SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /x/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PSINET INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount
on which the filing fee is calculated and state how it was
determined):N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
/ / Fee paid previously with preliminary materials: N/A
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
<PAGE>
PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia 20170
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1998
The Annual Meeting of Shareholders of PSINET INC. (the "Company")
will be held at the Hyatt Regency Reston, 1800 Presidents Street, Reston,
Virginia 20190 on Wednesday, May 20, 1998, at 9:00 A.M. for the purpose of
considering and acting upon the following matters:
(1) The election of three directors for terms
expiring at the Company's 2000 Annual Meeting of Shareholders.
(2) The ratification or disapproval of the
appointment by the Board of Directors of Price Waterhouse LLP
as independent accountants for the year ending December 31,
1998.
(3) The transaction of such other business as may
properly come before the meeting and any adjournments thereof.
Pursuant to the provisions of the By-Laws of the Company, the
Board of Directors has fixed the close of business on April 3, 1998 as the
record date for determining the shareholders of the Company entitled to notice
of and to vote at the meeting and any adjournments thereof.
ALL SHAREHOLDERS ARE URGED TO DATE, SIGN AND PROMPTLY MAIL THE
ENCLOSED PROXY TO THE COMPANY IN THE ACCOMPANYING POSTAGE PAID ENVELOPE.
By Order Of The Board Of Directors,
David N. Kunkel
Secretary
April 10, 1998
Herndon, Virginia
<PAGE>
PSINET INC.
510 Huntmar Park Drive
Herndon, Virginia 20170
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1998
SOLICITATION
This Proxy Statement is being mailed to shareholders on or about April
10, 1998, in connection with the solicitation of proxies by the Board of
Directors of PSINET INC., a New York corporation ("PSINet" or the "Company"), to
be used at the Annual Meeting of Shareholders of the Company (the "Annual
Meeting"), to be held on May 20, 1998. Accompanying this Proxy Statement is a
Notice of Annual Meeting of Shareholders and a form of proxy for such meeting. A
copy of the 1997 Annual Report to Shareholders of the Company, which contains
financial statements and related data, also accompanies this Proxy Statement.
All proxies which are properly completed, signed and returned to the
Company in time will be voted in accordance with the instructions thereon.
Proxies may be revoked by any shareholder upon written notice to the Secretary
of the Company prior to the exercise thereof and shareholders who are present at
the Annual Meeting may withdraw their proxies and vote in person if they so
desire.
The expense of preparing, assembling, printing and mailing the form of
proxy and the material used in the solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
to solicit proxies personally and by telephone and telegraph. The Company has
requested banks, brokers and other custodians, nominees and fiduciaries to
forward copies of the proxy materials to their principals and to request
authority for the execution of proxies and will reimburse such persons for their
services in doing so. The cost of such additional solicitation incurred
otherwise than by use of the mails is estimated not to exceed $5,000. In
addition, the Company has engaged the firm of MacKenzie Partners, Inc. as its
proxy solicitor in connection with the Annual Meeting for a retainer of $10,000
plus such amount as may be agreed upon by the Company and MacKenzie Partners,
Inc.
The Board of Directors has fixed the close of business on April 3,
1998, as the record date for the determination of shareholders who are entitled
to notice of and to vote at the Annual Meeting and any adjournments thereof. As
of the record date, the Company had outstanding approximately 50,981,175 shares
of its common stock, $.01 par value (the "Common Stock"). Holders of the
Company's Common Stock are entitled to one vote per whole share. Holders of
fractional shares are entitled to exercise voting rights in proportion to their
fractional holdings. A majority of the outstanding shares of the Company's
Common Stock entitled to vote at the Annual Meeting is required to establish a
quorum at the Annual Meeting. A plurality of the votes cast by the holders of
the shares of the Company's Common Stock entitled to vote at the Annual Meeting
is required for the election of directors. A majority of the votes cast by the
holders of the Company's Common Stock entitled to vote at the Annual Meeting is
required for the ratification of the appointment of independent accountants.
With regard to the election of directors, votes may be cast in favor or
withheld. Votes withheld from any director will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but will not affect the outcome of the voting in such
election. With regard to other proposals, abstentions may be specified. The
Company believes that abstentions are shares present and entitled to vote, but
do not constitute votes cast in respect of a particular matter. The Company,
therefore, intends to count abstentions and votes withheld for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but not as votes having been cast in respect of the
voting on any proposal. Accordingly, such abstentions or votes withheld will not
affect the outcome of the voting on any proposal. Broker non-votes (that is,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
on a particular matter as to which the
<PAGE>
brokers or nominees do not have discretionary power) may be counted as present
or represented for purposes of determining the presence or absence of a quorum
for the transaction of business, but not for purposes of determining the voting
power present with respect to proposals in respect of which brokers do not have
discretion (non-discretionary proposals). The Company believes that all
proposals being presented to shareholders at the Annual Meeting are proposals in
respect of which brokers and other nominees typically have discretion.
Accordingly, unless one or more beneficial owners of the Common Stock have
withheld discretionary authority from their brokers or nominees in respect of
these types of proposals, the Company does not anticipate that there will be any
broker non-votes in respect of such proposals. If there are any broker non-votes
in respect of these proposals, however, the Company intends to treat such broker
non-votes as stated above.
PRINCIPAL SHAREHOLDERS
Common Stock
The following table sets forth the beneficial ownership of the
Company's Common Stock, as of April 3, 1998, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each director and director nominee of the Company who owns shares of
the Company's Common Stock; (iii) each executive officer named in the Summary
Compensation Table appearing elsewhere herein; and (iv) all directors and
executive officers of the Company as a group.
Amount Percent
Name of Beneficial Owner Beneficially Owned(1) of Class
----------------------- -------------------- --------
IXC Internet Services, Inc................... 10,229,789(2) 20.1%
William L. Schrader.......................... 5,737,477(3) 11.3
David N. Kunkel.............................. 220,106(4) *
Harold S. Wills.............................. 204,007(5) *
William H. Baumer............................ 90,988(6) *
Edward D. Postal............................. 77,251(7) *
Volker Kleinn................................ 44,104(8) *
Ralph J. Swett............................... 10,000(9) *
Ian P. Sharp................................. 4,375(10) *
William A. Wilson............................ 4,375(10) *
Executive officers and directors as a group
(24 persons)................................. 7,385,755(11) 14.5
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* Less than 1%
(1) The persons named in the table have sole voting and dispositive power
with respect to all shares of the Company's Common Stock shown as
beneficially owned by them, subject to the information contained in the
notes to the table and to community property laws, where applicable.
