8.3 Property Insurance................................... 14
8.4 Insurance Policies................................... 15
8.5 Waiver of Subrogation................................ 16
8.6 Indemnity............................................ 16
8.7 Exemption of Lessor from Liability................... 16
</TABLE>
--i--
<PAGE>
TABLE OF CONTENTS (continued)
- -----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 9 DAMAGE, DESTRUCTION, OBLIGATION TO
REBUILD, RENT ABATEMENT.................................... 17
9.1 Obligation to Rebuild.................................. 17
9.2 Insurance Proceeds..................................... 18
9.3 Damage Near End of Term................................ 18
9.4 No Abatement of Rent................................... 19
9.5 Termination-Advance Payments........................... 19
9.6 Waiver................................................. 20
SECTION 10 REAL PROPERTY TAXES........................................ 20
10.1 Payment of Taxes...................................... 20
10.2 Definition of "Real Property Tax...................... 21
10.3 Personal Property Taxes............................... 23
SECTION 11 UTILITIES.................................................. 23
SECTION 12 ASSIGNING AND SUBLETTING................................... 23
12.1 Lessor's Consent Required............................. 23
12.2 Lessee Affiliate...................................... 24
12.3 No Release of Lessee.................................. 24
12.4 Attorneys' Fees....................................... 25
SECTION 13 DEFAULTS; REMEDIES......................................... 25
13.1 Defaults.............................................. 25
13.2 Remedies.............................................. 27
13.3 Default by Lessor..................................... 29
13.4 Late Charges.......................................... 29
13.5 Impounds.............................................. 30
SECTION 14 CONDEMNATION............................................... 30
SECTION 15 ESTOPPEL STATEMENT......................................... 32
15.1 Lessee Estoppel....................................... 32
15.2 Failure to Deliver Lessee Estoppel.................... 32
15.3 Financial Information................................. 32
15.4 Lessor Estoppel....................................... 32
SECTION 16 LESSOR'S LIABILITY......................................... 33
SECTION 17 SEVERABILITY............................................... 33
SECTION 18 INTEREST ON PAST-DUE OBLIGATIONS........................... 33
</TABLE>
--ii--
<PAGE>
TABLE OF CONTENTS (continued)
- -----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 19 TIME OF ESSENCE..................................... 34
SECTION 20 ADDITIONAL RENT..................................... 34
SECTION 21 INCORPORATION OF PRIOR AGREEMENTS;
AMENDMENTS.......................................... 34
SECTION 22 NOTICES............................................. 35
SECTION 23 WAIVERS............................................. 35
SECTION 24 HOLDING OVER........................................ 35
SECTION 25 CUMULATIVE REMEDIES................................. 36
SECTION 26 COVENANTS AND CONDITIONS............................ 36
SECTION 27 BINDING EFFECT; CHOICE OF LAW....................... 36
SECTION 28 SUBORDINATION....................................... 36
28.1 Generally...................................... 36
28.2 Execution of Documents......................... 37
SECTION 29 ATTORNEY'S FEES..................................... 37
SECTION 30 LESSOR'S ACCESS..................................... 37
SECTION 31 AUCTIONS............................................ 38
SECTION 32 SIGNS............................................... 38
SECTION 33 MERGER.............................................. 38
SECTION 34 GUARANTOR........................................... 39
SECTION 35 QUIET POSSESSION.................................... 39
SECTION 36 MULTIPLE-TENANT BUILDING............................ 39
SECTION 37 SECURITY MEASURES................................... 40
SECTION 38 EASEMENTS........................................... 40
SECTION 39 PERFORMANCE UNDER PROTEST........................... 40
</TABLE>
- iii -
<PAGE>
TABLE OF CONTENTS (continued)
- -----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 40 AUTHORITY........................................... 41
SECTION 41 CONFLICT............................................ 41
SECTION 42 OPTIONS............................................. 41
42.1 Definition..................................... 41
42.1 Assignment..................................... 41
42.3 Multiple Options............................... 41
42.4 Effect of Default on Options................... 41
SECTION 43 OPTIONS OF LESSOR AND LESSEE........................ 42
43.1 Addition Purchase Option....................... 42
43.2 Lessee's Lease Extension Options............... 44
43.3 Qualifications of Options...................... 45
SECTION 44 DETERMINATION AND FAIR
MARKET RENTAL VALUE................................. 45
44.1 Fair Market Rental Value....................... 45
44.2 Arbitration Procedures......................... 45
SECTION 45 HAZARDOUS MATERIALS................................. 47
45.1 Covenants of Lessee............................ 47
45.2 Hazardous Material Definition.................. 50
45.3 Governmental Regulations Defined............... 51
45.4 Underground Storage Tanks...................... 51
45.5 Groundwater Monitoring......................... 51
45.6 Survival....................................... 52
SECTION 46 LIENS............................................... 52
SECTION 47 LESSOR'S RIGHT TO DEVELOP EXCESS LAND............... 52
47.1 Release of Excess Land......................... 52
47.2 Development of Excess Land..................... 52
SECTION 48 FOREIGN BUYERS...................................... 53
48.1 Lessee's right to Consent...................... 53
48.2 Lessor's Obligations........................... 54
SIGNATURES .................................................... 55
</TABLE>
-iv-
<PAGE>
TABLE OF CONTENTS (continued)
- -----------------
<TABLE>
<CAPTION>
Page of
EXHIBITS First Reference
- ---------- ---------------
<S> <C> <C>
"A" Legal Description 1
"B" Special Improvements 2
"C" Released Land 52
</TABLE>
-v-
<PAGE>
DEED OF LEASE
AND
SPECIAL NET LEASE
SECTION 1
PARTIES
THIS DEED OF LEASE, dated, for reference purposes only, as of March
29, 1990, is made by and between UMT RESTON, INC., a Delaware corporation
(herein called "Lessor") and UNISYS CORPORATION, a Delaware corporation (herein
called "Lessee").
This Lease is entered into pursuant to that certain Agreement of
Purchase and Sale dated as of March 29, 1990 ("Purchase Agreement") between
Lessee, as Seller, and Lessor, as Buyer, for the purpose of leasing back to
Lessee the property acquired by Lessor pursuant to the Purchase Agreement.
SECTION 2
PREMISES
Lessor hereby demises and leases to Lessee and Lessee leases from
Lessor for the term, at the rental, and upon all of the conditions set forth
herein, that certain property (collectively, "Premises") described herein:
2.1 Land. The land located at 12010 Sunrise Valley Drive, Reston,
----
County of Fairfax ("County"), Commonwealth of Virginia ("State"), more
particularly described on Exhibit "A" attached hereto (the "Land").
----------
2.2 Improvements. All buildings, parking facilities and other
------------
improvements now on the Land (the "Improvements").
2.3 Fixtures. All fixtures and trade fixtures attached to or
--------
appurtenant to the Improvements, including but not limited to the following: the
heating, ventilation and air conditioning systems, which include all boilers,
pumps, compressors, chillers, cooling towers, ducting and hot and cold water
plumbing, whether located in the interior or exterior walls, floors and ceilings
of the Improvements, on the rooftop of the Improvements or on the Land outside
the Improvements; the plumbing systems, which includes all piping, hot and cold
water systems, sewer and water supply and plumbing fixtures; any cafeteria
fixtures; the electrical system, which includes all transformers, circuitry and
wiring; all lighting fixtures; and any fire alarm and sprinkler systems.
Notwithstanding anything to the contrary contained herein, the parties agree and
<PAGE>
acknowledge that those certain fixtures and improvements ("Special
Improvements") described on Exhibit "B". attached hereto were not purchased by
----------
Lessor pursuant to the Purchase Agreement and remain the property of Lessee.
Based thereupon, the Special Improvements do not constitute a portion of the
Premises for purposes of this Lease.
2.4 Other Interests. All right, title and interest of the Lessor in
---------------
and to any easements, rights-of-way or other interest in, on, or to any land,
highway, street, road or avenue open or proposed in, on, across, in front of,
abutting or adjoining the Land.
SECTION 3
TERM
3.1 Term. The term of this Lease shall be for fifteen (15) years,
----
with four (4) five (5) year options to extend in accordance with Paragraph 43.2
(which extensions, when made, shall be deemed part of the term of this Lease).
The term shall commence on March 30, 1990 (the "Commencement Date") and shall
end on the last day of the calendar month in which the fifteenth (15th)
anniversary falls (subject to extension in accordance with Paragraph 43.2).
SECTION 4
RENT
----
4.1 Description. Lessee shall pay to Lessor or as Lessor shall direct
-----------
as rent for the Premises, monthly rental ("Monthly Basic Rent") in the amount of
$ _____________, as adjusted pursuant to Paragraph 4.2, in advance, on the first
day of each month of the term hereof. Rent for any period during the term hereof
which is less than one (l) month shall be a pro rata portion of the Monthly
Basic Rent (based on the number of days in such month), as adjusted. Rent shall
be payable without deduction or offset of any kind to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
from time to time designate in writing. Lessor or Lessor's agent shall, on a
monthly basis, ten (10) days before the next installment of Monthly 8asic Rent
is due, send Lessee a written statement stating the amount of the installment of
Monthly Basic Rent next due, but Lessee shall still be obligated to pay the rent
therein specified to be paid notwithstanding Lessor's failure to send such
notice at the time specified.
-2-
<PAGE>
4.2 Rent Adjustment. The Monthly Basic Rent shall be adjusted as
---------------
follows:
(a) Commencing on the first day of the second Lease Year (as
hereinafter defined) and, subject to the terms of Section 4.2(b), on the
first day of every Lease Year thereafter during the term of this Lease, the
Monthly Basic Rent shall be increased by ________________ percent (%). For
purposes of this Lease, the term "Lease Year" shall mean each twelve-month
period during the term of this Lease commencing on April 1 and ending on
the following March 31. Notwithstanding the immediately preceding sentence,
in no event shall the Monthly Basic Rent be increased on the first day of
any Lease Year in which the Monthly Basic Rent is increased pursuant to
Paragraph 4.2(b) unless the Monthly Basic Rent which would be in effect
were such Monthly Basic Rent increased pursuant to this Paragraph 4.2(a)
exceeds the Monthly Basic Rent which would be in effect were such Monthly
Basic Rent increased pursuant to Paragraph 4.2(b).
(b) On the first day of April, 1995 and on the first day of April,
2000 (each, an "Adjustment Date"), the Monthly Basic Rent shall be
increased as set forth in this Paragraph 4.2(b), but only to the extent
that the Monthly Basic Rent, as so increased pursuant to this Paragraph
4.2(b), exceeds the Monthly Basic Rent which would otherwise be in effect
were the Monthly Basic Rent increased on such adjustment date as set forth
in Paragraph 4.2(a). Such rent increase shall be based on the increase, if
any, in the Consumer Price Index for All Items, All Urban Consumers for the
U.S. City Average (1982-84-100) ("CPI") published monthly by the United
States Department of Labor Bureau of Labor Statistics ("Index"), for the-
Comparison Month (described below) in comparison to the Index published for
December, 1989 ("Base Month"). The Base Month Index shall be compared with
the Index for the calendar month four (4) months prior to the Adjustment
Date ("Comparison Month"). If the Index for any Comparison Month is 7
higher than the Base Month Index, then, subject to the terms of this
Paragraph 4.2, the Monthly Basic Rent next due shall equal the Monthly
Basic Rent due for April, 1990 increased by a percentage which shall be
calculated by dividing the Base Month Index into that number which
represents the difference between the Base Month Index and the Index for
such Comparison
-3-
<PAGE>
Month ("Percentage Rent Increase"); provided, however, that in no event
-------- -------
shall such percentage exceed _______% for the adjustment to be made at the
end of the fifth Lease Year and ________% for the adjustment to be made at
the end of the tenth Lease Year. If the Index for any Comparison Month is
lower than the Base Month Index, then the terms of this Paragraph 4.2(b)
shall not apply to such Adjustment Date.
Should said Bureau discontinue the publication of the above Index, or publish
the same less frequently, or alter the same in some other manner, then Lessor
and Lessee shall reasonably agree upon adoption of a substitute index or
substitute procedure which reasonably reflects and monitors consumer prices. If
Lessor and Lessee are unable to agree on such substitute index or procedure by
the "Specified Date" (as defined in Paragraph 44.2), such matter shall be
decided by arbitration in accordance with Section 44 hereof.
4.3 Rent. Monthly Basic Rent and the amounts required to be expended
----
by Lessee pursuant to Paragraphs 7.1 and 9.1 hereof and elsewhere in this Lease
sometimes are hereinafter collectively referred to as "Rent."
SECTION 5
RIGHT OF FIRST REFUSAL
-4-
<PAGE>
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-5-
<PAGE>
[Page intentionally blank]
-6-
<PAGE>
SECTION 6
USE
6.1 Use. The Premises shall be used consistently with any legal and
---
permitted uses in accordance with applicable zoning ordinances.
6.2 Compliance with Law.
-------------------
(a) Lessor makes no warranty to Lessee regarding whether the
Premises violate any covenants or restrictions of record, or any
applicable building or zoning code, regulation or ordinance in effect
during the term of this Lease.
(b) Lessee shall, at Lessee's expense, comply promptly with all
applicable statutes, ordinances, rules, regulations, orders, covenants
and restrictions of record, and requirements in effect during the term
or any part of the term hereof, whensoever arising, regulating the use
by Lessee of the Premises (or any portion thereof). Lessee shall not
use or permit the use of the Premises (or any portion thereof) in any
manner that will tend to create waste (as determined under applicable
law) or a nuisance or which shall tend to disturb any other tenant.
6.3 Acceptance of Possession and Condition of Premises. Lessee's
--------------------------------------------------
acceptance of possession of the Premises on the commencement of the term shall
constitute acceptance by Lessee of the Premises in its then existing, "AS-IS"
condition, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use or condition of the
Premises and all applicable covenants or restrictions or record. Lessee
acknowledges that neither Lessor, nor any person acting on behalf of Lessor, has
made any representation or warranty whatsoever concerning the condition of the
Premises or the present or future suitability of the Premises for the conduct of
Lessee's business.
Lessee acknowledges that (a) it was the owner of the Premises
prior to the Commencement Date and it accepts the Premises in the condition and
with all defects and contamination, if any, existing as of the Commencement
Date, and (b) Lessee shall have complete responsibility for compliance with all
laws, orders, regulations and requirements with respect to the use of the
Premises by Lessee. Lessor and Lessee
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understand and agree that the provisions of this Paragraph 6.3 shall survive the
expiration or sooner termination of this Lease.
SECTION 7
MAINTENANCE, REPAIRS AND ALTERATIONS
7.1 Lessee's Obligations. As used in this Lease, the term "repair"
shall include all necessary or appropriate replacements and all expenditures for
capital repair, maintenance and replacement, including, but not limited to, any
work with respect to the roof as set forth in Paragraph 45.1(c)(i) hereof.
Lessee's obligation to maintain the Premises shall include the obligation to
make all necessary or appropriate capital expenditures to repair and replace
structural elements of the Premises such as, but not limited to, the floors,
walls, ceilings and roofs. Lessee shall keep in good order, condition and repair
(including all necessary or advisable capital replacements, including roof and
HVAC), the Premises and every part thereof, structural and non-structural
(whether or not such portion of the Premises requiring repair or the means of
repairing the same are reasonable or readily accessible to Lessee, and whether
or not the need for such repairs or replacement occurs as a result of Lessee's
use, prior use, the elements or the age of such portion of the Premises),
including, without limiting the generality of the foregoing, all plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities and
equipment within the Premises, fixtures, walls (interior and exterior),
foundations, ceiling, roofs (interior and exterior), floors, windows, doors,
plate glass and skylights located within the Premises, and all landscaping,
driveways, parking lots, fences and signs located on the Premises, and to the
extent that it or Lessor has or may have the legal obligation to do so,
sidewalks and parkways adjacent to the Premises. In particular, and not in
limitation of the terms of the immediately preceding sentence, Lessee will
properly maintain in good repair the Phase 1 building boilers referenced in the
Kellermeyer Dodfryt Hart, P.C. Engineering Report dated February 23, 1990, the
- ----------------------------- -----------------
Phase 1 building roof and the parking lot surfaces on the Property, all at
Lessee ts expense. Within six (6) months after the date of this Lease, Lessee
shall remove all flue pipe gaskets in the Phase 1 building mechanical penthouse
which contain asbestos and properly dispose of same in accordance with
applicable law, all at Lessee's expense. In the event Lessee performs repair or
replacement work with respect to the roof, Lessee also agrees to perform all
asbestos removal which may be necessitated by any such work, at its sole cost
and expense. Except in the case of
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an emergency (and then only to the extent of such emergency), Lessee shall not
perform any particular repair work without Lessor's prior written approval where
such repair shall involve material alterations to the structural portions of the
Improvements; the roof, the external facades of the Improvements or any building
systems (e.g. air conditioning, heating, ventilation, electrical and mechanical
---
systems) provided however, if Lessor unconditionally refuses to approve such
repair, Lessee's repair obligation shall be excused and the failure to make such
repair shall not be a default hereunder. At the end of each year during the term
of this Lease, as may be extended, Lessee shall promptly deliver to Lessor a
report on the condition of the Premises, which report shall include a summary of
all repairs performed during such year in excess of $100,000.00. Lessee's
maintenance obligations shall specifically extend to the clean-up of all
"Hazardous Materials. (as defined in Paragraph 45.2 below) occurring in, on or
about the Premises.
7.2 Surrender. No earlier than twelve (12) months nor later than six
---------
(6) months prior to the expiration or sooner termination of the term hereof or
any extension term, as applicable, Lessee shall give Lessor notice
("Expiration/Termination Notice") of all alterations, improvements and additions
contained within the Premises as of the date thereof. Within thirty (30) days
after the date of such Expiration/Termination Notice, Lessor shall give Lessee
Notice of the alterations improvements and/or additions which Lessee shall be
required to remove as of the expiration or sooner termination of this Lease
provided that either (a) Lessor indicated in its consent to such alteration,
improvement or addition that Lessor reserved its right to require such removal
or (b) Lessee failed to obtain Lessor's consent to such alteration, improvement
or addition. On the last day of the term hereof, or any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as when
received ordinary wear and tear excepted, free and clear of debris; provided
that Lessee shall have removed all "Hazardous Materials" (as defined in
Paragraph 45.2) from the Premises and all Special Improvements from the Premises
(which Lessor requires Lessee to remove) in a manner which complies with all
"Governmental Regulations" (as defined in Paragraph 45.3); provided, further
that Lessee shall be required to remove all other fixtures, tenant improvements,
equipment and furnishings which Lessor requires, within sissy (60) days after
the delivery of Lessor's notice to so remove. Lessee shall repair any damages to
the Premises occasioned by the installation or removal of the Special
Improvements and Lessee's tenant improvements, trade fixtures, furnishings and
equipment or occasioned by Lessee's removal of all Hazardous Materials.
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Except for the removal of all Hazardous Materials, if the cost of repairing the
damage to the Premises occasioned by any other removal would be prohibitive, in
Lessee's reasonable determination, Lessee shall deliver written notice thereof
to Lessor within 10 days after the Lessor's notice to remove. In such event,
Lessor shall then advise Lessee in writing within 10 days after receipt of
Lessee's notice to either (a) remove the subject improvements up to but not
including the shell portion of the Premises, or (b) leave the Premises as they
are, or (c) remove such improvements without repair to the Premises.
Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and fencing on the
Premises in good operating condition, normal wear and tear excepted.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations
---------------
under Paragraph 9 (relating to destruction of the Premises), or under any other
paragraph in this Lease within fifteen (15) days after Lessor's written notice
to Lessee of such failure or, if such obligations cannot be performed within
such time period (taking into account the possible need to prepare plans, obtain
bids, obtain permits or permit fabrication by contractors), Lessee has not
commenced to perform in due diligence and expedience and does not diligently
prosecute such obligations to completion, Lessor may at its option (but shall
not be required to) enter upon the Premises after reasonable notice to Lessee
and compliance with then-applicable governmental security requirements and
Lessee's reasonable rules and regulations with respect to classified areas
(except in the case of an emergency, in which case no notice shall be required),
perform such obligations on Lessee's behalf and put the same in good order,
condition and repair, and the cost thereof together with interest thereon at the
maximum rate then allowable by law shall become due and payable as additional
rent to Lessor together with Lessee's next rent installment.
7.4 Lessor's Obligations. Except for the obligations of Lessor under
--------------------
Paragraph 9 (relating to destruction of the Premises) and under Paragraph 14
(relating to condemnation of the Premises), it is intended by the parties hereto
that Lessor have no obligation, in any manner whatsoever, to repair or maintain
the Premises nor the buildings located thereon nor the equipment therein,
whether structural or non-structural, all of which obligations are intended to
be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives, to
the extent permitted under applicable law, the benefit of any statute now or
hereinafter in effect which would
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otherwise afford Lessee the right to make repairs at Lessor's expense or to
terminate this Lease because of Lessor's failure to keep the Premises in good
order, condition and repair.
7.5 Alterations Improvements and Additions.
--------------------------------------
(a) Lessee shall not have the right to make any alteration,
improvement or addition to that part of the Premises which is Excess
Land (as defined in Paragraph 47.1). Subject to the foregoing, Lessee
shall not, without Lessor's prior written consent, which consent shall
not unreasonably be withheld, make any alterations, improvements or
additions to the Premises or the building structures, including but
not limited to the walls (exterior and interior) and roof (exterior
and interior); to the exterior appearance of the buildings; or to the
utilities and building systems servicing the Premises and shall not
take any action or make any filings with Fairfax County or any other
governmental entity which would affect the zoning of, or development
rights related to, the Premises. Notwithstanding the foregoing,
Lessee may make any non-structural alterations, improvements and
additions to the Premises without Lessor's prior written consent
including "Utility Installations" (which shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and
fencing); provided, that (i) the cost of constructing said
alterations, improvements and additions do not exceed $100,000.00 per
alteration (which amount may be adjusted by the parties hereto in
writing from time to time), (ii) said alterations do not materially
alter the ratio of office and non-office space contained in the
Premises or the general ratio of uses of the Premises, and (iii)
Lessee promptly provides to Lessor after completion thereof "as-built"
plans and specifications of the alterations. Lessor may require that
Lessee remove any or all of said alterations, improvements or
additions costing in excess of $100,000.00 (which amount may be
adjusted in writing by mutual agreement of the parties hereto from
time to time), Lessor may require Lessee to provide Lessor, at
Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such
improvements, to insure Lessor against any liability for mechanics'
and materialmen's liens and to insure completion of the work. Except
for those items not requiring Lessor's approval, should
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Lessee make any alterations, improvements or additions of the types
specified hereunder, without the prior written approval of Lessor,
Lessor may require that Lessee remove any or all of the same.
(b) Any alterations, improvements or additions to the Premises
that Lessee shall desire to make and which require the consent of the
Lessor shall be presented to Lessor in written form, with proposed
detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to
Lessor prior to the commencement of the work and the compliance by
Lessee with all conditions of said permit in a prompt and expeditious
manner. Subject to the provisions of this Paragraph 7.5, Lessor agrees
to cooperate with Lessee in connection with any alteration,
improvement or addition to the Premises by Lessee including, without
limitation granting necessary ingress/egress, utility and/or signage
easements that do not unreasonably interfere with the use of the
Excess Land by Lessor, provided that Lessor shall not be required to
expend any funds in connection therewith. Lessee shall have the right
to two access points to Sunrise Valley Drive of similar quality to the
access as it exists on the Commencement Date. Lessee shall have the
right to signage similar to that existing on the Commencement Date,
subject to governmental regulations, provided that Lessee shall not be
required to reduce such signage in order to accommodate signage on
Released Land (as defined in Paragraph 47.1).
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee
at or for use in the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any
interest therein. In addition to obtaining Lessor's consent pursuant
to this Paragraph 7.5, Lessee shall give Lessor not less than ten (10)
days notice prior to the commencement of any work in the Premises
reasonably estimated to cost in excess of $250,000.00, and Lessor
shall have the right to post notices of non-responsibility in or on
the Premises as provided by law. If Lessee shall in good faith
contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense, defend itself and Lessor against the same
and shall pay and satisfy any such adverse judgment that may be
rendered
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thereon before the enforcement thereof against the Lessor or the Premises,
upon the condition that if Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien, claim or demand indemnifying Lessor against liability for
the same and holding the Premises free from the effect of such lien, claim
or demand. Lessor may require Lessee to pay Lessor's attorneys fees and
costs in participating in such action if Lessor shall decide it is to its
best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements (including standard office partitions
and suspended tile ceilings), additions and Utility Installations (whether
or not such Utility Installations constitute trade fixtures of Lessee)
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the
term. Notwithstanding the provisions of this Paragraph 7.5(d), Lessee's
machinery and equipment, other than that which is affixed to the Premises
so that it cannot be removed without material damage to the Premises
(except if Lessee demonstrates that the same can be removed by Lessee and
such damage repaired and restored to Lessor's reasonable satisfaction at
Lessee's sole cost and expense, and Lessee makes such repair and
restoration) and other than that which is described as a fixture in
Paragraph 2.3 and thus is a component of the Premises, shall remain the
property of Lessee and may be removed by Lessee subject to the provisions
of Paragraph 7.2.
(e) Upon Lessee's completion of any work of alteration, improvement
or addition described herein, Lessee shall promptly deliver to Lessor
copies of all plans and specifications prepared in connection with such
work of alteration, improvement or addition.
SECTION 8
INSURANCE; INDEMNITY
8.1 Insuring Party. Lessee shall, as additional rent for the Premises,
--------------
pay the cost of all insurance required hereunder.
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8.2 Liability Insurance. Lessee shall at Lessee's expense obtain and keep
-------------------
in force during the term of this Lease a policy of combined single limit, bodily
injury and property damage insurance insuring Lessor and Lessee against any
liability arising out of the use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be a combined single limit
policy in an amount not less than $5,000,000 per occurrence which names Lessor
as an additional insured thereunder. The policy shall insure performance by
Lessee of the indemnity provisions of this Paragraph 8. The limits of said
insurance shall not, however, limit the liability of Lessee hereunder. Lessee
shall deliver to Lessor evidence satisfactory to Lessor of the timely payment by
Lessee of the premiums for such insurance.
8.3 Property Insurance.
------------------
(a) Lessee shall obtain and keep in force during the term of this
Lease policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof including all
improvements, as the same may exist from time to time, but in no event less
than the total amount required by Lessor from time to time, against all
perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, flood, earthquake, and special extended
perils ("tall risk" as such term is used in the insurance industry). A
stipulated value or agreed amount endorsement deleting the coinsurance
provision shall be procured with said insurance. Said insurance policy or
policies must be approved by the Lessor, whose approval will not be
unreasonably withheld. Said insurance shall name Lessor as a named insured
and provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises as their interests may appear.
The Lessee shall, in addition, obtain and keep in force during the term of
this Lease a policy of business interruption insurance covering a period of
one year, with loss payable to Lessee, which insurance shall also cover all
rental payments, real estate taxes and insurance costs for said period. An
automatic increase in insurance endorsement causing the increase in annual
property insurance coverage by two percent (2%) per quarter will be
required only if Lessee no longer maintains a replacement cost insurance
policy. If the Lessee shall fail to procure and maintain said insurance the
Lessor may, but shall not be required to, procure and maintain the same,
but at the expense
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of Lessee. If such insurance coverage has a deductible clause, the
deductible amount shall not exceed $250,000.00 per occurrence or some other
limit as is mutually agreed upon between Lessor and Lessee from time to
time, and Lessee shall be liable for such deductible amount.
(b) If the Premises are a part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, then Lessee shall pay for any increase in the
property insurance of such other building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 Insurance Policies. Insurance required hereunder shall be with
------------------
companies (which may be part of an association of companies) admitted in the
State in which the Premises are located and holding a "General Policyholders
Rating'' of at least A and a financial rating of twelve (12) or better, or such
other rating as may be required by a lender having a lien on the premises, as
set forth in the most current issue of "Best's Insurance Guide". In lieu of
separate policies, the Lessee may maintain blanket or umbrella policies if such
policies provide the same coverage required herein with protection against each
risk not reducible by claims for other risks to amounts less than that specified
herein. The Lessee shall deliver to Lessor certificates of such insurance
required hereunder (evidencing that the insurance requirements hereof have been
met) promptly upon Lessee's receipt of each renewal thereof. Promptly upon the
execution of this Lease, Lessee shall deliver to Lessor certificates of
insurance evidencing the existence and amounts of such insurance and the
compliance of such insurance with the requirements of Section 8. No such policy
shall be cancellable or subject to reduction of coverage or other modification
except after thirty (30) days prior written notice by the insurer to Lessor.
Thirty (30) days prior to the expiration of such policies and upon Lessor's
request, Lessee shall furnish Lessor with renewals or "binders" thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee upon demand. Lessee shall not do or permit to
be done anything which shall invalidate the insurance policies referred to in
Paragraph 8. If Lessee does or permits to be done anything which shall increase
the cost of the insurance policies referred to in Paragraph 8.3, then Lessee
shall pay such additional premium or forthwith upon Lessor's demand reimburse
Lessor for any additional premiums attributable to any act or omission or
operation of Lessee causing such increase in the cost of insurance.
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8.5 Waiver of Subrogation. Lessee and Lessor each hereby release and
---------------------
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under Paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease and shall procure the consent of such carrier or carriers to the foregoing
mutual waiver of subrogation. All policies of insurance required hereunder shall
include a clause or endorsement denying the insurer any rights of subrogation
against the other party to the extent such rights are waived hereunder or have
otherwise been waived by the insured prior to the occurrence of injury or loss.
8.6 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
---------
against any and all claims arising from Lessee's use of the Premises or from the
conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, including Lessee
covenants with respect to use, management, transportation or other activities
involving Hazardous Materials, or arising from any negligence of the Lessee, or
any of Lessee's agents, contractors, or employees, and from and against all
costs, attorneys' fees, expenses and liabilities incurred in the defense of any
such claim or any action or proceeding brought thereon, and in case any action
or proceeding be brought against Lessor by reason of any such claim, Lessee upon
notice from Lessor shall defend the same at Lessee's expense by counsel
satisfactory to Lessor. Lessee, as a material part of the consideration to
Lessor, hereby assumes all risk of damage to property or injury to persons, in,
upon or about the Premises arising from any cause and Lessee hereby waives all
claims in respect thereof against Lessor. Lessee shall be entitled to timely
notice and reasonable cooperation from the Lessor, as well as to control of the
defense and settlement of all such claims.
8.7 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
----------------------------------
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee,
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Lessee's employees, customers, or any other person in or about the Premises, nor
shall Lessor be liable for injury to the person of Lessee, Lessee's employees,
agents or contractors, whether such damage or injury is caused by or results
from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said damage or injury results from conditions arising upon the
Premises or upon other portions of the buildings of which the Premises are a
part, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible to
Lessee. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the buildings in which the Premises are
located.
SECTION 9
DAMAGE, DESTRUCTION, OBLIGATION TO REBUILD, RENT ABATEMENT
9.1 Obligation to Rebuild. In the event that some or all of the
---------------------
improvements constituting a part of the Premises or the Premises itself are
damaged or destroyed, partially or totally, from an insured loss or earthquake
or a loss which would have been insured but for the actions or failure to act of
Lessee, its agents, employees or invitees, or from an uninsured loss which would
cost less than One Million Dollars ($1,000,000. 00) to repair, as reasonably
determined by an independent licensed architect retained by Lessor, then Lessee
shall repair, restore and rebuild the Premises to its condition existing
immediately prior to such damage or destruction and this Lease shall remain in
full force and effect. Such repair, restoration and rebuilding (all of which are
herein individually and collectively called "repair") shall be commenced within
a reasonable time after such damage or destruction has occurred and shall be
diligently pursued to completion. Lessee shall pay all costs of such repair in
excess of the available insurance proceeds. The appearance of "Hazardous
Material" (as defined in Paragraph 45.2 below) shall not be deemed an occurrence
of damage or destruction which is subject to the terms of this Section.
In the event of an uninsured loss for which Lessee does not have the
obligation to repair, as set forth above, Lessor shall have the option, at its
sole discretion, to contribute the uninsured amount and repair or contribute the
uninsured amount and require Lessee to repair the Premises, in which event
Lessee's obligation to pay rent shall not terminate
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during the period of reconstruction. Lessor shall notify Lessee of its election
to require such repair within thirty (30) days after the date of occurrence of
such damage. In the event Lessor elects not to repair the Premises, this Lease
shall terminate as of the date of occurrence of such damage. Nothing herein
shall obviate Lessee's obligations under Paragraph 8.
9.2 Insurance Proceeds. The proceeds of any insurance maintained under
------------------
Paragraph 8.3 hereof shall be paid to Lessor; however, such proceeds shall be
made available to Lessee for payment of costs and expense of repair; provided,
however, that such proceeds may be made available to Lessee subject to
reasonable conditions, including, but not limited to architect's certification
of cost, retention of a percentage of such proceeds pending recordation of a
notice of completion and a lien and completion bond to insure against mechanics'
or materialmen's liens (or compliance with such other applicable and comparable
legal and customary procedures within the State for insuring against any such
liens) arising out of the repair and to insure completion of the repair, all at
the expense of Lessee.
9.3 Damage Near End of Term.
-----------------------
(a) If the Premises are substantially damaged or destroyed, either
partially or totally, during the last six (6) months of the term of this
Lease or any extension term, Lessor or Lessee may at their option, cancel
and terminate this Lease as of the date of occurrence of such damage by
giving written notice to the other of their election to do so within ten
(10) days after the date of occurrence of such damage; provided, that the
parties shall not be permitted to exercise such election to cancel this
Lease in the event such damage is not in excess of ten percent (10%) of the
value of the Improvements and either (i) can be repaired within thirty (30)
days, as determined by Landlord's independent, licensed architect, which
determination shall be made as soon as reasonably possible and shall be
conclusive on the parties or (ii) has in fact been repaired by Lessee at
its sole cost and expense within thirty (30) days after the occurrence of
the damage.
(b) Notwithstanding Paragraph 9.3(a) to the contrary, in the event
that Lessee has an option to extend or renew this Lease, and the time
within which said option may be exercised has not yet expired, Lessee shall
exercise such option, if it is to be
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exercised at all, no later than twenty (20) days after damage or
destruction to the Premises, either total or partial, occurring during the
last six (6) months of the term of this Lease or any extension term, which
damage or destruction is covered by insurance required to be maintained
under Section 8. If Lessee duly exercises such option during said twenty
(20) day period, Lessee shall, in accordance with Paragraph 9.2, at
Lessee's expense, repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to
exercise such option during said twenty (20) day period, then Lessor may,
at Lessor's option, terminate and cancel this Lease as of the expiration of
said twenty (20) day period by giving written notice to Lessee of Lessor's
election to do so within ten (10) days after the expiration of said twenty
(20) day period, notwithstanding any term or provision in the grant of
Option to the contrary.
(c) Notwithstanding anything express or implied to the contrary in
the foregoing, if Lessee fails to exercise its option to extend pursuant to
Paragraph 9.3(b), then Lessee's presence on the Premises shall not be
deemed a holdover during a period of ninety (90) days after giving notice,
provided that Lessee uses its best efforts to move its equipment from the
Premises as soon as is reasonably possible, Lessee's presence is not in
violation of any laws, and Lessee complies with Lessor's reasonable safety
and insurance requirements.
9.4 No Abatement of Rent. Notwithstanding the partial or total
--------------------
destruction of the Premises or any part thereof, and notwithstanding whether the
casualty is insured or not, there shall be no abatement of rent or of any other
obligation of Lessee hereunder by reason of such damage or destruction unless
the Lease is terminated by virtue of any other provision of this Lease.
9.5 Termination Advance Payments. Upon termination of this Lease
----------------------------
pursuant to this Section 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Notwithstanding
any right of Lessor to terminate this Lease prior to the expiration hereof,
Lessee may elect, in writing, within ten (10) days of Lessor's notice of
termination, to continue to possess the undamaged portions of the Premises (to
the extent permitted by law), at the full rental prescribed herein and without
the abatement of rent.
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9.6 Waiver. Lessee waives the provisions of Va. Code Ann. (S) 55-226 and
------
any other statutes hereinafter enacted which relate to the abatement of rent,
repair of premises and/or termination of leases when the premises leased are
destroyed and agrees that such event shall be governed by the terms of this
Lease.
SECTION 10
REAL PROPERTY TAXES
10.1 Payment of Taxes. Lessee shall pay the real property tax, as defined
----------------
in Paragraph 10.2, applicable to the Premises (including the Excess Land as
defined in Section 47) during the term of this Lease; provided, however, that if
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at any time there exists any Released Land (as defined in-Section 47) Lessor
shall pay to Lessee from time to time, within thirty (30) days after being
billed therefor by Lessee, an amount equal to the sum of (a) the product of any
real property tax previously paid by Lessee for any period during the term of
this Lease attributable to the ''Land" portion of the Premises, including the
Excess Land, multiplied by a fraction, the numerator of which shall be the
number of square feet of land in the Released Land and the denominator of which
shall be the number of square feet of land in the Premises, including the Excess
Land, and (b) the product of any real property tax previously paid by Lessee for
any period during the term of this Lease attributable to the "Improvements"
portion of the Premises, including the Excess Land, multiplied by a fraction,
the numerator of which shall be the number of square feet of interior space in
all buildings on the Released Land and the denominator of which shall be the
number of square feet of interior space in all buildings on the Premises,
including the Released Land, to the extent not previously paid by Lessor. All
such payments shall be made prior to the due date of such payment. Promptly
after payment thereof, Lessee shall furnish Lessor with copies of receipted tax
bills, to the extent received by Lessee, showing that such taxes have been
timely paid. In the event Lessor receives the real property tax bill directly,
Lessor shall make best efforts to notify Lessee of such obligation prior to a
penalty attaching but in no event more than ten (10) days after receipt. If any
such taxes paid by Lessee shall cover any period of time after the expiration of
the term hereof, Lessee's share of such taxes shall be equitably prorated to
cover only the period of time within the tax fiscal year during which this Lease
shall be in effect, and Lessor shall reimburse Lessee to the extent required. If
Lessee shall fail to pay any such taxes, Lessor shall have the right to pay the
same, in which
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case Lessee shall repay such amount to Lessor with Lessee's next rent
installment together with interest at the lesser of (a) the maximum rate then
allowable by law or (b) 1.0% above the interest rate announced as its "prime"
rate by Sovran Bank, N.A. per annum, for the first thirty (30) days such taxes
remain unpaid and 4.0% above the interest rate announced as its "prime" rate by
Sovran Bank, N.A., per annum thereafter. Immediately upon the execution of this
Lease, Lessee shall request of all relevant taxing authorities that duplicate
tax bills be sent to Lessor at the address set forth by Lessor's signature.
10.2 Definition of "Real Property Tax". As used herein, "real property
----------------------------------
tax" shall include the following:
(a) any form of real estate tax or assessment, general, special,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, income or
estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any county, state or federal government,
or any school, agricultural, sanitary, fire, street, drainage or other
improvement district thereof, as against any legal or equitable interest of
Lessor in the Premises or in the real property of which the Premises are a
part, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Premises, so long as such are not
levied or assessed as substitutes or in lieu of taxes to be paid by Lessor
hereunder;
(b) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of real estate tax, including
assessments, taxes, fees, levies and charges which may be imposed by
governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants.
It is the intention of Lessee and Lessor that all such new or adjusted
assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
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(c) Any assessment, tax, business, professional or occupational
license tax, fee, levy or charge allocable to or measured by the area of
the Premises or the rent payable hereunder, including, without limitation,
any gross income tax or excise tax levied by the State, County or federal
government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
tenants of the Premises, or any portion thereof;
(d) any assessment, tax, fee, levy or charge upon this transaction or
any document to which Lessee is a party, creating or transferring an
interest or an estate in the Premises;
(e) any assessment, tax, fee, levy or charge by any governmental
agency related to any transportation plan, fund or system instituted within
the geographic area of which the Premises are a part;
(f) reasonable legal, consultants' and other professional fees, costs
and disbursements incurred in connection with proceedings to contest,
determine or reduce real property taxes;
(g) any rent taxes or gross receipt taxes (whether assessed against
Lessee and collected by Lessor, or both);
(h) any levy, assessment or charge by any governmental authority
against the Premises or Lessor or Lessee as a consequence of the occurrence
of "Hazardous Materials" (as defined in Paragraph 45.2 below) in, on or
about the Premises, or the leaching or migration thereof to other
properties.
(i) any levy, assessment or charge against the Premises or Lessor or
Lessee pursuant to any covenants, easements, agreements, reciprocal
easement agreements or similar documents applicable to or affecting the
Premises or Lessor or Lessee.
It is the intent of the foregoing that such obligation shall include
only such taxes which would be assessed on or against the Premises even were the
Premises the only real property owned by Lessor, and shall not include taxes on
Lessor's net income, franchise, estate, succession or inheritance taxes or taxes
based upon capital levies.
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10.3 Personal Property Taxes.
-----------------------
(a) Lessee shall pay prior to the date due all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises. When possible,
Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within thirty (30) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
SECTION 11
UTILITIES
Lessee shall pay for all water, gas, heat, light, power, telephone and
other utilities and services supplied to the Premises, together with any taxes
thereon. Lessor will attempt to provide separate metering but if any such
services are not separately metered to Lessee, Lessee shall pay a reasonable
proportion to be reasonably determined by Lessor of all charges jointly metered
with other premises.
SECTION 12
ASSIGNING AND SUBLETTING
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
-------------------------
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Notwithstanding the immediately preceding sentence, Lessee may grant
the U.S. Government licenses to have U.S. Government employees operate out of
the Premises in connection with the performance by Lessee of Lessee contracts
with the U.S. Government, but such licenses shall automatically terminate as to
the Premises and any part thereof upon the termination of Lessee's right to
occupy the Premises or such part pursuant to this Lease. Lessor shall
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respond to Lessee's request for consent hereunder within fifteen (15) business
day's after the Lessee shall have furnished Lessor with a copy of the proposed
sublease or assignment, reasonable detail regarding the identity of the proposed
sublessee or assignee and the business terms of the proposed sublease or
assignment and such other financial and other information as Lessor may request.
Any attempted assignment, transfer, mortgage, encumbrance or subletting without
such consent shall constitute a breach of this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of Paragraph 12.1
----------------
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease and provided further that Lessee delivers
to Lessor written notice of such assignment within five (5) business days after
the occurrence thereof. Any such assignment shall not, in any way, affect or
limit the liability of Lessee under the terms of this Lease even if after such
assignment or subletting the terms of this Lease are materially changed or
altered without the consent of Lessee, the consent of whom shall not be
necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no
--------------------
subletting or assignment shall release Lessee's obligation or alter the primary
liability of Lessee to pay the Rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of Rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof!
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee in the performance of any of the terms hereof,
Lessor may proceed directly against Lessee without the necessity of exhausting
remedies against said assignee. Lessor may consent to subsequent assignments or
subletting of this Lease or amendments or modifications to this Lease with
assignees of Lessee, with Lessee's prior written approval, which approval shall
not be unreasonably withheld or delayed. In the event Lessee does not respond to
Lessor in writing within ten (10) days after a written request for its consent
hereunder, Lessee conclusively shall be deemed to have consented. Any such
approved change or amendment shall not relieve Lessee of liability under this
Lease.
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12.4 Attorneys Fees. In the event Lessee shall assign or sublet the
--------------
Premises or request the consent of Lessor to any assignment or subletting, then
Lessee shall pay Lessor's actual attorneys' fees incurred in connection
therewith, such attorneys' fees not to exceed $1,000.00 for each such request.
SECTION 13
DEFAULTS; REMEDIES
13.1 Defaults. The occurrence of any one or more of the following events
--------
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee; provided,
however, that a vacation or abandonment of the Premises by Lessee shall not
constitute a material default and breach of this Lease so long as Lessee
complies with all of its obligations contained in this Lease and, in
addition, provides, in a manner satisfactory to Lessor, for adequate
security and other measures deemed necessary or desirable by Lessor for the
maintenance of the Premises in good order, condition and repair due' to the
vacation or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of Rent or any other
payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of ten (10) days after written
notice thereof from Lessor to Lessee that such amount is past due. In the
event that Lessor serves Lessee with a Notice to Pay Rent or Quit (or
similar notice under applicable law) pursuant to applicable Unlawful
Detainer statutes such Notice to Pay Rent or Quit shall also constitute the
10-day notice required by this subparagraph. Notwithstanding anything
express or implied to the contrary in the foregoing, to the extent Lessee
has not received from Lessor notice of the recalculation of the Monthly
Basic Rent as set forth in Paragraph 4.1 above, Lessee's payment of the
Monthly Basic Rent due for the prior month shall not constitute a default
hereunder, provided that Lessee pays any deficiency due within ten (10)
days after receipt of the notice of recalculation of the Monthly Basic
Rent.
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(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in Paragraph (b) above, where such failure
shall continue for a period of thirty (30) days after written notice hereof
from Lessor to Lessee; provided, however, that if the nature of Lessee's
default is such that more than thirty (30) days are reasonably required for
its cure, then Lessee shall not be deemed to be in default if Lessee
commenced such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement-or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless
in the case of a petition filed against Lessee, the same is dismissed
within one hundred twenty (120) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within one hundred twenty (120) days;
or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure i not discharged within one
hundred twenty (120) days. However, in the event that any provision of this
Paragraph 13.1(d) is contrary to any applicable law, such provision shall
be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
(f) The violation of Section 411 of the Employee Retirement Income
Security Act of 1974 ("ERISA") by Lessee or the causing of such a violation
by Lessee.
(g) The breach of the representations or covenants contained in
Section 45, the appearance, handling, use, presence, transport or disposal
of any
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"Hazardous Material" (as defined in Paragraph 45.2 below) on or about the
Premises not in compliance with all "Governmental Regulations" (as defined
in Paragraph 45.3 below) applicable thereto, and the failure of Lessee to
diligently and faithfully pursue and keep in place the clean-up and/or
remedial measures which may be required from time-to-time by any
governmental authority.
13.2 Remedies. Upon occurrence of a material default, Lessor shall have
--------
the following remedies, in addition to all other rights and remedies provided by
law or otherwise provided in this Lease, to which Lessor may resort cumulatively
or in the alternative:
(a) Lessor may continue this Lease in full force and effect, and this
Lease shall continue in full force and effect as long as Lessor does not
terminate this Lease, and Lessor shall have the right to collect Monthly
Basic Rent when due;
(b) Lessor may terminate Lessee's right to possession of the Premises
at any time by giving written notice to that effect, and relet the Premises
or any part thereof. Lessee shall be liable immediately to Lessor for all
reasonable costs Lessor incurs in reletting the premises or any part
thereof, including, without limitation, broker's commissions, expenses of
cleaning, redecorating, and preparing the Premises to be re-let and like
costs. Reletting may be for a period shorter or longer than the remaining
term of this Lease. No act by Lessor other than giving written notice to
Lessee shall terminate this Lease. Acts of maintenance, efforts to relet
the Premises or the appointment of a receiver on Lessor's initiative to
protect Lessor's interest under this Lease shall not constitute a
termination of Lessee. right to possession. Upon termination, Lessor shall
have the right to remove all of Lessee's personal property and store same
at Lessee's cost and to recover from Lessee as damages:
(1) The worth at the time of award or any unpaid Monthly Basic
Rent and other sums due and payable which had been earned at the time
of termination; plus
(2) The worth at the time of award Ct the amount by which the
unpaid Rent and other
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sums which would have been payable after termination until the
time of award exceeds the amount of such Rent loss that Lessee
proves could have been reasonably avoided; plus
(3) The worth at the time of award of the amount by which
the unpaid Rent and other sums due for the balance of the term of
this Lease after the time of award exceeds the amount of such
Rent loss that Lessee proves could be reasonably avoided; plus
(4) Any other amounts reasonably necessary to compensate
Lessor for all the detriment proximately caused by Lessee's
failure to perform Lessee's obligations under this Lease, or
which, in the ordinary course of things, would be likely to
result therefrom, including, without limitation, any costs or
expenses incurred by Lessor: (i) in retaking possession of the
premises; (ii) in maintaining, repairing, preserving, restoring,
replacing, cleaning, altering or rehabilitating the Premises or
any portion thereof, including such acts for reletting to a new
lessee or lessees; (iii) for leasing commissions; or (iv) for any
other costs necessary or appropriate to relet the Premises; plus
(5) At Lessor's election, such other amounts and remedies in
addition to or in lieu of the foregoing as may be permitted from
time to time by the laws of the State including, without
limitation, the remedies provided by Chapter 13 of Title 55 of
the Code of Virginia, Ann., as amended from time to time.
The "worth at the time of award" of the amounts referred to
in Paragraphs 13.2(b)(1) and 13.2(b)(2) is computed by allowing
interest at the prime rate promulgated by Sovran Bank, N.A. plus one
percent (1%) ("Interest Rate") on the unpaid Monthly Basic Rent and
other sums due and payable from the termination date through the date
of award. The "worth at the time of award" of the amount referred to
in Paragraph 13.2(b) (3) is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of Richmond at the time of
award plus one percent (1%). Lessee waives redemption or relief from
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forfeiture under any present or future law, in the event Lessee is
evicted or Lessor takes possession of the Premises by reason of any
default of Lessee hereunder; or
(c) Lessor may, with or without terminating this Lease, re-enter
the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Lessee. No re-entry or
taking possession of the Premises by Lessor pursuant to this
Subparagraph shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Lessee.