(footnotes continue on next page)
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(footnotes continued from previous page)
(2) These shares were issued to IXC Internet Services, Inc. ("IXC") in
consideration for the Company's acquisition from IXC on February 25,
1998 of noncancellable indefeasible rights of use in up to 10,000
equivalent route miles of fiber-based OC-48 network bandwidth across
the United States (which number of shares is equal to 19.99999% of the
issued and outstanding shares of Common Stock as of such date after
giving effect to the issuance of such shares and to 224,274 shares of
Common Stock issuable upon exercise of outstanding warrants). IXC's
address is City View Center, 1122 Capitol of Texas Highway South,
Austin, Texas 78746. See "Certain Relationships and
Transactions--Strategic Alliance with IXC."
(3) Includes (i) 427,000 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable, (ii)
2,170,457 shares which are pledged with Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") in respect of a non-recourse loan
of up to $4,800,000, of which $1,939,996.98 (including principal and
interest) was outstanding as of April 3, 1998, which relates to a
margin brokerage account Mr. Schrader maintains with Merrill Lynch and
provides for a standard margin interest rate currently equal to 8.375%
per annum, and (iii) 3,140,020 shares which are pledged with
NationsBank in respect of two lines of credit providing Mr. Schrader
with up to $2,250,000 on an aggregate basis, of which $2,043,959.54
(including principal and interest) was outstanding as of April 3, 1998,
at an interest rate equal to the 30 day LIBOR rate plus 2.5% per annum.
Does not include 1,227,435 shares beneficially owned by Mr. Schrader's
wife. Mr. Schrader disclaims beneficial ownership of the shares
beneficially owned by his wife. Mr. Schrader's address is c/o PSINet
Inc., 510 Huntmar Park Drive, Herndon, Virginia, 20170.
(4) Includes 217,577 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not
include 233,616 shares issuable upon the exercise of options which are
not deemed to be presently exercisable or 30,571 shares beneficially
owned by Mr. Kunkel's wife. Mr. Kunkel disclaims beneficial ownership
of the shares beneficially owned by his wife.
(5) Includes 197,916 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not
include 402,084 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(6) Includes 50,000 shares issuable upon the exercise of outstanding
warrants and 1,000 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not
include 1,000 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(7) Includes 62,451 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
212,549 shares issuable upon the exercise of options which are not
deemed to be presently exercisable.
(8) Includes 35,104 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
109,896 shares issuable upon the exercise of options which are not
deemed to be presently exercisable.
(9) Does not include 10,229,789 shares beneficially owned by IXC, of which
Mr. Swett is the chairman of the board. Mr. Swett disclaims beneficial
ownership of the shares beneficially owned by IXC. See "Certain
Relationships and Transactions--Strategic Alliance With IXC."
(10) Consists solely of shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. In each case,
does not include approximately 5,625 shares issuable upon the exercise
of options which are not deemed to be presently exercisable.
(11) See notes (3) through (10) above. Includes also approximately 1,671,650
shares issuable upon the exercise of vested options and options which
are deemed to be presently exercisable granted to 23 executive officers
and directors. Does not include approximately 2,552,393 shares issuable
upon the exercise of outstanding options granted to 22 executive
officers and directors which are not deemed to be presently
exercisable.
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<PAGE>
PROPOSAL 1 - ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors will be
divided into two classes consisting of at least three directors each and as
nearly equal in number as possible, and that directors will be elected for terms
of two years on a staggered basis. The Board of Directors is currently composed
of seven directors, three whose terms expire in 1998 and four whose terms expire
in 1999. Unless authority to vote for the election of a director is specifically
withheld by appropriate designation on the face of the proxy, it is the
intention of the persons named in the accompanying form of proxy to vote such
proxy for the election at the Annual Meeting of William H. Baumer, Ralph J.
Swett and Harold S. Wills as directors to serve until the 2000 Annual Meeting of
Shareholders and until their respective successors shall have been elected and
qualified.
All nominees presently are members of the Company's Board of Directors.
The proxies cannot be voted for a greater number of persons than three.
Management has no reason to believe that the named nominees will be unable or
unwilling to serve if elected to office. In such case, however, it is intended
that the individuals named in the enclosed proxy will vote for the election of
such substituted nominees as the Company's Board of Directors may recommend.
Certain information concerning the nominees and directors continuing in
office is set forth in the following table.
Principal Occupation, Business
Name Age Experience and Directorships
---- --- ------------------------------
Nominees For Terms
Expiring In 2000
William H. Baumer 65 Professor of Philosophy at the
University at Buffalo since 1971.
Acting Chairman of the Department of
Economics at the University at Buffalo
from June 1992 until June 1995. Treasurer
and Vice President of NYSERNet Inc.
("NYSERNet"), a provider of data
networking services in New York State,
from January 1986 to December 1990 and
from December 1989 to December 1990,
respectively. Director of the Company
since 1993.
Ralph J. Swett 63 Chairman of IXC Communications, Inc., the
indirect parent company of IXC ("IXC
Communications"), since its formation in
July 1992 and served as Chief Executive
Officer and President of IXC
Communications from July 1992 to October
1997. Prior thereto, served as Chairman
of the Board and Chief Executive Officer
of Communications Transmission, Inc.
("CTI")from 1986 to 1992. From 1969 to
1986, served in increasingly senior
positions (Vice President,President and
Chairman)of Times Mirror Cable Television
("TMCT"), a subsidiary of Times Mirror
and a previous owner of IXC Carrier,Inc.,
the direct parent company of IXC ("IXC
Carrier"), and as a Vice President of
Times Mirror from 1981 to 1986. Served as
Chairman of IXC Carrier since
1979 and served as its Chief Executive
Officer from 1986 to October 1997 and its
President from 1991 to October 1997.
Director of the Company since February
25, 1998, effective upon the closing of
the Company's transaction with IXC as
described herein under "Certain
Relationships and Transactions--Strategic
Alliance with IXC."