13.3 Default By Lessor. Lessor shall not be in default hereunder
-----------------
unless Lessor fails to perform obligations required of Lessor in this Lease
within a reasonable time, but in no event later than thirty (30) days after
written notice by Lessee to Lessor and to the holder of any first mortgage or
deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Lessee in writing specifying wherein Lessor has
failed to perform such obligation; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are required for
performance then Lessor shall not be in default if Lessor commences performance
within such thirty (30) day period and thereafter diligently prosecutes the same
to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
------------
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, beginning with the third and all subsequent occurrences of any
installment of rent or any other sum due from Lessee not being received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor,
beginning with such third late payment, a late charge within ten (10) days after
each such amount shall be due, equal to four percent (4%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver
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of Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
13.5 Impounds. In the event that a late charge is payable hereunder,
--------
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease during any twelve
(12) month period during the term hereof, Lessee shall pay to Lessor, if Lessor
shall so request, in addition to any other payments required under this Lease, a
monthly advance installment, payable at the first of each month, as estimated by
Lessor, for real property tax and insurance expenses attributable to the
Premises which are payable by Lessee under the terms of this Lease. Such fund
shall be established to insure payment when due, before delinquency, of any or
all such real property taxes and insurance premiums. If the amounts paid to
Lessor by Lessee under the provisions of this paragraph are insufficient to
discharge the obligations of Lessee to pay such real property taxes and
insurance premiums as the same become due, Lessee shall pay to Lessor, upon
Lessor's demand, such additional sums necessary to pay such obligations. All
moneys paid to Lessor under this paragraph may be intermingled with other moneys
of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums. After satisfaction of all monetary obligations of Lessee, Lessor shall
refund to Lessee any funds collected hereunder that remain unspent at the
expiration of Lease herein.
SECTION 14
CONDEMNATION
If the Premises or any portion thereof are taken under the power of
eminent domain, or sold under the threat of the exercise of said power (all of
which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than fifteen percent (15%) of the floor area of
either building or the Premises, or more than fifteen percent (15%) of the
available parking for the Premises such that minimum legal parking for the
Premises can no longer be provided, is taken by condemnation,
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Lessee may, at Lessee's option, to be exercised in writing only within ten (10)
days after Lessor shall have given Lessee (or in the absence of such notice,
condemning authority shall have taken possession) terminate this Lease as of the
date the condemning authority takes such possession (unless, in the case of
condemnation of more than fifteen percent (15%) of the parking for the Premises,
the remaining parking can be re-striped by Lessor to provide the necessary
parking to meet applicable zoning requirements or Lessor otherwise makes Lessee
improved parking spaces in the same number exist, at such locations as are
reasonably Lessee). with the available to as currently acceptable to Lessee). If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the rent shall be reduced in the proportion that the
floor area of the building-taken bears to the total floor area of the building
situated on the Premises. Lessee's rent shall be abated in the event that a
portion of the unimproved area of the Premises is taken, based upon an equitable
reduction in rent, as reasonably agreed upon in good faith by Lessor and Lessee,
in accordance with the same procedures used at the commencement of this Lease
for calculating fair market rental to reflect the decreased value of the
Premises (and, therefore, the fair market rental) by virtue of such taking;
provided, however, such calculation shall not result in a fair market value for
the Premises that is less than the fair market value that would be calculated by
subtracting the amount of the cash award (less all costs and expenses incurred
by Lessor in connection with such condemnation) awarded to Lessor as a result of
such condemnation from the fair market value of the Premises prior to such
condemnation. Any award for the taking of all or any part of the Premises under
the power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to the Special Improvements and Lessee's
trade fixtures and removable personal property and, to the extent specifically
provided for in the award, moving expenses. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation repair
any damage to the Premises caused by such condemnation except to the extent that
Lessee has been reimbursed therefor by the condemning authority. Lessee and
Lessor each shall pay one-half (1/2) of any amount in excess of such severance
damages required to complete such repair provided
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however, if the condemnation award is made during the last year of the term
hereof, or the last year of any extension term then such excess shall be the
responsibility of Lessor.
SECTION 15
ESTOPPEL STATEMENT
15.1 Lessee Estoppel. Lessee shall at any time upon not less than ten
---------------
(10) days' prior written notice from Lessor execute, acknowledge and deliver to
Lessor a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any (ii)--that Lessee has no right of first refusal or other option
to purchase the Premises except pursuant to Paragraph 5 hereof (and confirming
that Lessee has waived such right, if such is the case), and (iii) acknowledging
that there are not, to Lessee's knowledge, any uncured defaults on the part of
Lessor hereunder, or specifying such defaults if any are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
15.2 Failure to Deliver Lessee Estoppel. Without limiting Lessor's
----------------------------------
remedies, Lessee's failure to deliver such statement within such time shall, at
Lessor's option, be conclusive upon Lessee (i) that this Lease is in full force
and effect, without modification except as may be represented by Lessor, (ii)
that there are no uncured defaults in Lessor's performance, and (iii) that not
more than one month's rent has been paid in advance.
15.3 Financial Information. If Lessor desires to finance, refinance,
---------------------
or sell the Premises, or any part thereof. Lessee hereby agrees to deliver to
any lender or purchaser designated by Lessor such financial statements of Lessee
as Lessee shall have prepared in the ordinary course and as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
15.4 Lessor Estoppel. Lessor shall-provide to Lessee from time to time
---------------
upon not less than ten (10) days prior
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notice from Lessee, an estoppel statement in the form described in Paragraph
15.1 (but not subject to 15.2).
SECTION 16
LESSOR'S LIABILITY
Lessor and Lessee agree that this is a "Triple-Net" lease and that all
costs, taxes, repairs, expenses capital or otherwise incurred by or imposed on
the Premises or the Ownership thereof shall be paid by and be the responsibility
of Lessee. The term "Lessor" as used herein shall mean only the owner or owners,
at the time in question, of the fee title to the Premises. In the event of any
transfer of such title or interest, the Lessor herein named (and in case of any
subsequent transfers, the then current Lessor) shall be relieved from and after
the date of such transfer of all liability as respects Lessor's obligations
thereafter to be performed, provided that any funds in the hands of Lessor or
the then current Lessor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the Lessor to whom the assignment is being made.
The obligations contained in this Lease to be performed by Lessor shall, subject
to the foregoing, be binding on Lessor's successors and assigns, only during
their respective periods of ownership.
SECTION 17
SEVERABILITY
The invalidity of any provision of this Lease as determined by a court
of competent jurisdiction shall in no way effect the validity of any other
provision hereof.
SECTION 18
INTEREST ON PAST-DUE OBLIGATIONS
Except as expressly herein provided, any amount due to Lessor not paid
when due or within the applicable cure period in Paragraph 13.1 shall bear
interest at the lesser of the prime rate promulgated by Sovran Bank, N.A. plus
one percent (1%) or the maximum rate then allowable by law from the date due
(the "Interest Rate''). Payment of such interest shall not excuse or cure any
default by Lessee under this Lease provided, however,
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that interest shall not be payable on late charges incurred by Lessee.
SECTION 19
TIME OF ESSENCE
Time is of the essence.
SECTION 20
ADDITIONAL RENT
Any monetary obligations of Lessee to Lessor under the terms of this
Lease shall be deemed to be Rent.
SECTION 21
INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS
This Lease contains all agreements of the parties with respect to any
matter mentioned herein other than the Purchase Agreement. No prior agreement or
understanding pertaining to any such matter shall be effective, other than the
Purchase Agreement. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the Lessor nor any
employees or agents has made any oral or written warranties or representations
to Lessee relative to the condition or use by Lessee of said Premises and Lessee
acknowledges that Lessee assumes all responsibility regarding the Occupational
Safety Health Act, as may be amended, and all other laws covering similar
matters, the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease. This Section
is not meant to supersede any of the obligations or rights of Lessee and Lessor
contained in or pursuant to the Purchase Agreement.
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SECTION 22
NOTICES
Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail and, if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the respective parties,
as the case may be. Either party may by notice to the other specify a different
address for notice purposes. A copy of all notices required or permitted to be
given hereunder shall be concurrently transmitted to such party or parties at
such addresses as Lessor or Lessee may from time to time hereafter designate by
notice to the other.
SECTION 23
WAIVERS
No waiver by Lessor or any provision hereof shall be deemed a waiver
of any other provision hereof or of any subsequent breach by Lessee of the same
or any other provision. Lessor's consent to, or approval of, any act shall not
be deemed to render unnecessary the obtaining of Lessor's consent: to or
approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
SECTION 24
HOLDING OVER
If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy at sufferance upon all the provisions of this Lease
pertaining to the obligations of Lessee, but all options and rights of first
refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said tenancy, and Lessee shall pay
rent on a monthly basis in an amount equal to one hundred fifty percent (150%)
of the most recently due Monthly Basic Rent as adjusted pursuant to Paragraph
4.2, plus an amount of all additional rent which would
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be required to be paid hereunder. Further, Lessee shall also be liable to Lessor
for all damages arising as a result of such "holding over", including
compensation for the loss of prospective tenants.
SECTION 25
CUMULATIVE REMEDIES
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in equity.
SECTION 26
COVENANTS AND CONDITIONS
Each provision of this Lease performable by Lessee shall be deemed
both a covenant and a condition.
SECTION 27
BINDING EFFECT; CHOICE OF LAW
Subject to any provisions hereof restricting assignment or subletting
by Lessee and subject to the provisions of Section 16, this Lease shall bind the
parties, their personal representatives, successors and assigns. This Lease
shall be governed by the laws of the State wherein the Premises are located.
SECTION 28
SUBORDINATION
28.1 Generally. This Lease, at Lessor's option, may be subordinated
---------
to any ground lease, mortgage, deed of trust, or any other hypothecation or
security interest now or hereafter placed upon the real property of which the
Premises are a part and to any and all advances made on the security thereof and
to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed (including Lessee's Options under Section
5 and 43 hereof) if Lessee is not in default and so long as Lessee shall
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pay the rent and observe and perform all of the provisions of this Lease, unless
this Lease is otherwise terminated pursuant to its terms. If any mortgagee,
trustee or ground lessor shall elect to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and shall give written notice thereof
to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or
ground lease, whether this Lease is dated prior or subsequent to the date of
said mortgage, deed of trust or ground lease or the date of recording thereof.
28.2 Execution of Documents. Lessee agrees to execute any documents
----------------------
required to effectuate any attornment, a subordination or to make this Lease
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be (subject to the non-disturbance provisions above). Upon Lessee's failure
to execute such documents within fifteen (15) days after Lessor's second written
demand, specifying that Lessee has failed to respond to Lessor's first written
demand, without limiting Lessor's other remedies, Lessor shall have the option
to execute such documents on behalf of Lessee as Lessee's attorney-in-fact.
Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this Paragraph 28.2, provided however that Lessor
shall not exercise such right unless Lessor shall first have given Lessee no
less that thirty (30) days notice and so long as Lessor shall not thereafter
have received notice of Lessee's objection to Lessor's exercise of such right.
SECTION 29
ATTORNEY'S FEES
If either party named herein brings an action to enforce the terms
hereof or declare rights hereunder, the prevailing party in any such action, on
trial or appeal, shall be entitled to its actual fees and costs for attorneys
and other consultants.
SECTION 30
LESSOR'S ACCESS
Subject to compliance with then applicable governmental security
requirements and Lessee's reasonable rules and regulations with respect to
classified areas, Lessor and Lessor's agents shall have the right to enter the
Premises at
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reasonable times after reasonable notice for the purposes of inspecting the
same, showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the Premises or
to the building of which they are a part as Lessor may deem necessary or
desirable (but without any obligation to do so) or which Lessee is required to
perform under this Lease but Lessee has failed to perform, pursuant to the
provisions of Paragraph 7.3 above, or for purposes of posting notices of non-
responsibility. Subject to the same such limitations, Lessor may at any time
place on or about the Premises any ordinary "For Sale" signs and Lessor may at
any time during-the last one hundred twenty (120) days of the term hereof place
on or about the Premises any ordinary "For Lease" signs, all without rebate of
rent or liability to Lessee.
SECTION 31
AUCTIONS
Lessee shall not conduct, nor permit to be conducted either
voluntarily or involuntarily, any public auction upon the Premises without first
having obtained Lessor's prior written consent.
SECTION 32
SIGNS
Lessee shall not place any additional sign upon the Premises without
Lessor's prior written consent; provided, however, that with respect to the
signs of Lessee (but not with respect to the signs of Lessee's successors or
assigns) Lessor shall not be entitled to withhold its consent to the placement
of Lessee's customary and usual signs and logos used by Lessee generally when it
occupies office and industrial buildings. All signs placed by Lessee upon the
Premises shall comply with applicable laws and regulations.
SECTION 33
MERGER
The voluntary or other surrender of this Lease by Lessee, or a mutual
cancellation thereof, or a termination by Lessor, shall not work a merger, and
shall, at the option of Lessor, terminate all or any existing subtenancies or
may, at
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the option of Lessor, operate as an assignment to Lessor of any or all of such
subtenancies.
SECTION 34
GUARANTOR
In the event that there is a guarantor of this Lease, said guarantor
shall have the same obligations as Lessee under this Lease.
SECTION 35
QUIET POSSESSION
Upon Lessee paying the rent for the Premises and observing and
performing all of the covenants, conditions and provisions on Lessee's part to
be observed and performed hereunder, Lessee shall have quiet possession of the
Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf or Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Premises.
SECTION 36
MULTIPLE TENANT BUILDING
In the event that the Premises are part of a larger building or group
of buildings, then Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care and cleanliness of the buildings and grounds, the
parking of vehicles and the preservation of good order therein as well as for
the convenience of other occupants and tenants of the buildings. The violations
of any such rules and regulations shall be deemed a material breach of this
Lease by Lessee.
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SECTION 37
SECURITY MEASURES
Lessee hereby acknowledges that the Rent payable to Lessor hereunder
does not include the cost of guard service or other security measures, and that
Lessor shall have no obligation whatsoever to provide same. Lessee assumes all
responsibility for the protection of Lessee, its agents and invitees from acts
of third parties.
SECTION 38
EASEMENTS
Subject to Lessee's rights hereunder, Lessor reserves to itself the
right, from time to time, to grant such easements, rights and dedications, for
ingress, egress, utilities or other purposes consistent with the use of the
Premises or as an accommodation to adjacent landowners, that Lessor deems
necessary or desirable, and to cause the recordation of Parcel Maps and
restrictions, as long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee or any Addition constructed by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor.
SECTION 39
PERFORMANCE UNDER PROTEST
If at any time a dispute shall arise as to any amount or sum of money
to be paid by one party to the other under the' provisions hereof, the party
against whom the obligation to pay the money is asserted shall have the right to
make payment "under protest" and such payment shall not be regarded as a
voluntary payment, and there shall survive the right on the part of said party
to institute suit for recovery of such sum. If it shall be adjudicated that
there was no legal obligation on the part of said party to pay such sum or any
part thereof, said party shall be entitled to recover such sum, or so much
thereof as it was not legally required to pay under the provisions of this Lease
plus interest thereon at a rate per annum equal to the Interest Rate.
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SECTION 40
AUTHORITY
Each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity.
SECTION 41
CONFLICT
Any conflict between the typewritten and handwritten provisions
(initialed by the parties) shall be controlled by the handwritten provisions.
SECTION 42
OPTIONS
42.1 Definition. As used in this Section, the word "Options" includes
----------
all of the following: (1) the right or option to extend the term of this Lease
or to renew this Lease; (2) any option or right of first refusal to lease the
Premises; (3) the right of first refusal granted pursuant to Section 5 hereof;
(4) the option or right to purchase and leaseback an Addition as described in
Paragraph 43.1(a) hereof; or (5) the right to develop excess land as described
in Section 47 hereof.
42.2 Assignment. Each Option granted to Lessee in this Lease may be
----------
assigned in conjunction with the assignment of Lessee's rights and obligations
under this Lease in accordance with Section 12 above.
42.3 Multiple Options. Notwithstanding anything contained in this
----------------
Lease to the contrary, in the event that Lessee has any multiple Options
pursuant to this Lease, a later Option (of the same type) cannot be exercised
unless the prior Option has been duly exercised.
42.4 Effect of Default on Options.
----------------------------
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary,
(i) during the time commencing from a default pursuant to Paragraph
13.1(b) or 13.1(c) and continuing until the default alleged in
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SECTION 43
OPTIONS OF LESSOR AND LESSEE
43.1 Addition Purchase Option.
------------------------
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43.2 Lessee's Lease Extension Options. Lessor hereby gives and grants
--------------------------------
to Lessee the exclusive right and option to extend the term of this Lease for
four (4) consecutive five (5) year extension terms. Each such extension option
may only be exercised by written notice declaring Lessee's election to exercise
the extension option: given to Lessor not less than one-hundred eighty (180)
days prior to the expiration of the initial term or the then current extension
term preceding such extension term. All of the terms, covenants and conditions
of this Lease shall apply during such extension term, except that no more than
four (4) consecutive five (5) year extension terms shall be permitted (e.g. a
total possible extension of twenty (20) years), and except that the rent for
each renewal term shall be determined as follows:
(a) Promptly following the exercise of the extension option,
the monthly fair market rental value of the Premises and Addition(s),
if any, shall be
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determined. Lessor and Lessee hereby agree that such monthly fair
market rental value shall be the Monthly Basic Rent payable for the
first month of the extension term, subject to adjustment pursuant to
Paragraph 4.2 hereof. However, such fair market rental value for the
first month of the extension term shall exclude any Addition which is
not purchased by the Lessor, as described in Paragraph 43.1 herein.
(b) The adjustments to Monthly Basic Rent shall be in the same
manner and at the same times as set forth in Paragraph 4.2 hereof.
Notwithstanding the foregoing, in no event shall the rental payable
for any month during an extension term be less than the rental payable
for the first month of such extension term or the last month of the
prior initial or extension term, as the case may be.
43.3 Qualifications of Options. Lessor and Lessee recognize and agree
-------------------------
herein that neither party during the last one hundred eighty (180) days of the
Lease term described in Paragraph 3 herein or the then current extension term
shall have option rights or privileges pursuant to this Section 43; provided,
that such limitation shall not apply to subsequent extension options granted
herein-where Lessee has timely exercised each prior extension option. If at the
expiration of the Lease term, neither party has exercised its option as
described herein, Lessor and Lessee shall be released of any and all
responsibilities and obligations under this Section 43.
SECTION 44
DETERMINATION AND
FAIR MARKET RENTAL VALUE
44.1 Fair Market Rental Value. In each instance in this Lease where
------------------------
the fair market rental value of the Premises is to be determined, such
determination shall be made in accordance with the procedures set forth in this
Section 44. The fair market rental value shall be based on a triple-net lease
with tenants of the same quality as Lessee for comparable space in the Reston
area of Fairfax County including market concessions, if any.
44.2 Arbitration Procedures. Promptly following the giving of notice
----------------------
or other occurrence giving rise to the need to determine fair market rental
value, the parties shall endeavor in good faith to determine such value. If
Lessor and Lessee fail to reach agreement as to fair market rental value by the
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date twenty (20) days from the date of the giving of notice or other occurrence
giving rise to the need to determine value ("Specified Date"), such
determination shall be submitted to arbitration as follows:
(a) Lessor and Lessee shall each appoint one arbitrator who
shall by profession be a real estate appraiser who shall have been
active over the five (5) year period ending on the date of such
appointment in the appraisal of commercial properties in the Northern
Virginia area. The determination of the arbitrators shall be limited
solely to the issue of whether Lessor's or Lessee's submitted figure
for the fair market rental value is closest to the actual value as
determined by the arbitrators, taking into account the requirements of
this Section 44. Each such arbitrator shall be appointed within
fifteen (15) days after the Specified Date.
(b) The two arbitrators so appointed shall within fifteen (15)
days of the date of the appointment of the last appointed arbitrator
agree upon and appoint a third arbitrator who shall be qualified under
the same criteria set forth herein above for qualification of the
initial two arbitrators.
(c) The three arbitrators shall within thirty (30) days of the
appointment of the third arbitrator reach a decision as to whether the
parties shall use Lessor's or Lessee' submitted values and shall
notify Lessor and Lessee thereof.
(d) The decision of the majority of the three arbitrators shall
be binding upon Lessor and Lessee.
(e) If either Lessor or Lessee fails to appoint an arbitrator
within the time period specified herein above, the arbitrator
appointed by one of them shall reach a decision, notify Lessor and
Lessee thereof, and such arbitrator's decision shall be binding upon
Lessor.
(f) If the two arbitrators fail to agree upon and appoint a
third arbitrator, both arbitrators shall be dismissed and the matter
to be decided shall be forthwith submitted to arbitration under the
provisions of the American Arbitration Association.
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(g) The cost of arbitration shall be paid by Lessor and Lessee
equally.
SECTION 45
HAZARDOUS MATERIALS
45.1 Covenants of Lessee. Lessor and Lessee agree as follows with
-------------------
respect to the existence or use of "Hazardous Material" (as defined in Paragraph
45.2 below) on the premises:
(a) Lessee hereby makes the following representations and
covenants to Lessor:
(i) Any handling, transportation, storage, treatment or
use of Hazardous Material that has occurred on the Premises prior
to the Commencement Date by Lessee, its employees, agents or
tenants has been in compliance with all Applicable "Governmental
Regulations" (as defined in Paragraph 45.3 below).
(ii) Subject to Paragraph 45.1(a)(iii) below, the Premises
are, as of the Commencement Date, in compliance with all
Governmental Regulations regulating the handling, transportation,
storage, treatment, use and disposition of Hazardous Material.
(iii) To the best of Lessee's knowledge, the soil and ground
water on or under the Premises is substantially free of Hazardous
Material.
(b) Lessee shall be responsible for all costs incurred in
complying with all Governmental Regulations which relate to Hazardous
Material on, in or about the Premises. Upon Lessor's reasonable
determination that any such costs must be incurred, Lessee shall
obtain for the benefit of Lessor a performance bond in an amount of
such costs, as reasonably determined by Lessor, which Lessor may
enforce in the event Lessee fails to comply with all remedial or
clean-up requirements of such Governmental Regulations.
(c) Lessee shall indemnify, defend and hold Lessor harmless from
and against any and all claims,
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judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Premises,
damages for the loss or restriction on use of rentable or usable space
or of any amenity of the Premises, damages arising from any adverse
impact on the redevelopment of the Premises or the marketing of space
therein, increased costs of demolition and removal of the improvements
which are part of the Premises at the expiration or earlier
termination of the Lease term, and sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees) which arise during
or after the Lease term from or in connection with Lessee's failure to
maintain the levels of any Hazardous Materials present on and/or under
the Premises below the levels established by applicable Governmental
Regulations. Lessee agrees that its indemnification of Lessor
includes, without limitation, costs incurred in connection with (i)
the removal of the asbestos, if any, in the roofing materials of the
Premises (provided that (A) Lessor is required by Governmental
Regulation to remove such asbestos or (B) Lessor removes same if it
reasonably believes it constitutes a health hazard, in either case
occurring prior to the expiration or sooner termination of this
Lease); (ii) any liability for personal injury or other liability
arising during the term of the Lease in whole or in part due to the
presence of asbestos in the roofing materials; and (iii) any
investigation of site conditions or any clean-up, remedial, removal or
restoration work required by any federal, state or local governmental
agency or political subdivision because of Hazardous Materials present
in the soil or ground water on, in or under the Premises. Without
limiting the foregoing, if the presence of any Hazardous Material on
the Premises results in any contamination of the Premises, Lessee
shall promptly take all actions at its sole expense as are necessary
to return the Premises to a condition which does not constitute
contamination under applicable Governmental Regulations; provided that
(x) Lessee is responsible for the introduction of such Hazardous
Material on the Premises (which for the purposes of this Section 45
means that Lessee cannot prove by a preponderance of evidence that a
third party is responsible therefor), and (y) Lessor's approval of
such actions shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not have any
potential to cause a material adverse long-term or
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short-term effect on the Premises. The appropriate remediation plan to
return the Premises to such level shall conclusively be determined by
an environmental consultant designated by Lessor in its sole and
absolute discretion. The parties hereto agree that to the extent there
exists any inconsistencies between the indemnification set forth
herein and the indemnification set forth in the Purchase Agreement,
the indemnification set forth in this Paragraph 45.1 shall govern.
(d) Except for small, inconsequential amounts stored in retail
containers, within ten (10) days after the Commencement Date, Lessee
shall deliver to Lessor a detailed list of all of the Hazardous
Materials which Lessee is likely to use, keep store and/or maintain in
or about the Premises. Lessee shall not cause or permit any other
Hazardous Material to be brought upon, kept or used in or about the
Premises by Lessee, its agents, employees, contractors or invitees or
subtenants unless Lessee provides written notice thereof to Lessor and
provides reasonable written evidence to Lessor (to Lessor's reasonable
satisfaction) that such Hazardous Material is necessary or useful to
Lessee's business and will be used, kept and stored in a manner that
complies with all Governmental Regulations regulating any such
Hazardous Material so brought upon or used or kept in or about the
Premises.
(e) Lessor and Lessee acknowledge that Lessor may become legally
liable for the costs of complying with Governmental Regulations
relating to Hazardous Material which may not be the legal
responsibility of Lessee, including but not limited to the following:
(i) a change in Governmental Regulations which relate to Hazardous
Material which make that Hazardous Material which is present on the
Premises, whether known or unknown to Lessee, a-violation of such new
Governmental Regulation; and (ii) Hazardous Material that Lessee is
unable to conclusively demonstrate (to a preponderance of the
evidence) has migrated, flowed, percolated, diffused or in any way
moved on, to or under the Premises after the Commencement Date from
adjacent properties. Accordingly, Lessor and Lessee agree that
compliance with Governmental Regulations (amended or enacted after the
Commencement Date) relating to Hazardous Material on the Premises for
which Lessor may be legally liable shall be the sole
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responsibility of Lessee and, to the event legally permissible, Lessee
hereby assumes such responsibility and legal liability and forever
releases and discharges Lessor from the same and agrees that any cost
incurred by Lessor with respect to the same shall be paid by Lessee on
demand as additional rental under the Lease and shall be subject to
the terms of Paragraphs 45.1(b) and 45.1(c) above. Further, Lessee
shall be solely responsible for Hazardous Material that in any way
appears in, onto or under the Premises after the Commencement Date;
--------
provided, however, that if Lessee can prove by a preponderance of
evidence that a third party is responsible for said migration, flow,
diffusion or appearance, Lessee shall be relieved of all
responsibility therefor and provided further that Lessee shall not be
------------------------------------------------------
responsible for Hazardous Material that appears in, onto or under the
---------------------------------------------------------------------
Premises from conduct which occurs after the termination of this
----------------------------------------------------------------
Lease. In the event any such expense relating to Hazardous Material is
-----
subsequently recovered or reimbursed through insurance, or recovery
from responsible third parties, or other action, Lessee shall be
entitled to reimbursement to the extent it has paid such expense to
which such recovery or reimbursement relates.
(f) Lessee shall immediately notify Lessor of any inquiry, test,
investigation, or enforcement proceeding concerning a Hazardous
Material by or against Lessee or the Premises. Further, Lessee shall
make available to Lessor upon demand, copies of any tests,
investigations and studies undertaken by or at the request of Lessee
relating to Hazardous Materials (including, if Lessee disputes its
responsibility for the presence of any Hazardous Material on the
Premises) Lessee's purchase orders and manifests to ascertain what
Hazardous Materials have been brought by Lessee to the Premises.
Lessee acknowledges that Lessor may, at its election and at Lessee's
expense, negotiate, defend, approve, and appeal any action taken or
order issued with regard to a Hazardous Material by an applicable
Governmental Authority.
45.2 Hazardous Material Definition. As used herein, the term
-----------------------------
Hazardous Material means any hazardous or toxic substance, material or wastes
which is or becomes regulated by any local governmental authority, the State or
the United States Government. The term "Hazardous Material. includes, without
limitation, any material or substance which is (i) petroleum, (ii) asbestos,
(iii) designated as a "hazardous substance"
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pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C.
(S) 1317), (iv) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq. (42
U.S.C. (S) 6903), or (v) defined as a "hazardous substance. pursuant to Section
101. of the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. (S) 9601 EL seq. (42 U.S.C. (S) 9601).
45.3 Governmental Regulations Defined. "Governmental Regulations"
--------------------------------
means any laws, ordinances, rules, requirements, resolutions, policy statements
and regulations (including, without limitation, those relating to land use,
subdivision, zoning, environmental, toxic or hazardous waste, occupational
health and safety, water, earthquake hazard reduction, and building and fire
codes) of any governmental or quasi-governmental body or agency having
jurisdiction over the Premises, Lessor or Lessee, bearing on the construction,
alteration, rehabilitation, maintenance, leasing, use, operation or sale of the
Premises.
45.4 Underground Storage Tanks. At least every two (2) years during
-------------------------
the term of this Lease, or any extension thereof, Lessee shall test the
underground storage tanks located on the Premises for integrity and freedom from
leakage. The tests shall be performed by a contractor with expertise in testing
underground storage tanks and the written results of such tests shall be
provided to Lessor. Lessee shall comply with the requirements set forth in 40
C.F.R. parts 280.40, 280.41 and 280.43 in connection with such tanks.
45.5 Groundwater Monitoring. Within six (6) months after the date of
----------------------
this Lease, Lessee shall install on the Premises, at its own expense and in
accordance with plans previously approved by Lessor (such approval not to be
unreasonably withheld), applicable law and good industry practice, permanent
groundwater monitoring wells or early-warning monitoring devices in connection
with all underground tanks on the Premises. Any monitoring wells shall be of a
minimum depth of thirty (30) feet and Lessee shall maintain such wells or
monitoring devices in good repair throughout the term of this Lease. Lessee
shall cause a testing organization previously approved by Lessor (such approval
not to be unreasonably withheld) to take and analyze samples from such wells
semi-annually (quarterly after any test which reveals the presence of Hazardous
Materials) with a sampling range from ten (10) feet to the bottom of each well.
All analyses performed pursuant to this Paragraph 45.5 should at least
specifically check such samples for petroleum hydrocarbons using at least EPA
method 418.1 (or a comparable replacement method).
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45.6 Survival. The provisions of this Section 45 shall survive the
--------
expiration or sooner termination of this Lease by either Lessor or Lessee.
SECTION 46
LIENS
Lessee shall not suffer any lien to be recorded against the Premises
as a consequence of a Hazardous Material, including any so-called state, federal
or local "super fund" lien relating to the clean-up of a Hazardous Material in,
on or about the Premises; provided, however, that in the event that a lien is
recorded against the Premises as a result of any act of Lessee, Lessee shall
promptly and diligently perform any and all acts necessary to cause the removal
of such lien.
SECTION 47
LESSOR'S RIGHT TO RELEASE EXCESS LAND
47.1 Release of Excess Land. On and after one year after the
----------------------
Commencement Date, at any time and from time to time, Lessee shall, within ten
(10) days after receipt of a written request from Lessor, execute and
acknowledge an instrument or instruments in recordable form reasonably
acceptable to Lessor terminating this Lease with respect to all or any portion
of the real property described on Exhibit "C" attached hereto (the "Excess
-----------
Land"). Those portions of the Excess land released from time to time pursuant to
this Paragraph 47.1 are hereinafter collectively referred to as the "Released
Land". Lessor may exercise the right described in the immediately preceding
sentence as many times as Lessor desires without exhausting such right. Upon the
termination of this Lease with respect to the Released Land at any time, this
Lease shall be deemed null, void and of no force and effect with respect to the
Released Land and such Released Land shall not be considered part of the
Premises. In no event shall the termination of-this Lease with respect to any
Released Land cause or permit the reduction of any Rent otherwise due under this
Lease.
47.2 Development of Excess Land. Lessee acknowledges and understands
--------------------------
that Lessor may further develop the Released Land following the termination of
this Lease with respect to such Released Land. In connection with such
-52-
<PAGE>
development, Lessor shall have the right to construct, remove and/or relocate
any and all roadways, driveways, utility lines and easements, whether located on
the Premises, on the Excess Land, or the Released Land without the consent of
Lessee; provided, however, that at all times Lessee shall have adequate
pedestrian and vehicular access to, adequate utility service at, and adequate
parking on, the Premises. Lessee agrees to execute and acknowledge, promptly
upon request by Lessor, any instruments requested by Lessor reasonably necessary
to evidence the subordination of this Lease to any new access, utility,
temporary construction or other easements over the Premises reasonably requested
by Lessor in connection with the development of the Released Land. Lessee
further agrees to cooperate with Lessor in connection with all such development
provided that Lessee shall not be required to expend any funds in connection
therewith.
SECTION 48
FOREIGN BUYERS
-53-
<PAGE>
[Page intentionally blank]
-54-
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
UMT RESTON, INC.,
a Delaware corporation
On March 29, 1990
Executed at Blue Bell, PA By: [SIGNATURE ILLEGIBLE]
-----------------------------
Title: PRESIDENT
--------------------------
Address: "Lessor"
c/o Coldwell Banker Capital
Management Services
533 Fremont Avenue
Los Angeles, California 90071
Attn: Mr. Fred C Wasson
with a copy to:
c/o Coldwell Banker Capital
Management Services
533 Fremont Avenue
Los Angeles, California 90071
Attn: Mr. Ross E. Turner
-55-
<PAGE>
UNISYS CORPORATION,
a Delaware corporation
On March 25, 1990
Executed at Blue Bell, PA By: /s/ James W. Olson
--------------------------
James Olson
Title: Vice President
Address: "Lessee"
Unisys Corporation
Township Line and
Union Meeting Roads
P.O. Box 500
Blue Bell, Pennsylvania 19424-0001
Attn: Real Estate Department
with a copy to:
Unisys Corporation
Law Department
Township Line and
Union Meeting Roads
P.O. Box 500
Blue Bell, Pennsylvania 19424-0001
-56-
<PAGE>
EXHIBIT 10.11
================================================================================
OFFICE LEASE FOR
PSINET, INC.
SUITE NO. 320
11180 SUNRISE VALLEY DRIVE
RESTON, VIRGINIA
<PAGE>
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. DEMISED PREMISES..................................... 1
2. TERM................................................. 1
3. USE.................................................. 2
4. RENT................................................. 2
5. ADVANCE RENTAL/SECURITY DEPOSITS..................... 3
6. OPERATING EXPENSES AND REAL ESTATE TAXES............. 4
7. ANNUAL RENT RATE ESCALATIONS......................... 7
8. PARKING.............................................. 7
9. ASSIGNMENT AND SUBLETTING............................ 8
10. ALTERATIONS.......................................... 11
11. LIENS................................................ 12
12. MAINTENANCE BY LESSEE................................ 13
13. SIGNS AND ADVERTISEMENTS............................. 13
14. DELIVERIES AND MOVING OF LESSEE'S PROPERTY........... 14
15. LESSEE'S EQUIPMENT................................... 14
16. SERVICES AND UTILITIES............................... 15
17. LESSEE'S RESPONSIBILITY FOR DAMAGE................... 17
18. ENTRY FOR INSPECTIONS, REPAIRS AND INSTALLATIONS..... 17
</TABLE>
================================================================================
<PAGE>
================================================================================
<TABLE>
<S> <C>
19. INSURANCE RATING...................................... 17
20. INDEMNITY AND PUBLIC LIABILITY INSURANCE.............. 18
21. WORKER'S COMPENSATION INSURANCE....................... 18
22. ALL RISK COVERAGE INSURANCE........................... 18
23. LESSEE'S CONTRACTOR'S INSURANCE....................... 19
24. REQUIREMENTS FOR LESSEE'S INSURANCE POLICIES.......... 19
25. LIABILITY FOR DAMAGE TO PERSONAL PROPERTY AND PERSON.. 20
26. DAMAGE TO THE BUILDING AND/OR THE DEMISED PREMISES.... 20
27. DEFAULT OF LESSEE..................................... 21
28. REPEATED DEFAULTS..................................... 22
29. WAIVER................................................ 23
30. SUBORDINATION......................................... 23
31. CONDEMNATION.......................................... 24
32. RULES AND REGULATIONS................................. 24
33. RIGHT OF LESSOR TO CURE LESSEE'S DEFAULT.............. 25
34. LATE CHARGES.......................................... 25
35. BANKRUPTCY............................................ 25
36. NO PARTNERSHIP........................................ 26
37. NO REPRESENTATIONS BY LESSOR.......................... 26
38. BROKER AND AGENT...................................... 26
39. WAIVER OF JURY TRIAL.................................. 27
40. ENFORCEMENT OF LEASE.................................. 27
41. NOTICES............................................... 27
</TABLE>
<PAGE>
================================================================================
<TABLE>
<S> <C>
42. ESTOPPEL CERTIFICATES................................. 28
43. HOLDING OVER.......................................... 28
44. RIGHTS RESERVED BY LESSOR............................. 29
45. COVENANTS OF LESSOR................................... 29
46. RECORDADON............................................ 30
47. RULE AGAINST PERPETUITIES............................. 30
48. GENDER................................................ 30
49. BENEFIT AND BURDEN.................................... 30
50. GOVERNING LAW......................................... 31
51. SAVINGS CLAUSE........................................ 31
52. CORPORATE LESSEE...................................... 31
53. JOINT AND SEVERAL LIABILITY........................... 32
54. FINANCIAL STATEMENTS.................................. 32
55. ENVIRONMENTAL REQUIREMENTS............................ 32
56. BUSINESS DAY/WORKING DAY.............................. 33
57. ENTIRE AGREEMENT...................................... 33
</TABLE>
EXHIBITS
--------
A. Floor Plan, Demised Premises
B. Specifications for Office Space
C. Rules and Regulations
================================================================================
<PAGE>
================================================================================
D. Confirmation as to Date of Delivery and Acceptance of Possession of
Demised Premises
E. Specifications for Office Cleaning
<PAGE>
================================================================================
OFFICE LEASE
THIS DEED OF LEASE (the "Lease"), made and entered into on this 20th day of
----
February, 1995, by and between CarrAmerica Realty Corporation, a Maryland
- ---------
corporation, hereinafter called "Lessor," and PSINet, Inc., a New York
corporation, hereinafter called "Lessee".
WITNESSETH, That, for and in consideration of the rents, mutual covenants,
and agreements hereinafter set forth, the parties hereto do hereby mutually
agree as follows:
1. DEMISED PREMISES
----------------
================================================================================
(A) Lessor does hereby lease to Lessee, and does hereby lease from Lessor,
for the term and upon the conditions hereinafter provided, certain area
stipulated and agreed to comprise 1,749 square feet of rentable area on the
third (3rd) floor of the office building situated at 11180 Sunrise Valley Drive,
Reston, Virginia 20191 (such building being hereinafter referred to as the
"Building" and such rentable area being hereinafter referred to as the "Demised
Premises"). The Demised Premises has been assigned Suite No. 320 and is outlined
on the floor plan attached hereto and made a part hereof as Exhibit A.
================================================================================
================================================================================
(B) Lessee accepts possession of the Demised Premises in its "as is"
condition existing on the date possession is delivered to Lessee, without
requiring any alterations, improvements, or decorations to be made by Lessor at
Lessor's expense.
================================================================================
(C) Lessee represents that it has thoroughly examined the Demised Premises
and is aware of and accepts the existing condition of the Demised Premises and
the Building.
2. TERM
----
================================================================================
<PAGE>
================================================================================
(A) Subject to and upon the covenants, agreements and conditions of Lessor
and Lessee set forth herein, or in any Exhibit or Addendum hereto, the term of
this Lease shall commence on the 1st day of March, 1998 (hereinafter called the
"Commencement Date"), and expire on the 31st day of March, 2002.
================================================================================
(B) In the event Lessor is unable to deliver possession of the Demised
Premises to Lessee by the Commencement Date due to causes beyond the control of
Lessor, Lessor, its agents and employees, shall not be liable or responsible for
any claims, damages or liabilities arising in connection therewith or by reason
thereof, nor shall Lessee be excused or released from this Lease, because of
Lessor's inability to deliver the Demised Premises. The Commencement Date shall
be extended, however, to the date Lessor delivers possession of the Demised
Premises, and Lessee's obligations, including the payment of rent, pursuant to
this Lease shall commence thereon.
(C) When Lessee accepts possession of the Demised Premises, Lessor and
Lessee shall execute the "Confirmation as to Date of Delivery and Acceptance of
Possession of Demised Premises," attached hereto as Exhibit D, which shall
confirm the Commencement Date. Lessee's failure to execute Exhibit D attached
hereto shall not in any manner affect the Commencement Date otherwise
established pursuant to the terms of this Lease.
(D) For the purposes of this Lease, the term "Commencement Date" shall
also mean any extended Commencement Date which may be established pursuant to
the operation of the provisions of this section of the Lease.
3. USE
---
================================================================================
Lessee shall use and occupy the Demised Premises solely for general office
purposes in accordance with the applicable zoning regulations. The Demised
Premises shall not be used for any other purpose without the prior written
consent of Lessor. Lessee will not use or occupy the Demised Premises for any
unlawful purpose, and will comply with all present and future laws, ordinances,
regulations, and orders of all governments, government agencies and any other
public authority having jurisdiction over the Demised Premises.
================================================================================
4. RENT
----
================================================================================
(A) Lessee covenants and agrees to pay to Lessor rent of any kind or
nature specified in this Lease, including Monthly Rent (as hereinafter defined)
and any sums, charges, expenses
================================================================================
<PAGE>
================================================================================
and costs identified in this Lease as additional rent to be paid by Lessee to
Lessor. Lessee's obligation to pay rent shall begin on the Commencement Date and
shall continue to remain an obligation of Lessee until completely satisfied.
================================================================================
(B) Lessee shall make all payments of rent by check, payable to
"CarrAmerica Realty Corporation, t/a Reston" and delivered to P.O. Box 277813,
Atlanta, Georgia 30384-7813 or to such other party or to such other address as
Lessor may designate from time to time by written notice to Lessee, without
demand and without deduction, set-off or counterclaim. If Lessor shall at any
time or times accept rent after it shall become due and payable, such acceptance
shall not excuse delay upon subsequent occasions, or constitute, or be construed
as, a waiver of any or all of Lessor's rights hereunder.
(C) The monthly rent for the Demised Premises (hereinafter referred to as
"Monthly Rent-) as of the Commencement Date, which Lessee hereby agrees to pay
in advance to Lessor and Lessor hereby agrees to accept, shall be Three Thousand
Six Hundred Forty-Three and 75/lOOths Dollars ($3,643.75), subject to adjustment
as provided in the section of this Lease entitled "ANNUAL RENT RATE
ESCALATIONS." The term "Monthly Rent" is deemed to mean Monthly Rent as adjusted
pursuant to the operation of the provisions of said section of this Lease.
(D) Monthly Rent as specified above shall be payable in advance on the
first day of each calendar month during the term of this Lease. Lessee shall
also pay to Lessor with the payment of Monthly Rent such payments of additional
rent provided for in the section of the Lease entitled "OPERATING EXPENSES AND
REAL ESTATE TAXES."
(E) If the Commencement Date, and therefore the obligation under the Lease
to pay Monthly Rent hereunder, begins on a day other than the first day of a
calendar month, then Monthly Rent from such date until the first day of the
following calendar month shall be prorated at the rate of one-thirtieth (l/30th)
of Monthly Rent for each day of that month from and including the Commencement
Date, payable in advance, as specified above.
5. ADVANCE RENTAL/SECURITY DEPOSITS
--------------------------------
(A) Simultaneously with the execution of this Lease by Lessee, Lessee
shall deposit with Lessor the sum of Three Thousand Six Hundred Forty-Three and
75/1OOths Dollars ($3,643.75), as a deposit towards payment of Monthly Rent for
the first (1st) full calendar month of the term of this Lease (hereinafter
referred to as the " Rental Deposit"). Any good faith deposit made at the time
Lessee executed and delivered to Lessor any letter of intent or proposal to
lease
================================================================================
<PAGE>
================================================================================
shall be applied toward the amount of this Rental Deposit. Such Rental Deposit,
prior to its being applied to the applicable payment of Monthly Rent, shall be
security for the payment and performance by Lessee of all Lessee's obligations,
covenants, conditions and agreements under this Lease, and Lessor shall have the
right, but shall not be obligated, to apply all or any portion of the Rental
Deposit to cure any default by Lessee, in which event Lessee shall be obligated
to promptly deposit with Lessor the amount necessary to restore the Rental
Deposit to its original amount. In the event Lessee fails to perform its
obligations and to take possession of the Demised Premises on the Commencement
Date provided herein, said Rental Deposit shall not be deemed liquidated damages
and Lessor may apply the Rental Deposit to reduce Lessor's damages, and such
application of the Rental Deposit shall not preclude Lessor from recovering from
Lessee all additional damages incurred by Lessor.
(B) Simultaneously with the execution of this Lease by Lessee, Lessee
shall also deposit with Lessor an additional sum of Three Thousand Six Hundred
Forty-Three and 75/100ths Dollars ($3,643.75) (hereinafter referred to as the
"Security Deposit"). Such Security Deposit shall be security for the payment and
performance by Lessee of all Lessee's obligations, covenants, conditions and
agreements under this Lease, and Lessor shall have the right, but shall not be
obligated, to apply all or any portion of the Security Deposit to cure any
default by Lessee, in which event Lessee shall be obligated to promptly deposit
with Lessor the amount necessary to restore the Security Deposit to its original
amount. In the event Lessee fails to perform its obligations and to take
possession of the Demised Premises on the appropriate Commencement Date provided
herein, or Lessee otherwise fails to perform its obligations under this Lease,
said Security Deposit shall not be deemed liquidated damages and Lessor may
apply the Security Deposit and the Rental Deposit as provided above to reduce
Lessor's damages, and such application of the Security Deposit shall not
preclude Lessor from recovering from Lessee all additional damages incurred by
Lessor. Lessee hereby waives any applicable law requiring the placement of such
monies in an interest-bearing or a separate escrow account. In the event Lessee
fully and faithfully complies with all terms, covenants, and conditions of this
Lease, the Security Deposit shall be returned to Lessee within thirty (30) days
following the expiration of the term of this Lease and Lessee's surrender of the
Demised Premises in accordance with the terms of this Lease. Lessor shall
deliver the Security Deposit to any purchaser or other successor or assignee of
Lessor's interest in the Demised Premises in the event that such interest is
sold or otherwise transferred and Lessor shall be discharged and released from
all further liability with respect to the Security Deposit and Lessee agrees to
look solely to the successor or other new Lessor for the return of the Security
Deposit. No holder of a mortgage or deed of trust to which this Lease is
subordinate shall be responsible in connection with the Security Deposit unless
such mortgagee or holder of such deed of trust shall have actually received the
Security Deposit.
6. OPERATING EXPENSES AND REAL ESTATE TAXES
----------------------------------------
================================================================================
(A) If the Operating Expenses (as defined below) of the Building increase
during any calendar year after calendar year 1998 (hereafter called the "Base
Yearn), Lessee shall pay to Lessor, as additional rent, Lessee's proportionate
share of the increase in such Operating
================================================================================
<PAGE>
================================================================================
Expenses. Lessee's proportionate share shall be the percentage which the total
rentable square feet of the Demised Premises bears to the total rentable square
feet of office area in the Building, which percentage is stipulated and agreed
to be 2.23%. The amount of such percentage to be paid by Lessee for any calendar
year shall be the percentage of the calendar year that the Demised Premises were
leased by Lessee.
================================================================================
(B) The term "Operating Expenses. shall mean (i) any and all expenses,
charges and fees incurred in connection with managing, operating, maintaining,
servicing, cleaning, insuring and repairing the Building, all Building systems
(including without limitation all mechanical, electrical, plumbing, heating, air
conditioning, ventilation, elevator, and fire and life safety systems), atrium
(if any), adjacent areas and related land and exterior appurtenances (including
without limitation all parking areas and access ways); (ii) the cost of
electricity, water, and sewer service to the Building, including adjacent areas
and related land and exterior appurtenances (including without limitation all
parking areas and access ways); and (iii) any transit, personal property, sales,
rental, use, license, gross receipts and occupancy tax and other similar
charges, ordinary or extraordinary, foreseen or unforeseen, levied, imposed or
assessed against Lessor and not otherwise included as Real Estate Taxes (as
defined below) pursuant to this section of the Lease. Operating Expenses shall
not include the following: (a) the costs and expenses of capital improvements
(except the costs and expenses of capital improvements made subsequent to the
Base Year and reasonably intended to reduce Operating Expenses or required by
public authorities to bring the Building in compliance with applicable laws or
regulations, with the costs and expenses of those improvements (with interest at
(i) Lessor's cost of funds, or (ii) if the improvement is not financed, the
prime rate reported in the Wall Street Journal) being amortized over the
Approved Period (as herein below defined) and with only the amortized amount of
the costs and expenses of those improvements attributable to a calendar year
being an element of Operating Expenses in that particular calendar year); (b)
interest and amortization of mortgages; (c) base ground rent, if any (i.e.,
exclusive of real estate taxes, utilities, insurance and other "net" elements
constituting rent under a ground lease); (d) depreciation of the Building; (e)
compensation paid to officers or executives of Lessor or Agent; (f) leasing
commissions; (g) income or franchise taxes; (h) attorneys' fees incurred by
Lessor in the preparation or enforcement of any lease or in connection with a
tenant dispute arising thereunder; (i) costs of clean up of any Materials (as
hereinafter defined) in, on or under the Building or land associated therewith
(other than in the normal course of business of operating, maintaining and
repairing the Building and equipment therein), to the extent such costs of clean
up are not incurred as a result of any act, omission, or negligence of Lessee or
its subtenants, agents, employees or contractors; and (j) costs, including
permits, licenses, and inspection costs, incurred with respect to the
construction or installation of tenant improvements for new tenants in the
Building (collectively the "Excluded Items"). Operating Expenses shall also not
include Real Estate Taxes (as defined
================================================================================
<PAGE>
================================================================================
in (D) below). The "Approved Period" shall mean the economic useful life of the
improvement, except that, with respect to an improvement made for the purpose of
reducing Operating Expenses, Lessor may amortize the expense over the period
such that the yearly amortization amount is equal to the projected annual
savings as reasonably estimated by Lessor.