(table continues on next page)
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(table continued from previous page)
Principal Occupation, Business
Name Age Experience and Directorships
---- --- ------------------------------
Harold S. Wills 56 Executive Vice President and Chief
Operating Officer of the Company since
April 1996 and Acting Chief Financial
Officer of the Company from April 1996 to
October 1996. Chief Operating Officer of
Hospitality Information Networks, Inc., a
provider of information services for the
hospitality industry, from July 1995
through January 1996. Served in various
capacities including Managing Director,
International Computer Services,Technical
Service Director and Sales Director of
Granada Group PLC, a computer services
provider, from September 1991 through
September 1995. Director of the Company
since April 1996.
Directors Whose Terms
Expire In 1999
David N. Kunkel 55 Senior Vice President of the Company
since September 1996, Secretary, Vice
President and General Counsel of the
Company since September, July and June
1995, respectively. Vice President of
International Operations of the Company
from April 1996 to September 1996. Senior
Counsel to Nixon, Hargrave, Devans &
Doyle LLP, outside counsel for the
Company, from July 1995 through December
1995. Partner of Nixon, Hargrave, Devans
& Doyle LLP from January 1979 until July
1995. Outside counsel to NYSERNet, from
1986 until 1989 and to the Company from
its inception until July 1995. Director
of the Company since 1995.
William L. Schrader 46 Founder of the Company. Chairman of th
Board of Directors, President and Chief
Executive Officer of the Company, since
inception. President and Chief Executive
Officer of NYSERNet from January 1986 to
December 1989. Co-founder and Executive
Director of Cornell Theory Center, a
supercomputer center, from May 1984 until
February 1987. Director of the Company
since inception.
Ian P. Sharp 66 Retired. President and founder of I. P.
Sharp Associates, a software development
company, from December 1964 through July
1989. Director of the Company since
September 1996.
(table continues on next page)
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(table continued from previous page)
Principal Occupation, Business
Name Age Experience and Directorships
---- --- ------------------------------
Directors Whose Terms
Expire In 1999 (cont.)
William A. Wilson 52 Vice President, Finance and Chief
Financial Officer of XCOM Technologies,
Inc., a competitive local exchange
carrier, since February 1998. Consultant
to several private companies from October
1997 to February 1998. Senior Vice
President, Finance and Chief Financial
Officer of Computervision Corporation, a
software publishing and development
company,from June 1997 to October 1997.
Executive Vice President and Chief
Financial Officer of Arch Communications
Group, Inc., a wireless messaging
company, from June 1996 to June 1997 and
Vice President, Finance and Chief
Financial Officer of Arch Communications
Group, Inc. from January 1989 to June
1996. Director of the Company since
September 1996.
Board of Directors and Committees of the Board
The Board of Directors met 17 times during the year ended December 31,
1997. Each of the directors attended 75% or more of the meetings held by the
Board of Directors and any Committees of the Board of Directors on which such
person served during the last fiscal year.
The Company's Board of Directors has three committees, the Audit
Committee, the Compensation Committee and the Financing Committee. The Audit
Committee met six times during the year ended December 31, 1997. The Audit
Committee, among other things, recommends the firm to be appointed as
independent accountants to audit the Company's financial statements, discusses
the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants the Company's interim and
year-end operating results, considers the adequacy of the internal accounting
controls and audit procedures of the Company and reviews the non-audit services
to be performed by the independent accountants. The current members of the Audit
Committee are Messrs. Baumer, Sharp and Wilson.
The Compensation Committee met seven times during the year ended
December 31, 1997. The Compensation Committee reviews and recommends the
compensation arrangements for management of the Company and administers the
Company's Executive Stock Option Plan, Executive Stock Incentive Plan and
Strategic Stock Incentive Plan. The current members of the Compensation
Committee are Messrs. Baumer, Schrader and Swett.
The Financing Committee was formed in December 1997 and did not meet
during the year ended December 31, 1997. The Financing Committee may authorize
and approve debt financings, lease financings and equity financings subject to
certain limitations. The current members of the Financing Committee are Messrs.
Baumer, Schrader and Wilson.
Compensation of Directors
Directors, other than those who also are employees or consultants of
the Company or are serving on the Board of Directors as representatives of a
shareholder, receive annual fees of $5,000 and are eligible for awards under the
Company's Directors Stock Incentive Plan (the "Directors' Plan"). The Directors'
Plan provides for initial option grants with respect to 10,000 shares of Common
Stock ("Initial Grants") to be made to each eligible director upon his or her
first election to the Company's Board of Directors and, thereafter, for annual
grants of options to purchase 2,000 shares of Common Stock to be made to each
eligible director who has served on the Company's Board of Directors for at
least 12 months. Each of Messrs. Sharp and Wilson received Initial Grants upon
their election to the Company's Board of Directors in accordance with the
Directors' Plan. In addition, directors who are not also officers of the
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Company receive fees of $1,000 per day for committee meetings and consultations
not in conjunction with a Board of Directors meeting. Directors also are
reimbursed for certain reasonable expenses incurred in attending Board or
committee meetings. The Company has issued to Mr. Baumer warrants to purchase
25,000 shares of Common Stock for $1.60 per share in return for Mr. Baumer's
services as a director of the Company. Mr. Baumer also holds warrants to
purchase an additional 25,000 shares in return for consulting services rendered
to the Company by Mr. Baumer. Each of these warrants became fully vested
effective September 9, 1996. Other than these fees and awards and the warrants
issued to Mr. Baumer, no member of the Board of Directors receives any fees or
other compensation for serving in such capacity.
Executive Officers
The following table sets forth certain information concerning the
executive officers of the Company.
Name Age Title
- ---- --- -----
Senior Executive Officers:
William L. Schrader 46 Chairman of the Board of Directors,
President and Chief Executive Officer
(Founder)
Harold S. Wills 56 Executive Vice President, Chief Operating
Officer and Director
David N. Kunkel 55 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 43 Vice President, Product Manager 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 34 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 46 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. Muleta 33 Vice President
William L. Schrader is the founder of the Company and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company since its inception. Prior to forming the Company, Mr. Schrader served
as President and Chief Executive Officer of NYSERNet from January 1986 to
December 1989. Mr. Schrader also was a co-founder, and, from May 1984 until
February 1987, served as Executive Director of the Cornell Theory Center, a
National Science Foundation supercomputer center.
Harold S. Wills has served as a director and Executive Vice President
and Chief Operating Officer of the Company since April 1996 and as Acting Chief
Financial Officer of the Company from April 1996 to October 1996. Mr. Wills
served as Chief Operating Officer of Hospitality Information Networks, Inc., a
provider of information services for the hospitality industry, from July 1995
through January 1996. Mr. Wills also held various positions
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<PAGE>
including, Managing Director, International Computer Services, Technical Service
Director and Sales Director of Granada Group PLC, a computer services provider,
from September 1991 through September 1995.
David N. Kunkel has served as Senior Vice President of the Company
since September 1996, as a director and Secretary of the Company since September
1995, as Vice President of the Company since July 1995 and as General Counsel of
the Company since June 1995. Mr. Kunkel also served as Vice President of
International Operations of the Company from April 1996 to September 1996 and as
Senior Counsel to Nixon, Hargrave, Devans & Doyle LLP, outside counsel to the
Company, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to the
Company from its inception until July 1995.
Edward D. Postal has served as Senior Vice President and Chief
Financial Officer of the Company since August 1997 and served as Vice President
and Chief Financial Officer of the Company since October 1996. Prior to joining
the Company, Mr. Postal served as Senior Vice President, Chief Financial Officer
and a director of The Hunter Group, Inc., a systems integration consulting firm,
from March 1995 to October 1996, as Vice President and Chief Financial Officer
of The Wyatt Company, an international employee benefits and human resources
consulting firm (currently Watson Wyatt Worldwide), from December 1991 to
October 1994 and as controller/treasurer of The Wyatt Company from November 1985
to December 1991. From 1981 to November 1985, Mr. Postal served in various
financial management positions at Satellite Business Systems, a satellite
communications company acquired by MCI Communications Corp. ("MCI") in 1985,
and, prior thereto, held various positions at Touche Ross & Co. (currently
Deloitte & Touche LLP).
John J. Chidester has served as Senior Vice President of the Company
since November 1997. Prior to joining the Company, Mr. Chidester served as Vice
President Enterprise Management Services of MCI Systemhouse, Inc., a systems
integration, consulting and technology deployment company, from March 1997 to
November 1997, as Executive Vice President Sales and Marketing of XLConnect
Solutions, Inc., a systems integration company, from March 1996 to January 1997,
and as Vice President Sales of MCI from 1980 to March 1996.
Anthony A. Aveta has served as Vice President and Chief Information
Officer of the Company since September 1997. Prior to joining the Company, Mr.
Aveta served as Chief Information Officer at CACI International Inc, a
professional services and software products company, since June 1995. Prior
thereto, Mr. Aveta served as Center Director for the Network Integrations
Division of Computer Sciences Corporation, a software product services and
outsourcing company, since June 1994 and in various positions at Science
Applications International Corporation, a systems integrator, from 1989 to 1994.
Mary-Ann Carolan has served as Vice President, International Support of
the Company since September 1997, served as Vice President, Customer
Administration of the Company from May 1996 to September 1997, and served as
Vice President, Consumer Support of the Company from November 1995 to April
1996. From November 1989 until November 1995, Ms. Carolan held various positions
with the Company, including Assistant Director for Individual Support, Assistant
Sales Manager, Systems Administrator and Customer Support Administrator.
Charles P. Cary has served as Vice President, Product Management and
Development, Corporate Network Services of the Company since February 1998,
served as Acting Director of Marketing of the Company from September 1997 to
February 1998, and served as Planning Director of the Company from June 1997 to
September 1997. Prior to joining the Company, Mr. Cary served in various
positions at Pacific Telesis Group, Inc., a Regional Bell Operating Company,
including Executive Director, Financial and Strategic Planning from September
1996 to June 1997, Managing Director of TELE-TV Systems (a partnership of
Pacific Telesis, Bell Atlantic and NYNEX providing digital entertainment
services over wireless and broadband networks) from May 1995 to August 1996,
Executive Director, Finance of Telesis Enhanced Services from February 1994 to
April 1995 and other managerial positions from April 1986 to January 1994.
William P. Cripe has served as Vice President, Human Resources of the
Company since January 1998. Prior to joining the Company, Mr. Cripe was employed
as a consultant at Dinte Resources, a management consulting firm, from October
1997 to January 1998, in which capacity he provided consulting services to the
Company. Prior thereto, Mr. Cripe served as Vice President, Human Resources of
Software AG Americas, a software development and sales company, from August 1990
to April 1997, and as Vice President, Human Resources of The Milton Company, a
real estate development company, from August 1987 to August 1990.
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<PAGE>
James R. Davin has served as Vice President and Chief Technical Officer
of the Company since February 1997. From January 1995 until February 1997, Mr.
Davin held various positions with the Company, including Assistant Director of
Engineering, Assistant Director of New Product Development and Senior Scientist.
Prior to joining the Company, Mr. Davin served as a member of the technical
staff of Bell Communications Research Inc., a telephone engineering and
consulting company, from August 1992 to January 1995, as a member of the
research staff at the Massachusetts Institute of Technology from June 1988 to
August 1992 and as an engineer for Proteon Inc., a provider of network access
solutions, from February 1987 to June 1988.
Mark S. Fedor has served as Vice President, Engineering of the Company
since February 1997. From November 1989 until February 1997, Mr. Fedor held
various positions with the Company, including Director of Engineering.
Richard R. Frizalone serves as Vice President, Alliances and Business
Development in Corporate Network Services of the Company as of December 1, 1997
and served as Vice President, Corporate Sales of the Company from October 1996
to December 1997. During the period from March 1995 to October 1996, Mr.
Frizalone served as Area Vice President-Distribution and Planning for Bell
Atlantic Communications, Inc. and as Vice President and Chief Marketing Officer
of Telezone Corporation and Director-Marketing and Sales for Bell Atlantic
International. From March 1994 to February 1995, Mr. Frizalone was Director of
Sales and Marketing for Comcast Cellular One and, from November 1990 to March
1994, Mr. Frizalone was Director of Sales for McCaw Cellular One.
Harry G. Hobbs has served as Vice President, Customer Administration of
the Company since September 1997. Prior to joining the Company, Mr. Hobbs served
as Vice President, Customer Care for American Personal Communications, LP, a
provider of wireless communications services and an affiliate of Sprint
Spectrum, from February 1995 to August 1997. Prior thereto, Mr. Hobbs served in
various positions in the Customer Service, Operations and Large Account Support
groups at MCI, including Vice President, Global Customer Service from September
1993 to February 1995, Director, Operations from March 1992 to February 1995 and
Director, Large Account Group from November 1990 to March 1992.