(C) If the Real Estate Taxes increase during any calendar year after the
Base Year, Lessee shall pay to Lessor, as additional rent, Lessee's
proportionate share of the increases in such Real Estate Taxes. Lessee's
proportionate share shall be the percentage which the total rentable square feet
of the Demised Premises bears to the total rentable square feet of all office
areas in the Building, which percentage is stipulated and agreed to be 2.23%.
The amount of such percentage to be paid by Lessee for any calendar year shall
be the percentage of the calendar year that the Demised Premises were leased by
Lessee.
(D) The term "Real Estate Taxes n shall mean (i) any and all real estate
taxes and ad valorem taxes, surcharges, special assessments and impositions,
general and special, ordinary and extraordinary, foreseen or unforeseen, of any
kind levied, assessed, or imposed against the Building or land upon which the
Building is located thereon, and (ii) expenses (including reasonable attorneys'
fees, appraisers' fees and expert witness fees) incurred in reviewing,
protesting or seeking a reduction of Real Estate Taxes or any assessment related
thereto.
(E) If there is any change by the taxing body in the period for which any
of the Real Estate Taxes are levied, assessed or imposed, Lessor shall have the
right, in its sole but reasonable discretion, to make appropriate adjustments
with respect to computing Real Estate Taxes for the Base Year and increases in
Real Estate Taxes. If Lessor's contest of Real Estate Taxes for the Base Year
results in a decrease in Real Estate Taxes for such Base Year, the Real Estate
Taxes for the Base Year shall mean the amount incurred following such contest,
and Lessor shall have the right to bill Lessee for prior underpayments of Real
Estate Taxes thereby resulting.
(F) Lessor shall notify Lessee prior to the beginning of calendar year
1999 and each calendar year thereafter of Lessor's good faith estimate of the
amount of Operating Expenses (the "Estimated Operating Expenses") and the amount
of Real Estate Taxes (the "Estimated Real Estate Taxes") that Lessor likely will
incur for the Building during the coming calendar year, and pursuant to
Paragraph (G) hereof, shall advise Lessee of the amount of its Estimated
Payments (as defined below) for the coming calendar year.
(G) Lessee shall pay to Lessor, as additional rent, an amount equal to the
sum of (i) one-twelfth (l/12th) of Lessee's proportionate share of the amount by
which the Estimated Operating Expenses exceed the Operating Expenses for the
Base Year and (ii) one-twelfth (1/12th) of Lessee's proportionate share of the
amount by which Estimated Real Estate Taxes exceed the Real Estate Taxes for the
Base Year (collectively the "Estimated Payments"). The components of the
Estimated Payments described in clauses (i) and (ii) of the preceding sentence
shall be calculated independently without reference to one another. Lessee shall
commence to make its first Estimated Payments on the first day of January, 1999.
Thereafter, Lessee shall make its Estimated Payments on the first day of each
calendar month. Lessee shall pay the same
<PAGE>
================================================================================
amount of the Estimated Payments until the amount is adjusted, effective the
next succeeding January 1, based upon Lessor's good faith determination of the
Estimated Operating Expenses and Estimated Real Estate Taxes for the following
calendar year.
(H) Within ninety (90) days after the expiration of each calendar year
(including the calendar years in which the Commencement Date and expiration or
earlier termination of this Lease occurs), a firm of certified public
accountants selected by Lessor, shall audit Lessor's books and records for the
Building. Thereafter, Lessor shall determine any increase in the Operating
Expenses and Real Estate Taxes for such calendar year over the Operating
Expenses and Real Estate Taxes for the Base Year. The Operating Expenses and
Real Estate Taxes for each calendar year shall be those actually incurred;
provided, however, that if the Building was not at least ninety-five percent
(95%) occupied during the entire calendar year on a monthly weighted average
basis, the Operating Expenses shall be adjusted to project the Operating
Expenses as if the Building were ninety-five percent (95 %) occupied on a
monthly weighted average basis. The parties have agreed that the categories of
expenses to be so adjusted in such event shall be limited to (i) electricity,
(ii) nighttime janitorial service, (iii) water and sewer charges, and (iv) (if
and so long as the management fee varies proportionately with the gross income
of the Building) the management fee.
(I) Lessor shall submit to Lessee a statement setting forth Lessor's
determination of (i) any increases in Operating Expenses and Real Estate Taxes
over the Operating Expenses and Real Estate Taxes, respectively for the Base
Year; (ii) Lessee's proportionate share of such increases; and (iii) Lessee's
net obligation for such Operating Expenses and Real Estate Taxes for the
calendar year ("Lessee's Net Obligation") which reflects the credit of Lessee's
Estimated Payments for Estimated Operating Expenses and Estimated Real Estate
Taxes during the prior calendar year. In computing Lessee's Net Obligation,
Lessee's obligations with respect to each of (x) increases in Operating Expenses
and (y) increases in Real Estate Taxes, shall be computed independently without
reference to one another. Within thirty (30) days after the delivery of such
statement (including any statement delivered after the expiration or earlier
termination of this Lease), Lessee shall pay Lessor the full stated amount of
Lessee's Net Obligation. If the aggregate amount of Lessee's Estimated Payments
during the prior calendar year exceeds Lessee's proportionate share of (i) the
increases in Operating Expenses and (ii) the increases in Real Estate Taxes, the
excess, at Lessor's option, shall be refunded to Lessee or credited to Lessee's
next Estimated Payment(s), until such excess is fully refunded to Lessee or
credited to Lessee as provided above.
(D Lessee, and/or an independent certified public accounting firm offering a
full range of accounting services retained by Lessee on a non-contingent fee
basis, may, at Lessee's expense, at reasonable times, audit Lessor's books and
records for the Building relating to Lessor's determination of any increase or
decrease in the Operating Expenses and Real Estate Taxes for (i) the calendar
year for which Lessor's current determination is being made, (ii) the two (2)
prior
================================================================================
<PAGE>
================================================================================
calendar years, and (iii) the Base Year. Lessor shall compute the
Operating Expenses and Real Estate Taxes on the accrual basis.
7. ANNUAL RENT RATE ESCALATIONS
----------------------------
================================================================================
The annual rent rate for the Demised Premises (the "Annual Rent Rate ") as
of the Commencement Date is Twenty-five and 00/100ths Dollars ($25.00) per
rentable square foot, and the Annual Rent Rate (as then adjusted pursuant to
this section) shall be increased annually during the term of this Lease in
accordance with the following provisions. Effective on March 1, 1999 and on each
March 1 thereafter during the term of this Lease, the then effective Annual Rent
Rate shall be increased by multiplying the then effective Annual Rent Rate by
1.03, and the Annual Rent Rate as adjusted pursuant to this section shall become
the new Annual Rent Rate for purposes of determining the Monthly Rent payable
under this Lease. At all times during the term of this Lease, Monthly Rent shall
be equal to the quotient of (a) the then effective Annual Rent Rate (as adjusted
pursuant to this section) multiplied by the number of square feet of rentable
area of the Demised Premises, divided by (b) twelve (12).
================================================================================
8. PARKING
-------
================================================================================
Provided Lessee is then leasing one hundred percent (100%) of the Demised
Premises and it is not then in default hereunder, Lessee shall have the right
during the term of this Lease to park up to five (5) automobiles in the parking
area(s) serving the Building as designated by Lessor, subject in all events to
the reasonable rules and regulations of Lessor as may be amended from time to
time. Parking for Lessee and its employees shall be available on a nonexclusive
first-come, first-served basis, at no charge to Lessee or its employees;
provided, however, that Lessor, in its sole discretion, reserves the right at
any time during the term of this Lease to charge business invitees, clients or
guests of Lessee a fee (hourly, daily or otherwise) for the use of the parking
area, provided that any such fee shall be comparable to the parking rate(s) then
prevailing in comparable parking facilities serving comparable office buildings
in Reston, Virginia. Notwithstanding the foregoing, Lessor, at Lessee's sole
cost and expense, shall designate two (2) of Lessee's five (5) parking spaces as
reserved for Lessee's exclusive use (the "Reserved Spaces"), which Reserved
Spaces shall be located within the covered parking area serving the Building in
a location as reasonably determined by Lessor. Lessor reserves the right to
designate portions of the parking areas serving the building for the exclusive
and reserved use of any tenant(s) in the Building, and Lessee shall prohibit its
employees from parking in any such reserved areas. Lessor shall not be liable
for damage to or loss of any vehicle using the parking area, including any
damage or loss due to theft, vandalism, collision, fire or other casualty, nor
shall Lessor be liable for any injury to any person using the parking area
regardless of the cause of such injury, and Lessee agrees to indemnify and save
harmless Lessor and its Agent from any
<PAGE>
================================================================================
such liability. All persons using the parking area shall do so at their own
risk, and Lessee agrees to notify its employees, agents, visitors, guests and
invitees of the same. Lessee may not assign its right to use the parking area
without the prior written consent of Lessor. Lessee shall comply, and shall
cause its employees to comply, with all reasonable rules and regulations of
Lessor (or its parking operator or manager, if and as applicable) governing the
use of such parking area, as such rules and regulations may be promulgated or
modified by Lessor (or its parking operator or manager) from time to time.
Nothing contained in this Lease shall be construed to impose upon Lessor any
duty or obligation to enforce such rules and regulations, and Lessor shall not
be liable to Lessee for violation of the same by any other tenant, another
tenant's employees, agents, business invitees, customers, clients, family
members or guests. Lessor's remedies under such rules and regulations may
include, but shall not be limited to, the right to tow away at the owner's
expense, any vehicles not parked in compliance with the parking rules and
regulations. Lessor further reserves the right to implement a parking attendant
or other parking program to monitor access to and use of the parking areas, and
to include all costs thereof as an Operating Expense.
================================================================================
9. ASSIGNMENT AND SUBLETTING
-------------------------
================================================================================
(A) Lessee may not assign or otherwise transfer this Lease, or sublet
(including permitting occupancy or use by another party) the Demised Premises,
or any part thereof, without giving Lessor thirty (30) days prior written notice
of Lessee's intention to assign this Lease or sublet all or any part of the
Demised Premises. In the event Lessee seeks permission to sublease a part of the
Demised Premises, the notice shall also identify the area of the Demised
Premises Lessee seeks to sublease. Within thirty (30) days after receipt of said
notice of intent to assign or sublease, Lessor shall have the option (i) to
elect to terminate the Lease, if Lessee desires to assign this Lease, or (ii) to
terminate the Lease with regard to that portion of the Demised Premises which
Lessee seeks to sublet, or alternately to sublet that portion of the Demised
Premises from Lessee for the term which Lessee desires to sublet that portion of
the Demised Premises, at the rate and upon the same terms and conditions as
Lessee is leasing the Demised Premises from Lessor. Lessor may exercise the
option by giving Lessee written notice of its election to exercise the option
within said thirty (30) day period.
================================================================================
(B) The effective date of termination, or the effective date of
commencement of the sublease to Lessor, shall be mutually agreed upon by Lessor
and Lessee. If the parties cannot agree upon a termination date or upon a
sublease commencement date, the termination date or
================================================================================
<PAGE>
================================================================================
sublease commencement date shall be the date that is sixty (60) days after the
date Lessor received the notice that Lessee desired to assign the Lease or
sublet all or any portion of the Demised Premises. Upon termination, all of the
rights and obligations of Lessor and Lessee under the terms of this Lease shall
be terminated, or terminated with regard to that portion of the Demised Premises
that Lessee notified Lessor that Lessee desired to sublet, except that Lessee
shall continue to be obligated to pay rent and all other charges for the Demised
Premises which accrue to the date of termination.
(C) If Lessor does not exercise its option to terminate or sublet, Lessee
may assign this Lease or sublet all or any part of the Demised Premises within
one hundred twenty (120) days after the date that the thirty (30) day period
referenced above expires. Lessee shall be required however to obtain Lessor's
prior written consent to any assignee or any sublessee, which consent may not be
unreasonably withheld, contingent upon the proposed assignee or sublessee being
similar in kind and character to other private-sector office tenants in the
Building and financially reliable. The form of documentation implementing such
assignment or subletting shall be on Lessor's approved form of sublease or
assignment, or such other form of documentation which is acceptable to Lessor in
its reasonable discretion. In the event that Lessee fails to present to Lessor
any sublease or assignment agreement, fully executed by the parties hereto,
within said one hundred twenty (120) day period, Lessee may not assign this
Lease or sublet the Demised Premises without first affording Lessor the option
to terminate or sublease as previously provided for in this section.
(D) Lessee shall reimburse to Lessor, as additional rent, all costs and
expenses, including reasonable attorney's fees, which Lessor incurs by reason of
or in connection with any assignment, sublease, or leasehold mortgage proposed
or granted by Lessee (whether or not permitted under this Lease), and all
negotiations and actions with respect thereto, together with a processing fee of
Five Hundred and 00/l00ths Dollars ($500.00) per assignment, sublease, or
leasehold mortgage proposed or granted by Lessee, such additional rent to be due
and payable within fifteen (15) days of receipt of a statement of such costs and
expenses from Lessor.
(E) No assignment of this Lease shall be effectuated by operation of law
or otherwise without the prior written consent of Lessor. For the purposes of
this Lease, (i) the transfer of fifty percent (50%) or more of the ownership
interest of Lessee or the transfer and/or issuance of more than fifty percent
(50%) of the voting stock of Lessee, if Lessee is not a publicly held
corporation, to any persons or entities that are not owners or stockholders of
Lessee on the date of execution of this Lease, or (ii) the sale, transfer or
other conveyance of all or substantially all of Lessee's assets, shall be deemed
an assignment of this Lease thereby giving Lessor the right to consent to such
transaction and/or the option to terminate this Lease as provided above.
(F) Notwithstanding the foregoing provisions of this section, Lessee has
the right to assign this Lease or sublet the Demised Premises in whole or in
part to any subsidiary or affiliate of Lessee, or a successor corporation of
Lessee, upon giving Lessor ten (10) days' prior written notice of such
assignment or subleasing. Such an assignment or sublease shall not trigger
Lessor's right to terminate the Lease or subsequently require Lessor's consent
to any assignee or sublessee. A "subsidiary" of Lessee shall mean any
corporation not less than fifty percent (50%)
<PAGE>
================================================================================
of whose outstanding voting stock shall, at the time, be owned, directly or
indirectly, by Lessee. An "affiliate" of Lessee shall mean any corporation
which, directly or indirectly, controls or is controlled by or is under common
control with Lessee. For purpose of the definition of "affiliate," the word
"control" (including "controlled by" and "under common control within), as used
with respect to any corporation, partnership, or association, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policy of a particular corporation, partnership
or association, whether through the ownership of voting securities or by
contract or otherwise. A "successor corporation" shall mean any corporation
resulting from a merger with Lessee or a corporate reorganization of Lessee, so
long as such successor corporation (i) acquires all or substantially all of
Lessee's assets, (ii) continues Lessee's business operations at the Demised
Premises, (iii) is a financially reliable, reputable and bona fide entity which
has the financial capacity to undertake and perform the obligations of this
Lease and which assumes all of Lessee's obligations under this Lease, and (iv)
Lessee submits to Lessor such information as Lessor may reasonably request to
determine that the requirements of (i) through (iii) have been satisfied.
(G) Notwithstanding any other provision of this Lease to the contrary,
Lessee shall have no right to transfer, assign, sublet, enter into license or
concession agreements, or mortgage or hypothecate this Lease or Lessee's
interest in the Demised Premises or any part thereof to a foreign government or
to any individual or entity whereby enforcement of the obligations of the Lessee
under this Lease might be limited by sovereign immunity. Any such attempted
transfer, assignment, subletting, license or concession agreement mortgage or
hypothecation shall be void and confer no rights on such foreign government or
individual or entity.
(H) The consent by Lessor to any assignment or subletting to any party
other than Lessor, including a subsidiary or affiliate, shall not be construed
as a waiver or release of Lessee from the terms of any covenant or obligation
under this Lease. Lessor's collection or acceptance of rent from any assignee of
Lessee shall not constitute a waiver or release of Lessee of any covenant or
obligation contained in this Lease, nor shall any such assignment or subletting
be construed to relieve Lessee from giving Lessor said thirty (30) days notice
or from obtaining the consent in writing of Lessor to any further assignment or
subletting. In the event that Lessee is in default of any term or provision of
this Lease, Lessee hereby assigns to Lessor the rent due from any subtenant of
Lessee and hereby authorizes and directs each such subtenant, upon notice from
Lessor, to pay said rent directly to Lessor, the collection or acceptance of
rent from any subtenant in such instance not to constitute a waiver or release
of Lessee of any covenant or obligation contained in this I ease.
(I) Lessee shall not mortgage or encumber this Lease without the prior
written consent of Lessor.
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<PAGE>
================================================================================
10. ALTERATIONS
-----------
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(A) Lessee shall make no alterations, installations, additions or
improvements (hereinafter collectively called "Alterations.) in or to the
Demised Premises or the Building without Lessor's prior written consent. Consent
by Lessor to Lessee's Alterations shall not be unreasonably withheld,
conditioned or delayed, except that Lessor may withhold its consent for any
reason with regard to requested Alterations by Lessee which could (i) affect the
structure of the Building or the mechanical, plumbing or electrical systems of
the Building, or (ii) cause the imposition of additional costs or obligations on
Lessor. Lessee, at its sole cost and expense, shall provide Lessor with a copy
of the original or revised full-floor mechanical and electrical plans for the
floor or floors on which the Alterations are to be made, revised by the Building
architect and engineers to show Lessee's proposed Alterations. If any
Alterations are made without the prior written consent of Lessor, Lessor may
correct or remove the same, and Lessee shall be liable for any and all expenses
incurred by Lessor in the performance of this work. All Alterations shall be
made (i) at Lessee's sole expense; (ii) at such times and in such manner as
Lessor may designate; (iii) in a good, working workmanlike, first-class and
prompt manner; (iv) using new materials only; (v) in accordance with Lessor's
construction regulations (as the same may be modified or amended from time to
time); (vi) in accordance with all applicable legal requirements and the
requirements of any insurance company insuring the Building; and (vii) only by
such contractors or mechanics as are approved in writing by Lessor. Approval of
contractors or mechanics by Lessor, which approval may not be unreasonably
withheld, shall be based upon the contractors or mechanics being properly
licensed, their financial posture, experience and past job performance. Lesser
reserves the right to charge Lessee a construction supervision or management fee
for Alterations performed by or on behalf of Lessee, other than those
Alterations that are purely cosmetic and decorative in nature. Prior to the
commencement of any Alterations in the Demised Premises, Lessee shall submit to
Lessor copies of all permits required in connection therewith, and upon the
completion of any Alterations, Lessee, at its expense, shall furnish to Lessor a
set of the "as-built" plans for such Alterations constructed or installed in the
Demised Premises.
================================================================================
(B) All Alterations to the Demised Premises, whether made by Lessor or
Lessee, and whether at Lessor's or Lessee's expense, or the joint expense of
Lessor and Lessee, shall be and remain the property of Lessor. Notwithstanding
the foregoing, however, any Alterations, fixtures or any other property
installed in the Demised Premises at the sole expense of Lessee and with respect
to which Lessee has not been granted any credit or allowance by Lessor and which
can be removed without causing material damage to the Demised Premises and the
Building or the Demised Premises, shall be and remain the property of Lessee. In
the event Lessee removes any of these Alterations and the like, Lessee agrees,
at Lessor's election, (i) to repair any damage to the Building caused by said
removal and to restore the Demised Premises to a condition no less than the
Building standard condition as identified in Exhibit __, or (ii) pay Lessor, as
additional rent, for all costs incurred by Lessor to undertake such repairs. Any
replacements of any property
<PAGE>
================================================================================
or improvements of Lessor, whether made at Lessee's expense or otherwise, shall
be and remain the property of Lessor.
(C) Lessor, at the expiration or earlier termination of the term of the
Lease, may elect to require Lessee to remove all or any part of the Alterations
made by Lessee subsequent to the Commencement Date, unless Lessor agrees in
writing not to require the removal of any Alterations at the time Lessor
consents to the Alterations. Removal of Lessee's Alterations shall be at
Lessee's cost and expense, and Lessee agrees, at Lessor's election, (i) to
repair any damage to the Demised Premises or the Building caused by such removal
and to restore the Demised Premises to a condition no less than the Building
standard level as identified in Exhibit _, or (ii) pay Lessor, as additional
rent, all costs incurred by Lessor to undertake such repairs.
(D) Lessee shall remove all of Lessee's property at the expiration or
earlier termination of the Lease. In the event Lessee does not remove Lessee's
property at the expiration or earlier termination of the Lease, such property
shall become the property of Lessor.
(E) In the event Lessee fails to remove its property or the Alterations
requested to be removed by Lessor on or before the expiration, or earlier
termination, of the term of the Lease, then Lessor may remove such property and
Alterations from the Demised Premises at Lessee's expense, and Lessee hereby
agrees to pay to Lessor, as additional rent, the cost of such removal together
with any and all damages which Lessor may suffer and sustain by reason of the
failure of Lessee to remove the same. Said amount of additional rent shall be
due and payable upon receipt by Lessee of a written statement of costs and
damages from Lessor.
11. LIENS
-----
(A) If any mechanics' or other lien is filed against the Demised Premises,
or the Building of which the Demised Premises are a part, for work, labor,
services, or materials, done for or supplied to or claimed to have been done for
or supplied to Lessee, such lien shall be discharged by Lessee, at its sole cost
and expense, within ten (10) days from the date Lessee receives written demand
from Lessor to discharge said lien, by the payment thereof or by filing any bond
required by law. If Lessee shall fail to discharge any such lien, Lessor may, at
its option, discharge the same and treat the cost thereof as additional rent,
due and payable upon receipt by Lessee of a written statement of costs from
Lessor. It is hereby expressly covenanted and agreed that such discharge of any
lien by Lessor shall not be deemed to waive or release Lessee from its default
under the Lease for failing to discharge the same.
(B) Lessee will indemnify and hold harmless Lessor from and against any
and all claims, damages and expenses incurred by Lessor, arising from any liens
placed against the Demised Premises or the Building and the land upon which it
is situated, as a result of Lessee
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<PAGE>
================================================================================
undertaking construction work in the Demised Premises at its own cost and under
its own control and direction, or making any Alterations to the Demised
Premises.
12. MAINTENANCE BY LESSEE
---------------------
================================================================================
(A) Lessee shall keep the Demised Premises and the fixtures and equipment
therein in clean, safe and sanitary condition, shall take good care thereof, and
shall suffer no waste or injury thereto. At the expiration or earlier
termination of the term of this Lease, Lessee shall surrender the Demised
Premises broom clean and in the same order and condition in which they were on
the Commencement Date, ordinary wear and tear and damage by the elements, fire
and other insured casualty excepted.
================================================================================
(B) To the extent that Lessee's use or uses of the Demised Premises or
Lessee's manner of operation creates a need or requirement under applicable
statute, ordinance or regulation of any governmental authority to modify or
alter the Demised Premises, or its manner of operation, maintenance and repair,
Lessee shall be fully responsible for the costs to undertake such changes, and
to obtain approval from Lessor pursuant to the section of this Lease entitled
"ALTERATIONS". to undertake such changes.
13. SIGNS AND ADVERTISEMENTS
------------------------
================================================================================
(A) No sign, advertisement or notice shall be inscribed, painted, affixed
or displayed on any part of the outside or the inside of the Building, except
with Lessor's prior written consent and then only in such place, number, size,
color and style (i.e., Building standard lettering) as is authorized by Lessor.
If any such sign, advertisement or notice is exhibited without first obtaining
Lessor's written consent, Lessor shall have the right to remove the same, and
Lessee shall be liable for any and all expenses incurred by Lessor by said
removal, as additional rent.
================================================================================
(B) Lessor agrees to display Lessee's name on the Building directory in
the size and style of lettering used by Lessor, at Lessee's expense. Issue may
display its name on the main entry door of the Demised Premises in Building
standard color, size and style of lettering, at Lessee's expense.
(C) Lessor shall have the right to prohibit any published advertisement of
Lessee which in its opinion tends to impair the reputation of the Building or
its desirability as a high quality office building, and, upon written notice
from Lessor, Lessee shall immediately refrain from and discontinue any such
advertisement.
<PAGE>
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14. DELIVERIES AND MOVING OF LESSEE'S PROPERTY
------------------------------------------
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No furniture, equipment or other bulky matter of any description shall be
received into the Building or carried in the elevators except in the manner and
during the times approved by Lessor. Lessee shall obtain Lessor's determination
prior to moving said property into the Building. All moving of furniture,
equipment and other material within the public areas shall be under the direct
control and supervision of Lessor who shall, however, not be responsible for any
damage to or charges for moving the same. Lessor shall have the sole right to
determine the load capacities of the elevators of the Building and to determine
if Lessee's property can be safely transported in the elevators. Lessee agrees
promptly to remove from the sidewalks adjacent to the Building any of the
Lessee's furniture, equipment or other material there delivered or deposited.
================================================================================
15. LESSEE'S EQUIPMENT
------------------
================================================================================
(A) Lessee will not install or operate in the Demised Premises any
electrically operated equipment or other machinery, other than typewriters, word
processing machines, personal desktop computers, adding machines, radios,
televisions, tape recorders, dictaphones, bookkeeping machines, copying
machines, clocks, and other business machines and equipment normally employed
for general office use which do not require high electricity consumption for
operation, without first obtaining the prior written consent of Lessor, who may
condition such consent upon payment by Lessee of additional rent as compensation
for additional consumption of electricity and/or other utility services. Such
additional rent shall be in addition to Lessee's obligations, pursuant to the
section of this Lease entitled, "OPERATING EXPENSES AND REAL ESTATE TAXES" to
pay its proportionate share of increases in Operating Expenses.
================================================================================
(B) If any or all of Lessee's equipment requires electricity consumption
in excess of the capacity of the electrical system installed by Lessor in the
Demised Premises, all additional transformers, distribution panels and wiring
that may be required to provide the amount of electricity required for Lessee's
equipment shall be installed by Lessor at the cost and expense of Lessee. If
Lessee's equipment causes Lessee's consumption of electricity to exceed an
average of five (S) watts per rentable square foot, or if such equipment is to
be consistently operated beyond the normal Building hours of 8:00 a.m. to 6:00
p.m., Monday through Friday, and 9:00 a.m. to
================================================================================
<PAGE>
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1:00 p.m. on Saturday, Lessor may install at its option (i) a separate electric
meter for the Demised Premises at Lessee's sole cost and expense, or (ii) a
separate meter for the specific equipment that is causing Lessee's excessive
consumption of electricity at Lessee's sole cost and expense. In the event
Lessor installs a separate meter for the Demised Premises, Lessee shall then pay
the cost of electricity it consumes as recorded by such meter directly to the
electric company, and an appropriate adjustment shall be made to Lessee's
proportionate share of Operating Expenses to reflect Lessee's reduced
consumption of electricity because of such separate metering of the Demised
Premises. In the event Lessor separately meters the specific equipment, Lessee
shall be billed periodically by Lessor based upon such consumption and no
adjustment shall be made to Lessee's proportionate share of Operating Expenses.
(C) Lessee shall not install any equipment of any kind or nature
whatsoever which will or may necessitate any changes, replacements or additions
to, or in the use of, the water system, heating system, plumbing system, air-
conditioning system, or electrical system of the Demised Premises or the
Building without first obtaining the prior written consent of Lessor. Business
machines and mechanical equipment belonging to Lessee which cause noise or
vibration that may be transmitted to the structure of the Building or to any
space therein to such a degree as to be objectionable to Lessor or to any tenant
in the Building shall be installed and maintained by Lessee, at Lessee's
expense, on vibration eliminators or other devices sufficient to eliminate such
noise and vibration.
(D) Lessor shall have the right to prescribe the weight and position of all
heavy equipment and fixtures, including, but not limited to, data processing
equipment, record and file systems, and safes which Lessee intends to install or
locate within the Demised Premises. Lessee shall obtain Lessor's prior review
and approval before installing or locating heavy equipment and fixtures in the
Demised Premises, and if installation or location of such equipment or fixtures,
in Lessor's opinion, requires structural modifications or reinforcement of any
portion of the Demised Premises or the Building, Lessee agrees to reimburse
Lessor, as additional rent, for any and all costs incurred by Lessor to make
such required modifications or reinforcements, and such modifications or
reinforcements shall be completed prior to Lessee installing or locating such
equipment or fixtures in the Demised Premises. Lessee shall reimburse Lessor
within thirty (30) days of receipt of any statement setting forth those costs.
16. SERVICES AND UTILITIES
----------------------
================================================================================
(A) Lessor shall provide the following utilities and services:
================================================================================
(1) Hot and cold water and lavatory supplies, it being understood and
agreed that hot and cold water shall be furnished by Lessor only at those points
of supply provided for general use of other tenants in the Building.
<PAGE>
================================================================================
(2) Automatically operated elevator service at all times.
(3) Cleaning and char services, as specified in Exhibit E, after
normal business hours, Monday through Friday of each week, except on the
holidays listed in subparagraph (4) below.
(4) Heat and air-conditioning in season, Monday through Friday from
8:00 a.m. to 6:00 p.m. and on Saturday from 9:00 a.m. to 1:00 p.m., except for
the following holidays: New Year's Day, Memorial Day, Fourth of July, Labor Day,
Thanksgiving Day, and Christmas Day, and any other federally-designated holiday
which Lessor may choose to acknowledge and observe. Lessor shall provide heat
and air-conditioning at times in addition to those specified in the preceding
sentence at Lessee's expense, provided Lessee gives Lessor notice prior to 1:00
p.m. on a business day in the case of after-hours service on that business day
and prior to 3:00 p.m. on the immediately preceding business day in the case of
after-hours service on a Saturday, a Sunday or a holiday. Lessor shall charge
Lessee for said after-hours services the same rate it charges other tenants,
which is $20.00 per hour per floor on the date of execution of this Lease.
Lessor reserves the right, in its sole discretion, to increase the hourly charge
for said after-hours service, but in no event shall the rate per hour charged
Lessee be more than the rate per hour charged other tenants of such floor. In
the event the same after hours service is also requested by other tenants of
such floor in addition to Lessee, the charge therefor to each tenant requesting
such after-hours service shall be prorated among all requesting tenants based
upon the respective square footages of each of the demised premises of the
tenants requesting such after-hours service.
(5) Maintenance, painting and electric lighting service for all
public areas and special service areas in the Building.
(6) A controlled-access system to the Building comparable to other
first-class office buildings in the city or county where the Building is
located.
(7) Electricity and proper electrical facilities to furnish
sufficient electricity for equipment of Lessee installed pursuant to the section
of this Lease entitled, "LESSEE'S EQUIPMENT".
(B) In the event any public utility supplying energy requires, or
government law, regulation, executive or administrative order results in a
requirement, that Lessor or Lessee must reduce, or maintain at a certain level,
the consumption of electricity for the Demised Premises or Building, which
affects the heating, air-conditioning, lighting, or hours of operation of the
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<PAGE>
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Demised Premises or Building, Lessor and Lessee shall each adhere to and abide
by said laws, regulations or executive orders without any reduction in rent.
(C) Lessor's inability to furnish, to any extent, these defined services,
or any cessation thereof, resulting from, but not limited to, any causes
including entry for inspections, repairs, alterations, improvements and
installations by Lessor, its agents, employees or contractors pursuant to the
section of this Lease entitled 'ENTRY FOR INSPECTIONS, REPAIRS AND
INSTALLATION,. or from renovation, redecoration or rehabilitation of any area of
the Building, including the lobby, or any of the surrounding public spaces,
shall not render Lessor liable for damages to either person or property, nor be
construed as an eviction of Lessee, nor work an abatement of any portion of
rent, nor relieve Lessee from fulfillment of any covenant or agreement hereof.
Should any of the Building equipment or machinery cease to function properly for
any cause, Lessor shall use reasonable diligence to repair the same promptly,
but Lessee shall have no claim for damages or for a rebate of any portion of
rent on account of any interruptions in any services occasioned thereby or
resulting therefrom.
17. LESSEE'S RESPONSIBILITY FOR DAMAGE
----------------------------------
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Except as provided for in the section of this Lease entitled, "ALL RISK
COVERAGE INSURANCE" any and all injury, breakage or damage to the Demised
Premises or the Building arising from any cause done by Lessee or its agents,
subtenants, licensees, contractors, servants, employees and visitors, or by
individuals and persons making deliveries to or from the Demised Premises shall
be repaired by Lessor at the sole expense of Lessee. Payment of the cost of such
repairs by Lessee shall be due as additional rent with the next installment of
Monthly Rent after Lessee receives a bill for such repairs from Lessor. This
provision shall not be in limitation of any other rights and remedies which
Lessor has or may have in such circumstances.
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18. ENTRY FOR INSPECPTIONS. REPAIRS AND INSTALLATIONS
-------------------------------------------------
================================================================================
(A) Lessee shall permit Lessor, or its agent, employees or contractors,
without notice to Lessee, to enter the Demised Premises at all reasonable times
and in a reasonable manner, without charge to Lessor or diminution of Monthly
Rent payable by Lessee, to examine, inspect and protect the Building, and, upon
one (1) business day written notice, to make such repairs as in the judgment of
Lessor may be deemed necessary to maintain or protect the Building, or to
exhibit the same to prospective tenants during the last one hundred twenty (120)
days of the term of this Lease. Lessor shall use reasonable efforts to minimize
interference to Lessee's business when making repairs, but Lessor shall not be
required to perform the repairs at a time other than during normal working
hours.
<PAGE>
================================================================================
(B) In the event of an emergency, Lessor may enter the Demised Premises
without notice and make whatever repairs are necessary to protect the Building.
(C) Lessee shall permit Lessor, or its agents, employees or contractors,
upon no less than ten (10) days prior written notice to Lessee, to enter the
Demised Premises at reasonable times and in a reasonable manner, without charge
to Lessor or diminution of Monthly Rent payable by Lessee, to make installations
related to the construction of pre-occupancy tenant work being performed by
Lessor for other tenants of the Building, to make repairs, alterations and
improvements arising due to repairs, alterations and improvements to any areas
adjoining the Demised Premises, to erect, use and maintain pipes and conduits in
and through the Demised Premises, or to make installations, improvements and
repairs to utility services of the Building located in or about the Demised
Premises. Lessor shall use reasonable efforts to minimize interferences with
Lessee's business operations, but except in unusual circumstances, Lessor shall
not be required to perform such work at a time other than normal working hours.
19. INSURANCE RATING
----------------
Lessee shall not conduct or permit to be conducted any activity, or place
any equipment or property in or about the Demised Premises that will increase in
any way the rate of All Risk Coverage insurance or other insurance on the
Building, unless consented to by Lessor. Lessor's consent may be conditioned
upon Lessee's payment of any costs arising directly or indirectly from such
increase. If any increase in the rate of All Risk Coverage insurance or other
insurance on the Building is stated by any insurance company or by the
applicable Insurance Rating Bureau to be due to Lessee's activity, equipment or
property in or about the Demised Premises, said statement shall be conclusive
evidence that the increase in such rate is due to such activity, equipment or
property and, as a result thereof, Lessee shall be liable for such increase. Any
such rate increase and related costs incurred by Lessor shall be deemed
additional rent due and payable by Lessee to Lessor upon receipt by Lessee of a
written statement of the rate increase and costs. Lessee may contest, at its
sole cost and expense, any insurance rate increase, provided such action by
Lessee will not adversely affect the insurance coverage of Lessor.
20. INDEMNITY AND PUBLIC LIABILITY INSURANCE
----------------------------------------
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(A) Lessee shall indemnify and save harmless Lessor and its Agent from any
and all liability, damage, expense, cause of action, suits, claims, judgments
and cost of defense arising from injury to person or personal property in and on
the Demised Premises, or upon any adjoining sidewalks or public areas of the
Building, which arise out of the use and occupancy of
================================================================================
<PAGE>
================================================================================
the Demised Premises or the act, failure to act or negligence of Lessee, its
agents, contractors, employees, subtenants or licensees.
(B) In order to assure such indemnity, Lessee shall, at its sole cost,
carry and keep in full force and effect at all times during the term of this
Lease, a commercial comprehensive general liability policy with a single limit
of at least Two Million Dollars ($2,000,000.00) including coverage for bodily
injury, property damage and personal injury liability. Any blanket policy
carried by Lessee to insure the above obligation shall contain an endorsement
(in form reasonably satisfactory to Lessor) providing a per location combined
limit coverage in the above specified amount.
21. WORKER'S COMPENSATION INSURANCE
-------------------------------
================================================================================
Lessee shall carry and keep in full force and effect at all times during
the term of this Lease, at its sole cost, worker's compensation or similar
insurance in form and amounts required by law. Such insurance shall contain
waiver of subrogation provisions in favor of Lessor and its management agent.
================================================================================
22. ALL RISK COVERAGE INSURANCE
---------------------------
Lessor shall obtain and maintain All Risk Coverage insurance covering the
Building and the Building-standard tenant improvements to the level specified in
Exhibit B. Lessee shall obtain and maintain throughout the term of this Lease
and any extension periods All Risk Coverage insurance insuring against damage to
and loss of Lessee's Alterations and tenant improvements (above the level of the
Building-standard tenant improvements as specified in Exhibit B), fixtures,
equipment, furniture, and all other personal property in and about the Demised
Premises. Lessor and Lessee hereby release each other and waive any claims they
may have against the other for loss or damage to the Building, Demised Premises,
tenant improvements, fixtures, equipment and/or any other personal property
arising from a risk insured against under the All Risk Coverage insurance
policies to be carried by Lessor and Lessee, as required above, even though such
loss or damage was caused by the negligence of Lessor, Lessee, or their
respective agents or employees (or any combination thereof), except for the
amount of the deductible under said policies. Lessor and Lessee agree to obtain
and maintain throughout the term of this Lease endorsements to their respective
All Risk Coverage policies waiving the right of subrogation of their insurance
companies against the other party and its agents and employees. Except to the
extent expressly provided herein, nothing contained in this Lease shall relieve
Lessor or Lessee of any liability to each other or to their insurance carriers
which Lessor or Lessee may have under law or the provisions of this Lease in
connection with
<PAGE>
================================================================================
any damage to the Building, Demised Premises, tenant improvements, fixtures,
equipment, furniture, and all other personal property, by fire or other
casualty.
23. LESSEE'S CONTRACTOR'S INSURANCE
-------------------------------
Lessee shall require any contractor of Lessee performing work on the
Demised Premises to carry and maintain, at no expense to Lessor:
(A) commercial comprehensive general liability insurance, including
contractor's liability coverage, contractual liability coverage, completed
operations coverage, broad form property damage endorsement and contractor's
protective liability coverage, to afford protection with limits, for each
occurrence, of not less than One Million Dollars ($1,000,000.00) with respect to
personal injury, death, or property damage; and
(B) worker's compensation or similar insurance in form and amounts
required by law.
24. REQUIREMENTS FOR LESSEE'S INSURANCE POLICIES
--------------------------------------------
(A) The company or companies writing any insurance which Lessee is
required to carry and maintain or cause to be carried or maintained pursuant to
this Lease shall be a good and responsible insurance company and shall at all
times maintain a Best's rating of level A, class XII or better (or a comparable
rating by any successor publication). The form of such insurance shall at all
times be subject to Lessor's reasonable approval, and any such company or
companies shall be licensed to do business in the Commonwealth of Virginia.
Lessee's public liability and All Risk Coverage insurance policies and
certificates evidencing such insurance shall name Lessor and its Agent as
additional insured and shall also contain a provision by which the insurer
agrees that such policy shall not be cancelled except after thirty (30) days
written notice to Lessor. Lessee agrees to provide to Lessor prior to taking
possession of the Demised Premises the certificates evidencing such insurance;
Lessor may withhold delivery of the Demised Premises without delaying the
Commencement Date, or triggering any abatement of rent, if Lessee fails to
provide Lessor with these certificates.
(B) Any insurance carried or to be carried by Lessee hereunder shall be
primary over any policy that might be carried by Lessor. If Lessee shall fail to
perform any of its obligations regarding the acquisition and maintenance of
insurance, Lessor may perform the same and the cost of same shall be deemed
additional rent, payable upon Lessor's demand.
25. LIABILITY FOR DAMAGE TO PERSONAL PROPERTY AND PERSON
----------------------------------------------------
================================================================================
<PAGE>
================================================================================
(A) All personal property of Lessee, its employees, agents, subtenants,
business invitees, licensees, customers, clients, family members, guests or
trespassers, in and on the Demised Premises shall be and remain in and on the
Demised Premises and the Building at the sole risk of said parties and Lessor
shall not be liable to any such person or party for any damage to, or loss of
personal property thereof, including loss or damage arising from, (a) any act,
including theft, or any failure to act, of any other persons, (b) the leaking of
the roof, (c) the bursting, rupture, leaking or overflowing of water, sewer or
steam pipes, (d) the rupture or leaking of heating or plumbing fixtures,
including security and protective systems, (e) short circuiting or malfunction
of electrical wires or fixtures, including security and protective systems or
(f) the failure of the heating or air-conditioning systems. Lessor shall also
not be liable for the interruption or loss to Lessee's business arising from any
of the above-described acts or causes. Lessee specifically agrees to save Lessor
harmless in all such cases.
================================================================================
(B) Lessor shall not be liable for any personal injury to Lessee, Lessee's
employees, agents, subtenants, business invitees, licensees, customers, clients,
family members, guests or trespassers arising from the use, occupancy and
condition of the Demised Premises or the Building, unless such party establishes
that there has been negligence or a willful act or failure to act on the part of
Lessor, its agents or employees.
26. DAMAGE TO THE BUILDING AND/OR THE DEMISED PREMISES
--------------------------------------------------
================================================================================
(A) If the Demised Premises is damaged by fire or other casualty insured
against by Lessor's All Risk Coverage insurance policy covering the Building,
and the Demised Premises can be fully repaired, in Lessor's opinion, within 180
days from the date of the insured risk, Lessor, at Lessor's expense, shall
repair such damage, provided, however, Lessor shall have no obligation to repair
any damage to, or to replace, Lessee's non-building standard tenant improvements
or any other property located in the Demised Premises. Except as otherwise
provided herein, if the entire Demised Premises is rendered untenantable by
reason of the insured risk, then Monthly Rent shall abate for the period from
the date such damage to the date when Lessor has completed repairs to the
Demised Premises as specified above, and if only a portion of the Demised
Premises is so rendered untenantable, then Monthly Rent shall abate for such
period in the proportion which the area of the portion of the Demised Premises
so rendered untenantable bears to the total area of the Demised Premises,
provided, however, if, prior to the date when such repairs have been completed,
any portion of the Demised Premises so damaged shall be rendered tenantable and
shall be used or occupied by Lessee or any person claiming through or under
Lessee, then the amount by which the Monthly Rent shall abate shall be equitably
apportioned for the period from the date of any such use or occupancy to the
date when such repairs are completed. No compensation or claim or reduction of
rent will be allowed or paid by Lessor by reason of inconvenience, annoyance, or
injury to business arising from the necessity of repairing the Demised Premises
or any portion of the Building of which they are a part.
<PAGE>
================================================================================
(B) Notwithstanding the foregoing, if, prior to or during the term of this
Lease, (a) the Demised Premises or all access thereto is so damaged that, in
Lessor's opinion, the Demised Premises and access thereto cannot be fully
repaired within 180 days from the date the damage occurred, or (b) the Building
is so damaged that, in Lessor's opinion, substantial repair or reconstruction of
the Building shall be required (whether or not the Demised Premises is damaged
or rendered untenantable), then, in any of such events, Lessor, at its option,
may give to Lessee, within sixty (60) days after such fire or other casualty, a
thirty (30) days notice of termination of this Lease and, in the event such
notice is given, this Lease shall terminate (whether or not the term shall have
commenced) upon the expiration of such thirty (30) days with the same effect as
if the date of expiration of such thirty (30) days were the date definitely
fixed for expiration of the term of the Lease, and the then-applicable Monthly
Rent shall be apportioned as of such date, including any rent abatement as
provided above.
27. DEFAULT OF LESSEE
-----------------
================================================================================
This Lease shall, at the option of Lessor, cease and terminate if (i)
Lessee fails to pay rent, including any installment of Monthly Rent, or any
sums, charges, expenses and costs of any kind or nature identified in this Lease
as additional rent, although no legal or formal demand has been made, and such
failure to pay rent continues for a period of five (5) days after written notice
addressed to Lessee has been delivered by Lessor to the Demised Premises, or
(ii) Lessee violates or fails to perform any of the other conditions, covenants
or agreements of this Lease made by Lessee, and any violation or failure to
perform any of those conditions, covenants or agreements continues for a period
of fifteen (15) days after written notice thereof has been delivered by Lessor
to Lessee, or, in cases where the violation or failure to perform cannot be
corrected within fifteen (15) days, Lessee does not begin to correct the
violation or failure to perform within fifteen (15) days after receiving
Lessor's written notice and/or Lessee thereafter does not diligently pursue the
correction of the violation or failure to perform. Any said violation or failure
to perform or to pay any rent, if left uncorrected, shall operate as a notice to
quit, any further notice to quit or notice of Lessor's intention to re-enter
being hereby expressly waived. Lessor may thereafter proceed to recover
possession under and by virtue of the provisions of the laws of the jurisdiction
in which the Building is located or by such other proceedings, including re-
entry and possession, as may be applicable. If Lessor elects to terminate this
Lease, everything herein contained on the part of Lessor to be done and
performed shall cease without prejudice to the right of Lessor to recover from
Lessee all rent accruing up to and through the date of termination of this Lease
or the date of recovery of possession of the Demised Premises by Lessor,
whichever is later. Should this Lease be terminated before the expiration of the
term of this Lease by reason of Lessee's default as herein above provided, or if
Lessee abandons or
================================================================================
<PAGE>
================================================================================
vacates the Demised Premises before the expiration or termination of the term of
this I ease, the Demised Premises may be relet by Lessor for such rent and upon
such terms as are not unreasonable under the circumstances, and, if the full
rent herein above provided is not realized by Lessor, Lessee shall be liable for
all damages sustained by Lessor, including, without limitation, deficiency in
rent, reasonable attorneys' fees, brokerage fees, and expenses of placing the
Demised Premises in a commercially reasonable rentable condition. Any damage or
loss of rent sustained by Lessor (including any deficiency between the rent
reserved pursuant to the reletting and the rent reserved under this Lease,
accelerated to the date of reletting) may be recovered by Lessor, at Lessor's
option, at the time of the reletting, or in separate actions, from time to time,
as said damage shall have been made more easily ascertainable by successive
relettings, or, at Lessor's option, may be deferred until the expiration of the
term of this Lease, in which event the cause of action shall not be deemed to
have accrued until the date of expiration of said term. The provisions contained
in this section shall be in addition to and shall not prevent the enforcement of
any claim Lessor may have against Lessee for anticipatory breach of the
unexpired term of this Lease.
================================================================================
28. REPEATED DEFAULTS
-----------------
(A) If Lessee is in Material Default (as hereinafter defined) of this
Lease for the same or substantially the same reason more than twice during any
twelve (12) month period during the term of this Lease, then, at Lessor's
election, Lessee shall not have any right to cure such repeated Material
Default, the terms and conditions of the section of this Lease entitled,
"DEFAULT OF LESSEE," notwithstanding. In the event of Lessor's election not to
allow a cure of a repeated Material Default, Lessor shall have all of the rights
provided for in that section of this Lease for an uncured default.
(B) The phrase "Material Default" as used in this Lease, shall mean a
default related to (i) any obligation to pay Monthly Rent, additional rent or
any other sums, charges and costs of any kind or nature arising under this
Lease, (ii) any circumstance described in the section entitled "BANKRUPTCY,"
(iii) the failure of Lessee to provide timely notices to Lessor, to obtain
timely Lessor's consent, to furnish timely any document, statement, or other
item, or to take any action required pursuant to the following sections of the
Lease: "ASSIGNMENT AND SUBLETTING, "LIENS", "ESTOPPEL CERTIFICATES", or
"SUBORDINATION,", or (iv) any provision of this Lease requiring Lessee to obtain
or maintain insurance (or cause such insurance to be obtained or maintained).
29. WAIVER
------
If Lessor institutes legal or administrative proceedings against Lessee and
a compromise or settlement thereof is made, the same shall not constitute a
waiver of Lessee's obligations to comply with any covenant, agreement or
condition, nor of any of Lessor's rights hereunder. No waiver by Lessor of any
breach of any covenant, condition, or agreement
<PAGE>
================================================================================
itself, or of any subsequent breach thereof. No payment by Lessee or receipt by
Lessor (or any party designated by Lessor to receive any payments of rent) of a
lesser amount than the amount of rent due Lessor shall be deemed to be other
than on account of the earliest stipulated rent. In addition, no endorsement or
statement on any check or letter accompanying a check for payment of such rent
shall be deemed an accord and satisfaction. Lessor, or any party designated by
Lessor, may accept such check or payment without prejudice to Lessor's right to
recover the balance of such rent or to pursue any other remedy provided for in
this Lease or in the governing law of the jurisdiction in which the Building is
located. No re entry by Lessor, and no acceptance by Lessor of keys from Lessee,
shall be considered an acceptance of a surrender of the Lease.
30. SUBORDINATION
-------------
(A) This Lease is subject and subordinate to the lien of all and any
mortgages (which term "mortgages" shall include both construction and permanent
financing and shall include deeds of trust and similar security instruments)
which may now or hereafter encumber or otherwise affect the real estate
(including the Building) of which the Demised Premises is a part, or Lessor's
leasehold interest therein, and to all and any renewals, extensions,
modifications, recastings or refinancings thereof. In confirmation of such
subordination, Lessee shall, at Lessor's request, promptly execute any requisite
or appropriate certificate or other document. Lessee hereby constitutes and
appoints Lessor as Lessee's attorney-in-fact to execute any such certificate or
other document for or on behalf of Lessee if Lessee does not execute said
certificate or document within ten (10) business days after receipt thereof.
(B) Lessee agrees that in the event that any proceedings are brought for
the foreclosure of any such mortgage, Lessee shall attorn to the purchaser at
such foreclosure sale, if requested to do so by such purchaser. Lessee shall
also recognize such purchaser as the Lessor under this lease. Lessee waives the
provisions of any statute or rule of law, now or hereafter in effect, which may
give or purport to give Lessee any right to terminate or otherwise adversely
affect this Lease and the obligations of Lessee hereunder in the event that any
such foreclosure proceeding is prosecuted or completed.
(C) If the Building, the Demised Premises or any part respectively thereof
is at any time subject to a mortgage or a deed of trust or other similar
instrument, and this Lease or the rents are assigned to such mortgagee, trustee
or beneficiary, and the Lessee is given written notice thereof, including the
post office address of such assignee, then Lessee may not terminate this Lease
for any default on the part of Lessor without first giving written notice by
certified or registered mail, return receipt requested, to such Assignee,
Attention: Mortgage Loan Department. The notice shall specify the default in
reasonable detail, and afford such assignee a reasonable opportunity to make
performance, at its election, for and on behalf of Lessor.
================================================================================
<PAGE>
================================================================================
3 1. CONDEMNATION
------------
================================================================================
(A) If the whole or a substantial part of the Demised Premises or the
Building is condemned or acquired in lieu of condemnation by any governmental
authority for any public or quasi-public use or purpose, then the term of this
Lease shall cease and terminate as of the date when title vests in such
governmental authority. Lessee shall have no claim against Lessor or the
condemning authority for any portion of the amount of the condemnation award or
settlement that Lessee claims as its damages arising from such condemnation or
acquisition, or for the value of any unexpired term of the Lease. Lessee may
make a separate claim against the condemning authority for a separate award for
the value of any of Lessee's tangible personal property and trade fixtures, for
moving and relocation expenses and for such business damages and/or
consequential damages as may be allowed by law, provided the same shall not
diminish the amount of Lessor's award.
================================================================================
(B) If less than a substantial part of the Demised Premises is condemned
or acquired in lieu of condemnation by any governmental authority for any public
or quasi-public use or purpose, the rent shall be equitably adjusted on the date
when title vests in such governmental authority and the Lease shall otherwise
continue in full force and effect. For purposes of this section, a "substantial
part of the Demised Premises~ shall be considered to have been taken if twenty-
five percent (25%) or more of the Demised Premises is condemned or acquired in
lieu of condemnation, or if less than twenty-five percent (25 %) of the Demised
Premises is taken and the portion of the Demised Premises taken renders the
entire Demised Premises untenantable for the conduct of Lessee's business.
(C) If twenty-five percent (25 %) or more of the Building is condemned
(whether or not the Demised Premises shall have been condemned) and Lessor
elects to demolish the remainder of the Building, Lessor shall terminate this T
ease.
32. RULES AND REGULATIONS
---------------------
================================================================================
Lessee, its agents and employees shall abide by and observe the rules and
regulations attached hereto as Exhibit C and such other reasonable rules and
regulations as may be promulgated from time to time by Lessor for the operation
and maintenance of the Building, provided a COW thereof is sent to Lessee.
Nothing contained in this Lease shall be construed to impose upon Lessor any
duty or obligation to enforce such rules and regulations, or the terms,
conditions or covenants contained in any other lease as against any other
tenant, and Lessor shall not be liable to Lessee for violation of the same by
any other tenant, any other tenant's employees, agents, business invitees,
licensees, customers, clients, family members or guests. Lessor shall not
discriminate against Lessee in the enforcement of any rule or regulation.
<PAGE>
================================================================================
33. RIGHT OF LESSOR TO CURE LESSEE'S DEFAULT
----------------------------------------
If Lessee defaults in the making of any payment to any third party, or
doing any act required to be made or done by Lessee relating to the Demised
Premises (including the performance of Lessee's obligations under this I ease),
then Lessor may, but shall not be required to, make such payment or do such act,
and the amount of the expense thereof, if made or done by Lessor, with interest
thereon at a rate equal to two (2) percentage points above the then applicable
Wall Street Journal Prime Rate (U.S. money center commercial banks) or its
successor publication (or in the absence thereof, such similar rate as Lessor
may reasonably designate) (hereinafter the "Prime Rate"), accruing from the date
paid by Lessor, shall be paid by Lessee to Lessor and shall constitute
additional rent hereunder due and payable by Lessee upon receipt of a written
statement of costs from Lessor. The making of such payment or the doing of such
act by Lessor shall not operate as a waiver or cure of Lessee's default, nor
shall it prevent Lessor from the pursuit of any remedy to which Lessor would
otherwise be entitled.
34. LATE CHARGES
------------
If Lessee fails to pay any installment of rent, including Monthly Rent,
additional rent, costs of tenant work (if any), or other charges to be paid by
Lessee pursuant to this Lease, within ten (10) days after the same becomes due
and payable, Lessee shall be obligated to pay to Lessor a late charge equal to
five percent (5 %) of any rent or other charge not paid when due. In addition,
any installments of Monthly Rent, additional rent, costs of tenant work (if any)
or other charges to be paid by Lessee pursuant to this Lease which are not paid
by Lessee within ten (10) days after the same becomes due and payable shall bear
interest at a rate equal to two (2) percentage points above the then Prime Rate,
accruing from the date such installment or payment became due and payable to the
date of payment thereof by Lessee. Such interest shall constitute additional
rent due and payable to Lessor by Lessee upon the date of payment of the
delinquent payment referenced above.
35. BANKRUPTCY
----------
If Lessee or any guarantor of this Lease shall become bankrupt or
insolvent, or file any debtor proceedings or if Lessee or any guarantor shall
take or have taken against either party in any court pursuant to any statute
either of the United States or of any court pursuant to any statute either of
the United States or of any State a petition in bankruptcy or insolvency or for
reorganization or for the appointment of a receiver or trustee of all or a
portion of Lessee's or any such guarantor's property, or if Lessee or any such
guarantor makes an assignment for the benefit of creditors, or petitions for or
enters into an arrangement, then this Lease shall, at the option of Lessor,
terminate and Lessor, in addition to any other rights or remedies it may have,
shall have the immediate right of re-entry and may remove all persons and
property from the leased
================================================================================
<PAGE>
================================================================================
premises and such property may be removed and stored in a public warehouse or
elsewhere at the cost of, and for the account of Lessee, all without service of
notice or resort to legal process and without being deemed guilty of trespass,
or becoming liable for any loss or damage which may be occasioned thereby.
36. NO PARTNERSHIP
--------------
================================================================================
Nothing contained in this Lease shall be deemed or construed to create a
partnership or joint venture of or between Lessor and Lessee, or to create any
other relationship between the parties hereto other than that of Lessor or
Lessee.
================================================================================
37. NO REPRESENTATIONS BY LESSOR
----------------------------
Neither Lessor nor any agent or employee of Lessor has made any
representations or promises with respect to the Demised Premises or the Building
except as herein expressly set forth, and no rights, privileges, easements or
licenses are acquired by Lessee except as herein expressly set forth. Lessee, by
taking possession of the Demised Premises, shall accept the same in the then "as
is. condition, except for latent defects and punch list items. Taking of
possession of the Demised Premises by Lessee shall be conclusive evidence that
the Demised Premises and the Building are in good and satisfactory condition at
the time of such taking of possession, as provided for in Exhibit D.
38. BROKER AND AGENT
----------------
================================================================================
(A) Lessor and Lessee each represent and warrant one to another that,
except as hereinafter set forth, neither of them has employed any broker in
carrying on the negotiations, or had any dealings with any broker, relating to
this Lease. Lessee represents that it has not employed a broker; Lessor
represents that it has employed Carr Real Estate Services, Inc. as its broker,
and further agrees to pay the commissions accruing to each identified broker
pursuant to certain outside agreement(s). Lessor shall indemnify and hold Lessee
harmless, and Lessee shall indemnify and hold Lessor harmless, from and against
any claim or claims for brokerage or other commission arising from or out of any
breach of the foregoing representation and warranty by the respective
indemnitors.
================================================================================
(B) Lessor appoints and Lessee recognizes, until such time as Lessor
otherwise notifies Lessee in writing, Carr Real Estate Services Partnership, by
and through its subcontractor, Carr Real Estate Services, Inc., as Lessor's
management agent (referred to in this
<PAGE>
================================================================================
Lease as "Agent") for the management and operations of the Building including
issuance and receipt of all notices and the instituting and processing all legal
actions on behalf of Lessor under this Lease.
(C) Lessor appoints and Lessee recognizes, until such time as Lessor
otherwise notifies Lessee in writing, Marshall H. Brooks, 2000 14th Street
North, Suite 210, Arlington, Virginia 22201, as Lessor's registered agent for
the receipt of process and other matters required by law.
39. WAIVER OF JURY TRIAL
--------------------
================================================================================
Lessor and Lessee hereby waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties hereto against the other on or
with respect to any matter whatsoever arising out of or in any way connected
with this Lease, the relationship of Lessor and Lessee hereunder, Lessee's use
or occupancy of the Demised Premises, and/or any claim of injury or damage.
================================================================================
40. ENFORCEMENT OF LEASE
--------------------
================================================================================
(A) In the event Lessor is required or elects to take legal action to
enforce against Lessee the performance of Lessee's obligations under this Lease,
then Lessee shall immediately reimburse Lessor for all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred by Lessor in
its successful prosecution of that legal action.
================================================================================
(B) In the event Lessee is required or elects to take legal action to
enforce against Lessor the performance of Lessor's obligations under this Lease,
then Lessor shall immediately reimburse Lessee for all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred by Lessee in
its successful prosecution of that legal action.
41. NOTICES
-------
================================================================================
<PAGE>
================================================================================
All notices or other communications hereunder, except for service of
process, shall be in writing and shall be deemed duly given if delivered in
person, by certified mail, return receipt requested; or by registered mail,
postage prepaid: (i) if to Lessor, at Suite 700, 1700 Pennsylvania Avenue, N.W.,
Washington, D.C. 20006, Attn: Market Officer, with a copy to the same address to
the attention of the Lease Administrator; and (ii) if to Lessee, at 510 Huntrnar
Park Drive, Herndon, Virginia 20170, Attn: Real Estate Department, prior to the
Commencement Date, and at the Demised Premises thereafter. The party to receive
notices and the place notices are to be sent for either Lessor or Lessee may be
changed by notice given pursuant to the provisions of this section.
================================================================================
42. ESTOPPEL CERTIFICATES
---------------------
Lessee agrees, at any time and from time to time, upon not less than ten
(10) business days prior written notice by Lessor, to execute, acknowledge and
deliver to Lessor a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect (or, if there have been modifications,
that the Lease is in full force and effect as modified and stating the
modifications), (ii) stating the dates to which the rent and other charges
hereunder have been paid by Lessee, (iii) stating whether or not, to the best
knowledge of Lessee, Lessor is in default in the performance of any covenant,
agreement or condition contained in this Lease, and, if so, specifying each such
default of which Lessee may have knowledge, (iv) stating the address to which
notices to Lessee should be sent and, if Lessee is a corporation, the name and
address of its registered agent in the jurisdiction in which the Building is
located, (v) agreeing not to pay Monthly Rent more than thirty (30) days in
advance or to amend the Lease without the consent of any mortgage lender having
a security interest in the Building, and (vi) stating as to such other matters
as Lessor may reasonably request or require. Any such statement delivered
pursuant hereto may be relied upon by any owner of the Building, any prospective
purchaser of the Building, any mortgagee or prospective mortgagee of the
Building or of Lessor's interest, or any prospective assignee of any such
mortgage.
43. HOLDING OVER
------------
(A) In the event Lessee does not immediately surrender the Demised
Premises on the date of expiration of the term of this Lease or any extension
period thereof, Lessee shall, by virtue of this section of the Lease, become a
lessee by the month and hereby agrees to pay to Lessor a Monthly Rent equal to
one hundred fifty percent (150%) of the amount of (a) the Monthly Rent in effect
during the last month of the term of this Lease as it may have been extended,
plus (b) the one-twelfth (1/12th) payment made with Monthly Rent pursuant to the
section of this Lease entitled, "OPERATING EXPENSES AND REAL ESTATE TAXES". The
month-to-month tenancy shall commence with the first day next after the
expiration of the term of this Lease. Lessee as a month-to-month tenant shall
continue to be subject to all of the conditions and covenants of this Lease.
Lessee shall give to Lessor at least shiny (30) days written notice of any
intention to quit the Demised Premises. Lessee shall be entitled to thirty (30)
days written notice to quit the Demised Premises, except in the event of
nonpayment of the
<PAGE>
================================================================================
modified Monthly Rent in advance, in which event Lessee shall not be entitled to
any notice to quit, the usual thirty (30) days notice to quit being hereby
expressly waived.
================================================================================
(B) Notwithstanding the foregoing, in the event Lessee holds over after
the expiration of the term of the Lease or extension period thereof, and Lessor
desires to regain possession of the Demised Premises promptly at the expiration
of the term of this Lease or extension period thereof, then at any time prior to
Lessor's acceptance of modified Monthly Rent from Lessee as a month to month
tenant hereunder, Lessor, at its option, may forthwith re-enter and take
possession of the Demised Premises without process, or by any legal process in
force in the jurisdiction in which the Building is located.
================================================================================
44. RIGHTS RESERVED BY LESSOR
-------------------------
Lessor shall have the following rights, exercisable without notice to
Lessee, without liability for damage or injury to property, person or business
and without effecting an eviction, constructive or actual, or disturbances or
Lessee's use or possession of the Demised Premises or giving rise to any claim
for set-off, abatement of rent or otherwise:
(A) To change the Building's name or street address;
(B) To affix, maintain and remove any and all signs on the exterior and
interior of the Building;
(C) To designate and approve, prior to installation, all window shades,
blinds, drapes, awnings, window ventilators, lighting and other similar
equipment to be installed by Lessee that may be visible from the exterior of the
Demised Premises or the Building;
(D) To decorate and make repairs, alterations, additions and improvements,
whether structural or otherwise, in, to and about the Building and any part
thereof, and, during the continuance of any of such work, to temporarily close
doors, entry ways, and common areas in the Building and to interrupt or
temporarily suspend Building services and facilities, all without affecting
Lessee's obligations hereunder, so long as the Demised Premises remain
tenantable;
(E) To grant to anyone the exclusive right to conduct any business or
render any service in the Building, provided Lessee is not thereby excluded from
uses expressly permitted herein;
================================================================================
<PAGE>
================================================================================
(F) To alter, relocate, reconfigure and reduce the common areas of the
Building, as long as the Demised Premises remain reasonably accessible; and
(G) To alter, relocate, reconfigure, reduce and withdraw the common areas
located outside the Building, including parking and access roads, as long as the
Demised Premises remain reasonably accessible.
45. COVENANTS OF LESSOR
-------------------
================================================================================
Lessor covenants that it has the right to make this Lease for the term of
the Lease aforesaid. Further Lessor covenants that if Lessee shall pay the rent
and shall perform all of the covenants, agreements and conditions specified in
this Lease to be performed by Lessee, Lessee shall, for the term of the Lease,
freely, peaceably and quietly occupy and enjoy the full possession of the
Demised Premises without molestation or hindrance by Lessor, its agents or
employees. Entry in the Demised Premises for inspections, repairs, alterations,
improvements and installations by Lessor, its agents, employees or contractors
pursuant to the section of this Lease entitled "INSPECTIONS, REPAIRS AND
INSTALLATIONS". and the exercise by Lessor of Lessor's rights reserved in the
section of this Lease entitled "RIGHTS RESERVED BY LESSOR" shall not constitute
a breach by Lessor of this covenant, nor entitle Lessee to any abatement or
reduction of rent. In addition, planned activities of Lessor, whether in the
form of renovation, redecoration or rehabilitation of any area of the Building,
including the lobby, and any of the surrounding public spaces by Lessor or in
the form of organized activities, public or private, shall not be deemed
violation by Lessor of Lessor's covenant of quiet enjoyment benefitting Lessee.
================================================================================
46. RECORDATION
-----------
================================================================================
Lessee shall not record this Lease or any memorandum thereof without the
written consent of Lessor. All fees, costs, taxes and expenses in connection
with the filing and recording of this Lease or any memorandum thereof shall be
the sole obligation of Lessee. Lessor may condition its consent to any request
by requiring that only a memorandum of lease be filed and recorded, such
memorandum to exclude information as to the amount of rent specified in this
Lease.
================================================================================
47. RULE AGAINST PERPETUITIES
<PAGE>
================================================================================
If and to the extent that this Lease would, in the absence of the
limitation imposed by this section, be invalid or unenforceable as being in
violation of the rule against perpetuity or any other rule of law relating to
the vesting of interests in property or the suspension of the power of
alienation of property, then it is agreed that notwithstanding any other
provision of this Lease, this Lease and any and all options, rights and
privileges granted to Lessee thereunder, or in connection therewith shall
terminate if not previously terminated, on the date which is twenty-one (21)
years after the death of the last heir or issue, who are lives in being as of
the date of this Lease, of the following named persons: Oliver T. Carr, Jr. and
Robert O. Carr.
48. GENDER
------
================================================================================
Feminine or neuter pronouns shall be substituted for those of the masculine
form, and the plural shall be substituted for the singular number, in any place
or places herein in which the context may require such substitution or
substitutions.
================================================================================
49. BENEFIT AND BURDEN
------------------
================================================================================
(A) The terms and provisions of this Lease shall be binding upon and shall
inure to the benefit of the parties hereto and each of their respective
representatives, successors and permitted assigns. Lessor may freely and fully
assign its interest hereunder. In the event of any sale or transfer of the
Building by operation of law or otherwise by the party named as Lessor hereunder
(or any subsequent successor, transferee or assignee), then said party, whose
interest is thus sold or transferred shall be and is completely released and
forever discharged from and with respect to all covenants, obligations and
liabilities as Lessor hereunder after the date of such sale or transfer.
================================================================================
(B) In the event Lessor shall be in default under this Lease, and if as a
consequence of such default, Lessee shall recover a money judgment against
Lessor, such judgment shall be satisfied only out of the proceeds of sale
received upon execution of such judgment against the right, title and interest
of Lessor in the Building as the same may then be constituted and encumbered and
Lessor shall not be liable for any deficiency. In no event shall Lessee have the
right to levy execution against any property of Lessor other than its interests
in the Building.
================================================================================
<PAGE>
================================================================================
50. GOVERNING LAW
-------------
================================================================================
This Lease and the rights and obligations of Lessor and Lessee hereunder
shall be governed by the laws of the jurisdiction in which the Building is
located.
================================================================================
51. SAVINGS CLAUSE
--------------
If any provision of this Lease or the application thereof to any person or
circumstance is to any extent held invalid, then the remainder of this Lease or
the application of such provision to persons or circumstances other than those
as to which it is held invalid shall not be affected thereby, and each provision
of the Lease shall be valid and enforced to the fullest extent permitted by law.
52. CORPORATE LESSEE
----------------
================================================================================
If Lessee is or will be a corporation, the persons executing this Lease on
behalf of Lessee hereby consent, represent and warrant that Lessee is a duly
incorporated or a duly qualified (if a foreign corporation) corporation and
authorized to do business in the Commonwealth of Virginia; and that the person
or persons executing this Lease on behalf of Lessee is an officer or are
officers of Lessee, and that he or they as such officers are duly authorized to
sign and execute this Lease. Upon request of Lessor to Lessee, Lessee shall
deliver to Lessor documentation satisfactory to Lessor evidencing Lessee's
compliance with the provisions of this section. Further, Lessee agrees to
promptly execute all necessary and reasonable applications or documents
confirming such registration as requested by Lessor or its representatives
required to permit the issuance of necessary permits and certificates for
Lessee's use and occupancy of the Demised Premises. Any delay or failure by
Lessee in submitting such application or document so executed shall not serve to
delay the Commencement Date or delay or waive Lessee's obligations to pay rent
hereunder.
================================================================================
53. JOINT AND SEVERAL LIABILITY
---------------------------
================================================================================
If two or more individuals, corporations, partnerships or other business
associations (or any combination of two or more thereof) shall sign this Lease
as Lessee, the liability of each of them shall be joint and several. In like
manner, if Lessee named in this Lease shall be a partnership or other business
association the members of which are, by virtue of statute or
<PAGE>
================================================================================
general law, subject to personal liability, the liability of each of such member
shall be joint and several.
================================================================================
54. FINANCIAL STATEMENTS
--------------------
Lessee agrees, at any time and from time to time upon not less than ten
(10) days' prior written notice by Lessor, to deliver to Lessor the most current
financial statements of Lessee, together with such other information regarding
the financial condition of Lessee as Lessor may reasonably request. Lessor shall
not request such financial statements more than once in any calendar year,
except in the event of (i) a prospective sale or refinancing of the Building or
Lessor's interest therein; or (ii) a prospective assignment of the Lease or
sublet of any portion of the Demised Premises. All statements of Lessee shall be
certified by a corporate officer of Lessee as true and correct in all material
respects. Notwithstanding the foregoing, so long as Lessee is a publicly-held
corporation, its then current annual report prepared in accordance with
applicable laws shall be sufficient for purposes of satisfying the requirement
for the submission of financial statements as required pursuant to this section;
provided, however, that Lessee shall promptly make available to Lessor a
comptroller, chief financial officer, or other qualified representative of
Lessee to answer any reasonable inquiries of Lessor arising in connection with
Lessor's review of any such annual report and to respond in writing to such
inquiries at Lessor's request.
55. ENVIRONMENTAL REQUIREMENTS
--------------------------
(A) Lessee, its agents, employees, sublessees, contractors, invitees and
guests shall not use any portion or all of the Demised Premises or the Building
or land or other appurtences thereto for the generation, treatment, storage or
disposal of "hazardous materials", "hazardous waste", "hazardous substances" or
"oil" (collectively "Materials") as such terms are defined under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., as amended, the Resource Conservation and Recovery Act of
1976, 42 U.S.C. 6901 et seq., as amended, and any and all other "environmental
statuses n which regulate the use of hazardous and/or dangerous substances, and
the regulations promulgated thereunder and any and all state and local laws,
rules and regulations, without the express prior written consent of Lessor.
Notwithstanding the foregoing, however, Lessee may use Materials in the ordinary
course of business, provided that such use is in accordance with all applicable
statutes, laws, rules and regulations, and any manufacturer instructions; and
provided further that Lessee may not discharge any Materials in any public sewer
or any drain and/or drainpipe leading or connected thereto. Lessee shall
promptly given written notice to Lessor of any communication received by Lessee
from any governmental authority or other person or discharge (or alleged use or
alleged discharge) by Lessee or any materials. Lessor shall have the right (but
not the
================================================================================
<PAGE>
================================================================================
obligation) to conduct such investigations or tests (or both) as Lessor shall
deem necessary with respect to any such complaint, investigation or inquiry, and
Lessee, at its expense, shall take such action (or refrain from taking such
action) as Lessor may request in connection with such investigations and test by
Lessor. Lessee shall indemnify, defend (with counsel selected by Lessor), and
hold Lessor harmless from and against any such improper use or discharge (or
both) by Lessee, including any costs of all necessary clean-up activities
occasioned by Lessee's actions, whether during the term or after termination of
this Lease.
(B) Lessor agrees that it will not use Material in or about the Building
except in the ordinary course of business of owning, managing, operating,
repairing and maintaining the Building as an office building and uses accessory
thereto. In the event (I) Materials are discovered in the common or public
areas fo the Building, (ii) the presence of the Materials is found by any
governmental entity to be in violation of applicable law, and (iii) neither the
presence fo such Materials nor any contamination caused by such Material is
caused in whole or in part by Lessee, its assignees, subtenant, licensees,
invitees, employees, agents or contractors, then Lessor shall promptly commence
to cure (or cause to cure to be made thereof) the violation of law caused by the
materials, and Lessor shall thereafter pursue such cure with reasonable
diligence.
56. BUSINESS DAY/WORKING DAY
------------------------
================================================================================
The terms "business day" and "working day" are terms describing each
calendar day Monday through Friday except any holiday identified specifically or
generically in the section of this Lease entitled, "SERVICES AND UTILITIES"
falling on one of such calendar days,
================================================================================
57. ENTIRE AGREEMENT
----------------
This Lease, together with Exhibits A, B, C, D, and E attached hereto and
--------------------------
made a part hereof, contains and embodies the entire agreement of the parties
hereto, and no representations, inducements, or agreements, oral or otherwise,
between the parties not contained and embodied in this Lease and said Exhibits
shall be of any force or effect, and the same may not be modified, changed or
terminated in whole or in part in any manner other than by an agreement in
writing duly signed by all parties hereto.
<PAGE>
================================================================================
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be signed
in their names under seal by their duly authorized representatives and delivered
as their act and deed, intending to be legally bound by its terms and
provisions.
LESSOR:
CARRAMERICA REALTY CORPORATION
By: /s/ Philip L. Hawkins
---------------------
Name: Philip L. Hawkins
Title: Managing Director
LESSEE:
PSINET, INC.
By: /s/ Harold S. Wills
-------------------
Name: Harold S. Wills
Title: Chief Operating Officer
================================================================================
<PAGE>
[LOGO OF CISCO SYSTEMS CAPITAL APPEARS HERE]
Exhibit 10.30
Master Agreement No. 1047
MASTER AGREEMENT TO LEASE EQUIPMENT
THIS MASTER AGREEMENT TO LEASE EQUIPMENT (this "Agreement") is entered into as
of October 10, 1997 by and between CISCO SYSTEMS CAPITAL CORPORATION ("Lessor")
having its principal place of business at 3535 Garrett Drive, Santa Clara,
California 95054 and PSINET INC., a New York corporation ("Lessee"), having a
place of business at 510 Huntmar Park Drive, Herndon, CA 20170-5100. In
consideration of the covenants set forth herein, Lessor and Lessee have agreed
as follows:
I. THE LEASE
1.1 LEASE OF EQUIPMENT. In accordance with the terms and conditions of this
Agreement, Lessor shall lease to Lessee, and Lessee shall lease from
Lessor, the units of personal property (individually, a "Unit," and,
collectively, the "Equipment") described in the lease schedule(s) (each, a
"Lease") to be entered into from time to time into which this Agreement is
incorporated. Each Lease shall constitute a separate, distinct, and
independent lease and contractual obligation of Lessee. Lessor or its
assignee shall at all times retain the full legal title to the Equipment,
it being expressly agreed by both parties that each Lease is an agreement
of lease only. Each Lease shall be binding upon Lessor and Lessee from the
date of its acceptance and execution by Lessor at its principal place of
business.
1.2 TERM OF LEASE. The original term of each Unit shall commence on the date
specified in the applicable Lease and, subject to Sections 3.3, 3.5 and
5.14 below, shall terminate on the date specified in such Lease (the
"Original Term"). Subject to Section 5.13, notwithstanding the foregoing,
the Original Term for each Unit shall automatically extend for successive
30-day periods after its expiration unless either party gives the other
party written notice, at least 90 days prior to the expiration of the
Original Term or the then extended term, as the case may be, of its intent
not to so extend the applicable Lease. Except as specifically provided in
Section 5.14, no Lease may be terminated by Lessor or Lessee, for any
reason whatsoever, prior to the end of the Original Term or any extended
term.
1.3 RENTAL PAYMENTS. Lessee shall pay Lessor rent ("Rent") for each Unit in the
amounts and at the times specified in the Lease. The Lease Term for each
Unit shall commence on the Acceptance Certificate Execution Date and shall
continue for the period specified in the Lease, unless otherwise extended
or terminated pursuant to Section 1.2 or 5.14. The Lease Term as to any
Unit may not be terminated by Lessee unless otherwise expressly provided in
the Lease. All rental and other amounts payable by Lessee to Lessor
hereunder shall be paid to Lessor at the address specified above, or at
such other place as Lessor may designate in writing to Lessee from time to
time.
1.4 RETURN OF EQUIPMENT. Subject to Section 5.13, upon expiration of the
Original Term of a Unit, Lessee shall immediately return such Unit to
Lessor as provided in Section 3.3 below. Subject to Section 5.13, and
except as provided in Section 1.2 above, should Lessee not return any Unit
at the end of its Original Term, Lessee shall continue to pay Rent to
Lessor with respect to such Unit in the sum and on the due dates set out in
the applicable Lease, as a month-to-month lease, until such Unit is
returned by Lessee. If Lessee fails to return any of the Equipment upon
demand therefor by Lessor, Lessee shall pay Lessor, as the measure of
Lessor's damages, the Casualty Value (as defined in the applicable Lease)
of such Equipment.
II. DISCLAIMERS AND WARRANTIES; INTELLECTUAL PROPERTY
2.1 DISCLAIMERS; WARRANTIES. Lessee represents and acknowledges that each Unit
is of a size, design, capacity and manufacture selected by it, and that it
is satisfied that each Unit is suitable for its purposes. LESSOR SUPPLIES
THE EQUIPMENT AS IS, AND, NOT BEING THE MANUFACTURER OF THE EQUIPMENT, THE
MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY,
FITNESS FOR ANY PARTICULAR PURPOSE, DESIGN OR CONDITION OF THE EQUIPMENT,
LESSOR SHALL NOT BE RESPONSIBLE FOR ANY LOSS OR DAMAGE RESULTING FROM THE
INSTALLATION, OPERATION OR OTHER USE, OR DEINSTALLATION OF THE EQUIPMENT,
INCLUDING, WITHOUT LIMITATION, ANY DIRECT, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGE OR LOSS. Lessee shall look solely to the manufacturer
or the supplier of Equipment for correction of any problems that may arise
with respect thereto, and all warranties made by the manufacturer or such
supplier are, to the degree possible, hereby assigned to Lessee for the
term of the applicable Lease. To the extent any such warranty requires
performance of any kind by the beneficiary of the warranty, Lessee shall
perform in accordance therewith.
2.2 INTELLECTUAL PROPERTY. Except as otherwise expressly provided in each
Lease, LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS WHATSOEVER WITH
RESPECT TO THE INTELLECTUAL PROPERTY RIGHTS, INCLUDING, WITHOUT LIMITATION,
ANY PATENT, COPYRIGHT AND TRADEMARK RIGHTS, OF ANY THIRD PARTY WITH RESPECT
TO THE EQUIPMENT, WHETHER RELATING TO INFRINGEMENT OR OTHERWISE Lessor
shall, at Lessee's cost and expense, exercise, when requested by Lessee,
rights of indemnification, if any, for patent, copyright or other
intellectual property infringement obtained from the manufacturer under any
agreement for or relating to the purchase of the Equipment. If notified
promptly in writing of any action brought against Lessee based on a claim
that the Equipment infringes a United States patent, copyright or other
intellectual property right, Lessor shall promptly notify the manufacturer
thereof for purposes of exercising, for the benefit of Lessee, Lessor's
rights with respect to such claim under any such agreement.
III. COVENANTS OF LESSEE
1
<PAGE>
3.1 Payments Unconditional; Tax Benefits; Acceptance. EACH LEASE SHALL BE A NET
LEASE, AND SUBJECT TO SECTION 5.3 HEREOF, LESSEE'S OBLIGATION TO PAY ALL
RENT AND OTHER SUMS THEREUNDER, AND THE RIGHTS OF LESSOR IN AND TO SUCH
PAYMENTS, SHALL BE ABSOLUTE AND UNCONDITIONAL, AND SHALL NOT BE SUBJECT TO
ANY ABATEMENT, REDUCTION, SETOFF, DEFENSE, COUNTERCLAIM, INTERRUPTION,
DEFERMENT OR RECOUPMENT, FOR ANY REASON WHATSOEVER. It is the intent of
Lessor, and an inducement to Lessor, to enter into each Lease, to claim all
available tax benefits of ownership with respect to the Equipment subject
thereto. Lessee acknowledges and represents that (a) no right, title or
interest in such Equipment has been or is intended to be passed to Lessee,
other than the right to maintain possession of and use of such Equipment
for the Original Term of such Lease, conditioned on Lessee's performance of
the terms and conditions of such Lease, (b) Lessee has not taken and will
not, at any time during the Original Term of such Lease, take any action
which could cause Lessor to lose any tax benefits of ownership, and (c) the
Casualty Value of each Unit (as defined in the applicable Lease) includes
an amount which provides for Lessor's recovery of the loss of such tax
benefits. Lessee's acceptance of the Equipment subject to a Lease shall be
conclusively and irrevocably evidenced by Lessee executing a Acceptance
Certificate with respect to such Equipment, and, upon acceptance, such
Lease shall be noncancellable for its Original Term except as set forth in
Section 5.14. Any nonpayment of Rent or other amounts payable under any
Lease shall result in Lessee's obligation to promptly pay Lessor as
additional Rent on such overdue payment, for the period of time during
which it is overdue (without regard to any grace period), interest at a
rate equal to the lesser of (a) 14% per annum, or (b) the maximum rate of
interest permitted by law (the "Default Rate").
3.2 USE OF EQUIPMENT. Lessee shall use the Equipment solely in the conduct of
its business, in a manner and for the use contemplated by the manufacturer
thereof, and in material compliance with all laws, rules and regulations of
every governmental authority having jurisdiction over the Equipment or
Lessee and with the provisions of all policies of insurance carried by
Lessee pursuant to Section 3.6 below; provided, however, Lessee shall have
the right to allow third parties, under Lessees supervision, to use the
Equipment, so long as Lessee shall retain uninterrupted possession and
control of the Equipment. Lessee shall pay all costs, expenses, fees and
charges incurred in connection with the use and operation of the Equipment.
3.3 DELIVERY; INSTALLATION; RETURN; MAINTENANCE AND REPAIR; INSPECTION. Lessee
shall be solely responsible, at its own expense, for (a) the delivery of
the Equipment to Lessee, (b) the packing, rigging and delivery of the
Equipment back to Lessor, upon expiration of the Original Term, in good
repair, condition and working order, ordinary wear and tear excepted, at
the location(s) within the continental United States specified by Lessor,
and (c) the installation at Lessees premises, de-installation, maintenance
and repair of the Equipment. During the term of the applicable Lease,
Lessee shall ensure that each Unit is covered by a maintenance agreement,
to the extent available, with the manufacturer of such Unit or such other
party, reasonably acceptable to Lessor. Lessee shall, at its expense, keep
the Equipment in good repair, condition and working order, ordinary wear
and tear excepted, and, subject to Section 5.13, at the expiration of the
Original Term, or any renewal term, with respect to any of the Equipment,
have such Equipment inspected and certified acceptable for maintenance
service by the manufacturer. In the event any of the Equipment, upon its
return to Lessor, is not in good repair, condition and working order,
ordinary wear and tear excepted, Lessee shall be obligated to pay Lessor
for the out-of-pocket expenses Lessor incurs in bringing such Equipment up
to such status, but not in excess of the Casualty Value (as defined in the
applicable Lease) for such Equipment, promptly alter its receipt of an
invoice for such expenses. Lessor shall be entitled to inspect the
Equipment at Lessee's location at reasonable times and upon prior written
request.
3.4 TAXES. Lessee shall be obligated to pay, and hereby indemnifies Lessor and
its successors and assigns against, and holds each of them harmless from,
all license fees, assessments, and sales, use, property, excise and other
taxes and charges, other than those measured by Lessor's net income, now or
hereafter imposed by any governmental body or agency upon or with respect
to any of the Equipment, or the possession, ownership, use or operation
thereof, or any Lease or the consummation of the transactions contemplated
in any Lease or this Agreement. Notwithstanding the foregoing, Lessor shall
file all required personal property tax returns, and shall pay all personal
property taxes payable, with respect to the Equipment, Lessee shall pay to
Lessor, as additional rental, the amount of all such personal property
taxes within 15 days of its receipt of an invoice for such taxes.
Notwithstanding anything to the contrary in this Agreement or any Lease,
including without limitation, Sections 3.1, 3.4 and 3.7 hereof, Lessee
makes no representation or warranty whatsoever to Lessor as to the tax
treatment of this Lease under any applicable laws, rules or regulations.
3.5 LOSS OF EQUIPMENT. Lessee shall bear the entire risk of the Equipment being
lost, destroyed or otherwise rendered permanently unfit or unavailable for
use from any cause whatsoever (an "Event of Loss") after it has been
delivered to a common carrier for shipment to Lessee. If an Event of Loss
shall occur with respect to any Equipment (or any Unit), Lessee shall
promptly notify Lessor in writing of such Event of Loss and of all details
with respect thereto, and shall, within thirty (30) days of such event, at
Lessees option, (a) place such Equipment (or Unit) in good repair,
condition and working order, or (b) replace such Equipment (or any Unit)
with like personal property in good repair, condition and working order and
transfer title to such replacement property to Lessor whereupon such
property shall be subject to the applicable Lease and be deemed Equipment
for purposes thereof, or (c) pay Lessor an amount equal to the sum of (i)
all Rent accrued to the date of such payment, plus (ii) the Casualty Value
of such Equipment (or Unit) as set forth in the applicable Lease, whereupon
this Agreement and the applicable Lease shall terminate with respect to
such Equipment (or any such Unit) for which such payment is received by
Lessor. Upon payment of the amount set forth in (c), the Rent for such
Lease shall be reduced proportionately. Any insurance proceeds received
with respect to the Equipment (or any Unit) shall be applied, in the event
option (c) is elected, in reduction of the then unpaid obligations of
Lessee to Lessor, including the Casualty Value, if not already paid by
Lessee, or, if already paid by Lessee, to reimburse Lessee for such
payment, or, in the event of option (a) or (b) is elected, to pay or
reimburse Lessee for the costs of repairing, restoring or replacing the
Equipment (or any Unit) upon receipt by Lessor of evidence, reasonable
satisfactory to Lessor, that such repair, restoration or replacement has
been completed, and an invoice therefor.
3.6 INSURANCE. Lessee shall obtain and maintain for the entire term of each
Lease, at its own expense, property damage and liability insurance and
insurance against loss or damage to the Equipment subject to such Lease
including, without limitation, loss by fire (including so-called extended
coverage), theft and such other risks of loss as are normally maintained on
equipment of the type leased hereunder by company's carrying on the
business in which Lessee is engaged, in such amounts, in such form and with
such insurers as shall be reasonably satisfactory to Lessor. Each insurance
policy will name Lessee as insured and Lessor as an additional insured and
loss payee thereof as Lessor's interests may appear, and shall provide that
it may not be canceled or materially altered without at least 30 days prior
written notice thereof being given to Lessor or its successors and assigns.
3.7 INDEMNITY. Except with respect to the gross negligence or willful
misconduct of Lessor, Lessee hereby indemnifies, protects, defends and
holds harmless Lessor and its successors and assigns, from and against any
and all claims, demands, actions, suits, and proceedings, losses costs,
expenses, damages and liabilities, including, without limitation,
reasonable attorneys' fees and costs (collectively, "Claims"), arising out
of, connected with, or resulting from this Agreement, any Lease or any of
the Equipment, including, without limitation, the manufacture, selection,
purchase, delivery, possession, condition, use, operation, or return of the
Equipment. Each of the parties shall
2
<PAGE>
give the other prompt written notice of any Claim of which it becomes
aware. The provisions of this Section 3.7 shall survive the expiration or
termination of this Agreement or any Lease until the expiration of any
applicable statute of limitations.
3.8 PROHIBITIONS RELATED TO EQUIPMENT. Without the prior written consent of
Lessor, which consent as it pertains to subsections (a) and (c) below shall
not be unreasonably withheld, Lessee shall not: (a) sublease any of the
Equipment (provided that Lessee may, without the prior written consent of
Lessor, permit any Affiliate (defined below) of Lessee to use any of the
Equipment in the ordinary course of its business); (b) create or incur, or
permit to exist, any lien or encumbrance with respect to Lessee interest in
any of the Equipment, or any part thereof; (c) move any of the Equipment
from the location specified in the Lease, except within the continental
limits of the United States if Lessee gives Lessor 30 days prior written
notice thereof; (d) permit any of the Equipment to be moved outside the
continental limits of the United States. For purposes of this Agreement,
the term Affiliate" shall mean (i) any corporation which controls, is
controlled by, or under common control with Lessee, (ii) any corporation
resulting from the merger or consolidation of Lessee, or (iii) any entity
which acquires all of the assets of Lessee as a going concern. For purposes
of this Section 3.8, the term "control" shall mean the power to direct the
management of the relevant entity.
3.9 IDENTIFICATION. Lessee shall place and maintain permanent markings provided
by Lessor on each Unit evidencing ownership, security and other interests
therein, as specified from time to time by Lessor. Lessee shall not place
or permit to be placed on any Unit any other markings that might indicate
any other ownership or security interest in such Unit. Any markings on any
Unit not made at Lessor's request shall be removed by Lessee, at Lessee's
sole cost and expense, prior to the return of such Unit in accordance with
Section 3.3.
3.10 ALTERATIONS OR MODIFICATIONS. Lessee shall not make any additions,
attachments, alterations or improvements to the Equipment without the prior
written consent of Lessor. At any time during the Original Term of a Lease,
there may be added to such Lease additional Units of the same type as are
rented thereunder for a term equal to the remaining portion of such
Original Term and, subject to the terms and conditions hereof, at the Rent
applicable to such Units for such term at the time the order for such Units
is placed, provided that the order is in writing and accepted by Lessor.
Such acceptance shall be at the sole discretion of Lessor. Each addition,
attachment, alteration or improvement to any Unit shall belong to and
become the property of Lessor unless, at the request of Lessor, it is
removed prior to the return of such Unit by Lessee. Lessee shall be
responsible for all costs relating to such removal and shall restore such
Unit to its operating condition that existed at the time it became subject
to the applicable Lease.
3.11 EQUIPMENT TO BE PERSONAL PROPERTY. Lessee acknowledges and represents that
the Equipment shall be and remain personal property, notwithstanding the
manner in which it may be attached or affixed to realty, and Lessee shall
use reasonable efforts to ensure that the Equipment remains personal
property.
3.12 FINANCIAL STATEMENTS. Lessee shall promptly furnish to Lessor upon request
copies of Lessees reports on Form 10-K and 10-Q which are filed with the
Securities and Exchange Commission and information respecting the
Equipment, as Lessor may from time to time reasonably request.
3.13 LESSEE REPRESENTATIONS. Lessee hereby represents that, with respect to this
Agreement and each Lease: (a) the execution, delivery and performance
thereof by Lessee have been duly authorized by all necessary corporate
action; (b) the individual executing such document is duly authorized to do
so; (c) such document constitutes legal, valid and binding obligations of
Lessee, enforceable in accordance with its terms.
IV. DEFAULT AND REMEDIES
4.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an Event of Default hereunder: (a) Lessee shall fail to pay any rental or
other payment due hereunder which failure continues for five (5) days after
its receipt of notice of nonpayment from Lessor; (b) any representation or
warranty of Lessee made in this Agreement, any Lease, or in any document
furnished pursuant to the provisions of this Agreement or otherwise, shall
prove to have been false or misleading in any material respect as of the
date when it was made; (c) Lessee shall fail to perform any covenant,
condition or agreement made by it under any Lease, and such failure shall
continue for thirty (30) days after its receipt of notice from Lessor; (d)
bankruptcy, receivership, insolvency, reorganization, dissolution,
liquidation or other similar proceedings shall be instituted by or against
Lessee or all or any part of its property under the Federal Bankruptcy Code
or other law of the United States or of any other competent jurisdiction,
and, if such proceeding is brought against Lessee, it shall consent thereto
or shall fail to cause the same to be discharged within sixty (60) days
after it is filed.
4.2 REMEDIES. If an Event of Default hereunder shall occur and be continuing,
Lessor may exercise any one or more of the following remedies: (a)
terminate any or all of the Leases and Lessee's rights thereunder; (b)
proceed, by appropriate court action or actions, either at law or in
equity, to enforce performance by Lessee of the applicable covenants 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 amounts due under
any or all of the Leases on or before the Lessor giving Lessee written
notice that such Event of Default has occurred and, if Lessor obtains a
judgment against Lessee with respect to such Event of Default, the entry of
such judgment, whichever shall last occur, (ii) as liquidated damages for
loss of a bargain and not as a penalty, the present value of the balance of
all rentals and other sums payable thereunder and hereunder, without any
presentment, demand, protest or further notice (all of which are hereby
expressly waived by Lessee), discounted at a rate of ten percent (10%) per
annum (the "Discount Rate") as of the date of the payment of such amount,
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 Equipment from
Lessee and, for such purpose, enter upon Lessee's premises where any of the
Equipment is located with or without notice or process of law and free from
all claims by Lessee; and (e) require the Lessee to, and the Lessee shall,
assemble the Equipment and deliver the Equipment to a location which is
reasonably convenient to Lessor and Lessee. The exercise of any of the
foregoing remedies by Lessor shall not constitute a termination of any
Lease or this Agreement unless Lessor so notifies Lessee in writing.
4.3 DISPOSITION OF EQUIPMENT. In the event, upon the occurrence of an Event of
Default, Lessor repossesses any of the Equipment, Lessor may lease any or
all of such Equipment, or sell any or all of such Equipment at one or more
public or private sales, in such manner, at such times and upon such terms
as Lessor may determine. In the event that Lessor leases any of such Units,
any rentals received by Lessor for the Remaining Lease Term"(the period
ending on the date when the Original Term for such Unit would have expired
if an Event of Default had not occurred), discounted to present value, at
the Discount Rate, as of the Possession Date (the "Recovery Rentals"), for
such Units shall be applied to the payment of (a) all costs and expenses
(including, without limitation, reasonable attorneys' fees) incurred by
Lessor in retaking possession of, and removing, storing, repairing,
refurbishing and leasing, such Units, (b) accrued and unpaid rentals as of
the date Lessor obtained possession of such Units or the date on which
Lessee made an effective tender of possession of such Units to Lessor,
whichever shall first occur (the "Possession Date"), (c) the present value
of the rentals for such Units for the balance of the Original Term of the
applicable Lease (the "Discounted Remaining Rentals") and any other sums
payable
3
<PAGE>
(the "Recovery Proceeds") shall be applied to the payment of the amounts
referred to in clauses (a) through (d) above and the amount by which the
Casualty Value for such Units, as of the Possession Date, exceeds the
Discounted Remaining Rentals (the aggregate of such amounts being referred
to as the "Sale Recovery Amount"). The balance, if any, of the Recovery
Rentals, in the case of a release, and of the Recovery Proceeds, in the
case of a sale or other disposition, shall be applied first to reimburse
Lessee for any sums previously paid by Lessee as liquidated damages with
respect to such Units, and any remaining amounts shall be retained by
Lessor. Lessee shall remain liable to Lessor, with respect to any Units
which are released or sold or otherwise disposed of, to the extent that the
Release Recovery Amount exceeds the Recovery Rentals or the Sale Recovery
Amount exceeds the Recovery Proceeds. Lessor shall be entitled to, and
Lessee shall have no claim with respect to, all rentals, with respect to
any period commencing after the expiration of the applicable Remaining
Lease Term, from released Units.
V. MISCELLANEOUS
5.1 PERFORMANCE OF LESSEE'S OBLIGATIONS. Upon Lessee's failure to pay Rent (or
any other sum due hereunder) or perform any obligation hereunder when due,
Lessor shall have the right, but shall not be obligated, to pay such sum or
perform such obligation, whereupon such sum or the cost of such performance
shall immediately become due and payable hereunder as additional rent, with
interest thereon at the Default Rate from the date such payment or
performance was made.
5.2 ASSIGNMENT LESSEE SHALL NOT RELINQUISH POSSESSION OR CONTROL OF, OR ASSIGN,
SUBLEASE, PLEDGE, HYPOTHECATE OR OTHERWISE TRANSFER, DISPOSE OF OR ENCUMBER
ANY UNIT, THIS AGREEMENT OR ANY LEASE OR SCHEDULE, OR ANY PART THEREOF OR
INTEREST THEREIN, OR ANY RIGHT OR OBLIGATION WITH RESPECT THERETO, WITHOUT
THE PRIOR WRITTEN CONSENT OF LESSOR, except in connection with the
currently contemplated merger or consolidation of Lessee into a wholly-
owned subsidiary of Lessee.