Kathleen B. Horne has served as Vice President of the Company since
January 1998 and as Assistant General Counsel of the Company since April 1996.
Prior to joining the Company, Ms. Horne was a partner, since January 1996, and
an associate, from September 1986 to December 1995, with the law firm of Nixon,
Hargrave, Devans & Doyle LLP, outside counsel to the Company.
Volker Kleinn has served as Vice President, European Operations of the
Company since April 1997. Prior to joining the Company, Mr. Kleinn was employed
as a free-lance consultant advising a U.S.-based virtual reality software
company in establishing business operations in Europe from January 1997 to April
1997 and served as Vice President Europe of Sense8, a U.S.-based virtual reality
software company, from January 1996 to December 1996. Prior thereto, Mr. Kleinn
was employed as a free-lance consultant advising several Swiss and French
software companies from July 1995 to December 1995, served as President of
Megalon S.A., a Swiss software publishing company, from February 1994 to June
1996 and served as Vice President Europe of Autodesk, Inc., a leading supplier
of various software products, from February 1990 to January 1994.
John F. Kraft has served as Vice President, Carrier and ISP Services of
the Company since December 1997, served as Vice President, Wholesale Network
Services of the Company from July 1997 to December 1997 and was the General
Manager of Wholesale Network Services of the Company from July 1996 to July
1997. Prior to joining the Company, Mr. Kraft served as a Director of Sales of
the Mid-Atlantic Division of MCI Business Services, a unit of MCI, from February
1986 to July 1997.
Mitchell Levin has served as Vice President, Network Operations of the
Company since February 1995. Prior thereto, Mr. Levinn had been Director of
Operations of the Company since its inception. Prior to joining the Company, Mr.
Levinn served as Director of the Computer Science Laboratory of the Computer
Science Department at Rensselaer Polytechnic Institute from June 1985 to
December 1990.
Michael Mael has served as Vice President, Application and Web Services
of the Company since December 1997, served as Vice President, Web Services of
the Company from September 1997 to December 1997 and served as General Manager,
PSINet Web Business of the Company from May 1997 to August 1997. Prior to
joining the Company, Mr. Mael served in various positions in the Business
Management and Marketing groups at MCI, including Director, Business Management,
Director, Marketing and Director, Strategic Alliances, from
-9-
<PAGE>
February 1992 to May 1997. From July 1990 to February 1992, Mr. Mael was
employed as a consultant at Aladdin Partners, an independent management
consulting firm.
Michael J. Malesardi has served as Vice President and Controller of the
Company since July 1997. Prior to joining the Company, Mr. Malesardi served as
Director of Financial Administration of Watson Wyatt Worldwide, an international
employee benefits and human resources consulting firm ("Watson Wyatt"), from
April 1995 to May 1997 and as Controller of Watson Wyatt from February 1992 to
April 1995. From September 1982 to February 1992, Mr. Malesardi held various
positions at Price Waterhouse LLP, the latest as Senior Audit Manager.
John B. Muleta has served as Vice President of the Company since
February 1998. Prior to joining the Company, Mr. Muletta served in various
positions with the Federal Communications Commission (the "FCC"), including
Deputy Chief of the FCC's Common Carrier Bureau, which regulates U.S. telephone
and mass media communications, from September 1997 to February 1998, Chief,
Enforcement Division, of the FCC's Common Carrier Bureau from July 1995 to
September 1997 and Attorney Advisor of the FCC's Office of Plans and Policy from
December 1994 to June 1995. From September 1993 to December 1994, Mr. Muletta
was employed as a consultant in the Telecommunications and Media Consulting
Group at Coopers & Lybrand. Prior thereto, Mr. Muletta attended the University
of Virginia School of Law and Colgate University Darden Graduate School of
Business Administration, receiving his MBA/JD in May 1993.
Each of the Company's executive officers serves at the pleasure of the
Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules promulgated thereunder require
the Company's officers and directors and persons who own more than ten percent
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and to furnish to the Company copies of all such filings. The Company
has determined, based solely upon a review of those reports and amendments
thereto furnished to the Company during and with respect to the year ended
December 31, 1997 and written representations from certain reporting persons,
that Mr. Kleinn was inadvertently late in filing a Form 4 reporting a purchase
of 4,000 shares of the Company's Common Stock on November 13, 1997 and Mr. Kraft
was inadvertently late in filing a Form 4 reporting a purchase of 3,000 shares
of the Company's Common Stock on November 13, 1997.
-10-
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth in summary form
the compensation paid by the Company to its chief executive office and to each
of its four most highly compensated executive officers other that the chief
executive officer as of December 31, 1997 for services rendered to the Company
in all capacities.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Long-Term
---------------------------------------------- -------------
Compensation
Awards
-------------
Securities All Other
Name and Other Annual Underlying Compensation($)
Principal Position Year Salary ($) Bonus (1)($) Compensation ($) Options(#)
- ------------------- ---- ---------- ------------ ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 1997 $248,519 $150,000 $ 7,457(2) _ $3,135(3)
Chairman, President and 1996 194,471 2,438 2,015(2) _ 3,135(3)
Chief Executive Officer 1995 169,104 45,514 6,245(2) _ 2,635(3)
David N. Kunkel (4) 1997 $299,327 $100,000 $ 6,550(5) 100,000(6) $3,125(7)
Senior Vice President, 1996 272,596 103,438 88,474(8) 251,193(9)(12) _
General Counsel and 1995 77,038 106,323(10) 25,988(11) _
Secretary
Harold S. Wills(13) 1997 $252,654 $100,000 $ 9,929(14) 250,000(15) $3,125(7)
Executive Vice President and 1996 146,154 77,500 30,825(16) 250,000(17) _
Chief Operating Officer
Edward D. Postal(18) 1997 $204,077 $ 75,000 $ 6,880(19) 75,000(20) $3,125(7)
Senior Vice President and 1996 34,865 60,872 _ 100,000(21) _
Chief Financial Officer
Volker Kleinn(22) 1997 $164,784 $ 99,557 _ 125,000(21) _
Vice President,
European Operations
</TABLE>
- ----------------------------
(1) Amounts reported in respect of a particular fiscal year reflect bonuses
earned for services rendered in that fiscal year regardless of when
paid.
(2) Consists of (i) $5,107 and $6,245 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1997 and
1995, respectively, and (ii) a car allowance of $2,350 and $2,015 1996
and 1997, respectively.