5.3 QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing, neither Lessor nor its assignee or any person claming by or
through Lessor shall interfere with Lessee's right of quiet enjoyment and
use of the Equipment.
5.4 FURTHER ASSURANCES. Lessee shall, upon the request of Lessor, from time to
time, execute and deliver such further documents and do such further acts
as Lessor may reasonably request in order fully to effect the purposes of
any Lease and Lessor's rights thereunder. Lessor is authorized to file a
financing statement, signed only by Lessor in accordance with the Uniform
Commercial Code or signed by Lessor as Lessee's attorney in fact, with
respect to any of the Equipment.
5.5 RIGHT AND REMEDIES. Each and every right and remedy granted to Lessor under
any Lease shall be cumulative and in addition to any other right or remedy
therein specifically granted or now or hereafter existing in equity, at
law, by virtue of statute or otherwise, and may be exercised by Lessor from
time to time concurrently or independently and as often and in such order
as Lessor may deem expedient. Any failure or delay on the part of Lessor in
exercising any such right or remedy, or abandonment or discontinuance of
steps to enforce the same, shall not operate as a waiver thereof or affect
Lessor's right thereafter to exercise the same. Waiver of any right or
remedy on one occasion shall not be deemed to be a waiver of any other
right or remedy or of the same right or remedy on any other occasion.
5.6 NOTICES. Any notice, request, demand, consent, approval or other
communication provided for or permitted hereunder shall be in writing and
shall be conclusively deemed to have been received by a party hereto on the
day it is delivered personally to such party at its address set forth above
(or at such other address as such party shall specify to the other party in
writing), or if sent by a nationally recognized overnight delivery service,
the next business day after so sent, or if sent by registered or certified
mail, return receipt requested, on the fifth day after the day on which it
is so mailed, addressed to such party at such address.
5.7 SECTION HEADINGS; COUNTERPARTS. Section headings are inserted for
convenience of reference only and shall not affect any construction or
interpretation of this Agreement. This Agreement and each Lease may be
executed in counterparts, and when so executed each counterpart shall be
deemed to be an original, and such counterparts together shall constitute
one and the same instrument.
5.8 ENTIRE LEASE. This Agreement and each Lease constitute the entire agreement
between Lessor and Lessee with respect to the lease of Equipment and
supersede all other prior or contemporaneous agreements, whether oral or in
writing, with respect thereto. No waiver or amendment of, or any consent
with respect to, any provision of this Agreement shall bind either party
unless set forth in writing, specifying such waiver, consent, or amendment,
signed by both parties, and then such waiver, consent, or amendment shall
be effective only in the specific instance and for the specific purpose
given. Any term or condition of any purchase order or other document (with
the exception of any Lease) submitted by Lessee in connection with this
Lease which is in addition to or inconsistent with the terms and conditions
of this Agreement shall not be binding on Lessor and shall not apply to
this Agreement. To the extent permitted by applicable law and not otherwise
specifically provided to Lessee in this Agreement, Lessee hereby waives any
and all rights or remedies conferred upon a lessee under the California
Uniform Commercial Code, and any other applicable similar code or statutes
of another jurisdiction, with respect to a default by Lessor under this
Agreement.
5.9 SEVERABILITY. Should any provision of this Agreement or any Lease be or
become invalid, illegal, or unenforceable under applicable law, the other
provisions of this Agreement and such Lease shall not be affected and shall
remain in full force and effect, and, to the extent permissible under
applicable law and possible, any such invalid, illegal or unenforceable
provision shall be deemed amended to the extent necessary to be valid,
legal and enforceable and to conform to the intent of the parties;
provided, however, in the event Lessee's obligation under any Lease to pay
rent or any other amount shall be invalid, illegal or unenforceable, Lessor
shall have the right to terminate such Lease as if an Event of Default
shall have occurred.
5.10 ATTORNEYS' FEES. Should either party institute any action or proceeding to
enforce this Agreement or any Lease, or any provision hereof or thereof, or
for a declaration of rights under any such agreement, the prevailing party
in any such action or proceeding shall be entitled to receive from the
other party all reasonable out-of-pocket costs and expenses, including,
without limitation, reasonable attorneys' fees, which it incurs in
connection with such action or proceeding.
5.11 GOVERNING LAW. This Lease shall be governed in all respects by the laws of
the State of California with respect to agreements entered into, and to be
performed, entirely in California. EXCEPT AS OTHERWISE SPECIFICALLY
PROVIDED IN ANY LEASE, THIS AGREEMENT AND EACH LEASE SHALL BE GOVERNED IN
ALL RESPECTS BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY
LITIGATION ARISING FROM THIS AGREEMENT OR ANY LEASE. LESSEE CONSENTS TO THE
NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS OF CALIFORNIA, AND THE
FEDERAL COURTS SITTING IN THE STATE CALIFORNIA, FOR THE RESOLUTION OF ANY
DISPUTES HEREUNDER.
5.12 SURVIVAL. All obligations of Lessee to make payments to Lessor under any
Lease or to indemnify Lessor, pursuant to Section 3.4 or 3.7 above, with
respect to a Lease, and all rights of Lessor hereunder with respect to a
Lease, shall survive the termination of such Lease until the expiration of
any applicable statute of limitations.
4
<PAGE>
5.13 PURCHASE OPTION. Notwithstanding anything contained in this Agreement
or any Lease to the contrary, Lessee shall have the option to purchase
the Equipment the subject of any Lease, on an "AS IS or WHERE IS"
basis, at the end of the Original Term of the Lease for a purchase
price of $1.00. Lessee may exercise such option by giving notice to
Lessor at least five (5) days prior to the end of the Original Term.
5.14 EARLY TERMINATION. Lessee shall be entitled, at its option, upon at
least 30 days prior written notice to Lessor specifying the
termination date, to terminate any Lease prior to the expiration of
the Original Term thereof by paying to Lessor an amount equal to the
Casualty Value as of the termination date for all the Equipment
subject to each Lease together any accrued and unpaid Rent as of the
termination date.
LESSEE, BY THE SIGNATURE BELOW OF ITS AUTHORIZED REPRESENTATIVE, ACKNOWLEDGES
THAT IT HAS READ THIS LEASE, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS
AND CONDITIONS.
CISCO SYSTEMS CAPITAL CORPORATION. (LESSOR) PSINET INC. (LESSEE)
By: /s/ Brian P. Fukuhara By: /s/ Edward D. Postal
---------------------------------------- ----------------------------
(Authorized Signature) (Authorized Signature)
Manager Worldwide Financial Services Senior Vice President & CFO
- ------------------------------------------ -------------------------------
(Name/Title) (Name/Title)
November 4, 1997 October 24, 1997
- ------------------------------------------ -------------------------------
(Date) (Date)
5
<PAGE>
EXHIBIT 10.31
3COM(R) MASTER LEASE AGREEMENT NO. A212
- ---------------------------------------
This Master Lease Agreement (the "MLA") is entered into by and between 3Com
Credit Corporation ("Lessor"), having it's principal place of business at 5400
Bayfront Plaza, Santa Clara, CA 95052-8145, and PSINet Inc. ("Lessee"), having a
place of business at 510 Huntmar Park Drive, Herndon, VA 20170.
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees to
lease from Lessor, the equipment (the "Equipment") referenced in each of the
Schedules (the "Schedule" or "Schedules") which incorporate this MLA therein
(the "Lease").
2. SELECTION, ASSIGNMENT AND TITLE TO THE EQUIPMENT. Lessee will select the
type, quantity and Supplier of each item of Equipment designated in a Schedule,
and Lessee hereby assigns to Lessor all of its right, title, and interest in and
to the related equipment purchase agreement, a copy of which has been provided
to Lessor by Lessee (the "Agreement"). The Agreement may be amended with the
consent of Lessor. Any such assignment with respect to Equipment shall become
binding upon Lessor as of the Rent Commencement Date. Upon such an assignment
becoming effective, Lessor shall be obligated to purchase the Equipment from the
Supplier in accordance with the provisions of the Agreement. It is expressly
agreed that Lessee shall at all times remain liable to Supplier under the
Agreement to perform all duties and obligations of Lessee thereunder, except for
the obligation to purchase the Equipment to the extent expressly assumed by the
Lessor hereunder, and that the Lessee shall be entitled to the same rights of
the purchaser of the Equipment under the Agreement, except such right, title and
interest in the Equipment retained exclusively by the Lessor as owner of the
Equipment. Lessor shall have no liability for a Supplier's failure to meet the
terms and conditions of the Agreement.
Lessor shall retain title to each item of Equipment. Lessee, at its expense,
shall protect Lessor's title and keep the Equipment free from all claims, liens,
encumbrances and legal processes. The Equipment is personal property and is not
to be regarded as part of the real estate on which it may be situated. If
requested by Lessor, Lessee will, at Lessee's expense, furnish a landlord or
mortgagee waiver with respect to the Equipment. The Equipment shall not be
removed from the location specified in the Schedule without the written consent
of Lessor. Lessee shall, upon Lessor's request, affix and maintain plates, tags
or other identifying labels, showing Lessor's ownership of the Equipment in a
prominent position on the Equipment.
3. TERM. Each Lease shall be effective upon the execution of the MLA and the
related Schedule by the Lessor and the Lessee. The lease term (the "Lease
Term") of the Equipment referenced in each of the Schedules shall commence on
the rent commencement date specified in each Schedule (the "Rent Commencement
Date"). The Rent Commencement Date shall be the date 30 days from the date that
the
<PAGE>
Equipment is shipped by the Supplier (the "Ship Date") as evidenced by a
shipping document provided by the Supplier related to the Equipment (the
"Shipping Document"). Lessor will provide Lessee with a copy of the Shipping
Document evidencing the Ship Date.
4. RENT. The rent (the "Rent") for the Equipment referenced in any Schedule
shall be as stated in such Schedule and shall be payable according to the
provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
overdue charge (an "Overdue Charge"), defined as an amount equal to 2% per month
of any payment under a Lease which is past due, including, without limitation,
any amounts not included in any payment of Rent hereunder, or the highest charge
permitted by law, whichever is lower, with respect to such amount.
5. NO OFF-SET. All Rents shall be paid by Lessee irrespective of any off-set,
counterclaim, recoupment, defense or other right which Lessee may have against
Lessor, the manufacturer or Supplier of the Equipment or any other party.
6. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment of all
transportation, packing, installation, testing and other charges associated with
the delivery, installation, or use of any Equipment which are not included in
the Agreement with respect to such Equipment.
7. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment by
Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall have
the right to inspect the Equipment at the premises where the Equipment is
located. Lessee shall notify Lessor promptly of any claims, liens, encumbrances
or legal processes with respect to the Equipment.
8. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain each item
of Equipment in good condition, normal wear and tear excepted. Lessee shall not
make any addition, alteration, or attachment to the Equipment without Lessor's
prior written consent. Lessee shall make no repair, addition, alteration or
attachment to the Equipment which interferes with the normal operation or
maintenance thereof, creates a safety hazard, or might result in the creation of
a mechanic's or materialman's lien.
9. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS
OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY, OR ITS
FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR ANY
OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING FROM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON STRICT OR
ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE
<PAGE>
EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
10. LESSOR'S INDEMNITY. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross negligence or willful misconduct of Lessor. Such indemnities and
assumptions of liabilities and obligations shall continue in full force and
effect, notwithstanding the expiration or other termination of such Lease.
Nothing contained in any Lease shall authorize Lessee to operate the Equipment
subject thereto so as to incur or impose any liability on, or obligation for or
no behalf of, Lessor.
11. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if any, to
renew a lease or purchase the Equipment subject thereto, upon expiration of the
then current Lease Term of such Lease, Lessee shall, at its expense, cause such
Equipment to be removed, disassembled, and placed in the same condition as when
delivered to Lessee (reasonable wear and tear excepted) and properly crate such
Equipment for shipment and deliver it to a common carrier designated by Lessor.
Lessee will ship such Equipment, F.O.B. destination, to any address specified in
writing by Lessor within the continental United States. All additions,
attachments, alterations and repairs made or placed upon any of the Equipment
shall become part of such Equipment and shall be the property of Lessor.
12. CONSTRUCTION. This MLA shall be governed by and construed in accordance
with the internal laws, but not the choice of laws provisions, of the State of
California. The titles of the sections of this MLA are for convenience only and
shall not define or limit any of the terms or provisions hereof. Time is of the
essence in each of the provisions hereof.
13. DEFAULT. The occurrence of any of the following shall be deemed to
constitute a Default hereunder: (a) Lessee fails to pay Rent, any other amount
it is obligated to pay under a Lease or any other amount it is obligated to pay
to Lessor and does not cure such failure within 10 days of such amount becoming
due; (b) Lessee fails to perform or observe any obligation or covenant to be
performed or observed by Lessee hereunder or under any Schedule, including,
without limitation, supplying all requested documentation, and does not cure
such failure within 10 days of receiving written notice thereof from Lessor; (c)
any warranty, representation or statement made or furnished to Lessor by or on
behalf of Lessee is proven to have been false in any material respect
<PAGE>
when made or furnished; (d) the attempted sale or encumbrance by Lessee of the
Equipment, or the making of any levy, seizure to attachment thereof or thereon;
or (e) the dissolution, termination of existence, discontinuance of business,
insolvency, or appointment of a receiver of any part of the property of Lessee,
assignment by Lessee for the benefit of creditors, the commencement of
proceedings under any bankruptcy, reorganization or arrangement laws by or
against Lessee, or any other act of bankruptcy on the part of Lessee.
At any time after the occurrence of any Default, Lessor may exercise one or more
of the following remedies: (a) Lessor may terminate any or all of the Leases
with respect to any or all items of Equipment subject thereto; (b) Lessor may
recover from Lessee all Rent and other amounts then due and to become due under
any or all the leases; (c) Lessor may take possession of any or all items of
Equipment, wherever the same may be located, without demand or notice, without
any court order or other process of law and without liability to Lessee for any
damages occasioned by such taking of possession, and any such taking of
possession shall not constitute a termination of any Lease; (d) Lessor may
demand that Lessee return any or all items of Equipment to Lessor in accordance
with Paragraph 11; and (e) Lessor may pursue any other remedy available at law
or in equity, including, without limitation, seeking damages, specific
performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall sell,
lease or otherwise dispose of such item in a commercially reasonable manner,
with or without notice and on public or private bid, and apply the net proceeds
thereof (after deducting the estimated fair market value of such item at the
expiration of the term of the applicable Lease, in the case of a sale, or the
rents due for any period beyond the scheduled expiration of such Lease, in the
case of any subsequent lease of such item, and all expenses, including, without
limitation, reasonable attorneys' fees, incurred in connection therewith)
towards the Rent and other amounts due under such Lease, with any excess net
proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not exclusive,
and in addition to any other remedy referred to herein or otherwise available to
Lessor in law or in equity. Any repossession or subsequent sale or lease by
Lessor of any item of Equipment shall not bar an action for a deficiency as
herein provided, and the bringing of an action or the entry of judgment against
Lessee shall not bar Lessor's right to repossess any or all items of Equipment.
14. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule constitute
the entire agreement between Lessor and Lessee with respect to the lease of the
Equipment subject to such Schedule, and supersede all previous communications,
understandings, and agreements, whether oral or written, between the parties
with respect to such subject matter. No provision of any Lease may be changed,
waived, amended or terminated except by a written agreement, specifying such
change, waiver, amendment or termination, signed by both Lessee and Lessor,
except that Lessor may
<PAGE>
insert, on the appropriate schedule, the serial number of Equipment, after
delivery of such Equipment, and the Rent Commencement Date for the Equipment. No
waiver by Lessor of any Default shall be construed as a waiver of any future
Default or any other Default. At the expiration of the Lease Term with respect
to a Lease, upon notice given by Lessee at least ninety (90) days prior thereto,
(a) such lease shall be renewed or the Equipment subject thereto shall be
purchased under the terms and conditions set forth herein for a term and rent
amount or purchase price, as the case may be, to be agreed upon, or (b) if no
such agreement is reached prior to the expiration of such Lease Term or such
notice specifies that Lessee intends to return the Equipment, the Lessee shall
return the Equipment to Lessor in the manner prescribed in Paragraph 11 of this
MLA. In the absence of Lessor's timely receipt of the notice contemplated by the
preceding sentence, the Lease shall be automatically extended, on a month-to-
month basis, until terminated (upon notice by either party given at least ninety
(90) days prior to the end of the month on which the termination is to be
effective) or until renewed or the Equipment subject thereto is purchased by
agreement of the parties. Unless otherwise agreed, Lessee shall continue to pay
Rent for each month following such Lease Term until the Equipment subject to
such Lease is returned pursuant to Paragraph 11 of this MLA.
15. SEVERABILITY. If any provision of any Lease is held to be invalid by a
court of competent jurisdiction, such invalidity shall not affect the other
provisions of such Lease or any provision of any other Lease.
16. FINANCIAL INFORMATION. Within 90 days of the close of each of Lessee's
fiscal years, Lessee shall deliver to Lessor a copy of Lessee's annual report,
if any, and an audited balance sheet and profit and loss statement with respect
to such year. If audited financial statements of Lessee for such year are not
prepared, Lessee may provide financial statements certified by an officer of
Lessee. At Lessor's request, Lessee shall deliver to Lessor a balance sheet and
profit and loss statement for any of its fiscal quarters, certified by an
officer of Lessee.
17. ASSIGNMENT. Lessee shall not, without Lessor's prior written consent, (a)
sell, assign, transfer, pledge, hypothecate, or otherwise dispose of, encumber
or suffer to exist a lien upon or against, any of the Equipment or any Lease or
any interest therein, by operation of law or otherwise, or (b) sublease or lend
any of the Equipment or permit any of the Equipment to be used by anyone other
than Lessee.
Lessor may assign, sell or encumber its interest in any of the Equipment and any
Lease. Upon Lessor's written consent, Lessee shall pay directly to the assignee
of any such interest all Rent and other sums due under an assigned Lease. THE
RIGHTS OF ANY SUCH ASSIGNEE SHALL NOT BE SUBJECT TO ANY ABATEMENT, DEDUCTION,
OFF-SET, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE
AGAINST LESSOR OR ANY OTHER PERSON OR ENTITY. Notwithstanding the foregoing,
any such assignment (a) shall be subject to Lessee's right to possess and use
the Equipment subject to a Lease so long as Lessee is not in default thereunder,
and (b) shall not release any of Lessor's obligations hereunder.
<PAGE>
18. INSURANCE. As of the date that risk of loss for the Equipment passes from
the Supplier to the Lessee under the terms of the Agreement, Lessee shall obtain
and maintain through the end of the Lease Term of each Lease (and any renewal or
extension thereof), at its own expense, property damage and personal liability
insurance and insurance against loss or damage to the Equipment, including,
without limitation, loss by fire (with extended coverage), theft and such other
risks of loss as are customarily insured against with respect to the types of
Equipment leased hereunder and by the types of businesses in which such
Equipment will be used by Lessee. Such insurance shall be in such amounts, with
such deductibles, in such form and with such insurers as shall be satisfactory
to Lessor; provided, however, that the amount of the insurance against loss or
damage to the Equipment shall not be less than the greater of the replacement
value of the Equipment, from time to time, or the original purchase price of the
Equipment. Each insurance policy shall name Lessee as an insured and Lessor as
an additional insured or loss payee, and shall contain a clause requiring the
insurer to give Lessor at least 30 days prior written notice of any alteration
in the terms of such policy or of the cancellation thereof. 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 policy or to advise Lessee in the event such insurance coverage shall
not comply with the requirements hereof. Lessee shall give Lessor prompt notice
of any damage to, or loss of, any of the Equipment, or any part thereof, or any
personal injury or property damage occasioned by the use of any of the
Equipment.
19. TAXES. Lessee hereby assumes liability for, and shall pay when due, and, on
a net after-tax basis, shall indemnify, protect and hold harmless Lessor against
all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from the payment of taxes it would otherwise
be obligated to pay or reimburse to Lessor as herein provided) and federal taxes
on Lessor's net income. Lessee shall, at its expense, file when due with the
appropriate authorities any and all tax and similar returns, and reports
required to be filed with respect thereto, for which it has indemnified Lessor
hereunder or, if requested by Lessor, notify Lessor of all such requirements and
furnish Lessor with all information required for lessor to effect such filings.
Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make
such payments shall, at Lessor's option, become immediately due from Lessee to
Lessor and shall be subject to the Overdue Charge from the date paid by Lessor
until the date reimbursed by Lessee.
20. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the
<PAGE>
Equipment leased pursuant to a true lease shall not be deemed evidence of any
intent to create a security interest under the Uniform Commercial Code.
If Lessee fails to perform any of its obligations under a Lease, Lessor may
perform any act or make any payment which Lessor deems necessary for the
maintenance and preservation of the Equipment subject thereto and Lessor's title
thereto. All sums so paid by Lessor (together with all related Overdue
Charges), and reasonable attorneys' fees incurred by Lessor in connection
therewith, shall be additional rent payable to Lessor on demand. The
performance of any such act or the making of such payment by Lessor shall not be
deemed a waiver or release of any obligation or default on the part of Lessee.
21. COUNTERPARTS. Each Lease may be executed in two or more counterparts, each
of which shall be deemed an original and all of which together shall constitute
but one and the same instrument.
22. PARTIES. This MLA shall be binding upon, and inure to the benefit of, the
permitted assigns, representatives and successors of the Lessor and Lessee. If
there is more than one Lessee named in this MLA, the liability of each shall be
joint and several.
23. NOTICES. All notices hereunder shall be in writing and shall be deemed
given when sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to which it is being sent at its address set forth herein
or to such other address as such party may designate in writing to the other
party.
All the terms and conditions set forth hereon and on the reverse side
hereof form a part of this MLA. Lessee certifies that the person executing this
MLA on behalf of Lessee is duly authorized to execute this MLA and Lessee
accepts the terms and conditions hereof.
Accepted by: Lessee: PSINet Inc.
3Com Credit Corporation
By: /s/ Cecilia Faulkner By: /s/ Edward D. Postal
----------------------------- ----------------------------
Name: Cecilia Faulker Name: Edward D. Postal
-------------------------- -------------------------
Title: Credit Manager Title: Vice President and CFO
-------------------------- -------------------------
Date: 10-31-97 Date: 10-30-97
-------------------------- -------------------------
<PAGE>
AMENDMENT
This Amendment is to Master Lease Agreement No. A212, by and between 3Com Credit
Corporation ("Lessor") and PSINet Inc. ("Lessee").
Paragraph 2 - At the end of the second sentence in the second paragraph
-----------
insert the words "arising from or Imposed by persons claiming by or through
Lessee."
Line 5, delete the word "furnish" and replace with "use reasonable efforts
to obtain"
At the end of the fifth sentence insert the words "except to another
location within the Continental U.S. upon thirty (30) days prior written
notice to Lessor."
Paragraph 4 - Line 6, replace "2%" with "1%"
-----------
Paragraph 7 - Line 5, after the word "located," insert the words "during
-----------
normal business hours upon prior written request made to Lessee."
Line 6, after the word "Equipment." insert the words "arising from or
imposed by persons claiming by or through Lessee.
Paragraph 13 - Line 1, after the word "occurrence" insert the words "and
------------
continuance".
In the first paragraph (a) shall be deleted and replaced with "(a) Lessee
fails to pay Rent and does not cure such failure within ten (10) days after
the date when due or Lessee fails to pay any other amount it is obligated
to pay to Lessor under this Lease and does not cure such failure within
ten(10) days after receiving written notice from Lessor;"
Line 13, after the word "thereon" insert the words "arising from or imposed
by any person claiming by or through Lessee"
At the end of the first paragraph after the word "Lessee" insert the words
"which is not discharged within thirty (30) days".
In the second paragraph, Line 1, after the word "occurrence" insert the
words "and during the continuance"
In the second paragraph, Line 5, after the word "Leases:" insert the words
"provided that all future rents shall be discounted at the rate of 5%"
In the second paragraph, Line 9, after the word "possession" insert the
words "other than as a result of Lessor's negligence in taking possession"
<PAGE>
Paragraph 14 - Line 2, after the word "Schedule" insert the words "and all
------------
Addendums"
Line 18, after the word "herein" insert the words "or in any Schedule or
Addendum attached thereto"
Paragraph 16 - Line 1, replace "90 days" with "120 days"
------------
Line 7, after the word "Lessor" insert the words "within 45 days"
Paragraph 17 - Line 6, after the word "Lessee" insert the words "except
------------
to (i) a wholly owned subsidiary of Lessee in connection with the merger or
consolidation of Lessee into a wholly-owned subsidiary of Lessee, (ii)
subject to approval by Lessor, which will not be reasonably withheld, an
entity which acquires substantially all the Lessee's assets and agrees in
writing to assume this Lease."
In the second paragraph, Line 9, after the word "to" and before the word
"Lease" replace the word "a" with the word "the"
Paragraph 18 - Line 11, after the word "be" and before the word
------------
"satisfactory" insert the word "reasonably"
Line 13, delete the word "greater" and replace it with the word "lesser"
Line 17, after the word "any and before the word "alteration" insert the
word "material"
Insert the following as the second paragraph:
"In the event any item of Equipment is damaged or destroyed, Lessee
shall promptly notify Lessor in writing, and shall, within thirty (30) days
of such event, at Lessee's option, (a) place such item of Equipment in good
repair and working order, or (b) replace such item of Equipment with like
personal property in good repair and working order and transfer title to
such replacement property to Lessor whereupon such property shall be
subject to the applicable Lease Schedule and be deemed Equipment for
purposes thereof, or (c) pay Lessor an amount equal to the sum of (i) all
Rent accrued to the date of such payment, plus an amount equal to the
remaining rent payments discounted a the rate of 5%, whereupon this
Agreement and the applicable Lease shall terminate with respect to such
items of Equipment for which such payment is received by Lessor. Upon
payment of the amount set forth in (c), the Rent for such Lease schedule
shall be reduced proportionately. In the event option (a) or (b) is
elected, the proceeds of any insurance shall be applied to pay or reimburse
Lessee for the costs of repairing, restoring or replacing the items of
Equipment."
<PAGE>
Paragraph 19 - Line 11, after the word "filed" and before the word "with"
------------
insert the words "by Lessee"
Line 11 and 12, delete the words "for which it has indemnified Lessor
hereunder"
Line 12 and 13, delete the words "notify Lessor of all such requirements
and "
Line 13, after the word "information" and before the word "required" insert
the words "in Lessee's possession"
Paragraph 20 - in the second paragraph, Line 6, delete the words
------------
"additional rent"
Paragraph 23 - Lien 2, after the word "given" and before the word "when"
------------
insert the words "when delivered personally, the next business day after
delivered by a recognized overnight delivery service or five (5) days
after"
Paragraph 24 - The following shall be added Paragraph 24:
------------
"Quiet Enjoyment: So long as no Default has occurred and is continuing
-----------------
under the Lease, Lessee shall be entitled to peaceful and quiet use and
enjoyment of the Equipment during the Lease Term and such peaceful and
quiet sue and enjoyment shall not be disturbed by Lessor, Lessor's
assignees or any person claiming by or through Lessor,"
"Early Termination Lessee shall be entitled, as its option, upon at least
-----------------
sixty (60) days prior written notice to lessor specifying the termination
date, to terminate any Lease Schedule prior to the expiration of the Lease
Term thereof by paying to Lessor an amount equal to the remaining Rent
payments as of the termination date discounted at the rate of five percent
(5%) for all the Equipment the subject of a Lease Schedule together any
accrued and unpaid rent as of the termination date."
Except as modified by this Amendment, the terms and conditions of the Master
Lease Agreement shall remain in full force and effect.
Accepted by: Lessee: PSINet Inc.
3Com Credit Corporation
By: /s/ Cecilia Faulkner By: /s/ Edward D. Postal
------------------------ -----------------------------
Name: Cecilia Faulker Name: Edward D. Postal
---------------------- --------------------------
Title: Credit Manager Title: Vice President and CFO
---------------------- --------------------------
Date: 10-31-97 Date: 10-30-97
---------------------- --------------------------
<PAGE>
LEASE OF PERSONAL PROPERTY NUMBER: 3402 EXHIBIT 10.32
- --------------------------------------------------------------------------------
L L
E PSINET INC. E CHARTER FINANCIAL, INC.
S 510 HUNTMAR PARK DRIVE S 153 EAST 53RD STREET
S HERNDON, VIRGINIA 20170-5100 S NEW YORK, N.Y. 10022
E O
E R
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUANTITY DESCRIPTION OF LEASED EQUIPMENT (Show: Make, Kind, Model No., Serial,
Other Identification) - (If additional space needed attached separate
sheet for each copy, marked Schedule to Lease from (Lessor's Name) to
(Lessee's Name)).
- --------------------------------------------------------------------------------
Various equipment as more fully described on the attached Schedule "A"
annexed hereto and made a part hereof.
- --------------------------------------------------------------------------------
EQUIPMENT IS TO BE
AT LESSEE'S ADDRESS SEE ATTACHED SCHEDULE "B" FOR EQUIPMENT LOCATIONS
ABOVE UNLESS A DIFFERENT
LOCATION IS SHOWN HERE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TERM AND RENT PAYMENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TERM OF LEASE RENT PAYABLE (1) ADVANCE RENT PAID (2) No. and Amount of Rent Payments
(Excluding Advance Rents Paid)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
NO. OF MONTHS MONTHLY NO. OF AMOUNT OF EACH TOTALING NUMBER AMOUNT OF EACH
35 X PAYMENTS 35 1 @ $164,178.00
34 @ 82,089.00
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1. LEASE. Lessor hereby leases to Lessee, and Lessee hires and takes from
Lessor, the personal property described above (hereinafter with all renewals,
substitutions and replacements and all parts, repairs, improvements, additions
and accessories incorporated therein or affixed thereto referred to as the
Equipment). The Equipment is and shall at all times be and remain the sole and
exclusive personal property of Lessor, and notwithstanding any trade-in or down
payment by Lessee or on its behalf with respect to the Equipment, Lessee shall
have no right, title or interest therein or thereto except as to the use thereof
subject to the terms and/or conditions of this Lease.
2. TERM. The term of this Lease shall commence on January 15, 1998 and shall
continue until the expiration of thirty (30) days after the due date of the last
payment of rent shown above (the "Term").
3. RENTAL. Lessee agrees to pay to Lessor or its assignee during the Term
the rent payments shown above with the first rent payment due on the
commencement date shown above. Lessee hereby authorizes Lessor to insert the
commencement date in the space provided hereinabove. The rent payments shown
above together with any and all additional payments to be made by Lessee to
Lessor under this Lease are hereinafter referred to as "Rental". All Rental
shall be paid without notice or demand and without abatement, deduction or set
off of any amount whatsoever, at such address and to such person or persons as
Lessor or its assignee shall direct. Any nonpayment of Rental within ten days of
when due hereunder shall result in the obligation on the part of Lessee promptly
to pay also an amount equal to five percent (5%) (or the maximum rate permitted
by law, whichever is less) of the amounts overdue.
4. DISCLAIMER OF WARRANTIES; LESSEE'S OBLIGATIONS. LESSEE ACKNOWLEDGES THAT:
LESSOR IS NOT THE MANUFACTURER OF THE EQUIPMENT NOR THE MANUFACTURER'S AGENT NOR
A DEALER THEREIN; THE EQUIPMENT IS OF A SIZE, DESIGN, CAPACITY, DESCRIPTION AND
MANUFACTURE SELECTED BY THE LESSEE; LESSEE HAS SELECTED THE EQUIPMENT PRIOR TO
HAVING REQUESTED LESSOR TO PURCHASE THE SAME FOR LEASING TO LESSEE; LESSEE IS
SATISFIED THAT THE EQUIPMENT IS SUITABLE AND FIT FOR ITS PURPOSES; AND LESSOR
HAS NOT MADE AND DOES NOT MAKE ANY WARRANTY OR REPRESENTATION WHATSOEVER, EITHER
EXPRESS OR IMPLIED, AS TO THE FITNESS, CONDITION, MERCHANTABILITY, DESIGN OR
OPERATION OF THE EQUIPMENT, ITS FITNESS FOR ANY PARTICULAR PURPOSE, THE QUALITY
OR CAPACITY OF THE MATERIALS IN THE EQUIPMENT OR WORKMANSHIP IN THE EQUIPMENT,
NOR ANY OTHER REPRESENTATION OR WARRANTY 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 LEASED HEREUNDER OR THE USE OR
MAINTENANCE THEREOF OR THE FAILURE OF OPERATION THEREOF, OR THE REPAIR, SERVICE
OR ADJUSTMENT THEREOF, OR BY ANY DELAY OR FAILURE TO PROVIDE ANY SUCH
MAINTENANCE, REPAIRS, SERVICE OR ADJUSTMENT, OR BY ANY INTERRUPTION OF SERVICE
OR LOSS OF USE THEREOF OR FOR ANY LOSS OF BUSINESS HOWSOEVER CAUSED. LESSOR
SHALL NOT BE LIABLE FOR DAMAGES OF ANY KIND INCLUDING ANY CONSEQUENTIAL DAMAGES
AS THAT TERM IS USED IN THE UNIFORM COMMERCIAL CODE OR OTHERWISE. No defect or
unfitness of the Equipment, nor any failure on the part of the manufacturer or
the shipper of the equipment to deliver the Equipment or any part thereof to
Lessee, shall relieve Lessee of the obligation to pay Rental or any other
obligation under this Lease. Lessor shall have no obligation under this Lease in
respect of the Equipment and shall have no obligation to install, erect, test,
adjust or service the Equipment. Lessor agrees, so long as there shall not have
occurred and be continuing any Event of Default hereunder, that Lessor will
permit Lessee to enforce in Lessee's own name and at Lessee's sole expense any
supplier's or manufacturer's warranty or agreement in respect of the Equipment
to the extent that such warranty or agreement is assignable. The parties agree
that this Lease is a "Finance Lease" as defined in Article 2A of the Uniform
Commercial Code. Lessee acknowledges either (a) that Lessee has reviewed and
approved the purchase order, supply contract or purchase agreement ("Supply
Contract") covering the Equipment purchased from the vendor or supplier thereof
for lease to Lessee or (b) that Lessor has informed or advised Lessee in
writing, either previously or by this Lease, of the following: (i) the identity
of the supplier/vendor; (ii) that the Lessee may have rights under the Supply
Contract; and (iii) that the Lessee may contact the supplier/vendor for a
description of any such rights Lessee may have under the Supply Contract.
________________________________________________________________________________
This Lease is subject to the terms and conditions set forth above and in
Sections 5 through 20 printed on the reverse and successive sides hereof, and
Lessee acknowledges and accepts the provisions thereof.
LESSEE ACKNOWLEDGES RECEIPT OF A SIGNED TRUE COPY OF THIS LEASE.
Accepted on December 16, 1997 Date: December 12, 1997
CHARTER FINANCIAL, INC. PSINET INC. (Lessee)
---------------------------------------
(Signature of Proprietor or name of
Corporation or Partnership)
BY /s/Brian Twomey BY /s/Edward Postal
------------------------------ -----------------------------------
Its Vice President Its Senior Vice President & CFO
----------------------------- ----------------------------------
(Title of Officer) (If Corporation, President, Vice
President or Treasurer should sign
and give official title. If
Partnership, state partner.)
PAGE 1 OF 4
<PAGE>
5. ASSIGNMENT OF LESSOR. This Lease and Lessor's interest in the Equipment
shall be assignable by Lessor and by its assigns without notice to or the
consent of Lessee, but Lessee shall not be obligated to any assignee of Lessor
except upon written notice of such assignment from Lessor or such assignee.
Subject to Section 18, hereof, the obligation of Lessee to pay Rental to such
assignee and perform all other obligations hereunder shall be absolute,
irrevocable, independent and unconditional and shall not be affected by any
circumstances whatsoever, and such payments shall be made without interruption,
deduction, offset or abatement notwithstanding any event or circumstance
whatsoever, including, without limitation, the late delivery, non-delivery,
destruction or damage of or to the Equipment, the deprivation or limitation of
the use of the Equipment, the bankruptcy or insolvency of Lessor or Lessee or
any disaffirmance of this Lease by or on behalf of Lessee, and notwithstanding
any defense, setoff, recoupment or counterclaim or any other right whatsoever,
whether by reason of breach of this Lease or otherwise which Lessee may now or
hereafter have against Lessor and whether any such event shall be by reason of
any act or omission of Lessor or otherwise; provided, however, that nothing
herein contained shall effect any right by Lessee to enforce against Lessor any
claim which Lessee may have against Lessor in any manner other than by
abatement, attachment, or recoupment of, interference with, or set-off,
counterclaim or defense against, the aforementioned payments to be made to such
assignee. Lessee's undertaking herein to pay the Rental to and to perform the
other obligations of Lessee hereunder for the benefit of an assignee of Lessor
shall constitute a direct, independent and unconditional obligation of Lessee to
said assignee. Lessee also acknowledges and agrees that any assignee of Lessor's
interest in this Lease shall have the right to exercise all rights, privileges
and remedies (either in its own name or in the name of Lessor) which by the
terms of this Lease are permitted to be exercised by Lessor.
6. DAMAGE TO OR LOSS OF THE EQUIPMENT; REQUISITION. No loss or damage to
the Equipment or any part thereof shall affect any obligation of Lessee under
this Lease which shall continue in full force and effect. Lessee shall advise
Lessor in writing promptly of any item of Equipment lost or damaged and of the
circumstances and extent of such damage. If the Equipment is totally destroyed,
irreparably damaged, lost, stolen or title thereto shall be requisitioned or
taken by any governmental authority under the power of eminent domain or
otherwise, Lessee shall, at the option of the Lessor, replace the same with like
equipment in good repair, condition and working order and transfer title to such
replacement item to Lessor by bill of sale and other appropriate documents or
pay to Lessor all Rental due and to become due hereunder (with all future
Rentals to be paid over the term of the Lease discounted at a rate equal to
seven percent (7%)), less the net amount of the recovery, if any, actually
received by Lessor from insurance or otherwise for such destruction, damage,
loss, theft, requisition or taking. Whenever the Equipment is destroyed or
damaged and, in the sole discretion of the Lessor, such destruction or damage
can be repaired, Lessee shall, at its expense, promptly effect such repairs as
Lessor shall deem necessary for compliance with paragraph 7(a) below. Any
proceeds of insurance received by Lessor with respect to such reparable damage
to the Equipment shall, at the election of Lessor, be applied either to the
repair of the Equipment by payment by Lessor directly to the party completing
the repairs, or to the reimbursement of Lessee for the cost of such repairs;
provided, however, that Lessor shall have no obligation to make such payment or
any part thereof until receipt of such evidence as Lessor shall deem
satisfactory that such repairs have been completed and further provided that
Lessor may apply such proceeds to the payment of any Rental or other sum due or
to become due hereunder if at the time such proceeds are received by Lessor
there shall have occurred and be continuing any Event of Default hereunder or
any event which with lapse of time or notice, or both, would become an Event of
Default. Lessee shall, when and as requested by Lessor, undertake, by litigation
or otherwise, in Lessee's name, the collection of any claim against any person
for such destruction, damage, loss, theft, requisition or taking, but Lessor
shall not be obligated to undertake, by litigation or otherwise, the collection
of any claim against any person for such destruction, damage, loss, theft,
requisition or taking.
7. AFFIRMATIVE COVENANTS OF LESSEE. Lessee shall (a) cause the Equipment to
be kept in good condition and use the Equipment only in the manner for which it
was designed and intended so as to subject it to only ordinary wear and tear and
cause to be made all needed and proper repairs, renewals, and replacements
thereto; (b) maintain at all times property damage, fire, theft and
comprehensive insurance for the full replacement value of the Equipment, with
additional loss payable provisions in favor of Lessor and any assignee of Lessor
as their interests may appear, and maintain general liability insurance in
amounts satisfactory to Lessor naming Lessor and any assignee of Lessor as
insureds with all of said insurance and loss payable provisions to be in form,
substance and amount and written by companies reasonably approved by Lessor, and
deliver certificates of insurance policies therefor, or duplicates thereof, to
Lessor; (c) pay or reimburse Lessor for any and all taxes, assessments and other
governmental charges of whatever kind or character, however designated (together
with any penalties, fines or interests thereon) levied or based upon or with
respect to the Equipment or the Rental or upon the manufacture, purchase,
ownership, delivery, leasing, possession, use, storage, operation, maintenance,
repair, return or other disposition of the Equipment, or for titling or
registering the Equipment, or upon the income or other proceeds received with
respect to the Equipment or this Lease provided, however, that Lessee shall pay
taxes on or measured by the net income of Lessor and franchise taxes of Lessor
only to the extent that such net income taxes or franchise taxes are levied or
assessed in lieu of such other taxes, assessments or other governmental charges;
(d) pay all shipping and delivery charges and other expenses incurred in
connection with the Equipment and pay all lawful claims, whether for labor,
materials, supplies, rent or services, which might or could if unpaid become a
lien on the Equipment; (e) comply in all material respects with all governmental
laws, regulations, requirements and rules, all manufacturers instructions and
warranty requirements, and with the conditions and requirements of all policies
of insurance with respect to the Equipment and this Lease; (f) mark and identify
the Equipment with all information and in such manner as Lessor or its assigns
may request from time to time and replace promptly any such markings or
identification which are removed, defaced pr destroyed; (g) at any and all times
during business hours, upon prior request by facsimile, grant Lessor free access
to enter upon the premises wherein the Equipment shall be located or used and
permit Lessor to inspect the Equipment; (h) reimburse Lessor for all charges,
cost and expenses (including reasonable attorneys' fees), incurred by Lessor in
defending or protecting its interest in the Equipment, in the attempted
enforcement or enforcement of the provisions of this Lease or in the attempted
collection or collection of any Rental under this Lease; (i) indemnify and hold
Lessor harmless from and against all claims, losses, liabilities (including
negligence, tort and strict liability), damages, judgments, suits and all legal
proceedings, and any and all costs and expenses in connection therewith
(including reasonable attorneys' fees) arising out of or in any manner connected
with the manufacture, purchase, financing, ownership, delivery, rejection, non-
delivery, transportation, possession, use, storage, operation, maintenance,
repair, return or other disposition of the Equipment or with the Lease,
including, without limitation, claims for injury to or death of persons and for
damage to property (but excluding any claims resulting from Lessor's gross
negligence or willful misconduct), and give Lessor prompt notice of any such
claim or liability; (j) upon the expiration of the Term, or any renewal term of
this Lease, or upon sooner termination of this Lease, at its own cost and
expense, deliver possession of the Equipment to Lessor in the condition in which
it is required to be maintained by Lessee hereunder, at a location within the
United States designated by the Lessor; and (k) within sixty (60) days after the
end of each fiscal quarter, deliver to Lessor a balance sheet as at the end of
such quarter and statement of operations for such quarter, and within one
hundred and twenty (120) days after the end of each fiscal year, deliver to
Lessor a balance sheet as at the end of such year and statement of operations of
such year, in each case prepared in accordance with generally accepted
accounting principles and practices consistently applied and certified by
Lessee's chief financial officer as fairly presenting the financial position and
results of operations of Lessee in accordance with generally accepted accounting
principles, and, in the case of year end financial statements, certified, by an
independent accounting firm reasonably acceptable to Lessor.
8. NEGATIVE COVENANTS OF LEASE. Lessee shall not (a) voluntarily or
involuntarily create, incur, assume or suffer to exist any mortgage, lien,
pledge or other encumbrance or attachment of any kind whatsoever upon, affecting
or with respect to the Equipment or any of Lessee's interests thereunder except
for those arising from or imposed by persons claiming by or through or Lessor or
Lessor's assignees; (b) make any changes or alterations in or to the Equipment
except as necessary for compliance with paragraph 7(a) above;(c) permit the name
of any person, association or corporation other than the Lessor to be placed on
the Equipment as a designation that might be interpreted as a claim of ownership
or security interest (provided, however, that Lessee may place its name on the
Equipment so long as such marking indicates that the Equipment is subject to
Lessor's right, title and interests as Lessor hereunder); (d) part with
possession or control of or suffer or allow to pass out of its possession or
control any item of the Equipment or change the location of the Equipment or any
part thereof except upon thirty (30) days written notice to Lessor from the
address shown above or on Schedule A hereto; (e) ASSIGN OR IN ANY WAY DISPOSE OF
ALL OR ANY PART OF ITS RIGHTS OR OBLIGATIONS UNDER THIS LEASE OR ENTER INTO ANY
SUBLEASE OF ALL OR ANY PART OF THE EQUIPMENT except to (i) a wholly-owned
subsidiary of Lessee or in connection with the merger or consolidation of Lessee
into a wholly-owned subsidiary of Lessee, or (ii) an entity which acquires
substantially all of Lessee's s assets and the successor entity agrees in
writing to assume this Lease; or (f) change its name or address from that set
forth above unless it shall have given Lessor or its assigns no less than thirty
(30) days' prior written notice thereof.
PAGE 2 OF 4
<PAGE>
9. USE OF EQUIPMENT; EQUIPMENT PERSONALITY. So long as no Event of Default
shall have occurred, Lessee shall be entitled to possession and use of the
Equipment for the Term of this Lease in its lawful business in accordance with
the provisions of this Lease. The Equipment is, and shall at all times be and
remain, personal property notwithstanding that the Equipment or any part thereof
may now be, or hereafter become, in any manner affixed or attached to, or
imbedded in, or permanently resting upon, real property or any building thereon,
or attached in any manner to real property by cement, plaster, nails, bolts,
screws, wires, pipes or otherwise. If requested by Lessor with respect to any
item of the Equipment, Lessee will use good faith efforts to obtain and deliver
to Lessor waivers of interest or liens in recordable form, reasonably
satisfactory to Lessor, from all persons claiming any interest in the real
property on which such item of the Equipment is installed or located.
10. EVENT OF DEFAULT AND REMEDIES. If any one or more of the following
events ("Events of Default") shall occur and be continuing; (a) Lessee shall
fail to make any payment of rent hereunder within ten (10) days of the date when
due or Lessee shall fail to make any other payment hereunder when due if such
failure continues for ten (10) days after notice from Lessor; or (b) any
certificate, statement, representation, warranty or financial report heretofore
or hereafter furnished by or on behalf of Lessee or any guarantor of any of
Lessee's obligations hereunder proves to have been false in any material respect
at the time as of which the facts therein set forth were stated or certified or
has omitted any material contingent or unliquidated liability or claim against
Lessee or any such guarantor; or (C) Lessee or any guarantor of Lessee's
obligations shall fail to perform or observe in any material respect any
covenant (including, without limitation, the covenant to keep the Equipment free
from any mortgage, lien, pledge, encumbrance or attachment of any kind
whatsoever), condition or agreement to be performed or observed by it hereunder
which failure continues unremedied for more than thirty (30) days from the date
of notice of such failure from Lessor; or (d) Lessee or any guarantor of any of
Lessee's obligations hereunder shall be in breach of or in default, which breach
or default is not waived or cured within any applicable grace or notice period
in the payment or performance of any obligation owing to Lessor whether or not
related to this Lease and howsoever arising, whether by operation of law or
otherwise, present or future, contracted for or acquired, and whether joint,
several, absolute, contingent, secured, unsecured, matured or unmatured; or (e)
Lessee shall fail to comply, which failure is not waived, with the financial
covenants (as amended from time to time) set forth in its credit agreement (as
amended, restated or replaced, from time to time) with Fleet National Bank, and
its successors and assigns (collectively, "Fleet Bank") or in a credit agreement
with any other financial institution which provides a working capital facility
secured by substantially all the assets of Lessee which replaces the credit
facility with Fleet Bank, in whole or in part (a "New Lender"), and as a result
of such failure Fleet Bank or such New Lender shall declare an event of default
under its credit facility with Lessee and shall exercise its rights and remedies
which are available upon such event of default; or (f) Lessee or any guarantor
of any of Lessee's obligations hereunder shall cease doing business as a going
concern, make an assignment for the benefit of creditors, admit its inability to
pay its debts as they become due, file a petition commencing a voluntary case
under any chapter of Title 11 of the United States Code entitled "Bankruptcy"
(the "Bankruptcy Code"), be adjudicated as insolvent, file a petition seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar arrangement under any present or future
statue, law, rule or regulation or file an answer admitting the material
allegations of a petition filed against it in any such proceeding, consent to
the filing of such a petition or acquiesce in the appointment or a trustee,
receiver or liquidator of it or of all or any part of its assets or properties,
or take any action looking to its dissolution or liquidation; (g) an order for
relief against Lessee or any guarantor of any of Lessee's obligations hereunder
shall have been entered under any chapter of the Bankruptcy Code or a decree or
order by a court having jurisdiction in the premises shall have been entered
approving as properly filed a petition seeking reorganization, arrangement,
readjustment, liquidation, dissolution or similar relief against Lessee or any
guarantor of any of Lessee's obligations hereunder under any present or future
statue, law, rule or regulation, or within sixty(60) days after the appointment
without Lessee's or such guarantor's consent or acquiescence of any trustee,
receiver or liquidator of it or such guarantor or of all or any part of its or
such guarantor's assets and properties, such an appointment shall not be
vacated, or an order, judgment, or decree shall be entered against Lessee or
such guarantor by a court of competent jurisdiction and shall continue in effect
for any period of twenty(20) consecutive days without a stay of execution or any
execution or writ or process shall be issued under any action or proceeding
against Lessee whereby the Equipment or its use may be taken or restrained; or
(h) Lessee shall suffer an adverse material change in its financial condition
from the date hereof, and as a result thereof Lessor reasonably deems itself or
any of the Equipment to be insecure; then and in any such event, Lessor may (but
it not obligated to), at the sole discretion of Lessor, without notice or
demand, take any one or more of the following steps: (1) Immediately terminate
Lessee's rights hereunder; (2) require Lessee, at its expense, promptly to
return all or any portion of the Equipment to the possession of the Lessor at
such place within the United States as Lessor may designate, or with or without
process of law, directly or acting through agents, without liability to Lessor,
enter upon the premises of Lessee or other premises where all or any portion of
the Equipment may be and take immediate possession of all or any portion of the
Equipment, and thenceforth hold, possess, and enjoy the same free from any right
of the Lessee to the possession and use of the Equipment for any purpose
whatsoever in which event Lessee hereby expressly waives all further rights to
possession of the Equipment and all claims for injuries suffered through or
caused by any such repossession except for claims resulting from the gross
negligence or willful misconduct of Lessor; or (3) sue for and seek to recover
from Lessee all rent and other sums then past due pursuant to the terms and
provisions of this Lease; or (4) declare immediately due and payable and sue for
and seek to recover, all payments of rent, whether or not accrued (with all
future rent to be paid over the term of the Lease discounted at a rate equal to
seven percent (7%)), and all other amounts payable hereunder, provided, however,
upon the occurrence of any of the events specified in subparagraphs (f) or (g)
above, all sums as specified in this subparagraph (4) shall immediately be due
and payable without notice to Lessee (the date on which Lessor declares all rent
and other amounts to be due and payable is hereinafter referred to as the
"Declaration Date"); or (5) sell or release any or all of the Equipment at a
public or private sale on such terms and notice as Lessor shall deem reasonable
and recover from Lessee damages, not as penalty, but herein liquidated for all
purposes and in an amount equal to the sum of (i) any accrued and unpaid rent as
the later of (A) the date of default or (B) the date that Lessor has obtained
possession of the Equipment (the "Computation Date"); (ii) the present value of
all future rent reserved in this Lease and contracted to be paid over the
unexpired term of the Lease as of the Computation Date, discounted at a rate
equal to seven percent (7%); (iii) all commercially reasonable costs and
expenses incurred by Lessor in any repossession, recovery, storage, repair,
sale, re-lease or other disposition of the Equipment including reasonable
attorneys' fees and costs incurred in connection with or otherwise resulting
from the Lessee's default; (iv) the amount of the purchase option for the
Equipment; and (v) any indemnity, if then determinable, plus interest from the
date determined at fourteen percent (14%) per annum; LESS the amount received by
Lessor upon such public or private sale or re-lease of such items of Equipment,
if any; or (6) with or without terminating this Lease, recover from Lessee
damages, not as a penalty, but herein liquidated for all purposes in an amount
equal to the sum of (i) any accrued and unpaid rent as of the Declaration Date
plus interest at the rate of fourteen percent (14%) per annum; (ii) the present
value of all future rent reserved in this Lease and contracted to be paid over
the unexpired term of this Lease discounted at a rate equal to seven percent
(7%); (iii) all commercially reasonable costs and expenses incurred by Lessor in
any repossession, recovery, storage, repair, sale, re-lease, or other
disposition of the Equipment including reasonable attorneys' fees and costs
incurred in connection therewith or otherwise resulting from the Lessee's
default; (iv) the amount of the purchase option for the Equipment; and (v) any
indemnity, if then determinable, plus interest from the date determined at
fourteen percent (14%) per annum; or (7) exercise any other right or remedy
which may be available under the Uniform Commercial Code or any other applicable
law or proceed by appropriate court action or actions, at law or in equity,
either to enforce performance by Lessee of the applicable covenants of this
Lease or to recover damages for the breach thereof or of any warranty or
representation herein contained, or in aid of the exercise of any power, right
or remedy granted herein. Lessee shall be liable for all costs and expenses,
including reasonable attorneys' fees and disbursements, incurred by reason of
the occurrence of any Event of Default or the exercise of Lessor of remedies
with respect thereto. Any personalty in or attached to the Equipment when
repossessed may be held by Lessor without any liability arising with respect
thereto, and any and all claims in connection with such personalty shall be
deemed to have been waived unless notice of such claim is sent by certified or
registered mail upon Lessor within five (5) business days after repossession. A
termination hereunder shall occur only upon notice by Lessor and only as to such
items of Equipment as Lessor specifically elects to terminate and this Lease
shall continue in full force and effect as to the remaining items, it any. If
this Lease is deemed at any time to be one intended as security, Lessee agrees
that the Equipment shall secure, in addition to the indebtedness set forth
herein, any other indebtedness at any time owing by Lessee to Lessor but only
until such time as all Rental due hereunder has been paid and satisfied in full,
including, without limitation, any amounts due for any purchase option of Lessee
hereunder.
PAGE 3 OF 4
<PAGE>
11. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to perform or
comply with any of its agreements contained herein, Lessor may perform or
comply with such agreements and the amount of any commercially reasonable
payments and expenses of Lessor incurred in connection with such performance or
compliance, together with interest thereon at the rate provided in paragraph 15
below, shall be deemed Rental payable by Lessee upon demand.
12. FURTHER ASSURANCES. Lessee will cooperate with Lessor for the purpose
of protecting the interests of Lessor in the Equipment, this Lease and the sums
due under this Lease, including, without limitation the execution of all Uniform
Commercial Code financing statements reasonably requested by Lessor. Lessor and
any assignee of Lessor is authorized if permitted by applicable law to file one
or more Uniform Commercial Code financing statements disclosing any security
interests in the Equipment, this Lease and the sums due under this Lease without
the signature of Lessee or signed by Lessor or any assignee of Lessor as
attorney-in-fact for Lessee. Lessee will pay all costs of filing any financing,
continuation or termination statements with respect to this Lease, including,
without limitation, any documentary stamp taxes relating thereto. Lessee will
do whatever may be reasonably necessary to have a statement of the interest of
Lessor and any assignee of Lessor in the Equipment noted on any certificate of
title relating to the Equipment and will deposit said certificate with Lessor or
such assignee. Lessee shall execute and deliver to Lessor upon request such
other instruments and assurances as Lessor deems necessary or advisable for the
implementation, effectuation, confirmation or perfection of this Lease and any
rights of Lessor hereunder.
13. NON-WAIVER. No course of dealing between Lessor and Lessee or any delay
or omission on the part of Lessor in exercising any rights hereunder shall
operate as a waiver of any rights or Lessor. A waiver on any one occasion shall
not be construed as a bar to or waiver of any right or remedy on any future
occasion. No waiver or consent shall be binding upon Lessor unless it is in
writing and signed by Lessor. To the extent permitted by applicable law, Lessee
hereby waives the benefit and advantage of, and covenants not to assert against
Lessor, any valuation, inquisition, stay, appraisement, extension or redemption
laws now existing or which may hereafter exist which, but for this provision,
might be applicable to any sale or re-leasing made under the judgment, order or
decree of any court or under the powers of sale and re-leasing conferred by this
Lease or otherwise. To the extent permitted by applicable law, Lessee hereby
waives any and all rights and remedies conferred upon a Lessee by Article 2A-508
through 2A-522 of the Uniform Commercial Code, including but not limited to
Lessee's rights to: (i) cancel this Lease; (ii) repudiate this Lease; (iii)
reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover
damages from Lessor for any breaches of warranty or for any other reason; (vi)
claim a security interest in the Equipment in Lessee's possession or control for
any reason; (vii) deduct all or any part of any claimed damages resulting from
Lessor's default; if any, under this Lease; (vii) accept partial delivery of the
Equipment; (ix) "cover" by making any purchase or lease of or contract to
purchase or lease Equipment in substitution of Equipment identified to this
Lease; (x) recover any general, special, incidental, or consequential damages,
for any reason whatsoever; and (xi) specific performance, replevin, detinue,
sequestration, claim, delivery or the like for any Equipment identified to this
Lease. To the extent permitted by applicable law, Lessee also hereby waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages as set forth in paragraph 10 or which may otherwise limit or modify any
of Lessor's rights or remedies under paragraph 10.
14. ENTIRE AGREEMENT; SEVERABILITY; ETC. This instrument and the Schedules and
Riders hereto constitutes the entire agreement between Lessor and Lessee
relating to the Equipment and supersede all prior and contemporaneous
conversations, agreements or representations relating to this Lease of the
Equipment. Lessee acknowledges and agrees that neither the manufacturer,
supplier, shipper, dealer or vendor ("Supplier") nor any salesman,
representative or other agent of Supplier, is an agent of Lessor. No salesman,
representative or agent of Supplier is authorized to bind Lessor or to waive or
alter any term or condition to this Lease and no representation as to the
Equipment or any other matter by a Supplier shall in any way affect Lessee's
duty to pay Rental and perform its other obligations as set forth in this Lease.
If any provision hereof or any remedy herein provided for shall be invalid under
applicable law, such provision or remedy shall be inapplicable and deemed
omitted, but the remaining provisions and remedies hereunder shall be given
effect in accordance with the intent hereof. Neither this Lease not any term
hereof may be changed, discharged, terminated or waived except by an instrument
in writing signed by the party against which enforcement of the change,
discharge, termination or waiver is sought. THIS LEASE SHALL BE DEEMED TO HAVE
BEEN MADE IN THE STATE OF NEW YORK BY VIRTUE OF LESSOR HAVING SIGNED AND
ACCEPTED THIS LEASE IN THE STATE OF NEW YORK, REGARDLESS OF THE ORDER IN WHICH
THE SIGNATURES OF THE PARTIES SHALL BE AFFIXED HERETO, SHALL BE DEEMED TO BE
PERFORMED IN THE STATE OF NEW YORK AND SHALL BE INTERPRETED, AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW OR
CHOICE OF LAW, AND AS PART OF THE CONSIDERATION OF THE LESSOR EXECUTING THIS
LEASE, LESSEE HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY OR
INDIRECTLY FROM THIS LEASE SHALL BE LITIGATED ONLY IN COURTS HAVING SITUS WITHIN
THE STATE OF NEW YORK AND LESSEE HEREBY CONSENTS TO THE JURISDICTION OF ANY
LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK AND WAIVES
THE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON THE LESSEE HEREIN, AND CONSENTS
THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO THE LESSEE AT THE ADDRESS SHOWN ON THE FACE HEREOF WITH
AN ADDITIONAL COPY SENT IN THE SAME MANNER, TO THE SAME ADDRESS, MARKED TO THE
ATTENTION OF LESSEE'S GENERAL COUNSEL AND SERVICE SO MADE SHALL BE COMPLETE FIVE
(5) BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN POSTED AS AFORESAID. LESSEE AND
LESSOR HEREBY WAIVE ANY RIGHT TO A JURY TRIAL WITH RESPECT TO ANY MATTER ARISING
UNDER OR IN CONNECTION WITH THIS LEASE. The captions in this Lease are for
convenience for reference only and shall not define or limit any of the terms or
provisions hereof. This Lease shall inure to the benefit of and be binding upon
Lessor and Lessee and their respective successors and assigns, subject, however,
to the limitations set forth in this Lease with respect to Lessee's assignment
hereof. No right or remedy referred to in this Lease is intended to be exclusive
but each shall be cumulative and in addition to any other right or remedy
referred to in this Lease or otherwise available to Lessor at law or in equity,
and shall be in addition to the provisions contained in any instrument referred
to herein and any instrument in supplement hereto. TIME IS OF THE ESSENCE WITH
RESPECT TO THE OBLIGATIONS OF LESSEE UNDER THIS LEASE.
15. NO PREPAYMENT; INTEREST. In the event Lessor declares all rents and other
amounts payable hereunder to be due and payable pursuant to paragraph 10 above,
Lessee shall, upon demand, be required to pay the full amount demanded pursuant
to said paragraph 10. All amounts due and payable under this Lease (including
past due installments of rent) shall bear interest from and after their
respective due dates, at the lesser of fourteen percent (14%) per annum or the
highest rate permitted by applicable law, provided, however, that Lessee shall
have no obligation to pay any interest on interest except to the extent
permitted by applicable law.
16. 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 or by certified or registered mail,
return receipt requested, to Lessor and Lessee at their respective addresses set
forth at the head of this Lease. Any party hereto may from time to time by
written notice to the other change the address to which notices are sent to such
party.
17. PURCHASE OPTION. Notwithstanding anything contained in the Lease or any
schedule thereto to the contrary, Lessee shall have the option to purchase the
Equipment the subject of any Lease as provided in the Purchase Option Agreement
between Lessor and Lessee.
18. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing under this Lease, Lessee shall be entitled to peaceful and quiet use
and enjoyment of the Equipment during the Term and such peaceful and quiet use
and enjoyment shall not be disturbed by Lessor, Lessor's assignees or any person
claiming by or through Lessor.
19. CERTAIN TAX MATTERS. Notwithstanding anything to the contrary in the
Lease or any schedule thereto, Lessee makes no representation or warranty to
Lessor as to whether the taxing authorities will treat this Lease as an
operating lease or one intended as security nor does Lessee agree to indemnify
Lessor with respect thereto.
20. EARLY TERMINATION. Provided that no Event of Default has occurred and is
continuing under the Lease, Lessee shall be entitled, at its option, upon at
least thirty (30) days prior written notice to Lessor specifying the termination
date, to terminate any Lease prior to the expiration of the Term thereof by
paying to Lessor an amount equal to the present value of the remaining rent
payments as of the termination date discounted at the rate of seven percent (7%)
for all of the Equipment subject to such Lease together with any accrued and
unpaid Rental as of the termination date. Notwithstanding anything to the
contrary contained herein, Lessee shall be permitted to terminate this Lease in
accordance with the provisions in this Section 20 prior to making the first
twelve (12) monthly payments of rent, but only in the event that, due to changes
in the tax laws, Lessee is obligated to pay taxes on or measured by the net
income of Lessor and franchise taxes of Lessor in lieu of such other taxes as
Lessee is otherwise obligated to pay under Section 7(c) of this Lease.
PAGE 4 OF 4
<PAGE>
AMENDMENT TO LEASE OF PERSONAL PROPERTY NO.3402 DATED DECEMBER 12, 1997 (THE
"AGREEMENT") BY AND BETWEEN PSINET INC. AND
CHARTER FINANCIAL, INC.
The Agreement is hereby amended as follows:
1. The first (1/st/) monthly rental payment due on January 15, 1998 shall be
decreased by the amount of $4,533.00, from $164,178.00 to $159,645.00 and the
next thirty-four (34) rental payments commencing with the rental payment due on
February 15, 1998 through and including the monthly rental payment due on
November 15, 2000 shall each be decreased by the amount of $2,267.00, from
$82,089 each to $79,822 each.
2. Except for the decrease in the remaining monthly rental payments as set
forth hereinabove, there are no other modifications or amendments to the
Agreement, which remains in full force and effect.
PSINET INC. CHARTER FINANCIAL,INC.
BY: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE]
------------------------------- --------------------------------
TITLE: CEO & CFO Title: Vice President
---------------------------- -----------------------------
Date: December 16, 1997 Date: December 16, 1997
----------------------------- ------------------------------
<PAGE>
EXHIBIT 10.51
November 3, 1997
Mr. Jack Chidester
1311 Shadow Oak Drive
Malvern, PA 19355
Dear Jack:
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, November 4, 1997.
1. EMPLOYMENT:
A) The Company agrees to employ you as Senior Vice President, US Sales and
Marketing, 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 November 17, 1997,
and remain in the employ of the Company for two years (24 months), 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.
C) In connection with your employment by the Company, your principal place of
employment shall be the greater Washington, D.C. area.
2. COMPENSATION:
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$200,000 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
<PAGE>
installments as the Company regularly pays its other salaried employees, subject
to such deductions and withholdings as may be required by law or by further
agreement with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured in two groups and as follows;
a) $100,000 per year as targeted compensation for achievement of the business
unit objectives, paid for each quarter as achieved.,
b) $100,000 per year as targeted bonus for the contribution by you and your
organization to the overall Company Performance, paid semi-annually.
Furthermore, the first 25% ($50,000) of these targets will be guaranteed, and,
during the period until April 1, 1998 you may request an advance against these
amounts on the basis of 100% achievement (up to $2000,000), provided that such
amount shall be credited against future bonus amounts to be paid and, provided
further, in the event that such targets are not achieved, you shall promptly
repay such portion of the advanced amounts that is in excess of the $50,000
guaranteed amount, plus interest thereon from the date of such advances at 12%
per annum.
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 prorated. 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 125,000 shares of
PSINet Inc.'s common stock (the "Options") pursuant to its Executive Stock
Incentive Plan (the "Plan"). During the period of your first year of employment
you will also be eligible for additional option grants on June 30, 1998 of
25,000, and December 31, 1998 of 50,000 (the "Additional Options"), which will
be granted based upon your achievement of the objectives set forth by the COO.
Such Options shall be evidenced by an option agreement in such form as required
by the Plan. Among other terms and provisions prescribed by the Plan, the option
agreement shall provide that (a) the exercise price of the Options shall be the
price per share of the Company's common stock as reported by the NASDAQ Stock
Market at the close of business on your start date (any subsequent grants such
as the Additional Options shall have as their exercise price the closing NASDAQ
price on the date(s) of their grant, (b) any options shall not be exercisable
after the expiration of ten years from the date such options are granted, and
(c) the options 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
2
<PAGE>
Company's Board of Directors ratifies, no less often than annually, that you
have met the performance standards and criteria set for you for the preceding
period.
In the event a Change of Control, as defined in Section 7 below, while you are
in compliance with the requirements hereof, 50,000 of the unvested stock options
shall vest immediately upon such termination.
3. COMPANY CAR, HOUSING. For the period beginning with the start of your
employment under this Agreement and ending on the earlier of (i) the termination
of this Agreement and (ii) the relocation of your permanent place of residence
to the greater Washington, D.C. area, the Company will make available for your
business use a vehicle and temporary housing accommodations in the Herndon area.
4. 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.
5. TERMINATION:
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 5(c) hereof. Your employment may also be
terminated by the Company at any time without Cause provided the Company shall
have given you one-hundred-eighty (180) days' prior written notice of such
termination. 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.
B) The Company shall have "Cause" for your termination of your employment by
reason of your committing an act materially adversely affecting the Company
which constitutes wanton or willful misconduct, your conviction of a felony, or
any material beach by you of this Agreement
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
3
<PAGE>
interest you may have in such Work Product, including any property rights or
other intellectual property rights pertaining thereto. Upon request of the
Company, you shall take such further actions, including execution and delivery
of instruments of conveyance, as may be appropriate to give full and proper
effect to such assignment.
7. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 7, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
C) As used in this Agreement, "Change in Control" shall mean: (i) the Company
sells all or substantially all of the assets of the Company; or (ii) the
shareholders of the Company approve a merger or consolidation of the Company
with any other corporation (and the Company implements it), other than (A) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent more than
80% of the combined voting power of the voting securities of the Company, or
such surviving entity, outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as defined below) acquires more than 30% of the combined voting power of the
Company's then-outstanding securities; or (iii) any "person," as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than (A) the Company, (B) any corporation
owned, directly or indirectly, by the Company or the shareholders of the Company
in substantially the same proportions as their ownership of stock of the Company
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the combined voting power of the Company's then-outstanding
securities.
8. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this
4
<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 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 November 6, 1998:
By: /s/ Jack Chidester
-------------------
JACK CHIDESTER
5
<PAGE>
EXHIBIT 10.52
January 8, 1998
Mr. William P. Cripe
5312 Broad Brook Court
Centreville, VA 20120-1753
Dear Bill:
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 ratification by the
Company's Board of Directors.
1. EMPLOYMENT:
A) The Company agrees to employ you as Vice President - Human Resources
(subject to Board Approval), reporting to the Chief Financial Officer ("CFO") 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
January 8, 1998, 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
$140,000 per annum. Your base salary shall be subject to additional increases
at the discretion of the Company's Board of Directors. Your base salary shall
be payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
<PAGE>
B) PERFORMANCE BONUS. 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 December 31, 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,
1998 will be a total of up to $40,000.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc. shall
grant you options, subject to Board approval, to purchase 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.
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 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
2
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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 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
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
3
<PAGE>
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 instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. TRANSFERABILITY.
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<PAGE>
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.
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.
5
<PAGE>
WILLIAM P. CRIPE EMPLOYMENT AGREEMENT SIGNATURE PAGE
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/Edward D. Postal
----------------------------------------------
EDWARD D. POSTAL
Sr. Vice President and Chief Financial Officer
Accepted and Agreed to as of January 8, 1998:
---------
By: /s/William P. Cripe
----------------------------------------------
WILLIAM P. CRIPE
6
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EXHIBIT 10.53
January 18, 1998
Ms. Kathleen B. Horne
19095 Loudoun Orchard Road
Leesburg, Virginia 20175
Dear Kathy:
This letter confirms your employment by PSINet Inc. (the "Company"), and sets
forth the terms and conditions which shall govern such employment as outlined
below. This agreement amends the terms of your employment agreement dated March
6, 1996.
1. EMPLOYMENT:
A) The Company hereby employs you as Vice President and Assistant General
Counsel reporting to the Senior Vice President and General Counsel. You accept
the employment and agree to 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 professional legal services to the Company,
as determined by and under the direction of the General Counsel.
B) In connection with your employment by the Company, your principal place of
employment shall be the greater Washington, D.C. area and you shall not be
required permanently to relocate to a principal place of business outside such
area during the term of your employment hereunder.
C) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. TERM OF EMPLOYMENT. The term of the employment shall commence on January
18, 1998, and shall continue for a period of three (3) years.
<PAGE>
3. COMPENSATION:
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$190,000 per annum. On January 1st of each succeeding year during the term of
this Agreement, your base salary shall be increased at a minimum by an amount
equal to 5% of your then current base salary. Your base salary shall be subject
to additional increases at the discretion of the Company's Chairman and CEO.
Your base salary shall be payable in such installments as the Company regularly
pays its other salaried employees, subject to such deductions and withholdings
as may be required by law or by further agreement with you.
B) PERFORMANCE BONUS. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance for the applicable
year. The performance criteria will be issued separately by the Company's
General Counsel, at the beginning of each year, and may be changed, with
fairness, from time to time as situations develop. The performance bonus for
the period ending December 31, 1998 and for subsequent years will be $40,000 or
greater.
C) INCENTIVE STOCK OPTIONS. In the event of a Change of Control, as defined in
Section 8 below, or upon the occasion of your death during the term of this
Agreement while you are in compliance with the requirements hereof, the Company
shall (i)vest immediately all of the unvested stock options you received
pursuant to the terms of your employment agreement dated March 6, 1996, (ii) in
the event that your employment is terminated or continued under conditions not
substantially the same as those called for in this Agreement, the Company shall
provide a loan sufficient to exercise all vested stock options and pay any
required taxes to which you may be subjected as a result, with the terms of the
loan to be no less favorable than installment free for the duration, interest
charged at the IRS minimum rate, with a 5 year balloon payment for interest and
principal.
4. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), revenue bonus plan participation, four weeks' paid
vacation (which can accumulate to a maximum of eight weeks), and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies, and programs.
5. TERMINATION:
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 5(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 6(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated without Cause within the term of your employment, you will be paid
severance pay equal to 26 weeks' salary, plus pro-rata bonus, continued vesting
of options and benefits for the remainder of such period. In addition, your
employment may be terminated by you at any time for any reason, provided you
shall have given the Company at least thirty (30) days' prior written notice of
such termination. By the 30th day the Company must notify you in writing
whether it has elected to use the non-Competition restriction. Such decision
may not be rescinded. Failure of the Company to so notify you shall result in
the non-Competition restriction not being in place.
B) Subject to your compliance with your obligations under Section 6 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any
2
<PAGE>
reason, 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 (unless, in the case of a termination of your
employment by the Company during the term of your employment without Cause, the
payments and benefits to which you would be entitled under paragraph 5(a) would
be greater than those provided in this paragraph 5(b), in which case, paragraph
5(a) shall govern to the extent that such payments and benefits exceed those
specified in paragraph 5(b)) (collectively, the "Termination Payments"): (i)
your then current rate of base salary as provided in Section 3; (ii) all life
insurance and health benefits, disability insurance and benefits and
reimbursement theretofore being provided to you; and (iii) Company
contributions, to the extent permitted by applicable law, to a SEP-IRA, Keogh or
other retirement mechanism selected by you sufficient to provide the same level
of retirement benefits you would have received if you had remained employed by
the 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. If the Company has not elected
to exercise the non-competition restriction, except as otherwise provided in
paragraph 5(a), eight (8) weeks of severance will be paid on your last day of
employment.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 6
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, your
voluntary resignation, or any material breach by you of this Agreement.
6. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of 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)
the general practice of law, either individually or in a private firm practice,
; (ii) writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (iii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iv) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 6(a). The Company
shall respond
3
<PAGE>
to such request within thirty (30) days after receipt. The Company will notify
you in writing if it becomes aware of any breach or threatened breach of any of
the provisions in Section 6(a), and you shall have thirty (30) days after
receipt of such notice in which to cure or prevent the breach, to the extent
that you are able to do so. You and the Company acknowledge that any breach or
threatened breach by you of any of the provisions in Section 6(a) above cannot
be remedied by the recovery of damages, and agree that in the event of any such
breach or threatened breach which is not cured with such 30-day period, the
Company may pursue injunctive relief for any such breach or threatened breach.
If a court of competent jurisdiction determines that you breached any of such
provisions, you shall not be entitled to any Termination Payments from and after
date of the breach. In such event, you shall promptly repay any Termination
Payments previously made plus interest thereon from the date of such payment(s)
at 12% per annum. If, however, the Company has suspended making such Termination
Payments and a court of competent jurisdiction finally determines that you did
not breach such provision or determines such provision to be unenforceable as
applied to your conduct, you shall be entitled to receive any suspended
Termination Payment, plus interest thereon from the date when due at 12% per
annum. The Company may elect (once) to continue paying the Termination Payments
before a final decision has been made by the court.
7. INTELLECTUAL PROPERTY Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
8. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
C) As used in this Agreement, "Change in Control" shall mean: (i) the
shareholders of the Company approve an agreement for the sale of all or
substantially all of the assets of the Company; or (ii) the shareholders of the
Company approve a merger or consolidation of the
4
<PAGE>
Company with any other corporation (and the Company implements it), other than
(A) a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent more than
80% of the combined voting power of the voting securities of the Company, or
such surviving entity, outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as defined below) acquires more than 30% of the combined voting power of the
Company's then-outstanding securities; or (iii) any "person," as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than (A) the Company, (B) any corporation
owned, directly or indirectly, by the Company or the shareholders of the Company
in substantially the same proportions as their ownership of stock of the Company
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
30% or more of the combined voting power of the Company's then outstanding
securities.
9. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5(b).
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
5
<PAGE>
HORNE EMPLOYMENT AGREEMENT SIGNATURE PAGE
Please confirm your agreement with the forgoing by signing and returning
one copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ David N. Kunkel
----------------------------------------------------------
David N. Kunkel, Senior Vice President and General Counsel
Accepted and Agreed to as of
the day first above written:
By: /s/ Kathleen B. Horne
----------------------------------------------------------
Kathleen B. Horne
6
<PAGE>
EXHIBIT 10.54
12 January, 1998
Mr. John B. Muleta
2120 N. Troy Street
Arlington, VA 22201
Dear John:
This letter confirms our offer of your 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 noon on January 15, 1998.
1. EMPLOYMENT:
A) The Company agrees to employ you as a Vice President, reporting initially
to the Senior Vice President and General Counsel of the Company. After
approximately six months, we anticipate that you will be assigned to the PSINet
Telecom group, and will report to this company's Executive Vice President and
Chief Operating Officer (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
about February 16, 1998, 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 Senior Vice President and General
Counsel or the Executive Vice President and Chief Operating Officer.
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
$150,000 per annum. Beginning on January 2, 1999, your base salary shall be
increased at a minimum by an amount equal of 5% of your then current base
<PAGE>
salary. Your base salary shall be guaranteed through 1998, and is subject to
annual or other increases at the discretion of the Company's Board of Directors.
Your base salary shall be payable in such installments as the Company regularly
pays its other salaried employees, subject to such deductions and withholdings
as may be required by law or by further agreement with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance for the applicable
year. The performance criteria will be issued separately by the Chairman of the
Company's Board or the Chief Operating Officer, at the beginning of each year,
with mutual fairness, from time to time as situations develop. The performance
bonus_ for the period ending December 31, 1998 will be a total of up to $50,000,
in two tiers, the first being up to $25,000, decided upon on June 30,1998, and
the second being up to $25,000 being decided upon by December 31, 1998.
Separate criteria will be established for your entitlement for each tier's bonus
money.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc.
shall grant you options, subject to Board approval, to purchase forty-eight
thousand (48,000) 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.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), revenue bonus plan participation, 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 without cause during 1998, you will be paid severance pay,
plus pro-rate bonus and benefits for the remainder of the year. Thereafter, if
your employment is terminated without cause, you will be entitled to ninety (90)
days' salary, pro-rata bonus, and benefits. 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 twenty-four (24)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 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 24-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.
C) The Company shall have "Cause" for 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 twenty-
four (24) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself
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or for any other person, firm or corporation, manage, operate, control,
participate in the management, operation or control of or be employed by any
other person or entity which is engaged in providing Internet-related network or
communications services competitive with the Internet-related network or
communication services offered to customers by the Company as of the date of
termination or within six (6) months thereafter. The foregoing shall in no event
restrict you from: (i) writing or teaching, whether on behalf of for-profit, or
not-for-profit institution(s); (ii) investing (without participating in
management or operation) in the securities of any private or publicly traded
corporation or entity; or (iii) after termination of employment, becoming
employed by a hardware, software or other vendor to the Company, provided that
such vendor does not offer network or communication services that are
competitive with the Internet-related network or communications services offered
by the Company as of the date of termination of employment or within six (6)
months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 5(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of any of the provisions
in Section 5(a) above cannot be remedied by the recovery of damages, and agree
that in the event of any such breach or threatened breach which is not cured
with such 30-day period, the Company may pursue injunctive relief for any such
breach or threatened breach. If a court of competent jurisdiction determines
that you breached any of such provisions, you shall not be entitled to any
Termination Payments from and after date of the breach. In such event, you
shall promptly repay any Termination Payments previously made plus interest
thereon from the date of such payment(s) at 12% per annum. If, however, the
Company has suspended making such Termination Payments and a court of competent
jurisdiction finally determines that you did not breach such provision or
determines such provision to be unenforceable as applied to your conduct, you
shall be entitled to receive any suspended Termination Payment, plus interest
thereon from the date when due at 12% per annum. The Company may elect (once)
to 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
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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
requested, addressed to the party intended to be notified at the address of such
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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/David N. Kunkel
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DAVID N. KUNKEL, SENOR VICE PRESIDENT AND GENERAL COUNSEL
By: /s/Harold S. Wills
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HAROLD S. WILLS, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER
Accepted and Agreed to as of January 14, 1998:
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By: /s/ John B. Muleta
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JOHN B. MULETA
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EXHIBIT 10.62
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made as of the
25th day of February, 1998 by and between PSINet Inc., a New York corporation
(the "Company"), and IXC Internet Services, Inc., a Delaware corporation
("IXC").
WITNESSETH:
WHEREAS, the Company and IXC have entered into an IRU and Stock Purchase
Agreement dated as of July 22, 1997, as amended, supplemented or modified (the
"IRU Agreement"), pursuant to which the Company will issue to IXC shares of
Common Stock.
WHEREAS, it is a condition precedent to the consummation of the
transactions under the IRU Agreement that this Agreement be entered into.
WHEREAS, the Company has previously granted registration rights to certain
other holders of the Company's securities pursuant to the Amended and Restated
Registration Rights Agreement, the 2/8/95 Registration Rights Agreement, the
6/16/95 Registration Rights Agreement, the 7/11/95 Registration Rights Agreement
and the 9/19/96 Registration Rights Agreement.
WHEREAS, it is the intention of the parties to this Agreement that the
registration rights granted hereunder shall rank ratably with the registration
rights under the Amended and Restated Registration Rights Agreement, the 2/8/95
Registration Rights Agreement, the 6/16/95 Registration Rights Agreement, the
7/11/95 Registration Rights Agreement and the 9/19/96 Registration Rights
Agreement and with registration rights to be granted under other agreements as
more fully provided in Section 2.6 hereof.
WHEREAS, certain defined terms are set forth in Article I hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and in consideration of the mutual
covenants contained herein and for other good and available consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
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ARTICLE I
DEFINITIONS
SECTION 1.1 CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"Amended and Restated Registration Rights Agreement" shall mean the Amended
and Restated Registration Rights Agreement dated as of January 17, 1995 among
the Company and the other parties thereto, as the same has been and hereafter
may be amended from time to time to add additional parties signatory thereto.
"Closing" shall mean the closing of the transactions contemplated under the
IRU Agreement as more specifically defined therein.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $.01 par value per share, of
the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Existing Registration Rights" shall have the meaning set forth in Section
2.7 hereof.
"Other Registration Rights" shall have the meaning set forth in Section 2.7
hereof.
"Person" shall mean any individual, corporation, partnership, firm, joint
venture, association, limited liability company, trust, unincorporated
organization, or other entity.
"Primary offering" shall have the meaning set forth in Section 2.1 hereof.
"Registrable Securities" shall have the meaning set forth in Section 2.4
hereof.
"Secondary offering" shall have the meaning set forth in Section 2.1
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"2/8/95 Registration Rights Agreement" shall mean the Registration Rights
Agreement dated as of February 8, 1995 among the Company and the other parties
thereto, as the same
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may be amended from time to time and, to the extent, if any, the same shall be
in effect on the date hereof and remain in effect from time to time hereafter.
"6/16/95 Registration Rights Agreement" shall mean the Registration Rights
Agreement dated as of June 16, 1995 among the Company and the other parties
thereto, as the same may be amended from time to time and, to the extent, if
any, the same shall be in effect on the date hereof and remain in effect from
time to time hereafter.
"7/11/95 Registration Rights Agreement" shall mean the Registration Rights
Agreement dated as of July 11, 1995 among the Company and the other parties
thereto, as the same may be amended from time to time and, to the extent, if
any, the same shall be in effect on the date hereof and remain in effect from
time to time hereafter.
"9/19/96 Registration Rights Agreement" shall mean the Registration Rights
Agreement dated as of September 19, 1996 between the Company and The Chatterjee
Management Company, as the same may be amended from time to time and, to the
extent, if any, the same shall be in effect on the date hereof and remain in
effect from time to time hereafter.
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1 OPTIONAL REGISTRATIONS
If at any time or times after the date hereof (so long as IXC shall own
Registrable Securities which are not eligible for sale by IXC under Rule 144(k)
of the Securities Act), the Company shall determine to register any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
shares of the Common Stock under the Securities Act (whether in connection with
a public offering of securities by the Company (a "primary offering"), a public
offering of securities by shareholders (a "secondary offering"), or both, but
not in connection with a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 or any other similar rule of the
Commission under the Securities Act is applicable), the Company will promptly
give written notice thereof to IXC. In connection with any such registration,
if within 30 days after receipt of such notice IXC requests the inclusion of
some or all of the Registrable Securities in such registration, the Company,
subject to Section 2.7 hereof, will use its reasonable best efforts to effect
the registration under the Securities Act of all such Registrable Securities;
provided, that such registration is in connection with an underwritten public
offering; and provided, further, that, if the underwriter determines that the
registration of securities in excess of any amount to be registered by the
Company would adversely affect such offering then the Company may (subject to
the allocation priority set forth below) exclude from such registration and
underwriting some or all of the Registrable Securities which would otherwise be
underwritten pursuant to the notice described herein. The Company shall advise
IXC promptly after such determination by the underwriter, and the number of
shares
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of securities that are entitled to be included in the registration and
underwriting shall be allocated in the following manner: the securities to be
sold by the Company shall be included in such registration and underwriting,
and, subject to Section 2.7 hereof, the number of additional shares that may be
included in the registration and underwriting shall be allocated among IXC and
all holders of other securities having registration rights granted by the
Company requesting that such other securities be included in such registration
and underwriting in proportion, as nearly as practicable, to their respective
holdings of Registrable Securities and such other securities. All expenses of
the registration and offering shall be borne by the Company, except that IXC and
all holders of other securities having registration rights granted by the
Company shall bear underwriting and selling discounts and commissions
attributable to their Registrable Securities or such other securities, as the
case may be, being registered, transfer taxes on shares being sold by IXC or the
other holders, as the case may be, and all fees and expenses of counsel for IXC
and such holders, as the case may be. Without in any way limiting the types of
registrations to which this Section 2.1 shall apply, in the event that the
Company shall effect a "shelf registration" under Rule 415 of the Securities Act
or any other similar rule or regulation, the Company shall take all necessary
action, including, without limitation, the filing of post-effective amendments,
to permit IXC to include its shares in such registration in accordance with the
terms of this Section 2.1.
SECTION 2.2 REQUIRED REGISTRATIONS
At any time or times after the date hereof (so long as IXC shall own
Registrable Securities which are not eligible for sale by IXC under Rule 144(k)
of the Securities Act), IXC may notify the Company in writing that it (i)
intends to offer or cause to be offered for public sale all or any portion of
its Registrable Securities (such requests shall be in writing and shall state
the number of shares of Registrable Securities to be disposed of and the
intended method of disposition of such shares by IXC) and (ii) request that the
Company cause such Registrable Securities to be registered under the Securities
Act; provided, however, that IXC may make only three requests for registration
under this Section 2.2. Upon receipt of such notification, subject to Section
2.7 hereof, the Company will notify all of the Persons who would be entitled to
notice of a proposed registration under Existing Registration Rights or Other
Registration Rights of its receipt of such notification. Upon the written
request of any such Person delivered to the Company within 30 days after receipt
from the Company of such notification, the Company will use its reasonable best
efforts to cause such Registrable Securities as may be requested by IXC or such
securities as may be requested by any such Person to be registered under the
Securities Act within 125 days of the notification by IXC, in accordance with
the terms of this Section 2.2; provided, however, that unless such registration
becomes effective and remains in effect for 60 days, such registration shall not
be counted as one of the three requests for registration that may be made by IXC
under this Section 2.2. IXC shall have the right to select the investment
banker(s) and manager(s) (which shall be of national standing and reputation) to
administer any underwritten public offering under this Section 2.2, subject to
the execution and delivery by such investment banker(s) to the Company of a
confidentiality agreement in form and substance satisfactory to the Company. If
requested in writing by the Company, IXC and the other Persons participating in
a registration under this Section 2.2 shall negotiate in good faith with
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any underwriters retained in connection with the underwriting of such
registration. In the case of the registration of Registrable Securities in
connection with an underwritten public offering under this Section 2.2, if the
underwriter determines that the registration of securities in excess of an
amount determined by such underwriter would adversely affect such offering, then
the Company may (subject to the allocation priority set forth below) exclude
from such registration and underwriting some or all of the Registrable
Securities and other securities which would otherwise be underwritten pursuant
to this Section 2.2. The Company shall advise IXC and the other Persons who
requested to participate in such registration promptly after such determination
by the underwriter, and the number of securities that are entitled to be
included in the registration and underwriting shall be allocated in the
following manner: subject to Section 2.7 hereof, the number of securities that
may be included in the registration and underwriting shall be allocated among
IXC and such other Persons requesting that Registrable Securities or other
securities be included in such registration and underwriting in proportion, as
nearly as practicable, to their respective holdings of Registrable Securities
and other securities; provided, however, that if the number of Registrable
Securities pursuant to such registration shall be reduced to a number which is
less than 80% of the number of Registrable Securities as to which IXC requested
registration pursuant to this Section 2.2, then such registration shall not be
counted as one of the three requests for registration that may be made by IXC
under this Section 2.2. All expenses of such registration and offering and the
reasonable fees and expenses of one independent counsel for IXC and the other
Persons who requested to participate in such registration shall be borne by the
Company; provided, however, that (i) the Company shall have no liability for
such expenses if such registration does not become effective due solely to the
action or failure to act of IXC and (ii) IXC and other Persons who requested to
participate in such registration shall bear underwriting and selling discounts
and commissions attributable to their Registrable Securities or other securities
being registered and transfer taxes on shares being sold by them. The Company
may postpone the filing of any registration statement required hereunder for a
reasonable period of time, not to exceed 90 days during any 12 month period of
time, if the Company has been advised by legal counsel that such filing would
require the disclosure of a material transaction or other matter and the Company
determines reasonably and in good faith that such disclosure would have a
material adverse effect on the Company. Notwithstanding anything in this Section
2.2 to the contrary, the Company shall not be required to effect a registration
under this Section 2.2 more than 135 days following the end of the Company's
fiscal year, if such registration shall require the preparation of audited
financial statements for any interim period not otherwise prepared by the
Company. If a demand registration is requested during such period, subject to
the second preceding sentence, the Company will commence such registration
promptly following the end of the next fiscal year. The Company will enter into
customary agreements (including underwriting agreements) reasonably acceptable
to the Company to facilitate the demand registrations provided for above.
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SECTION 2.3 FORM S-3 SHELF REGISTRATION
IXC shall have the right to request and have effected up to one
registration every six months of Registrable Securities on Form S-3 or any
successor form or, if Form S-3 or any successor form is not available, any
appropriate form under the Act (the "Shelf Registration Statement") for an
offering to be made on a continuous basis covering all the Registrable
Securities (the "Shelf Registration") (such request shall be in writing and
shall state the number of shares of Registrable Securities to be disposed of and
the intended method of disposition of such shares by IXC) provided that the
Registrable Securities for which such registration is requested are not eligible
for sale by IXC under Rule 144(k) of the Securities Act. Subject to the
provisions of applicable law, the Company will use its reasonable best efforts
to (i) file the Shelf Registration Statement to effect the registration of all
shares of Registrable Securities within 30 days of such request and (ii) cause
the Shelf Registration Statement to become effective under the Act on or prior
to the date 45 days from the date of filing and (iii) keep the Shelf
Registration Statement continuously effective for 60 days from the date the
Registration Statement becomes effective under the Act. All expenses in
connection with a registration requested pursuant to this Section 2.3 shall be
borne by the Company; provided, however, that (i) the Company shall have no
liability for such expenses if such registration does not become effective due
solely to the action or failure to act of IXC and (ii) IXC shall bear
underwriting and selling discounts and commissions, if any, attributable to its
Registrable Securities being registered, transfer taxes on shares being sold by
it and all fees and expenses of its counsel. The Company may postpone the filing
of any registration statement required hereunder for a reasonable period of
time, not to exceed 90 days, if the Company has been advised by legal counsel
that such filing would require the disclosure of a material transaction or other
factor which would not otherwise be required to be disclosed at such time and
the Company determines reasonably and in good faith that such disclosure would
have a material adverse effect on the Company with respect to the registration
of the Registrable Securities. The shelf-registration statement may also include
securities held or to be held by other holders of the Company's securities.
SECTION 2.4 REGISTRABLE SECURITIES
For purposes of this Agreement, the term "Registrable Securities" shall
mean the Common Stock issued or issuable under the IRU Agreement and any Common
Stock issued or issuable with respect thereto by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization.
SECTION 2.5 FURTHER OBLIGATIONS OF THE COMPANY
Whenever the Company is required under this Article II to register any
Registrable Securities, it agrees that it shall also do the following:
(a) Use its reasonable best efforts to diligently prepare and file
with the Commission a registration statement and such amendments and supplements
to said registration
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statement and the prospectus used in connection therewith as may be necessary to
keep said registration statement effective (but, in the case of a registration
under this Agreement, for no more than 60 days after the initial effective date
of the registration statement) and to comply with the provisions of the
Securities Act with respect to the sale of securities covered by said
registration statement for the period necessary to complete the proposed public
offering; provided, however, the Company may suspend the effectiveness of any
registration statement filed hereunder for a reasonable period of time, not to
exceed 90 days, if the Company has been advised by legal counsel that
maintaining such effectiveness would require the disclosure of a material
transaction or other matter and the Company determines reasonably and in good
faith that such disclosure would have a material adverse effect on the Company;
provided, further, that in the event of any such suspension of effectiveness,
the 60 day period of effectiveness required above shall be deemed tolled for the
number of days the effectiveness of such registration statement was suspended
and, if any securities covered by such registration statement remain unsold, the
Company shall thereafter take all necessary actions, including, without
limitation, the filing of post-effective amendments, to cause such registration
statement to become effective for the remainder of such 60 day period;
(b) Furnish to IXC such copies of each preliminary and final
prospectus and such other documents as IXC may reasonably request to facilitate
the public offering of its Registrable Securities;
(c) Use its reasonable best efforts to register or qualify the
securities covered by said registration statement at the Company's expense under
the securities or "blue-sky" laws of such jurisdiction as IXC may reasonably
request, provided that the Company shall not be required to register or qualify
the securities in any jurisdictions which require it to qualify to do business
or subject itself to taxation or general service of process therein;
(d) Immediately notify IXC, at any time when a prospectus relating to
its Registrable Securities is required to be delivered under the Securities Act,
of any stop order issued or threatened by the Commission or of the happening of
any event as a result of which such prospectus contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and, at the request of IXC, prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading;
(e) Cause all such Registrable Securities to be listed on NASDAQ or
included in each securities exchange or quotation system on which similar
securities issued by the Company are then listed;
(f) Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission and make generally available
to its security holders, in each case as soon as practicable, but not later than
30 days after the close of the period covered
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thereby, an earnings statement of the Company which will satisfy the provisions
of Section 11(a) of the Securities Act; and
(g) Choose the underwriters (except as otherwise provided in Section
2.2 hereof), auditors, Company legal counsel and financial printer to be engaged
by the Company in any such registration.
SECTION 2.6 NO TRANSFER OF REGISTRATION RIGHTS
The registration rights of IXC under this Agreement may not be transferred
or assigned except to IXC Communications, Inc. or a controlled affiliate of IXC
Communications, Inc.; provided that such transferee shall have entered into an
agreement substantially the same as that set forth in Section 15.8 of the IRU
Agreement.
SECTION 2.7 PRIOR AND OTHER REGISTRATION RIGHTS AGREEMENTS
Notwithstanding any provision hereof to the contrary, the provisions of
this Article II: (i) shall rank ratably with the registration rights granted
under the Amended and Restated Registration Rights Agreement (the "Amended
Registration Rights") and, to the extent the provisions of this Article II
conflict or are inconsistent with any such Amended Registration Rights, such
conflict or inconsistency shall be resolved in a manner which, to the greatest
extent reasonably feasible, affords IXC and the holders of such Amended
Registration Rights, the ratable benefits of this Article II and such Amended
Registration Rights; (ii) shall rank ratably with the registration rights
granted under the 2/8/95 Registration Rights Agreement (the "2/8/95 Registration
Rights") and, to the extent the provisions of this Article II conflict or are
inconsistent with any such 2/8/95 Registration Rights, such conflict or
inconsistency shall be resolved in a manner which, to the greatest extent
reasonably feasible, affords IXC and the holders of the 2/8/95 Registration
Rights, the ratable benefits of this Article II and such 2/8/95 Registration
Rights; (iii) shall rank ratably with the registration rights granted under the
6/16/95 Registration Rights Agreement (the "6/16/95 Registration Rights") and,
to the extent the provisions of this Article II conflict or are inconsistent
with any such 6/16/95 Registration Rights, such conflict or inconsistency shall
be resolved in a manner which, to the greatest extent reasonably feasible,
affords IXC and the holders of the 6/16/95 Registration Rights, the ratable
benefits of this Article II and such 6/16/95 Registration Rights; (iv) shall
rank ratably with the registration rights granted under the 7/11/95 Registration
Rights Agreement (the "7/11/95 Registration Rights") and, to the extent the
provisions of this Article II conflict or are inconsistent with any such 7/11/95
Registration Rights, such conflict or inconsistency shall be resolved in a
manner which, to the greatest extent reasonably feasible, affords IXC and the
holders of the 7/11/95 Registration Rights, the ratable benefits of this Article
II and such 7/11/95 Registration Rights; (v) shall rank ratably with the
registration rights granted under the 9/19/96 Registration Rights Agreement (the
"9/19/96 Registration Rights") and, to the extent the provisions of this Article
II conflict or are inconsistent with any such 9/19/96 Registration Rights, such
conflict or inconsistency shall be resolved in a manner which, to the greatest
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extent reasonably feasible, affords IXC and the holders of the 9/19/96
Registration Rights, the ratable benefits of this Article II and such 9/19/96
Registration Rights; and (vi) shall rank ratably with the registration rights to
be granted under any other agreement in connection with the original issuance of
any other capital stock of the Company (the "Other Registration Rights") and, to
the extent the provisions of this Article II shall conflict with any such Other
Registration Rights, such conflict shall be resolved in a manner which, to the
greatest extent reasonably feasible, affords IXC and the holders of such Other
Registration Rights, the ratable benefits of the provisions of this Article II
and such Other Registration Rights.