(3) Consists of: (i) insurance premiums in the amount of $2,135 paid by the
Company in each of 1995, 1996 and 1997 with respect to the
proportionate beneficial interest of Mr. Schrader's spouse in an
insurance policy on Mr. Schrader's life and (ii) matching contributions
made to Mr. Schrader's account under the Company's 401(k) Plan in the
amount of $500 in 1995 and in the amount of $1,000 in each of 1996 and
1997.
(4) Mr. Kunkel joined the Company as General Counsel in June 1995.
Accordingly, no information is provided for periods prior thereto with
respect to Mr. Kunkel.
(5) Consists of (i) payments made to Mr. Kunkel in connection with his
relocation as follows: $830 for certain closing costs on the sale of
his primary residence and $2,176 for certain carrying costs for his
residence pending such sale and (ii) a car allowance of $3,544.
(6) Issued pursuant to the Company's Executive Stock Option Plan.
(footnotes continue on next page)
-11-
<PAGE>
(footnotes continued from previous page)
(7) Consists of matching contributions made to the named officer's account
under the Company's 401(k) Plan in the years indicated.
(8) Consists of payments made to Mr. Kunkel in connection with his
relocation as follows: $52,175 pursuant to an agreement to guarantee
Mr. Kunkel a minimum price on the sale of his primary residence and
$36,299 for certain carrying costs for his residence pending such sale.
(9) Consists of options issued in connection with a company-wide repricing
of certain previously granted options as of April 5, 1996. Does not
include options with respect to 18,494 shares granted in February 1996
(with respect to 1995) which were replaced in connection with such
repricing or options with respect to 75,000 shares of Common Stock
granted in November 1996 which were cancelled as of December 31, 1996
due to failure to satisfy certain vesting conditions.
(10) Includes a signing bonus of $50,000 and a performance bonus of $50,000
paid to Mr. Kunkel pursuant to his employment agreement with the
Company.
(11) Consists of payments made to Mr. Kunkel in connection with his
relocation as follows: $13,456 for moving expenses, $9,200 for certain
costs on his new home and $3,332 for installation of a security system
at his new home.
(12) Does not include options with respect to 251,193 shares issued under
the Company's Executive Stock Incentive Plan pursuant to Mr. Kunkel's
employment agreement with the Company which were replaced in connection
with a company-wide repricing as of April 5, 1996. See footnote 9
above.
(13) Mr. Wills joined the Company as Executive Vice President and Chief
Operating Officer in April 1996. Accordingly, no information is
provided for periods prior thereto with respect to Mr. Wills.
(14) Consists of (i) $6,051 paid to Mr. Wills for installation of a security
system at his home and (ii) a car allowance of $3,878.
(15) Consists of (i) 200,000 options issued under the Company's Executive
Stock Option Plan and (ii) 50,000 options issued under the Company's
Executive Stock Incentive Plan.
(16) Consists of (i) payments made to Mr. Wills in connection with his
relocation as follows: $15,271 for certain closing costs on his new
home and $15,298 for moving expenses and (ii) a car allowance of $256.
(17) Consists of options issued under the Company's Executive Stock
Incentive Plan. Does not include options with respect to 100,000 shares
of Common Stock granted in November 1996 which were cancelled as of
December 31, 1996 due to failure to satisfy certain vesting conditions.
(18) Mr. Postal joined the Company as Vice President and Chief Financial
Officer in October 1996. Accordingly, no information is provided for
periods prior thereto with respect to Mr.
Postal.
(19) Represents a car allowance to Mr. Postal.
(20) Consists of (i) 38,950 options issued under the Company's Executive
Stock Option Plan and (ii) 36,050 options issued under the Company's
Executive Stock Incentive Plan.
(21) Issued pursuant to the Company's Executive Stock Incentive Plan.
(22) Mr. Kleinn joined the Company as Vice President, European Operations in
April 1997. Accordingly, no information is provided for periods prior
thereto with respect to Mr.
Kleinn.
-12-
<PAGE>
Option Grants. The following table sets forth certain information, as
of December 31, 1997, concerning individual grants of stock options made during
the fiscal year ended December 31, 1997 to the persons named in the Summary
Compensation Table above.
<TABLE>
Option Grants in 1997
<CAPTION>
Individual Grants
----------------------------------------------------------------
Name Number of Percent of Total Exercise Expiration Potential Realizable
Securities Options Granted Price Date Value
Underlying Options To Employees in $/sh) At Assumed Annual Rates
Granted(#) Fiscal Year(1) Of Stock Appreciation
For Option Term
- ---- ------------ -------------- ------- --------- ------------------------
5% 10%
--- ---
<S> <C> <C> <C> <C> <C> <C>
David N. Kunkel 100,000(2) 2.07% $7.00 03/12/07 $440,226 $1,115,620
Harold S. Wills 200,000(2) 4.13% $7.00 03/12/07 $880,452 $2,231,239
50,000(3) 1.03 8.25 10/18/07 259,419 657,419
Edward D. Postal 38,950(2) .81% $7.00 03/12/07 $171,468 $434,534
36,050(3) .75 8.25 10/18/07 187,041 473,999
Volker Kleinn 125,000(3) 2.58% $5.88 04/23/07 $461,844 $1,170,405
</TABLE>
- ---------------------
(1) Based upon total grants of options in respect of 4,841,600 shares of
Common Stock made during 1997.
(2) Granted under the Company's Executive Stock Option Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to continued
employment by the Company on each of such dates.
(3) Granted under the Company's Executive Stock Incentive Plan. Vest
monthly over 48 months from the anniversary of the grant, subject
to the continued employment by the Company on each of such dates.
Under each of the Company's Executive Stock Incentive Plan, Executive
Stock Option Plan, Directors Stock Incentive Plan and Strategic Stock Incentive
Plan, upon the acquisition of beneficial ownership of 30% or more of the
Company's outstanding Common Stock by any person other than a wholly-owned
subsidiary of the Company or the occurrence of certain other change in control
events specified in such plans, including certain mergers, consolidations and
transfers of all or substantially all of the Company's assets, all options and
stock appreciation rights will become fully exercisable and all restricted stock
awards will become immediately vested.
Aggregate Year-End Option Values. The following table provides
information concerning the number of unexercised options held by the individuals
named in the Summary Compensation Table as of December 31, 1997. Also reported
are the values for "in the money" options, which represent the positive spread
between the exercise price and the fair market value of the Company's Common
Stock as of December 31, 1997.