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
SECTION 3.1 INDEMNIFICATION
Incident to any registration statement referred to in this Agreement, and
subject to applicable law, the Company will indemnify and hold harmless each
underwriter, IXC (including its directors, officers, employees and agents), and
each person who controls any of them within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement
(including any related preliminary or definitive prospectus, or any amendment or
supplement to such registration statement or prospectus), (ii) any omission or
alleged omission to state in such document a material fact required to be stated
in it or necessary to make the statements in it not misleading, or (iii) any
violation by the Company of the Securities Act, any state securities or "blue
sky" laws or any rule or regulation thereunder in connection with such
registration; provided, however, that the Company will not be liable to the
extent that such loss, claim, damage, expense or liability (x) arises from and
is based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information furnished in
writing to the Company by or on behalf of such underwriter, IXC or controlling
person expressly for use in such registration statement or (y) provided that the
Company has theretofore timely prepared all necessary prospectus supplements or
amendments and provided them to IXC or its representative, arises from the
failure of IXC or any underwriter to comply with such prospectus delivery
requirements as are applicable to it. With respect to losses, claims, damages,
expenses and liabilities arising out of or based upon such untrue statement or
omission or alleged untrue statement or omission in the information furnished in
writing to the Company by or on behalf of IXC expressly for use in such
registration statement or such failure to comply with such prospectus delivery
requirements, IXC will indemnify and hold harmless each underwriter, the
9
<PAGE>
Company (including its directors, officers, employees and agents), and each
person who controls any of them within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages, expenses and liabilities, joint or several, to which
they, or any of them, may become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, at common law or
otherwise to the same extent provided in the immediately preceding sentence. In
no event, however, shall the liability of IXC for indemnification under this
Section 3.1 exceed the proceeds received by it from its sale of Registrable
Securities under such registration statement.
SECTION 3.2 CONTRIBUTION
If the indemnification provided for in Section 3.1 above for any reason is
held by a court of competent jurisdiction to be unavailable to an indemnified
party in respect of any losses, claims, damages, expenses or liabilities
referred to therein, then each indemnifying party under this Article III, in
lieu of indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, expenses or liabilities in such proportion as is appropriate to
reflect the relative benefits received by the Company, IXC and the underwriters
from the offering of the Registrable Securities as well as the relative fault of
the Company, IXC and the underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company, IXC and the underwriters shall be
deemed to be in the same respective proportions as the net proceeds from the
offering (before deducting expenses) received by the Company and IXC and the
underwriting discount received by the underwriters, in each case as set forth in
the table on the cover page of the applicable prospectus, bear to the aggregate
public offering price of the Registrable Securities. The relative fault of the
Company, IXC and the underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, IXC or the underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and IXC agree that it would not
be just and equitable if contribution pursuant to this Section 3.2 were
determined by pro rata or per capita allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this paragraph. In no event, however, shall IXC be required to contribute
any amount under this Section 3.2 in excess of the proceeds received by it from
its sale of Registrable Securities under such registration statement. No person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
SECTION 3.3 EXPENSES, ETC.
(a) The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in this Article III
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such
10
<PAGE>
indemnified party in connection with investigating or defending any such action
or claim. The indemnification and contribution provided for in this Article III
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified parties or any officer, director, employee, agent
or controlling person of the indemnified parties.
(b) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in an underwriting agreement
entered into in connection with any registration statement referred to in this
Agreement are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
ARTICLE IV
RULE 144
SECTION 4.1 RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of the Registrable
Securities to the public without registration, the Company agrees to: (i) at all
times make and keep public information available as those terms are understood
and defined in Rule 144 under the Securities Act (and any successor rule to Rule
144); (ii) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and (iii) furnish to IXC as promptly as possible upon its request a written
statement by the Company confirming its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act, a copy
of the most recent annual or quarterly report of the Company, and any other
reports and documents so filed as IXC may reasonably request in availing itself
of any rule or regulation of the Commission allowing it to sell any such
securities without registration.
SECTION 4.2 USE OF RULE 144
IXC shall endeavor to sell its Registrable Securities whenever possible in
transactions pursuant to Rule 144 under the Securities Act (and any successor
rule to Rule 144) rather than pursuant to registrations effected under this
Agreement so long as such sales may be effected in compliance with the
requirements of Rule 144 (or any successor rule to Rule 144).
11
<PAGE>
ARTICLE V
GENERAL
SECTION 5.1 GRANTING OF RIGHTS AGREEMENTS
The Company shall not grant any registration rights in respect of any
shares of capital stock of the Company or other securities of the Company if
such rights would be superior to the registration rights granted to IXC under
this Agreement; provided, however, that IXC hereby consents and agrees that 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 IXC.
SECTION 5.2 AMENDMENTS, WAIVERS AND CONSENTS
For purposes of this Agreement and all agreements, documents and
instruments executed pursuant hereto, except as otherwise specifically set forth
herein or therein, no course of dealing between the Company and IXC and no delay
on the part of any party hereto in exercising any rights hereunder or thereunder
shall operate as a waiver of the rights hereof or thereof. No covenant or other
provision hereof or thereof may be waived or amended other than by a written
instrument signed by the party so waiving or amending such covenant or other
provision. Any waiver or amendment affected in accordance with this Section 5.2
shall be binding upon IXC and the Company at the time such waiver or amendment
is effected.
SECTION 5.3 SURVIVAL OF COVENANTS; ASSIGNABILITY OF RIGHTS
All covenants and agreements of the Company or IXC made herein shall
survive until fully discharged; provided, however, that notwithstanding any
provision of this Agreement to the contrary, in no event shall IXC be entitled
to any registration rights hereunder to the extent that it could sell pursuant
to Rule 144(k) under the Securities Act Registrable Securities which it desires
to register under the Securities Act pursuant to Sections 2.1, 2.2 or 2.3 hereof
or at any time after one year following the date at which the IRU Agreement is
no longer in effect. This Agreement may not be assigned by IXC except as set
forth in Section 2.6. All covenants and agreements of the Company herein shall
bind the Company's successors and assigns, whether so expressed or not, and,
except as otherwise provided in this Agreement, all such covenants and
agreements shall inure to the benefit of IXC's successors and assigns.
SECTION 5.4 GOVERNING LAW
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
12
<PAGE>
SECTION 5.5 HEADINGS
The headings used in this Agreement have been inserted for reference
purposes only and shall not control or affect in any manner the meaning or
interpretation of any provision of this Agreement.
SECTION 5.6 PRONOUNS
All pronouns and any variation thereof, shall be deemed to refer to the
masculine, feminine or neuter, singular or plural, as the identity of the person
or persons may require.
SECTION 5.7 NOTICES AND DEMANDS
Any notice or demand which, by any provision of this Agreement or any
agreement, document or instrument executed pursuant hereto or thereto, except as
otherwise provided therein, is required or provided to be given shall be deemed
to have been sufficiently given or served and received for all purposes when
delivered or 5 days after being sent by certified or registered mail, postage
and charges prepaid, return receipt requested, or by express delivery providing
receipt of delivery, to the following addresses: if to the Company, at 510
Huntmar Park Drive, Herndon, Virginia 20170, or at such other address designated
by the Company to IXC in writing; if to IXC, at its mailing address maintained
on the books and records of the Company, or at such other address designated by
IXC to the Company in writing.
SECTION 5.8 SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the remaining provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted. All provisions of this
Agreement shall be enforced to the full extent permitted by law.
SECTION 5.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes and cancels all other
prior agreements, understandings, negotiations and discussions, whether written
or oral, relating to the subject matter hereof.
SECTION 5.10 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original, and all of which together shall be deemed one
and the same instrument.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
PSINet Inc.
By: /s/ David N. Kunkel
--------------------------------
Name: David N. Kunkel
Title: Senior Vice President, General
Counsel and Secretary
Accepted and Agreed as of the
date first above written.
IXC Internet Services, Inc.
By: /s/ Jeffrey C. Smith
--------------------------------
Name: Jeffrey C. Smith
Title: Senior Vice President
14
<PAGE>
Exhibit 10.74
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
This Third Amendment to Amended and Restated Credit Agreement ("Agreement")
is made as of this 29 day of January, 1998 by and between PSINet Inc. (f/k/a
Performance Systems International, Inc.), a New York corporation ("PSI"), (PSI
hereinafter sometimes referred to as "Borrower" or "Borrowers"), and Fleet
National Bank, formerly known as Fleet National Bank of Connecticut, successor
by merger to Fleet Bank of Massachusetts, N.A. (hereinafter referred to as the
"Bank"), as lender.
WHEREAS, as of November 30, 1994, PSI and the Bank entered into a Credit
Agreement (the "Original Credit Agreement");
WHEREAS, as of March 24, 1995, PSI and the Bank entered into an amendment
to the Original Credit Agreement (the "First Amendment to Credit Agreement") to
(i) increase the term credit from $2,000,000 to $8,500,000, (ii) add the then
newly-acquired PSINet Pipeline New York, Inc. ("Pipeline") as a guarantor and
(iii) otherwise amend the Original Credit Agreement, all as set forth in the
First Amendment to Credit Agreement;
WHEREAS, as of November 10, 1995, PSI, InterCon Systems Corporation
("InterCon"), Software Ventures Corporation ("Software") and the Bank entered
into an Amended and Restated Credit Agreement (the "Amended and Restated Credit
Agreement") which amended and restated the terms of the Original Credit
Agreement as amended by the First Amendment to Credit Agreement to (i) increase
the revolving credit from $1,500,000 to $5,000,000, (ii) add Software and
InterCon as borrowers under the revolving credit (to the extent provided
therein), (iii) increase the term credit from $8,500,000 to $13,500,000 and (iv)
make certain other changes, all as set forth in the Amended and Restated Credit
Agreement;
WHEREAS, on or about April 8, 1996, Software merged with and into InterCon,
with InterCon as the surviving entity;
WHEREAS, as of August 13, 1996, PSI, InterCon and the Bank entered into a
First Amendment to the Amended and Restated Credit Agreement (the "First
Amendment to Amended and Restated Credit Agreement") to (i) increase the term
credit from $13,500,000 to $18,500,000, (ii) extend the Term Credit Expiration
Date to June 30, 1997, and (iii) make certain other changes, all as set forth in
the First Amendment to Amended and Restated Credit Agreement;
WHEREAS, as of February 1, 1997, PSI and the Bank entered into a Second
Amendment to Amended and Restated Credit Agreement (the "Second Amendment to
Amended and Restated Credit Agreement) to (i) consent to the sale of the stock
of InterCon and to release all obligations of InterCon and Software to the Bank,
including without limitation, all guarantees and security interests, and (ii)
make certain other charges, all as set forth in the Second Amendment to Amended
and Restated Credit Agreement;
<PAGE>
WHEREAS, on or about June, 1996, the assets of Pipeline were sold; and
WHEREAS, the Borrowers and the Bank now desire to further amend the Amended
and Restated Credit Agreement (as amended by the First Amendment to Amended and
Restated Credit Agreement and the Second Amendment to Amended and Restated
Credit Agreement, hereinafter referred to as the "Credit Agreement") to (i)
establish a new acquisition term credit in the original principal amount of
$20,000,000 to finance the purchase of stock of iSTAR Internet Inc., a Canadian
company, and for working capital, (ii) extend the expiration date of the
revolving credit to March 31, 1998, (iii) cause delivery to the Bank of an
outstanding letter of credit issued by the Bank on December 31, 1997, as amended
to date, and (iv) make certain other changes, all as set forth in this
Agreement. Unless otherwise defined herein, capitalized terms used herein shall
have the meanings ascribed to them in the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. The terms "Borrower" and "Borrowers" as used in the Credit Agreement,
as amended by this Agreement, shall, for all purposes, from and after the date
hereof have the meaning set forth in the first paragraph of this Agreement, and
if at any time there is only a single "Borrower," references to "Borrowers"
shall be deemed to refer only to such single "Borrower." All references in the
Credit Agreement to "Agreement" shall from and after the date hereof mean the
Credit Agreement as amended by this Agreement.
2. Section 1.01 of the Credit Agreement is hereby amended by deleting
said section in its entirety and substituting therefore the following:
Section 1.01. The Credit.
------------ ----------
Subject to the terms and conditions hereof, and in
reliance on the representations and warranties contained herein,
the Bank hereby establishes a credit facility in favor of the
Borrower in the aggregate maximum principal amount of
$43,500,000, as set forth below (the "Credit"). The Credit shall
consist of (a) a secured equipment term credit in favor of PSI in
the maximum principal amount of $18,500,000 (the "Term Credit"),
(b) a secured revolving line of credit in favor of the Borrower
in the maximum principal amount of $5,000,000 (the "Revolving
Credit") and (c) a secured acquisition term credit in favor of
the Borrower in the maximum principal amount of $20,000,000 (the
"Acquisition Credit"). The Borrower acknowledges that the Term
Credit Expiration Date has occurred and that no further Term
Credit Advances shall be permitted hereunder.
2
<PAGE>
3. The Credit Agreement is hereby amended by inserting the following new
section "Section 1.02A. The Acquisition Credit." between "Section 1.02. The
------------- ---------------------- ------------ ---
Term Credit." and "Section 1.03. The Revolving Credit.":
- ----------- ------------ --------------------
Section 1.02A. The Acquisition Credit.
------------- ----------------------
(a) Terms of Acquisition Credit. Subject to the terms and conditions
---------------------------
hereof, and provided no Event of Default, or event which with the passage
of time or giving of notice or both would become an Event of Default, has
occurred, on January 29, 1998 (the "Acquisition Credit Funding Date") the
Bank shall loan the Borrower the Acquisition Credit.
(b) The Acquisition Credit Note. All amounts owed by the Borrower
---------------------------
with respect to the Acquisition Credit shall be evidenced by promissory
note of the Borrower in the original principal amount of the Acquisition
Credit, dated the Acquisition Credit Funding Date and substantially in the
form of Exhibit 1.02A(b) attached to this Agreement (the "Acquisition
----------------
Credit Note").
(c) Payment of the Acquisition Credit. Unless sooner prepaid
---------------------------------
pursuant to Section 1.02A(e) hereof or accelerated pursuant to Article V
hereof, the Borrower shall repay the entire balance of the Acquisition
Credit Note (including principal, all accrued but unpaid interest
(including any interest accruing at the default rate) and any other amounts
then due), without premium or penalty, on the earlier of (i) the
consummation of a public offering of debt or equity securities of the
Borrower for the account of the Borrower, or (ii) July 31, 1998 (the
"Acquisition Credit Maturity Date"). Interest shall be payable on the
Acquisition Credit Note as provided in Section 1.02A(d).
(d) Interest. The Acquisition Credit Note shall bear interest prior
--------
to maturity or the occurrence of an Event of Default (computed on the basis
of actual days elapsed over a 360-day year) on the unpaid principal balance
outstanding from time to time at a rate per annum equal to the Prime Rate
plus 1.375%. Interest on the Acquisition Credit Note shall be payable
monthly in arrears on the first day of each succeeding month commencing
March 1, 1998. After maturity, or after the occurrence of an Event of
Default and until such Event of Default shall have been cured or waived in
writing by the Bank, the unpaid principal balance of the Acquisition Credit
Note shall bear interest at the Prime Rate plus 3.375%.
(e) Prepayment. The unpaid principal balance of the Acquisition
----------
Credit Note may be voluntarily prepaid upon prior written notice in whole
or in part without premium or penalty.
3
<PAGE>
4. Section 1.03 of the Credit Agreement (as amended by letter agreement
dated September 30, 1997) is hereby amended by deleting the date "December 31,
1997" (the "Revolving Credit Maturity Date") appearing in line 4 of paragraph
(a) thereof and substituting therefore "March 31, 1998" (the "Revolving Credit
Maturity Date").
5. The Credit Agreement is hereby amended by inserting the following
"Section 1.06A. The Acquisition Credit Fees." between "Section 1.06. Term
- -------------- --------------------------- ------------ ----
Credit Fee." and "Section 1.07. Revolving Credit Facility Fee.":
- ---------- ------------ -----------------------------
Section 1.06A. The Acquisition Credit Fees. The Borrower shall pay
------------- ---------------------------
to the Bank on the Acquisition Credit Funding Date a one-time, non-
refundable facility fee in the amount of $300,000.
In addition to the facility fees paid by the Borrower pursuant to the
immediately preceding paragraph, if the Acquisition Credit is not paid in
full on the Acquisition Credit Maturity Date, the Borrower shall pay to the
Bank a late payment fee (the "Late Payment Fee") on the first day of each
month thereafter until the Acquisition Credit is paid in full in the
following amounts: (a) on each of August 1, 1998 and September 1, 1998,
$100,000, and (b) on October 1, 1998 and the first day of each month
thereafter, $200,000.
6. Sections 1.10, 4.15, 4.17, 6.01 and 6.02 of the Credit Agreement are
hereby amended by deleting said Sections in their entirety and substituting
therefor the following:
Section 1.10. Use of Proceeds.
------------ ---------------
The proceeds of the Term Credit shall be used by PSI solely to fund
the purchase of Approved Equipment. The proceeds of the Revolving Credit
shall be used by the Borrowers solely as working capital. The proceeds of
the Acquisition Credit will be used to finance the purchase by the Borrower
(or its Canadian subsidiary, PSINet Limited) of at least 51% of the
outstanding stock of iSTAR Internet, Inc. ("iSTAR") (the "iSTAR Tender
Offer") and for working capital.
Section 4.15. Loans and Investments.
------------ ---------------------
Except as set forth on Schedule 4.15 and except as otherwise consented
-------------
or agreed to in writing by the Bank prior to the date hereof, neither the
Borrower nor any Subsidiary will purchase or otherwise acquire or retain
any stock or obligations of, or make any loans or advances to, or
investments in, any corporation or other entity or person, other than:
(a) obligations of the United States of America, or any agency
thereof, maturing not more than one (1) year from the date of issue
thereof, or
4
<PAGE>
mutual funds comprised of the same, provided that the Bank shall acquire a
perfected first-priority security interest in such obligations
simultaneously with such purchase or acquisition;
(b) certificates of deposit or other deposit obligations
maturing not more than one (1) year from the date of issue thereof issued
by any bank within the United States of America having total combined
capital and surplus in excess of $100,000,000;
(c) short-term investment grade debt securities;
(d) by PSI in wholly-owned Subsidiaries, provided that the
aggregate outstanding amount of all such amounts during this Agreement
shall not exceed $45,000,000, excluding (i) any amounts previously advanced
to Pipeline, it being understood that no future amounts shall be advanced
to Pipeline without the prior written consent of the Bank, and (ii) any
amounts owing to PSI by its Subsidiaries as a result of services rendered
by PSI to such Subsidiaries;
(e) by the Borrower pursuant to the iSTAR Tender Offer; and
(f) loans, advances and guarantees to employees of the Borrower
and its Subsidiaries in an aggregate amount for all of the Borrowers and
their Subsidiaries taken together not to exceed $500,000.
Section 4.17. Consolidation, Merger or Disposition/Acquisition of
------------ ---------------------------------------------------
Assets.
------
Except as heretofore consented or agreed to in writing by the Bank,
neither the Borrower nor any Subsidiary will (nor will PSI permit) without
the prior written consent of the Bank consolidate with or merge with or
into another firm, person or corporation, permit (to the extent within its
control with respect to PSI) a change in control, directly or indirectly
pledge or otherwise encumber any shares of its capital stock, sell, lease
or otherwise dispose of (other than in the ordinary course of its business)
all or any material portion of its properties or assets to any firm, person
or corporation, or acquire any material amount of the properties or assets
of any other firm, person or corporation, whether in one or a series of
related transactions and whether by merger, acquisition of stock,
acquisition of assets or otherwise, except as otherwise expressly permitted
by this Agreement, provided, however, that (a) the Borrower or any
Subsidiary may sell or otherwise dispose of any property which has become
uneconomic, obsolete or worn out if disposed of in the ordinary course of
business, and (b) the Borrower or PSINet Limited may purchase the stock of
iSTAR pursuant to the iSTAR Tender Offer and consummate the proposed
amalgamation under Canadian Law of PSINet Limited and iSTAR provided that
PSINet Limited is
5
<PAGE>
the surviving entity (the "Amalgamation"). Notwithstanding anything
contained in this Section 4.17 to the contrary, neither the sale by PSI of
its common stock in an initial public offering nor any other issuance or
sale of common stock of PSI in the public market shall be deemed a
violation of this Section 4.17.
Section 6.01. Term of Agreement.
------------ -----------------
This Agreement shall terminate when each of the following conditions
shall have been met (a) all principal of and interest on the Term Note(s),
the Acquisition Credit Note and the Revolving Credit Note and all other
amounts due and payable under this Agreement have been paid and discharged
in full, and (b) no Borrower shall have any further right to borrow
hereunder.
Section 6.02. Notices.
------------ -------
All notices hereunder shall be deemed to have been given when
delivered in person, telefaxed to the number set forth below (with receipt
acknowledged) or, if mailed, when actually received by the party to whom
addressed; provided, however, that any written notice given pursuant to
Article V hereof shall be deemed to be effective when mailed, so long as
such notice is mailed by registered mail, postage prepaid. Such actual
receipt shall be conclusively presumed if such notice shall be mailed by
registered or certified mail, addressed to any party at its address set
forth below or at any other address notified in writing to the other
parties hereto, and if the sender shall have received back a return
receipt, or if telefaxed to the number set forth below and receipt
acknowledged.
To the Bank: Fleet National Bank
One Federal Street
Mail Stop MA0FD07A
Boston, MA 02110
Attention: Thomas W. Davies, Senior Vice President
Facsimile No.: (617) 346-0151
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109-2881
Attention: H. David Henken, Esq.
Telefax No.: (617) 570-8150
6
<PAGE>
To the Borrower: PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 22070
Attention: Mr. Harold Wills
Telefax No.: (703) 904-4200
PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 22070
Attention: General Counsel
Telefax No.: (703) 904-9527
With a copy to: Nixon, Hargrave, Devans & Doyle, LLP
437 Madison Avenue
New York, NY 10022
Attention: Richard F. Langan, Jr., Esq.
Telefax No.: (212) 940-3111
Notwithstanding anything contained in this Agreement to the contrary,
notice to PSI shall be deemed to constitute notice to each Borrower.
7. Section 4.30 is hereby added to the Credit Agreement as follows:
"Section 4.30. Agreements Relating to iSTAR.
------------ ----------------------------
The Borrower shall deliver to the Bank executed copies of all material
documents, instruments and agreements executed in connection with the iSTAR
Tender Offer and the Amalgamation. Promptly, and in any event within 5
days after receipt of certificates for iSTAR stock delivered by the
transfer agent or otherwise, the Borrower will deliver stock certificates
evidencing all stock of iSTAR purchased by the Borrower and its
Subsidiaries in the iSTAR Tender Offer."
8. The Borrower acknowledges and agrees that any and all iSTAR stock
owned by the Borrower and its Subsidiaries (including, without limitation,
PSINet Limited) is part of the Bank's collateral and accordingly agrees to
deliver all iSTAR stock certificates to the Bank promptly, and in any event
within 5 days after receipt of certificates for iSTAR stock (delivered by the
transfer agent or otherwise), and any failure to so deliver shall be deemed to
be an Event of Default under the Credit Agreement (which is not subject to
notice or cure). The Borrower and the Bank hereby amend the Pledge Agreement
dated as of October 1, 1996, as amended by Amendment No. 1 to the Pledge
Agreement dated as of November 18, 1996, by deleting Exhibit A thereto in its
---------
entirety and replacing it with Exhibit A to this Agreement.
---------
7
<PAGE>
9. The Borrower acknowledges and agrees that the Obligations under the
Security Documents shall be deemed to include any additional Obligations created
by this Agreement, including, without limitation, the obligations under the
Acquisition Credit.
10. The Borrower hereby represents that the Leverage Ratio calculated
under Section 4.25 of the Credit Agreement as of December 31, 1997 is 1.53:1.0,
subject to any adjustment as a result of the audit of the Borrower's 1997 year-
end financial statements, such adjustment shall not result in a ratio greater
than 1.60:1.0. The Bank hereby waives the requirement under Section 4.25 of the
Credit Agreement that the Leverage Ratio as of December 31, 1997 not exceed
1.50:1.0.
11. Notwithstanding the written consent of the Bank dated November 6, 1997
relating to the issuance of the Borrower's Series B 8% Convertible Preferred
Stock (the "Series B Preferred Stock") or any other consent of the Bank which
may heretofore have been given, the Borrower shall not be permitted to redeem
the Series B Preferred Stock pursuant to the provisions of the Borrower's
Certificate of Incorporation, as amended (the "Certificate of Incorporation") if
the redemption price is greater than $.01 per share of Series B Preferred Stock,
subject to adjustment in accordance with the Certificate of Incorporation.
12. On the date hereof, the Standby Letter of Credit No. 1091043 dated
December 31, 1997 between the Borrower and the Bank, as amended (the "Letter of
Credit"), shall be delivered by Montreal Trust Company of Canada ("MTCC") to
Michael Beairsto on behalf of the Bank for further delivery to the Bank, and
MTCC and iSTAR, as the sole beneficiaries under the Letter of Credit, shall
consent to termination thereof. The Borrower agrees to use best efforts and to
take any actions reasonably requested by the Bank to effect the foregoing.
13. After giving effect to this Agreement (including Schedules 2.02, 2.06
and I attached hereto), all representations and warranties made by the Borrower
and its Subsidiaries in the Credit Agreement and the Security Documents are true
and correct as of the date hereof, except for those representations which relate
to a specific date which are true and correct as of such date.
14. The Borrower represents, on behalf of itself and its Subsidiaries,
that (i) the iSTAR Tender Offer and the Amalgamation have been, or will be,
consummated in accordance with all applicable laws, rules and regulations,
including without limitation, the Canadian securities laws and (ii) it has
performed and complied with all covenants and agreements required to be
performed and complied with by them under the Credit Agreement as amended by
this Agreement and the Security Documents (as amended by the First Amendment to
Amended and Restated Credit Agreement, the Second Amendment to Amended and
Restated Credit Agreement and this Agreement) except to the extent performance
or compliance has been waived or modified in writing by the Bank.
15. Except as amended by the First Amendment to Amended and Restated
Credit Agreement, the Second Amendment to Amended and Restated Credit Agreement
and this
8
<PAGE>
Agreement and any other written agreements of the Bank, all provisions of the
Amended and Restated Credit Agreement, the Security Documents and all other
documents referred to therein shall remain in full force and effect after giving
effect to this Agreement and are hereby ratified and confirmed as being in full
force and effect and are binding upon the parties thereto in accordance with
their terms.
16. The amendments set forth in this Agreement shall not be effective, and
the Bank shall not be obligated to amend, modify or alter the Credit Agreement
unless and until all of the following conditions shall have been fulfilled or
waived by the Bank:
(a) Closing of iSTAR. The iSTAR Tender Offer shall have been
----------------
consummated on terms reasonably satisfactory to the Bank;
(b) Acquisition Credit Note. The Borrower shall have executed and
-----------------------
delivered to the Bank the Acquisition Credit Note;
(c) No Default. No Event of Default specified in Article V and no
----------
event which, under Article V with the giving of notice or the lapse of time, or
both, would become an Event of Default, shall have occurred and be continuing;
(d) Officer's Certificate for Borrower. The Borrower shall have
----------------------------------
delivered to the Bank a certificate substantially in the form of attached hereto
with attached corporate resolutions authorizing (i) the transactions
contemplated by this Agreement and (ii) its officers to pursue a public offering
of debt securities of the Borrower, the proceeds of which may be used to, among
other things, repay the Acquisition Credit; and
(e) Fee. The Bank shall have received from the Borrower a fee of
---
$300,000 in connection with this Third Amendment to Amended and Restated Credit
Agreement.
17. The Borrower agrees to cause to be delivered to the Bank within 7
business days after the Acquisition Funding Date the written opinions of (i)
Nixon, Hargrave, Devans & Doyle, L.L.P., counsel to the Borrower, and (ii)
Fraser & Beatty, Canadian counsel to the Borrower, in form and substance
reasonably satisfactory to the Bank and Bank Counsel covering such matters as
the Bank and Bank Counsel may reasonably request.
18. This Agreement represents the entire agreement among the parties
hereto relating to the amendment to the Credit Agreement effected hereby, and
supersedes all prior understandings and agreements among the parties relating to
the matters the subject of this amendment to the Credit Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first above written.
PSINET INC.
By: /s/ Edward D. Postal
------------------------------------
Name:
Title: Senior Vice President & CFO
FLEET NATIONAL BANK
By: /s/ Thomas W. Davis
------------------------------------
Name:
Title: Senior Vice President
10
<PAGE>
EXHIBIT 10.75
DEPOSIT PLEDGE AGREEMENT
THIS AGREEMENT is made as of December 31 , 1997, by and between PSINet Inc.
(the "Pledgor") And Fleet National Bank (the "Bank"), 25 State Street, Boston,
Massachusetts 02109
In order to induce the Bank to enter into the Agreement described below,
Pledgor, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, hereby assigns to the Bank and grants to the Bank
a security interest in, and exclusive control over the Collateral as described
below in an amount of not less than $17,500,000. The Collateral is pledged to
secure performance of all payment obligations, direct or indirect, absolute or
contingent, now existing or hereafter arising of every kind and description (the
"Obligations") of Pledgor. pursuant to the Standby Letter of Credit # 1091043
dated 12/31/97 between Pledgor and the Bank (the "Agreement").
COLLATERAL: 1) Specific Assets with a $17,500,000 par value:
in Account No. 0001558870 maintained with Bank in an
Investment Management Account;
2) All proceeds of and interest in any of the foregoing, now
existing or hereafter deposited, credited, issued or
arising.
The Pledgor and the Bank agree that the above pledge, and security interest
granted herewith, are subject to all of the following terms and conditions.
1. COLLATERAL. The Collateral shall remain in the control or possession
of the Bank and shall constitute continuing collateral security for the full
payment and performance of the Obligations of Pledgor. The Pledgor agrees that
so long as any of the Obligations remains outstanding no action of any kind
whatsoever may be taken by Pledgor or any other person with respect to any
portion of the Collateral without the Bank's written consent. The Bank is hereby
authorized and appointed as agent and attorney-in-fact of the Pledgor, which
appointment is coupled with an interest and shall be irrevocable so long as any
of the Obligations remains outstanding, to sign and deliver such documents,
endorsements and instruments and to take all such other actions in the name of
the Pledgor as the Bank may deem necessary or advisable to perfect or preserve
the deposits placed with another financial institution or with the Bank's London
or Nassau branch, the Pledgor agrees to execute and deliver a notice and
acknowledgement of assignment of deposits with respect to such Collateral in
form and substance satisfactory to the Bank.
2. WAIVERS BY PLEDGOR. The Pledgor waives: notice of acceptance hereof,
notice of any action taken or omitted by the Bank in reliance hereon, notice of
default with respect to any of the Obligations.
3. PLEDGE UNCONDITIONAL. This Agreement is the direct, unconditional,
absolute and primary obligation of the Pledgor and no invalidity, irregularity
or unenforceability of all or any part of the Obligations or of any security
therefor, shall affect, impair or be a defense to this Agreement. This Agreement
and the Collateral are given to secure payment and not
<PAGE>
merely collection of the Obligations. The Bank shall not be required to seek to
enforce any of its rights under this Agreement as condition to exercise or to
enforce its rights hereunder nor shall any failure to seek to enforce any such
rights affect, impair or be a defense to the Bank's rights hereunder.
4. DEFAULTS AND REMEDIES. Each of the following shall constitute a
default hereunder: any failure by the Pledgor to pay, perform or observe any
obligations on its part hereunder, the service upon the Bank, its International
Banking Facility, its Nassau branch or its London branch, or upon any other
financial institution in which the Collateral is located, of and summons naming
the Bank or such facility or branch as trustee for the Pledgor or the Borrower,
or any similar writ or process of attachment relating to any deposit or property
of the Pledgor. Upon the occurrence of any default hereunder the Bank may apply
any Collateral to the satisfaction of any or all of the Obligations and pursue
any additional rights or remedies available to it hereunder, or under the
Agreement or applicable law.
5. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants
to the Bank that except for the security interest granted to the Bank hereunder
and under any other loan and security documents existing between Pledgor and the
Bank, the Collateral is and shall remain free from any adverse lien, security
interest or encumbrances in favor of others; it is duly organized, validly
existing and in good standing under the laws of the State of New York and is
duly qualified to do business as a foreign corporation and in good standing
under the laws of each other jurisdiction in which its business conducted or
properties owned requires such qualification; it has full power to enter into
and perform this Agreement and has taken all necessary corporate or other action
to authorize the execution, delivery and performance of this Agreement; this
Agreement constitutes the legal, valid and binding obligations of the Pledgor,
enforceable in accordance with its terms, subject to bankruptcy, insolvency or
other similar laws affecting the rights of creditors generally; the execution,
delivery and performance of this Agreement will not violate any provision of any
existing law, treaty or regulation applicable to the Pledgor or (as applicable)
of its Certificate of Incorporation, Articles of Organization and By-Laws,
Articles of Partnership, trust agreement or other governing documents, or of any
order or decree of any court, arbitrator or governmental agency or of any
contractual undertaking to which it is a party or by which it may be bound; no
consents, licenses, approvals or authorizations of, exemptions by or
registrations or declarations with, any governmental authority are required with
respect to this Agreement.
6. COSTS. The Pledgor agrees to reimburse the Bank for any reasonable out-
of-pocket costs or expenses (including without limitation reasonable fees and
disbursements of counsel) incurred by the Bank in connection with the
preservation or enforcement of its rights or remedies under this Agreement.
7. INTERPRETATION, ETC. This Agreement is a continuing one and all
liabilities to which it applies or may apply under the terms hereof shall be
conclusively presumed to have been created in reliance hereon. No delay on the
part of the Bank in exercising any of its options, powers or rights, or partial
or single exercise thereof, shall constitute a waiver thereof. Except as
expressly provided herein, no waiver of any of its rights and no modification or
amendment of this Agreement shall be deemed to be made by the Bank unless the
same shall be in writing, duly signed on behalf of the Bank; each such waiver
(if any) shall apply only with respect to the specific instance involved and
shall in no way impair the rights of the Bank or the obligations of the Pledgor
to the Bank in any other respect or at any other time. The Collateral, this
Agreement and the rights and obligations of the Bank and of the Pledgor
hereunder shall be
<PAGE>
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts. This Agreement is binding upon the Pledgor, its successors or
assigns. The headings contained herein are for convenience only and shall not
affect the remaining provisions hereof nor affect the validity or enforceability
of such provision in any other jurisdiction.
8. SUBMISSION TO JURISDICTION. Pledgor irrevocably submits to the non-
exclusive jurisdiction of any state or federal court sitting in Boston,
Massachusetts over any suit, action or proceeding arising out of or relating to
this Agreement or the Collateral. Pledgor and the Bank irrevocably waive, to the
fullest extent they may effectively do so under applicable law, their right to a
trial by jury, and any objection which they may have or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in any such
court and any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum. Pledgor agrees, to the fullest
extent, it may effectively do so under applicable law, that a final judgement in
any such suit, action or proceeding brought in such court shall be conclusive
and binding upon Pledgor and may be enforced in the courts of the United States
of America and the Commonwealth of Massachusetts (or any other courts to the
jurisdiction of which the Pledgor is or may be subject) by a suit upon such
judgement, provided that service or process is effected on Pledgor as permitted
by law.
9. TERMINATION. When any and all Obligations shall have been paid in full,
if any, and the Letter if Credit shall have expired or been terminated, this
Agreement shall automatically terminate, and the Bank shall cause to be
assigned, transferred and delivered, against receipt but without any recourse,
warranty or representation whatsoever, any remaining Collateral to or for the
order of the Pledgor, upon such termination, such documentation as shall be
reasonably requested as necessary by the Pledgor to effect the termination and
release of the pledge and security interest granted herein on the Collateral.
IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly
executed under seal and delivered as of the date first above written.
PSINet Inc.
By: /s/David N. Kunkel
------------------------------------------
Agreed and Accepted:
Senior Vice President & General Counsel
_____________________________ ---------------------------------------------
(Print Name and Title)
By: /s/Thomas W. Davis
--------------------------
Senior Vice President
- -----------------------------
(Print Name and Title
<PAGE>
EXHIBIT 10.95
SECURITY AGREEMENT AND ASSIGNMENT
THIS SECURITY AGREEMENT AND ASSIGNMENT, dated as of February 25, 1998, is
made by and between IXC Internet Services, Inc. a Delaware corporation
(hereinafter, together with its successors and assigns, "IXC"), and PSINet Inc.,
a New York corporation (hereinafter, together with its successors and assigns,
"PSINet" or the "Secured Party"). All capitalized terms used but not otherwise
defined herein shall have the meanings set forth in that certain IRU and Stock
Purchase Agreement entered into as of July 22, 1997 (as amended, supplemented or
modified, the "Purchase Agreement").
PRELIMINARY STATEMENTS:
A. IXC and PSINet are parties to the Purchase Agreement pursuant to which,
among other things, PSINet has acquired the PSINet Fiber IRU and the IRU
Capacity from IXC and IXC has acquired from PSINet 19.99999% of the total
outstanding shares of Common Stock of PSINet.
B. Pursuant to the Purchase Agreement, IXC has agreed to execute and
deliver this Security Agreement and to grant to PSINet a security interest in
the Collateral (as hereinafter defined) as security for IXC's obligation to
provide the PSINet Fiber IRU and IRU in the IRU Capacity.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
A G R E E M E N T
1. DEFINED TERMS. As used in this Security Agreement the following terms
have the following meanings, unless the context otherwise requires:
"COLLATERAL" has the meaning assigned to it in Section 2 of this
Security Agreement.
"DEFAULT" means a default under the Purchase Agreement that remains
uncured following the expiration of any applicable cure period and that
materially and adversely affects the use and enjoyment of the PSINet Fiber
IRU or the IRU in the IRU Capacity by PSINet.
1
<PAGE>
"GAAP" means generally accepted accounting principles in the United
States of America from time to time in effect as set forth in the opinions
and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board, or in such
other statements by any successor entity as may be in general use by
significant segments of the accounting profession that are applicable to
the circumstances as of the date of determination.
"HEREBY," "HEREIN," "HEREOF," "HEREUNDER" and words of similar import
refer to this Security Agreement as a whole and not merely to the specific
section, paragraph or clause in which the respective word appears.
"LIEN" means any mortgage, pledge, charge, security interest or other
encumbrance.
"PERMITTED LIENS" means (i) any Liens for taxes not yet delinquent or
Liens for taxes being contested in good faith and by appropriate
proceedings promptly instituted and diligently concluded, and (ii)
materialmen's and mechanic's Liens and other similar Liens arising in the
ordinary course of business, which are being contested in good faith by
appropriate proceedings or are paid within 60 days from the creation
thereof, and which do not impair the use and enjoyment by PSINet of the
PSINet Fiber IRU and/or the IRU in the IRU Capacity.
"PROCEEDS" MEANS "PROCEEDS," as such term is defined in section 9-
306(1) of the UCC and, in any event, shall include, without limitation, (i)
any and all payments (in any form whatsoever) made or due and payable to
IXC from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by
any governmental body, authority, bureau or agency (or any person acting
under color of governmental authority), and (ii) any and all other amounts
from time to time paid or payable to IXC under or in connection with any of
the Collateral, excluding from such other amounts, amounts paid to IXC by
PSINet.
"SECURED OBLIGATIONS" means IXC's obligation to provide the PSINet
Fiber IRU and the IRU in the IRU Capacity pursuant to the Purchase
Agreement.
"SECURITY AGREEMENT" means this Security Agreement and Assignment, as
the same may from time to time be amended or supplemented.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of Delaware; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, priority or exercise of remedies of either Secured
Party's security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of
Delaware, the term "UCC" means the Uniform Commercial Code, as in effect
2
<PAGE>
in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection, priority or exercise of remedies and for
purposes of definitions related to such provisions.
2. GRANT OF SECURITY INTEREST; COLLATERAL ASSIGNMENT.
2.1 COLLATERAL. (a) As collateral security for the prompt and complete
performance when due of the Secured Obligations, IXC hereby grants to the
Secured Party a continuing security interest in, all IXC' right, title and
interest in, to and under the following, whether now owned or hereafter acquired
and wherever located (all of which, together with the Collateral as further
defined in this Section 2.1(a) and in Section 2.1(b), being hereinafter
collectively called the "Collateral"):
(i) the Long-Term Indivisible IRU;
(ii) the Short-Term Indivisible IRU;
(iii) the Access Right; and
(iv) to the extent not otherwise included, all Proceeds of the
foregoing.
As set forth in Section 1.4 of the Purchase Agreement, the PSINet Fiber IRU
and the Base IRU in the IXC Fibers shall be extended to cover additional
completed portions of the Available System effective immediately upon completion
without any further action on the part of IXC and the Long-Term Indivisible IRU
and the Short-Term Indivisible IRU shall include such completed portions of the
Available System. IXC hereby grants, without further action on its part, and
will execute the necessary documents to evidence such grant of a continuing
security interest in (i) the Long-Term Indivisible IRU (with such defined phrase
being extended to cover such completed portions of the Available System) and the
products and proceeds thereof, (ii) the Short- Term Indivisible IRU, and (iii)
the Access Right (with each such defined phrase being extended to cover such
completed portion of the Available System) and the products and proceeds
thereof, and the Long-Term Indivisible IRU, the Short-Term Indivisible IRU, and
the Access Right, as so extended, will thereupon become part of the Collateral.
Notwithstanding the foregoing, however, commencing in respect of any completed
portion of the Available System, after the date on which such completed portion
of the Available System shall have been completed, the length of the Short-Term
Indivisible IRU shall not exceed the excess, if any, of 10,000 Route Miles over
the number of completed Route Miles on the Available System Accepted by the
Secured Party. To the extent completion of additional portions of the Available
System requires shortening the length of the Short-Term Indivisible IRU (which
is subject to the security interest pursuant to the preceding sentence) by a
certain number of Route Miles (the "Reduction Miles"), the Short-Term
Indivisible IRU shall be deemed to be shortened 30 days after the date on which
such completed portion of the Available System shall have been completed by
changing its definition to exclude a number of Route Miles equal to the number
of Reduction Miles. The specific Route Miles excluded shall be determined by
excluding that
3
<PAGE>
number of Route Miles of the Available System most recently completed beginning
with the eastern most portion along the applicable route, all as set forth in a
written notice from IXC to the Secured Party.
(b) IXC does hereby assign, transfer and set over unto Secured Party, as
collateral security for the prompt and complete performance of the Secured
Obligations, all of IXC's rights and interests in and to the Contribution
Agreement to the extent necessary to deliver and provide PSINet with the IRU in
the IRU Capacity and the PSINet Fiber IRU (such necessary rights and interests
in and to the Contribution Agreement being referred to as the "PSINet Rights"),
including without limitation: (i) the right to receive, use and accept the
PSINet Rights, (ii) all claims for damages in respect of the PSINet Rights
arising as a result of any default under the Contribution Agreement, (iii) any
and all rights of IXC to compel performance of the terms of the Contribution
Agreement relating to the PSINet Rights, and (iv) all rights, benefits and
claims under all warranty and indemnity provisions, if any, contained in the
Contribution Agreement relating to the PSINet Rights. Notwithstanding the
foregoing, so long as no Default shall have occurred and be continuing, Secured
Party authorizes IXC, without affecting the terms of this Agreement, to exercise
in its own name the PSINet Rights under the Contribution Agreement. The defined
term "Collateral" under this Agreement shall include the PSINet Rights.
2.2 NON-DISTURBANCE AND RESTRICTIONS. The Secured Party and each
transferee of any Collateral pursuant to this Agreement shall not disturb the
exercise of the rights of any third party or IXC to use fibers, appurtenances or
equipment in the Available System so long as the exercise of such rights does
not interfere with the exercise by PSINet of its rights to use the PSINet Fiber
IRU, the IRU in the IRU Capacity or to enjoy the benefits thereof. The rights of
PSINet and each such transferee hereunder are subject to the obligation to
comply with Section 8, Section 15.5 and the other obligations of PSINet under
the Purchase Agreement.
3. REPRESENTATIONS AND WARRANTIES. IXC hereby represents and warrants
that:
3.1 OWNERSHIP, LIENS. Except for the security interest granted to the
Secured Party pursuant to this Security Agreement, IXC is the owner of each item
of the Collateral, having good title thereto, free and clear of any and all
Liens other than Permitted Liens.
3.2 BUSINESS LOCATIONS. IXC' principal place of business and the place
where its records concerning the Collateral are kept are at the locations listed
in Schedule I hereto, and IXC will not change such principal place of business
or remove such records without at least thirty (30) days prior written notice to
each Secured Party and providing to Secured Party such documents and taking such
action as is necessary to ensure PSINet has a first priority perfected security
interest in the Collateral.
3.3 TRADE NAMES. Neither IXC nor any of its predecessors in interest has,
at any time within the five-year period ending on the date hereof, conducted any
business under any name other than "IXC Internet Services, Inc." except as set
forth on Schedule IV hereto.
4
<PAGE>
3.4 IDENTIFICATION NUMBER. The Federal Employer Identification Number of
IXC is 74-2865665.
4. COVENANTS. IXC covenants and agrees with the Secured Party that from
and after the date of this Security Agreement and until the Secured Obligations
are fully satisfied:
4.1 COMPLIANCE WITH LAWS. IXC will comply, in all material respects, with
all acts, rules, regulations, orders, decrees and directions of any governmental
authority, applicable to the Collateral or any part thereof; provided, however,
that IXC may contest any act, regulation, order, decree or direction in any
reasonable manner which shall not in the sole opinion of the Secured Party
adversely affect the Secured Party's right or the priority of its security
interest in the Collateral; and provided further, that nothing contained herein
shall be deemed to prohibit IXC from contesting any Lien arising by operation of
law where IXC is contesting in good faith and by appropriate proceedings the
obligations which gave rise to such Lien, provided that such contest does not
involve the material danger of the sale, forfeiture or loss, or material
restriction of, use or enjoyment of any of the Collateral.
4.2 PAYMENT OF OBLIGATIONS. IXC will pay promptly when due, all taxes,
assessments, franchises, fees and governmental charges or levies imposed upon or
payable in respect of the Collateral or in respect of its income or profits
therefrom, as well as all claims and demands of any kind (including claims for
labor, materials and supplies), except that no such charge need be paid if (i)
the validity thereof is being contested in good faith in an appropriate manner,
and (ii) such contest does not involve any material danger of the sale,
forfeiture or loss, or material restriction of, use or enjoyment of any of the
Collateral or any interest therein.
4.3 LIMITATIONS ON LIENS ON COLLATERAL; LIEN WAIVERS. IXC will not create,
permit or suffer to exist, and will defend the Collateral against and take such
other action as is necessary to remove, any Lien, claim or right, in or to the
Collateral, other than Permitted Liens, and will defend the right, title and
interest of the Secured Party in and to any of IXC's rights to the Collateral
and in and to the Proceeds and products thereof against the claims and demands
of all persons whomsoever.
4.4 CONTINUOUS PERFECTION. IXC will not change its name, identity or
corporate structure in any manner which might make any financing or continuation
statement filed in connection herewith seriously misleading within the meaning
of section 9-402(7) of the UCC (or any other then applicable provision of the
UCC) unless IXC shall have given each Secured Party at least thirty (30) days'
prior written notice thereof and shall have taken all action (or made
arrangements to take such action substantially simultaneously with such change
if it is impossible to take such action in advance) necessary or reasonably
requested by each Secured Party to amend such financing statement or
continuation statement so that it is not seriously misleading.
5
<PAGE>
4.5 FURTHER IDENTIFICATION OF COLLATERAL. IXC will furnish to the Secured
Party from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Secured Party may reasonably request, all in reasonable
detail.
4.6 NOTICES. IXC will advise each Secured Party promptly, in reasonable
detail, (i) within 30 days of IXC gaining knowledge of any lien, security
interest, encumbrance or claim, other than Permitted Liens for taxes not yet due
and payable, made or asserted against any of the Collateral, (ii) of any
material change in the composition of the Collateral, and (iii) of the
occurrence of any other event which would have a material effect on the security
interests created hereunder.
4.7 CONTRIBUTION AGREEMENT. (a) IXC agrees that, so long as this Agreement
is in effect, it will not, without the prior written consent of Secured Party,
do any of the following if such act would have a material adverse effect on the
Collateral; (i) amend, modify or permit to be amended or modified the
Contribution Agreement, (ii) waive or permit to be waived any material
provisions of the Contribution Agreement, or (iii) exercise any right to
terminate or cancel any material provision of the Contribution Agreement or
consent or agree to, or suffer or permit, the termination thereof whether or not
on account of any default therein specified.
(b) It is expressly agreed that anything herein to the contrary
notwithstanding, IXC shall remain liable under the Contribution Agreement to
perform all of its obligations thereunder and Secured Party shall have no
obligation or liability under the Contribution Agreement by reason of, or
arising out of, this Security Agreement nor shall the Secured Party be required
or obligated in any manner to perform or fulfill any obligations of IXC under or
pursuant to any of the Contribution Agreement, or to make any payment or to make
any inquiry, as to the nature or sufficiency of any payment received by it, or
to present or file any claim or to take any other action to collect or enforce
the payment of any amounts which may have been assigned to it or to which it may
be entitled hereunder at any time or times.
5. REMEDIES, RIGHTS UPON DEFAULT. If any Default shall occur and be
continuing, the Secured Party may exercise (in addition to all other rights and
remedies granted to it in this Security Agreement) after thirty (30) days notice
to IXC (and the notice specified below of time and place of public or private
sale), may forthwith collect, receive, appropriate and realize upon the
Collateral or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or sell and deliver said Collateral (or contract
to do so), as the case may be, or any part thereof, in one or more parcels at
public sale or sales, at any exchange broker's board or at the Secured Party's
offices or elsewhere at such prices as it may deem best (subject to Section 2.2
and the last sentence of this Section 5), for cash or on credit or for future
delivery without assumption of any credit risk. The Secured Party shall have
the right upon any such public sale or sales to purchase the whole or any part
of said Collateral so sold. The Secured Party shall pay over the net proceeds
of any such collection, recovery, receipt, appropriation, realization or sale,
after deducting all reasonable costs and expenses incurred therein or incidental
to the care, safekeeping or otherwise of any or all of the Collateral or in any
way
6
<PAGE>
relating to the rights of the Secured Party hereunder, for application on an
equal basis to the payment in whole or in part of the Secured Obligations, and
only after such net proceeds need the Secured Party account for the surplus, if
any, to IXC. IXC agrees that neither Secured Party needs to give more than
thirty (30) days' notice (which notification shall be deemed given when mailed,
postage prepaid, addressed to IXC at its address provided pursuant to this
Security Agreement) of the time and place of any public sale may take place and
that such notice is reasonable notification of such matters. The Secured Party's
exercise of the foregoing rights and remedies is subject to the provisions of
Section 2.2 and any transferee (including the Secured Party) of any of the
Collateral must agree to be bound by such provisions.
6. REINSTATEMENT. This Security Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
IXC for liquidation or reorganization, should IXC become insolvent or make an
assignment for the benefit of creditors or should a receiver or trustee be
appointed for all or any significant part of IXC's assets, and shall continue to
be effective or be reinstated, as the case may be, if at any time payment and
performance of the Secured Obligations, or any part thereof, is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee of the Secured Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Secured Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
7. NOTICES. Unless otherwise provided herein, all notices and
communications concerning this Security Agreement shall be addressed to the
other party as follows:
If to IXC: IXC Internet Services, Inc.
Attn: Chief Financial Officer
1122 Capital of Texas Highway South
Austin, TX 78746
Facsimile No.: (512) 328-0239
with copies to: IXC Communications, Inc.
Attention: General Counsel
1122 Capital of Texas Highway South
Austin, TX 78746
Facsimile No.: (512) 328-7902
Michael P. Whalen, Esq.
Riordan & McKinzie
695 Town Center Drive
Suite 1500
Costa Mesa, CA 92626
Facsimile No.: (714) 549-3244
7
<PAGE>
If to PSINet: PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Attention: Chairman
Facsimile: (703) 904-1608
with a copy to: PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Attention: General Counsel
Facsimile: (703) 904-9527
and to: Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022
Attention: Richard F. Langan, Jr.
Facsimile: (212) 940-3111
Unless otherwise provided herein, notices shall be sent by registered or
certified U.S. Mail, postage prepaid, or by commercial overnight deliver
service, or by facsimile, and shall be deemed served or delivered to the address
or its office on the date of receipt acknowledgement or, if postal claim notices
are given, on the date of this return marked "unclaimed," provided, however,
that upon receipt of a returned notice marked "unclaimed," the sending party
shall make a reasonable effort to contact and notify the other party by
facsimile.
8. SEVERABILITY. Any provision of this Security Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render enforceable
such provision in any other jurisdiction.
9. NO WAIVER; CUMULATIVE REMEDIES. The Secured Party shall by any act,
delay, omission or otherwise be deemed to have waived any of its or their rights
or remedies hereunder and no waiver shall be valid unless in writing, signed by
the Secured Party, and then only to the extent therein set forth. A waiver by
the Secured Party of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy which the Secured Party would
otherwise have had on any future occasion. No failure to exercise nor any delay
in exercising on the part of the Secured Party any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or future
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies hereunder provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights and remedies
provided by law. None of the terms or provisions of this Security Agreement may
be waived, altered, modified or
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amended except by an instrument in writing, duly executed by the party against
which enforcement of such waiver, alteration, modification or amendment is
sought.
10. SUCCESSORS AND ASSIGNS; GOVERNING LAW. This Security Agreement and
all obligations of IXC hereunder shall be binding upon the successors and
assigns of IXC, and shall, together with the rights, obligations and remedies of
the Secured Party hereunder inure to the benefit of and be binding upon the
successors and assigns of the Secured Party. This Security Agreement shall be
governed by, and be construed and interpreted in accordance with, the laws of
the State of Delaware.
11. TERMINATION.
11.1 Short Term Indivisible IRU. Subject to Section 6 hereof, the Secured
Party's security interest in the Short Term Indivisible IRU shall terminate upon
the Secured Party's Acceptance of 10,000 Route Miles along the Available System.
11.2 AGREEMENT. Subject to Section 6 hereof, upon expiration of the
Purchase Agreement and the payment or performance of the Secured Obligations,
this Security Agreement shall terminate and PSINet will, at the request and
expense of IXC, execute and deliver to IXC a proper instrument or instruments
evidencing such termination.
12. DISPUTE RESOLUTION. Any controversy or claim between or among the
Secured Party, IXC or IXC Carrier, Inc. arising out of or relating to this
Agreement or with respect to an alleged breach of the terms hereof shall be
resolved in accordance with the provisions of Section 19.14 of the Purchase
Agreement; provided that the foregoing shall not be applicable with respect to
any matters which arise in connection with any Bankruptcy Proceeding involving
IXC or IXC Carrier, Inc., as debtor.
13. COUNTERPARTS. This Security Agreement may be executed in any number
of counterparts, which shall, collectively and separately, constitute one
agreement.
14. NO CONFLICT. Nothing contained in this Security Agreement shall be
deemed to alter, modify, affect or limit any of Secured Party's rights under the
Purchase Agreement.
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IN WITNESS WHEREOF, IXC and PSINet have each caused this Security Agreement
to be executed by a duly authorized officer as of the date first set forth
above.
IXC Internet Services, Inc.
By: /s/ Jeffrey C. Smith
-------------------------------------
Name: Jeffrey C. Smith
Title: Senior Vice President
PSINet Inc.
By: /s/ David N. Kunkel
-------------------------------------
Name: David N. Kunkel
Title: Senior Vice President, General
Counsel and Secretary
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ACKNOWLEDGEMENT AND CONSENT
The undersigned, IXC Carrier, Inc. ("Carrier"), hereby acknowledges and
consents to the foregoing Security Agreement and Assignment and agrees not to
interfere with the rights or quiet enjoyment of the Secured Party under the
Purchase Agreement in accordance with its terms, except that IXC will have the
rights under Section 7.4(a) of the Purchase Agreement with respect to a
continuing breach (as determined by an arbitration) by Secured Party of a
Material Provision and in such event Carrier shall not be obligated to perform
any obligation which IXC is allowed pursuant to Section 7.4(a) to withhold or
suspend. Carrier hereby consents to the collateral assignment by IXC to the
Secured Party of the PSINet Rights under the Contribution Agreement as provided
in the Security Agreement and Assignment and recognizes the Secured Party as the
permitted assignee with respect to the PSINet Rights and agrees to allow the
Secured Party to exercise and obtain the benefit of such PSINet Rights. Carrier
hereby agrees to be bound by the provisions of Section 4.7 of the Security
Agreement and Assignment to the same extent as IXC and as if Carrier were a
party thereto. If Carrier gives any notices of the occurrence of a default or
event of default under the Contribution Agreement to IXC, Carrier shall
simultaneously give such notice to the Secured Party. Secured Party shall be
entitled to exercise the rights granted to IXC with respect to the PSINet Rights
and to obtain the benefits of the PSINet Rights under the Contribution Agreement
without being required or obligated to cure any default or event of default on
the part of IXC or to perform or fulfill any obligations of or make any payments
which were required to be made by IXC. Notwithstanding the foregoing, upon and
after the exercise by Secured Party of the PSINet Rights under the Contribution
Agreement, the Secured Party will have the same rights and opportunity to cure
the default or event of default as are given to IXC under the Contribution
Agreement. In no event shall Secured Party's obligations with respect to the
PSINet Rights under the Contribution Agreement exceed, duplicate or be in
addition to any obligation of Secured Party under the Purchase Agreement.
Carrier agrees that, with respect to the PSINet Rights, upon a default or event
of default on the part of IXC under the Contribution Agreement, the Contribution
Agreement will continue in full force and effect between Carrier and the Secured
Party in respect of the PSINet Rights to the same extent as if Secured Party
were a party thereto, subject to the fifth and seventh sentences of this
paragraph.
In the event of a Default under the foregoing Security Agreement and
Assignment, notwithstanding Section 5 thereof, Secured Party shall not be
entitled to foreclose, collect, receive, appropriate, sell, lease, assign, give
option or options to purchase, or sell or deliver, or contract to do any of the
foregoing or otherwise realize upon the PSINet Rights under the Contribution
Agreement (except that Secured Party may deal with its IRU capacity and shall
have the rights to the PSINet Rights and use thereof as provided and permitted
under the Purchase Agreement with respect to the PSINet Fiber IRU and/or the IRU
in the IRU Capacity, including without limitation Section 15.5 of the Purchase
Agreement). Nothing contained herein shall (i) be deemed to modify, affect or
limit any of Secured Party's rights under the Purchase Agreement or (ii) prevent
Secured Party from taking any action necessary to preserve, protect,
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perfect or continue its security interest in the PSINet Rights or (iii) prevent
Secured Party from using or obtaining the benefits of the PSINet Rights.
Capitalized terms used herein but not otherwise defined herein shall have
the respective meanings ascribed thereto in the foregoing Security Agreement and
Assignment.
IXC Carrier, Inc.
By: /s/ Jeffrey C. Smith
----------------------------------
Name: Jeffrey C. Smith
Title: Senior Vice President
The foregoing Acknowledgment and Consent is acknowledged and agreed to by
the undersigned.
PSINet Inc.
By: /s/ David N. Kunkel
----------------------------------
Name: David N. Kunkel
Title: Senior Vice President, General
Counsel and Secretary
IXC Internet Services, Inc. hereby acknowledges receipt of notice of,
consents to and agrees to be bound by the terms and provisions of the foregoing
Acknowledgment and Consent as they relate to the relative rights of PSINet Inc.
and IXC Carrier, Inc.
IXC Internet Services, Inc.
By: /s/ Jeffrey C. Smith
---------------------------------------
Name: Jeffrey C. Smith
Title: Senior Vice President
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EXHIBIT 10.96
COLLOCATION AND INTERCONNECTION AGREEMENT
This Collocation and Interconnection Agreement (this "Agreement") is
entered into as of the 25th day of February, 1998, by and between IXC Internet
Services, Inc., a Delaware corporation ("IXC"), and PSINet Inc., a New York
corporation ("PSINet"). All capitalized terms used but not otherwise defined
herein shall have the meanings set forth in that certain IRU and Stock Purchase
Agreement entered into as of July 22, 1997 by and between IXC and PSINet (as
amended, supplemented or modified, the "Purchase Agreement"). In the event of
any conflict between the terms of this Agreement and those of the Purchase
Agreement, the terms of the Purchase Agreement shall control.
BACKGROUND AND PURPOSE
This Agreement is made with reference to the following facts:
A. IXC and PSINet have entered into the Purchase Agreement pursuant to
which, among other things, PSINet has acquired from IXC the PSINet Fiber IRU,
the IRU Capacity and the option to order Bandwidth on the Available System and
IXC has acquired from PSINet shares of PSINet's common stock.
B. In connection with the Purchase Agreement, PSINet may wish to collocate
its telecommunications equipment ("Equipment") at IXC's premises or points-of-
presence ("POPs") and, or may wish to interconnect its Equipment to IXC's or
third party's equipment. This Agreement sets forth the terms and conditions on
which PSINet may collocate and, or interconnect its Equipment on IXC's premises.
TERMS OF AGREEMENT
Accordingly, in consideration of the foregoing and of the mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. IXC PREMISES. IXC's premises available for the collocation of PSINet's
Equipment or interconnection of PSINet's facilities are listed on Exhibit K to
the Purchase Agreement as it may be expanded from time to time (the "IXC
Premises" or "IXC POPs").
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2. COLLOCATION RIGHTS.
2.1 COLLOCATION. IXC hereby grants to PSINet the right to locate,
install, maintain and operate Equipment at the IXC Premises for the duration of
the term of the Purchase Agreement. No use of the IXC Premises required or
permitted under this Agreement shall create or vest in PSINet any easements or
other ownership or property rights of any nature in IXC's real or personal
property or the IXC Premises.
2.2 BASIC SERVICES. In consideration of the maintenance fee that
PSINet is required to pay IXC under the section entitled System Maintenance and
----------------------
POPs -Consideration set forth in the Purchase Agreement, IXC shall supply HVAC
- -------------------
(Heating, Ventilation and Air Conditioning) for standard components, non-UPS AC
power and space for PSINet Equipment at the IXC POPs as follows:
SITES # OF SPACES** POWER PER SPACE
----- ------------- ----------------
As listed on Exhibit K * *
** A space adequate to contain a cabinet (measuring 2 feet (width) x 3 feet
(depth) x 70 inches (height)). PSINet shall supply its own cabinets. If PSINet
has more, or desires more, than six Spaces in the IXC POPs, PSINet shall be
required to pay for those Spaces at IXC's standard rates.
2.3 INTERFACE. Interface points for PSINet's IRU Capacity provided
by IXC under the Purchase Agreement shall be at fiber patch panels ("Connect
Panels") located in the IXC Premises. The Connect Panel located in the IXC
Premises shall be the demarcation to establish PSINet's operational and
maintenance responsibilities. Subject to the space limitations set forth in
this Agreement, PSINet shall provide, install and maintain at its expense the
electronic equipment at the IXC Premises it desires. PSINet will pay IXC time
and materials agreed upon on a case by case basis for equipment installation,
tech-assists and build-outs for power, cabling and HVAC.
2.4 ADDITIONAL SERVICES. In the event PSINet desires installation
services (including, but not limited to cross connect facilities needed to
access local exchange carriers' or competitive access providers' entrance
facilities), DC power, or additional space, AC power or HVAC (collectively
referred to as the "Services") at any of the IXC Premises, it shall make a
written request for such Services to IXC. Within fifteen (15) business days
after receiving such written request, IXC shall provide PSINet with the
availability of the Services and IXC's standard rates for the Services. In the
event upgrades or expansions to the IXC Premises or its facilities are necessary
to accommodate PSINet's request, IXC may include the entire cost of such
upgrades or expansions in the cost to PSINet. In the event IXC provides the
Services to PSINet by replacing its existing equipment at PSINet's expense, IXC
shall give the old, replaced equipment to PSINet. In
* Confidential material has been omitted and filed separately with the
Securities and Exchange Commission.
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the event PSINet chooses to receive additional Services at the IXC Premises,
PSINet shall pay any and all (initial and continuing) costs reasonably
determined by IXC to be necessary to provide Services to PSINet. If IXC makes
available and PSINet utilizes more than 20 amps of AC power per Space during any
particular month during the term of this Agreement, PSINet shall pay IXC its
standard rate for each additional amp. IXC shall provide PSINet with an invoice
setting forth the costs for additional Services within sixty (60) days of the
later of: (a) IXC receiving its invoices for such Services from subcontractors
and vendors or (b) delivering the Services to PSINet. PSINet shall pay IXC the
amounts due within thirty (30) days of receipt of an invoice from IXC.
2.5 BACK-UP POWER. In the event that PSINet desires back-up power at
the IXC POPs, PSINet shall submit its back-up power requirements to IXC. IXC
shall within thirty days of receipt of PSINet's request provide PSINet with a
quote as to IXC's costs for providing such back-up power; provided however, that
IXC shall only be obligated to provide such quote and the back-up power if IXC,
in its sole discretion, determines that providing such back-up power is feasible
considering available space, environmental factors, required consents from third
parties and other relevant factors. In the event IXC does provide back-up power
to PSINet: (a) IXC shall provide PSINet with invoices setting forth the costs
for such back-up power within sixty (60) days of the later of: (i) IXC receiving
its invoices from subcontractors and vendors for installing and providing such
back-up power or (ii) delivering the back-up power to PSINet; and (b) IXC will
have no liability whatsoever to PSINet with regard to any delay, failure or
defect in such back-up power and Section 18 shall apply to such power. IXC's
initial and ongoing costs for providing such back-up power to PSINet may be
included in IXC's invoices to PSINet. PSINet shall pay IXC the amounts due
within thirty (30) days of receipt of an invoice from IXC.
2.6 DELIVERY AND INSTALLATION. PSINet shall, at its own expense,
deliver, install and maintain its collocated Equipment in a safe condition and
meeting or exceeding the standards set forth in Section 7.2. At no additional
charge, IXC shall provide to PSINet Spaces that are reasonably proximate to each
other in light of the type of Equipment that PSINet is installing; provided,
however, that if PSINet or its Equipment requires a specific geometric
arrangement, and IXC determines that in order to accommodate PSINet or its
Equipment, rearrangement of the existing facilities at the IXC Premises is
required, PSINet agrees to reimburse IXC for any such make-ready costs. IXC
will advise PSINet in writing of any estimated make-ready charges (including
investigation, design and engineering fees) for such rearrangement work and
PSINet shall make payment to IXC within thirty (30) days from its receipt of
IXC's invoice therefor.
3. INTERCONNECTION WITH PSINET POPS.
3.1 CONSTRUCTION AND INSTALLATION. In the event PSINet desires to
connect any of its POPs to any IXC POP, PSINet may construct, install, operate
and maintain a connection facility (the "POP-to-POP Interconnect Facility")
--------------------------------
between the PSINet premises and the IXC Premises so long as PSINet meets or
exceeds the standards set forth in Section 7.2. PSINet shall provide at its
expense all necessary rights-of-way, permits, equipment and IXC-approved
materials to construct and install each POP-to-POP Interconnect Facility,
including, but not limited to, cables and conduit and any labor charges
associated therewith. If necessary, and where applicable, IXC shall use
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commercially reasonable efforts to provide PSINet, at PSINet's expense, access
to existing building entrance facilities, if available, to access and exit IXC
POPs. The demarcation point for PSINet shall be in the IXC POPs at the Connect
Panel or the DSX panel, as appropriate.
3.2 OWNERSHIP. PSINet shall retain ownership of any portion of the
POP-to-POP Interconnect Facility that is located on the IXC Premises during the
term of this Agreement; provided, however, that title to any part of the POP-to-
POP Interconnect Facility within the IXC Premises shall be transferred to IXC
upon expiration or termination of this Agreement.
3.3 MAINTENANCE AND CHANGES. PSINet shall be responsible for
maintenance and repair of the POP-to-POP Interconnect Facility on PSINet's side
of the point of demarcation. Any improvement, modification, addition to,
relocation, or removal of, the POP-to-POP Interconnect Facility by PSINet at the
IXC Premises is subject to prior review and written approval by IXC Transmission
Engineering Department and the cost of such improvement, modification, addition
to, relocation, or removal of, the POP-to-POP Interconnect Facility will be the
sole responsibility of PSINet. IXC's approval will not be unreasonably withheld
and in the event IXC fails to respond to PSINet's written request within thirty
(30) days of receiving PSINet's request for such changes, IXC's shall be deemed
to have approved PSINet's request.
4. INTERCONNECTION TO THIRD PARTIES. Interconnect facilities to
interconnect PSINet's equipment to other parties within IXC's POPs shall be
installed and maintained subject to available space at the IXC POPs and under
the following terms and conditions:
(a) IXC shall provide PSINet at each POP with free interconnections
(crossconnects) between PSI and third parties in units of DS-3's, as
specified by PSINet, not to exceed, in the aggregate, the bandwidth
capacity of the circuits PSINet has ordered at the POP. Such free
interconnections are not transferable to other POPs and any other
connections shall be referred to as "Additional Interconnects" subject
to the charges in Exhibit E to the Purchase Agreement. Should
subsequent interconnections become necessary after initial
installation, up to the aggregate bandwidth capacity of the circuits
PSINet has ordered at the POP, realignment of the interconnections
shall be subject to the preceding and to the reconfiguration charges
as indicated in Exhibit E. All such interconnections shall be subject
to the provisions of Section 15.5 of the Purchase Agreement.
(b) PSINet shall reimburse IXC for the capital cost to establish a point
of demarcation for Additional Interconnects that PSINet requests IXC
to provide. This demarcation shall be in the IXC equipment room and
shall be either the IXC standard DSX termination or fiber distribution
frame as is applicable for the interconnects required.
(c) IXC shall charge PSINet a one time charge and a monthly recurring
charge for each Additional Interconnect in the IXC POP. These charges
shall be an amount equal to the then standard ancillary pricing for
such service set forth on Exhibit E to the
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Purchase Agreement. Nothing in this Agreement shall prevent or in any
way limit IXC's ability to charge third parties for interconnection.
(d) In the event IXC chooses to cross-connect with an Additional
Interconnect party for which PSINet has paid a charge to IXC under
Section 4(b), IXC shall at IXC's option: (i) refund to PSINet such
charge or (ii) shall pay PSINet a monthly cross-connect fee negotiated
by the parties at such time.
(e) IXC's maintenance responsibility shall be limited to the demarcation
point and the associated cross connect at that point.
(f) PSINet shall not use any interconnect facility to allow third parties
collocated in any POP to interconnect with each other at that POP.
5. NOTICE TO INTERCONNECT OR COLLOCATE. No later than forty-five (45)
days prior to PSINet's planned installation of its Equipment or POP-to-POP
Interconnect Facilities at any IXC Premises, PSINet shall provide to IXC notice
of its desire to interconnect/locate in a particular IXC Premise, a copy of
PSINet's construction design drawings and installation schedule for IXC's review
and approval (collectively referred to hereon as the "Interconnect/Collocation
Notice"). The Interconnect/Collocation Notice shall (at a minimum) include: (a)
PSINet's installation date(s); (b) any excess cable storage requirements; (c)
identification of all POP-to- POP Interconnect Facilities and Equipment to be
installed; (d) a diagram of the desired location of the POP-to-POP Interconnect
Facilities and Equipment; (e) the space, power, environmental and other
requirements for the POP-to-POP Interconnect Facilities and Equipment; (f) the
estimated commencement and termination dates for the
interconnection/collocation; (g) all other information reasonably required by
IXC. PSINet's Equipment shall be placed and maintained in accordance with IXC's
requirements and specifications. Within two weeks of receiving the
Interconnection/Collocation Notice, IXC shall respond to PSINet's
Interconnection/Collocation Notice with its acceptance or objections.
6. REQUIRED AUTHORIZATIONS. PSINet shall obtain, at its sole cost and
expense, from any appropriate public and/or private authority, any required
permission, authorization, permit, license or easement (collectively, the
"Authorizations") to bring fiber to the IXC Premises and, or needed to
construct, install, operate and maintain the POP-to-POP Interconnect Facility
and to use the property over which the POP-to-POP Interconnect Facility will be
operated and maintained. PSINet represents and warrants that such
Authorizations shall be in effect for the entire Term of this Agreement. IXC
shall cooperate with PSINet in its efforts to obtain such authorizations.
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7. USE OF EQUIPMENT AND POP-TO-POP INTERCONNECT FACILITIES.
7.1 NO INTERFERENCE. PSINet shall not use its fibers, Equipment or
POP-to- POP Interconnect Facilities, and IXC shall not use its fiber, equipment
or interconnect facilities in any way which interferes with the other party's
use of its fibers or equipment or in any manner which violates any of the terms
or conditions of this Agreement or the Purchase Agreement. PSINet shall not
install any electrical or other equipment that overloads any electrical
paneling, circuitry or wiring.
7.2 STANDARDS. PSINet shall ensure that its equipment and any POP-
to-POP Interconnect Facilities (as defined) are installed to meet or exceed any
reasonable requirements of IXC, any requirements of IXC's building management,
and any applicable local, state and federal codes and public health and safety
laws and regulations (including fire regulations and the National Electric
Code). In the event IXC's building management or any local, state or federal
body determines the POP-to-POP Interconnect Facility is not in compliance with
the applicable laws and regulations, PSINet shall immediately make any changes
necessary such that the POP-to-POP Interconnect Facility no longer conflicts
with such law or regulations. PSINet further agrees to comply with the
requirements of IXC's or IXC's building management's insurance underwriter(s).
7.3 INTERVENTION. If any part of PSINet's fiber, POP-to-POP
Interconnect Facilities or Equipment is not placed and maintained in accordance
with the terms and conditions of this Agreement and PSINet fails to correct the
violation within thirty days from receipt of written notice thereof from IXC,
then IXC may, at its option, without further notice to PSINet, correct the
deficiency at PSINet's expense without liability for damages to the fiber, POP-
to-POP Interconnect Facilities or Equipment or for any interruption of PSINet's
services. As soon as practicable thereafter, IXC shall advise PSINet in writing
of the work performed or the action taken. PSINet shall reimburse IXC for all
expenses incurred by IXC associated with any work or action performed by IXC
pursuant hereto. PSINet shall remit payment to IXC within thirty days from its
receipt of IXC's invoice therefor.
7.4 THREAT TO PERSONS OR PROPERTY. In the event, and in IXC's sole
determination, if PSINet's fiber, POP-to-POP Interconnect Facilities or
Equipment poses an immediate threat to the safety of IXC employees or the
public, interferes with the performance of IXC's service obligations, or poses
and immediate threat to the physical integrity of IXC's facilities, IXC may
perform such work and/or take such action that it deems necessary without notice
to PSINet and without subjecting itself to any liability for damage to the
fiber, POP-to- POP Interconnect Facilities or the Equipment or for any
interruption of PSINet's services. As soon as practicable thereafter, IXC shall
advise PSINet in writing of the work performed or the action taken. PSINet
shall reimburse IXC for all expenses incurred by IXC associated with any work or
action performed by IXC pursuant hereto. PSINet shall remit payment to IXC
within thirty days from its receipt of IXC's invoice therefor.
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8. Access to IXC Premises.
8.1 NOTICE. Except as specifically set forth in the Purchase
Agreement, the terms in this Section 8 shall govern PSINet's access to the IXC
Premises. In the event PSINet's Equipment or POP-to-POP Interconnect Facilities
are located in the IXC Premises Customer Interface Facility ("CIF"), PSINet may
perform routine preventative maintenance or emergency maintenance and repairs on
its Equipment or POP-to-POP Interconnect Facilities during normal business hours
(7 am - 6 pm local time) without advance notice to IXC. In the event PSINet
desires to: (a) perform routine preventative maintenance or emergency
maintenance and repairs during non-business hours; (b) perform any procedures
other than routine preventative maintenance (such as installation, removal or
relocation of its Equipment or POP-to-POP Interconnect Facilities); (c) perform
any function outside of the CIF or (d) access (on PSINet's side of the
demarcation point) the fibers leading from the IXC electronics which provide the
IRU Capacity, PSINet may do so if: (x) it provides reasonable advance notice to
IXC; and (y) a IXC employee or representative is present on the IXC Premises at
the time. Notice provided as follows shall be deemed "reasonable advance
notice" for the purposes of this section: (i) twenty-four (24) hours for routine
preventative maintenance during non-business hours or outside the CIF; (ii) two
(2) hours for repairs of network malfunction causing loss of service or degraded
conditions (during non-business hours or outside the CIF), provided that such
period shall be reasonably tolled to permit IXC to dispatch personnel to an un-
manned IXC Premise upon receipt of a request for access thereto; (iii) two (2)
weeks notice for removing POP-to-POP Interconnect Facilities and, or Equipment
(regardless of location or time) and (iv) forty-five (45) days (as set forth in
Section 5) for installing Equipment or POP-to-POP Interconnect Facilities
(regardless or location or time). The presence of a IXC employee or
representative shall not relieve PSINet of its responsibility to conduct all of
its work operations in the IXC Premises in a safe and workmanlike manner. Under
no circumstances shall PSINet have access to any fibers on the IXC side of the
demarcation point.
8.2 SECURITY. PSINet shall abide by IXC's reasonable security
requirements. When deemed appropriate by IXC, PSINet employees or
representatives shall be issued passes or visitor identification cards which
must be presented upon request before entry to the IXC Premises and surrendered
upon demand or upon termination of this Agreement. Such passes or other
identification shall be issued only to persons meeting any reasonable security
criteria applicable at the IXC Premise for such purpose. Notwithstanding any
other provision of this Agreement, IXC shall, without threat of liability, have
the right to immediately terminate the right of access of any PSINet personnel
or representative should it determine in its sole discretion for any lawful
reason that such termination is in its best interest. IXC shall promptly notify
PSINet of any such termination, and PSINet shall have a reasonable opportunity
to demonstrate that the terminated rights of access should be reinstated. Any
termination of access shall remain in effect pending such demonstration and
IXC's final determination as to the advisability of such reinstatement.
9. RELOCATION. PSINet shall, at its own expense, relocate its fiber,
POP-to-POP Interconnect Facilities and Equipment upon IXC's written request and
in the reasonable (under the circumstances) time frame required by IXC. Such
relocations could be within the IXC POP or in
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the event the entire IXC POP is relocated. In any such event, IXC shall provide
the following services at no cost to PSINet: (i) site make-ready; (ii) the
intra-site cabling functionally equivalent to that which existed in the prior
IXC POP; (iii) relocation of IXC's IRU circuits and equipment used by PSINet;
and (iv) re-establishing competitive access provider and local exchange carrier
interconnects common to both IXC and PSINet.
10. NO RESTRICTIONS. Except as specifically set forth in the Purchase
Agreement, nothing contained in this Agreement shall be construed as a
limitation, restriction or prohibition against IXC with respect to any agreement
or arrangement which IXC has heretofore entered into, or may in the future enter
into, with others not parties to this Agreement regarding the IXC Premises.
IXC's right to maintain and operate its facilities in such a manner as will best
enable it to fulfill its own service requirements is in no manner limited by
this Agreement.
11. INSPECTIONS. IXC reserves the right to make periodic inspections of
any part of the fiber, POP-to-POP Interconnect Facilities and Equipment located
within or physically attached to the IXC Premises; provided that PSINet shall
have the right to have one or more of its employees or representatives present
during the time of any such inspection. IXC shall give PSINet advance notice of
such inspections, except in those instances where, in the sole judgment of IXC,
safety considerations justify the need for such an inspection without the delay
of providing notice. The making of periodic inspections or the failure to do so
shall not operate to impose upon IXC any liability of any kind whatsoever nor
relieve PSINet of any responsibility, obligation, or liability assumed under
this Agreement.
12. EMERGENCIES. In the event of an emergency:
(a) IXC's work shall take precedence over any and all operations of
PSINet in the IXC Premises and IXC may rearrange PSINet's Equipment or
POP-to-POP Interconnect Facilities.
(b) IXC shall use reasonable efforts to provide PSINet with advance
notice of any such work.
(c) IXC shall use reasonable care given the circumstances when
handling PSINet Equipment.
13. LIENS AND ENCUMBRANCES. PSINet shall not have the power, authority or
right to create and shall not permit any lien or encumbrance, including, without
limitation, tax liens, mechanics' liens, or other liens or encumbrances with
respect to work performed, in connection with the installation, repair,
maintenance or operation of its Equipment, POP-to-POP Interconnect Facilities or
other property installed within the IXC Premises.
14. TERM. This Agreement shall become effective as of its execution by
both parties and shall continue in effect until such time as it is terminated on
the earlier of (a) the expiration or
6
<PAGE>
termination of the Purchase Agreement or (b) such time as it is terminated as
provided herein or by operation of law.
15. SUBORDINATION. PSINet agrees that its rights under this Agreement
shall be totally subordinate to any mortgages, loans, deeds of trust or any
other borrowing upon the real or personal property which may be incurred by IXC.
PSINet shall sign any such reasonable documents as are necessary to satisfy any
lender, private or institutional, to reflect said subordination.
16. RELEASE; INDEMNIFICATION. Each party (each party in such capacity
being referred to as the "Releasing Party") releases, assumes and agrees to
---------------
indemnify, defend, protect and save the other party harmless from and against
any claim, damage, loss, liability, cost and expense (including reasonable
attorneys' fees) in connection with any loss or damage to any physical property
or facilities of the Releasing Party or any injury to or death of any person
arising out of or resulting in any way from the negligence or misconduct of the
Releasing Party or its employees, servants, contractors and/or agents.
17. LIMITATION OF LIABILITY.
17.1 EQUIPMENT AND FACILITIES. IXC, its employees or subcontractors
shall not be liable for any damages to PSINet's fiber, POP-to-POP Interconnect
Facilities and Equipment collocated on the IXC Premises, except to the extent
that such damages are caused by the gross negligence or intentional acts of IXC,
its agents or employees; provided that the maximum liability of IXC for any
damage to PSINet's fiber, POP-to-POP Interconnect Facilities and Equipment shall
not exceed the replacement value of the fiber, POP-to-POP Interconnect
Facilities and Equipment, or in the event that the fiber, POP-to-POP
Interconnect Facilities and the Equipment is repairable, the costs to restore
the fiber, POP-to-POP Interconnect Facilities and the Equipment to its original
condition. IXC shall not be liable for any damages of whatever nature,
including, but not limited to actual or consequential damages, arising from any
interruption or failure in the supply of utilities to the IXC Premises.
17.2 NO CONSEQUENTIAL DAMAGES. Except as specifically provided for in
the Purchase Agreement, in no event shall IXC or PSINet be liable for any
special, incidental, direct, indirect, punitive, reliance or consequential
damages, whether foreseeable or not, arising under this Agreement or from any
breach or partial breach of the provisions of this Agreement or occasioned by
any defect in the Bandwidth or other service provided hereunder, delay in
availability of the Bandwidth or any service provided hereunder, failure of the
Bandwidth or other service provided hereunder, interruptions or outages of the
Available System or any other cause whatsoever or arising out of any act or
omission by IXC or PSINet, as applicable, its employees, servants and/or agents,
including but not limited to, damage or loss of property or equipment, loss of
profits or revenue, cost of capital, cost of replacement services, or claims of
customers for service interruptions or transmission problems.
18. DISCLAIMER OF WARRANTY. IXC MAKES NO WARRANTY TO PSINET OR ANY OTHER
PERSON OR ENTITY, WHETHER EXPRESS, IMPLIED, OR STATUTORY, AS
7
<PAGE>
TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY
PARTICULAR PURPOSE OF ANY PREMISES, FACILITIES, SERVICES, EQUIPMENT, POWER,
CABLE OR FIBERS PROVIDED HEREUNDER OR DESCRIBED HEREIN, OR AS TO ANY OTHER
MATTER, ALL OF WHICH WARRANTIES ARE HEREBY EXCLUDED AND DISCLAIMED. NO OTHER
WARRANTIES ARE EXPRESSED OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
19. DEFAULT/TERMINATION.
19.1 DEFAULT. A party may deliver to the other party a written
"Notice of Default" for: (i) failing to make any payment owed hereunder, when no
bona fide dispute exists (a "Monetary Default"); or (ii) the breaching by either
----------------
party or its agents, assigns or affiliates of any Material Provision; or (iii)
the filing or initiating of proceedings by or against a party seeking
liquidation, reorganization or other such relief under any federal or state
bankruptcy or insolvency law (a "Bankruptcy Proceeding"). Such Notice of
Default must prominently contain the following sentences in capital letters:
"THIS IS A FORMAL NOTICE OF A BREACH OF CONTRACT FAILURE TO CURE SUCH BREACH
WILL HAVE SIGNIFICANT LEGAL CONSEQUENCES." A party that has received a Notice of
Default shall have five (5) business days to cure a Monetary Default, thirty
(30) days to cure the alleged breach of any Material Provision (and, if the
defaulting party shall have commenced actions in good faith to cure such
defaults which are not susceptible of being cured during such 30-day period,
such period shall be extended (but not in excess of 90 additional days) while
such party continues such actions to cure), and shall be given ninety (90) days
to remove, have dismissed or stay any involuntary Bankruptcy Proceeding (each
such period, a "Cure Period"). If such party fails to cure the breach within
the Cure Period, as long as such default shall be continuing, the non-defaulting
party shall have the right to either (a) suspend its performance or payment
obligations under this Agreement, (b) seek an order of specific performance,
and/or (c) seek the award of compensatory damages.
19.2 REMOVAL UPON TERMINATION. Upon termination of this Agreement for
any reason other than a material default by IXC, PSINet shall remove, at its
sole expense, its fiber, POP-to-POP Interconnect Facilities and Equipment within
ten (10) days following such termination. In the event PSINet fails to remove
its fiber, POP-to-POP Interconnect Facilities and Equipment within such ten (10)
day period, the fiber, POP-to-POP Interconnect Facilities and Equipment shall be
deemed abandoned and IXC, at its sole discretion and without liability, may
remove the fiber, POP-to-POP Interconnect Facilities and Equipment and be
reimbursed by PSINet for all costs associated with such removal. PSINet shall
make payment to IXC for any such costs within thirty days of its receipt of an
invoice containing such costs. In the event this Agreement terminates due to a
material default by IXC, either PSINet or IXC may remove the PSINet Equipment or
POP-to-POP Interconnect Facilities at its own expense upon fifteen (15) working
days written notice to the other party.
8
<PAGE>
20. INSURANCE. PSINet shall, at its expense, obtain and keep in full
force and effect at all times for the duration of this Agreement, with a carrier
or carriers satisfactory to IXC, insurance policies of the following kinds and
in the following amounts:
(a) Worker's Compensation Insurance in accordance with all applicable
laws;
(b) Employer's liability insurance with limits for employer's
liability of $500,000 per accident;
(c) Comprehensive bodily injury and property damage liability
insurance, including automobile insurance and contractual liability insurance,
in at least the following amounts:
<TABLE>
<CAPTION>
<S> <C>
Bodily injury to any one person $1,000,000
Bodily injury aggregate per occurrence $1,000,000
Property damage in any one accident $ 500,000
Property damage aggregate per occurrence $1,000,000
</TABLE>
Upon request of IXC, PSINet shall furnish IXC certificates of such insurance
and/or copies of the applicable policies, and each policy shall provide that no
change or cancellation shall become effective except upon twenty (20) days prior
written notice to IXC of such change or cancellation. In the event of any
change or cancellation not acceptable to IXC, IXC may demand that PSINet obtain
replacement coverage. If PSINet fails to obtain replacement coverage within
twenty (20) days after such demand by IXC, IXC may obtain replacement coverage
and invoice all premiums therefore to PSINet. PSINet shall make payment to IXC
for any amount of such invoices within thirty days of its receipt thereof.
21. ASSIGNMENT. Except as provided below, this Agreement may not be
assigned in whole or in part without the prior written consent of IXC. PSINet
may assign this Agreement in whole, but not in part and only in connection with
a permitted assignment of all of PSINet's rights and obligations under the
Purchase Agreement to an entity that is both a permitted assignee under the
section entitled Binding Effect; Assignment in the Purchase Agreement and a
--------------------------
permitted transferee under the section entitled Restrictions on Resale in the
----------------------
Purchase Agreement; provided, however, that any such assignment or transfer
shall be subject to IXC's rights under this Agreement and an assignee or
transferee shall continue to perform PSINet's obligations to IXC under the terms
and conditions of this Agreement. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
22. NOTICES. All notices, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given when delivered
personally, the next business day after delivered to a nationally recognized
overnight courier for next business day delivery, when transmitted by facsimile
or five (5) days after sent by registered or certified mail, return receipt
requested, to the parties (and to the Persons receiving copies thereof) at the
following addresses or facsimile numbers (or to such other address or facsimile
number as a party may have specified by notice given to the other party pursuant
9
<PAGE>
to this provision):
If to IXC to:
IXC Internet Services, Inc.
1122 Capital of Texas Highway South
Austin, Texas 78746
Attention: Chief Financial Officer
Facsimile: (512) 328-0239
With copies to:
IXC Communications, Inc.
1122 Capital of Texas Highway South
Austin, Texas 78746
Attention: General Counsel
Facsimile: (512) 328-7902
Riordan & McKinzie
695 Town Center Drive, Suite 1500
Costa Mesa, California 92626
Attention: Michael P. Whalen
Facsimile: (714) 549-3244
If to PSINet to:
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Attention: Chairman
Facsimile: (703) 904-1608
With copies to:
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Attention: General Counsel
Facsimile: (703) 904-9527
10
<PAGE>
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, New York 10022
Attention: Richard F. Langan, Jr.
Facsimile: (212) 940-3111
23. GENERAL PROVISIONS.
23.1 LAWS AND LICENSES. This Agreement is subject to all applicable
federal, state and local laws, regulations, rulings and orders of governmental
agencies, including, but not limited to, the Communications Act of 1934 as
amended by the Telecommunications Act of 1996, and the rules and regulations of
the FCC. IXC and PSINet agree that, except as otherwise provided herein, the
statute of limitations set forth in the Communications Act of 1934, 47 U.S.C.
section 415, as amended, shall govern all actions arising out of this Agreement,
including arbitrations.
23.2 CONFIDENTIALITY. This Agreement shall be governed by the terms
of the Confidentiality Agreement entered into between the parties and dated as
of May 14, 1997.
23.3 AMENDMENTS, WAIVERS AND CONSENTS. For purposes of this
Agreement and the Transaction Documents, except as otherwise specifically set
forth herein or therein, no course of dealing between PSINet and IXC and no
delay on the part of either party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No
covenant or other provision hereof or thereof may be waived or amended other
than by a written instrument signed by the party so waiving or amending such
covenant or other provision.
23.4 SECTION HEADINGS. The table of contents and section headings in
this Agreement have been inserted for reference purposes only and shall not be
deemed to limit or otherwise affect the construction of any provision thereof or
hereof.
23.5 GOVERNING LAW. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of the State of
Delaware without reference to its principles of conflicts of law.
23.6 DISPUTE RESOLUTION. Any controversies, claims or disputes
arising out of or relating to this Agreement shall be resolved in the manner set
forth in the section entitled Dispute Resolution in the Purchase Agreement.
23.7 SEVERABILITY. In the event that any one or more of the clauses,
covenants or provisions contained in this Agreement should be held to be
unenforceable under any Federal, State or City law, statute, code,
administrative or regulatory rule, such invalidity or unenforceability shall not
affect the remainder of this Agreement, which shall remain in full force and
effect.
11
<PAGE>
23.8 INTERPRETATION. This Agreement shall be interpreted in a manner
so as to be consistent with the Purchase Agreement and under the same rules of
construction and interpretation set forth in the Purchase Agreement.
23.9 COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which when so executed and delivered shall
be taken to be an original, but such counterparts shall together constitute but
one and the same document.
23.10 FACSIMILE DELIVERY. This Agreement may be delivered by
facsimile transmission of an executed counterpart signature page hereof, and
after attachment of such transmitted signature page to a copy of this Agreement,
such copy shall have the same effect and evidentiary value as copies delivered
with original signatures. Any party delivering this Agreement by facsimile
transmission shall deliver to the other party, as soon as practicable after such
delivery, an original executed counterpart signature page of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
IXC Internet Services, Inc.
By: /s/ Jeffrey C. Smith
----------------------
Name: Jeffrey C. Smith
Title: Senior Vice President
PSINet Inc.
By: /s/ David N. Kunkel
-----------------------
Name: David N. Kunkel
Title: Senior Vice President, General
Counsel and Secretary
12
<PAGE>
EXHIBIT 11.1
PSINET INC.
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES
USED IN CALCULATION(1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year.................... 40,113,234
Weighted average shares issued during the year ended
December 31, 1997 (364,552 shares)........................ 192,566
------------
40,305,800
============
Net loss available to common shareholders.................... $(46,013,000)
============
Basic and diluted loss per share............................. $ (1.14)
============
</TABLE>
- --------
(1) For a description of basic and diluted loss per share, see Note 1 of the
Notes to the Consolidated Financial Statements included in Part II, Item 8
of this Form 10-K.
<PAGE>
EXHIBIT 11.2
PSINET INC.
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES
USED IN CALCULATION(1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year.................... 37,914,932
Weighted average shares issued during the year ended Decem-
ber 31, 1996 (2,198,302 shares)........................... 1,463,072
------------
39,378,004
============
Net loss..................................................... $(55,097,000)
============
Basic and diluted loss per share............................. $ (1.40)
============
</TABLE>
- --------
(1) For a description of basic and diluted loss per share, see Note 1 of the
Notes to the Consolidated Financial Statements included in Part II, Item 8
of this Form 10-K.
<PAGE>
EXHIBIT 11.3
PSINET INC.
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES
USED IN CALCULATION(1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of year.................... 13,041,266
Weighted averages shares from conversion of redeemable pre-
ferred stock (10,042,680 shares).......................... 6,695,120
Weighted average shares issued to employees under revenue
bonus plan (18,300 shares)................................ 18,021
Weighted average shares issued for the acquisition of Pipe-
line (2,690,218 shares)................................... 2,413,723
Weighted average shares issued for the conversion of cer-
tain Pipeline employee stock options (98,255 shares)...... 88,157
Weighted average shares issues in connection with initial
public offering (4,370,000 shares)........................ 2,828,361
Weighted average shares issued for the acquisition of
InterCon (921,612 shares)................................. 496,676
Weighted average shares issued for the acquisition of Soft-
ware Ventures (762,208 shares)............................ 357,814
Weighted average shares issued for the acquisition of EUnet
(42,011 shares)........................................... 18,555
Weighted average shares issued in connection with public
offering (4,000,000 shares issued by the Company.......... 66,667
Weighted average shares issued during the year ended Decem-
ber 31, 1995 (1,928,382 shares)........................... 460,947
------------
26,485,307
============
Net loss................................................... $(53,160,000)
============
Basic and diluted loss per share .......................... $ (2.01)
============
</TABLE>
- --------
(1) For a description of basic and diluted loss per share, see Note 1 of the
Notes to the Consolidated Financial Statements included in Part II, Item 8
of this Form 10-K.
<PAGE>
EXHIBIT 21
SUBSIDIARIES
1. PSINet Japan Inc. (PSINet Kabushiki Kaisha), a company organized under the
laws of Japan.
2. PSINet Limited, a corporation organized under the laws of Canada.
3. PSINet Pipeline New York, Inc., a corporation organized under the laws of
the State of New York.
4. PSINet Pipeline USA, Inc., a corporation organized under the laws of the
State of Delaware.
5. PSINet Asia Holdings Inc., a corporation organized under the laws of the
State of Delaware.
6. Telecom Licensing Inc., a corporation organized under the laws of the State
of Delaware.
7. EUnet GB Limited, a corporation organized under the laws of the United
Kingdom.
8. PSINet UK Limited, a corporation organized under the laws of the United
Kingdom.
9. PSIWeb Inc., a corporation organized under the laws of the State of
Delaware.
10. PSIWeb Europe Limited, a corporation organized under the laws of the
Republic of Ireland.
11. PSINet Security Services Inc., a corporation organized under the laws of
the State of Delaware.
12. PSINet Europe Inc., a corporation organized under the laws of the State of
Delaware.
13. PSINet Telecom Limited, a corporation organized under the laws of the State
of Delaware.
14. PSINet Telecom UK Limited, a corporation organized under the laws of the
United Kingdom.
15. PSINet Europe B.V., a corporation organized under the laws of the Kingdom
of The Netherlands.
16. PSINet Europe Limited, a corporation organized under the laws of the
Republic of Ireland.
17. PSINet Netherlands B.V., a corporation organized under the laws of the
Kingdom of The Netherlands.
18. PSINet Belgium S.P.R.L., a corporation organized under the laws of the
Kingdom Of Belgium.
19. PSINet Germany GmbH, a corporation organized under the laws of the Federal
Republic of Germany.
20. PSINet (Europe) S.A., a corporation organized under the laws of the Swiss
Confederation.
21. PSINet SARL, a corporation organized under the laws of the Republic of
France.
22. PSINet France S.A. (formerly Serveur Telematique Internet SA, dba
Calvacom), a corporation organized under the laws of the Republic of
France.
23. Internet Prolink S.A., a corporation organized under the laws of the Swiss
Confederation.
24. PRC Internet Corporation, a corporation organized under the laws of the
State of California.
25. iSTAR internet inc., a corporation organized under the laws of Canada.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-98314, 33-98316, 33-98318, 33-98320, 33-99464,
33-99466, 33-99470, 333-04008) of PSINet Inc. of our report dated February 6,
1998, except as to the first three paragraphs of Note 11, which are as of
February 25, 1998 appearing on page 45 of this Form 10-K.
Price Waterhouse LLP
March 19, 1998
Washington, D.C.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 54,012
<SECURITIES> 0
<RECEIVABLES> 13,123
<ALLOWANCES> 2,101
<INVENTORY> 0
<CURRENT-ASSETS> 78,898
<PP&E> 149,263
<DEPRECIATION> 53,644
<TOTAL-ASSETS> 186,181
<CURRENT-LIABILITIES> 77,626
<BONDS> 33,820
0
28,135
<COMMON> 406
<OTHER-SE> 44,888
<TOTAL-LIABILITY-AND-EQUITY> 186,181
<SALES> 121,902
<TOTAL-REVENUES> 121,902
<CGS> 94,363
<TOTAL-COSTS> 94,363
<OTHER-EXPENSES> 77,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,362
<INCOME-PRETAX> (46,078)
<INCOME-TAX> 476
<INCOME-CONTINUING> (45,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,602)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