<TABLE>
Aggregated Option Exercises 1997 and Year-End Option Values
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 31, at December 31,
1997(#) 1997($)(1)
-------------------------- --------------------------
Shares Acquired Value
Name On Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 1,000 $ 4,275 361,400 65,600 $1,133,935 $231,240
David N. Kunkel - - 174,359 176,835 - -
Harold S. Wills - - 139,583 360,417 - -
Edward D. Postal - - 37,972 137,028 - -
Volker Kleinn - - 20,833 104,167 - -
------- -------- ------------ ----------
734,147 844,047 1,133,935 231,240
</TABLE>
- ---------------------
(1) Based upon a closing price of $5.125 on December 31, 1997, as reported
on The Nasdaq Stock Market.
-13-
<PAGE>
Employment Agreements. The Company has employment agreements with and
each of Messrs. Kunkel, Wills, Postal and Kleinn. The Company also has
employment agreements with most of its other executive officers other than Mr.
Schrader pursuant to which they serve in their respective capacities.
Mr. Kunkel's employment agreement provides for a five-year term ending
in June 2000 and a current annual base salary of $315,000, and also provides for
a performance bonus of $100,000 or greater for each of 1997 and subsequent years
as determined by the Compensation Committee.
Mr. Wills's employment agreement provides for a three-year term ending
April 1999 and a current annual base salary of $315,000, and also provides for a
performance bonus of $75,000 or greater in 1997 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Postal's employment agreement provides for a three-year term ending
October 1999 and a current annual base salary of $236,250, and also provides for
a performance bonus of $60,000 or greater for each of 1997 and subsequent years
as determined by the Compensation Committee.
Mr. Kleinn's employment agreement provides for a three-year term ending
April 2000 and a current annual base salary of SFr. 360,000 (equivalent to
$247,176 as of December 31, 1997), and also provides for a performance bonus of
SFr. 220,000 (equivalent to $151,052 as of December 31, 1997) in 1997, prorated
based upon the number of days Mr. Kleinn was employed by the Company in 1997,
and for performance bonuses in subsequent years, subject to achievement of
certain performance objectives, as determined by the Company's Chief Operating
Officer.
These employment agreements also provide for standard employee
benefits, including, without limitation, participation in the Company's 401(k)
plan and bonus plan as well as life, health, accident and disability insurance.
These agreements also provide for a 24-month non-competition period. If the
Company elects to enforce such non-competition restrictions, these officers are
entitled, for a period of 24 months after termination of their employment, to
receive their then current base salary and all benefits being provided to them
at the time of termination. Options awarded pursuant to these agreements are
subject to immediate vesting upon the occurrence of certain change in control
events.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee currently is composed of Messrs. Baumer and
Swett, each a non-employee director of the Company, and Mr. Schrader. The
Compensation Committee is responsible, subject to the approval of the Board of
Directors, for establishing the Company's compensation program.
Compensation Philosophy and Policy
The Company's compensation program generally is designed to motivate
and reward the Company's executive officers and other personnel responsible for
attaining financial, operational and strategic objectives that will contribute
to the overall goal of enhancing shareholder value. In administering the plan,
the Compensation Committee assesses the performance of individuals and the
Company relative to those objectives. The Company's compensation program
generally provides incentives to achieve annual and longer term objectives. The
principal elements of the compensation plan include base salary, cash bonus
awards and stock awards in the form of grants of stock options and restricted
Common Stock. These elements generally are blended in order to provide
compensation packages which provide competitive pay, reward the achievement of
financial, operational and strategic objectives and align the interests of the
Company's executive officers and other high level personnel with those of the
Company's shareholders.
Base Salary. During 1997, the Company had employment agreements with
each of Messrs. Kunkel, Wills, Postal and Kleinn, as well as with most of the
other individuals who served as executive officers during such period, other
than Mr. Schrader, whose employment agreement expired on March 10, 1996.
Following the expiration of his employment agreement in March 1996, the Board of
Directors determined not to enter into a new employment agreement with Mr.
Schrader. Mr. Schrader's compensation was determined based upon his leadership
of the Company in setting and pursuing its financial, operational and strategic
objectives. Mr. Schrader did not participate as a member of the Compensation
Committee in determining his compensation.
-14-
<PAGE>
Until May 1995, the Company was a private company and senior management
of the Company possessed primary responsibility for establishing base salaries
for its executive officers and key employees of the Company. The Company's most
direct competitors, like the Company, have been, until recently, private
companies and, prior to going public, have not publicly disclosed executive
compensation, financial condition or operating performance information.
Accordingly, the Company generally did not consider the compensation paid by
other Internet service providers or other companies similar to the Company in
determining the base pay levels and increases for its executive officers and
other key employees prior to 1995. The Company considered the experience of the
individual, the scope and complexity of the position and the size and growth
rate of the Company as well as the salary payable to Mr. Schrader in setting
base salaries for these officers and employees. During 1997, in addition to the
factors discussed above, the Company also considered the compensation paid by
the Company's competitors, when such information was available to the Company,
in making these compensation decisions. Due to the increasingly competitive
nature of the Company's industry segment, this factor is expected to continue to
grow in importance to the Company as it assesses its compensation structure in
the future in order to ensure its ability to attract and retain highly qualified
executives.
Bonus Plans. All full-time employees of the Company are eligible to
receive bonuses, which are tailored for each department to specific criteria for
participation and compensation and are based upon contributions made by their
respective groups to the Company's overall performance. Executive officers of
the Company, to the extent they are not already entitled to receive a bonus
pursuant to their respective employment agreements, are eligible for bonuses
under this general program. No payments under the Company's general bonus
program were made to Messrs. Schrader, Kunkel, Wills, Postal or Kleinn during
1997. Bonuses were paid to each of these officers (other than Mr. Schrader)
during 1997 pursuant to their employment agreements with the Company. See
"Executive Compensation--Employment Agreements." In determining the level of
bonus paid to Mr. Schrader in 1997, the Compensation Committee, in addition to
consideration of Mr. Schrader's individual performance, took particular note of
the Company's achievements in the following key areas: the significant expansion
and enhancement of the Company's network through its acquisition from IXC of
noncancellable indefeasible rights of use in up to 10,000 equivalent route miles
of fiber-based OC-48 bandwidth and the continued expansion of the Company's
international presence through strategic acquisitions of Internet service
providers in Canada, France and Switzerland.
Stock Awards. To promote the Company's long-term objectives, stock
awards are made to directors, officers and employees who are in a position to
make a significant contribution to the Company's long-term success. The stock
awards are made to officers and employees pursuant to the Company's Executive
Stock Option Plan, in the form of incentive stock options and non-qualified
stock options, and since 1995, pursuant to the Company's Executive Stock
Incentive Plan, in the form of incentive stock options, non-qualified stock
options, stock appreciation rights and restricted stock awards, and to directors
pursuant to the Company's Directors Stock Incentive Plan, in the form of
non-qualified stock options. The Company also makes awards in the form of
incentive stock options, non-qualified stock options, stock appreciation rights
and restricted stock grants to key personnel in connection with acquisitions,
mergers, strategic alliances and other business combinations pursuant to its
Strategic Stock Incentive Plan.
Stock options represent rights to purchase shares of the Company's
Common Stock in varying amounts pursuant to a vesting schedule determined by the
Compensation Committee at a price per share specified on the date of grant of
the option (which may not be less than the fair market value on the date of the
grant). Stock options expire at the conclusion of a fixed term (generally 10
years).
Stock appreciation rights may be granted in tandem with options and,
upon exercise, entitle the holder to receive cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of fair market value per share of the Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is
exercised over the option exercise price for such number of shares.
Restricted stock awards consist of a specified number of shares of the
Company's Common Stock with an appropriate restrictive legend affixed thereto.
Shares of restricted stock may not be sold or otherwise transferred until
ownership vests in the recipient, at the time and in the manner specified by the
Compensation Committee at the time of the award.
Since the stock options, stock appreciation rights and restricted stock
awards vest and may grow in value over time, these components of the Company's
compensation plan are designed to reward performance over a sustained period and
to enhance shareholder value through the achievement of corporate objectives.
The Company
-15-
<PAGE>
intends that these awards will strengthen the focus of its directors, officers
and employees on managing the Company from the perspective of a person with an
equity stake in the Company.
In selecting recipients and the size of grants, the Compensation
Committee considers various factors such as the potential of the recipient, the
salary of the recipient and competitive factors affecting the Company's ability
to attract and retain employees, prior grants, a comparison of awards made to
officers in comparable positions at similar companies and Company performance.
No stock awards were made during 1997 to Mr. Schrader. Messrs. Kunkel,
Wills and Postal were awarded options to purchase 100,000, 200,000 and 38,950
shares of the Company's Common Stock, respectively, under the Company's
Executive Stock Option Plan during 1997. Messrs. Wills, Postal and Kleinn were
awarded options to purchase 50,000, 36,050 and 125,000 shares of the Company's
Common Stock, respectively, under the Company's Executive Stock Incentive Plan
during 1997. Awards made to other executive officers during 1997 consisted of
options to purchase an aggregate of 960,000 shares under the Company's Executive
Stock Incentive Plan. Total option awards under the Company's Executive Stock
Option Plan and the Company's Executive Stock Incentive Plan were made during
1997 with respect to 338,950 and 4,313,650 shares of Common Stock, respectively.
Options to purchase 185,000 shares of Common Stock were awarded under the
Company's Strategic Stock Incentive Plan during 1997. Awards made to directors
during 1997 consisted of options with respect to 4,000 shares of Common Stock
under the Company's Directors Stock Incentive Plan.
Tax Deductibility of Executive Compensation. Beginning in 1994, the
Internal Revenue Code (the "Code") imposed limitations upon the federal income
tax deductibility of compensation paid to the Company's chief executive officer
and to each of the other four most highly compensated executive officers. Under
these limitations, the Company may deduct such compensation only to the extent
that during any fiscal year the compensation paid to any such officer does not
exceed $1,000,000 or meets certain specified conditions (such as shareholder
approval). Based on the Company's current compensation plans and policies and
proposed regulations interpreting the Code, the Company and the Compensation
Committee believe that, for the near future, there is little risk that the
Company will lose any significant tax deduction for executive compensation. The
Company's compensation plans and policies will be modified to ensure full
deductibility of executive compensation if the Company and the Compensation
Committee determine that such an action is in the best interests of the Company.
COMPENSATION COMMITTEE
William H. Baumer, Chairman
William L. Schrader
Ralph J. Swett
-16-
<PAGE>
STOCK PRICE PERFORMANCE
Set forth below is a line graph comparing the cumulative total
shareholder return on the Company's Common Stock, based upon the market price of
the Company's Common Stock as reported by The Nasdaq Stock Market, with the
cumulative total return of companies in the Nasdaq Composite Index, the Nasdaq
Telecommunications Index and an Internet industry peer group (the "Peer Group")
for the period from May 1, 1995 through December 31, 1997. Prior to May 1, 1995,
the Company's Common Stock was not publicly traded. The Peer Group is comprised
of Bolt, Beranek and Newman Inc. ("BBN"), Digex Inc. ("Digex") and NETCOM
On-Line Communications Services, Inc.
("NETCOM").
Due to recent acquisitions of BBN by GTE Corporation, Digex by
Intermedia Communications, Inc. and NETCOM by ICG Communications Inc., the
companies comprising the Peer Group (which were selected for purposes of this
comparison last year) are no longer independent public companies whose stock
price performance can be separately compared against the Company's. Moreover, as
a result of other recent moves toward consolidation within the Internet industry
(e.g., the WorldCom, Inc. ("WorldCom")/ MFS Communications Inc./UUNet
Technologies, Inc. consolidation and WorldCom's pending acquisition of MCI), the
Company believes that there currently is an insufficient number of publicly
traded direct competitors of the Company to formulate a meaningful Internet
industry peer group for 1997. As a result, the Company believes that the Nasdaq
Telecommunications Index is comprised of a broader, more representative group of
companies doing business in the same general industry as the Company than the
companies comprising the Peer Group. While the Company still considers these
companies to be competitors, they are now owned by larger telecommunications
companies engaged in different industry sectors and it is not practicable to
distinguish the extent to which these different sectors may have impacted these
companies' respective stock prices.
[GRAPH comparing the performance of the Company with Nasdaq Composite
Index, Nasdaq telecom Index and Peer Group based on the following
data]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
5/2/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96 3/97 6/97 9/97 12/97
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PSINet 100.00 99.61 140.98 150.00 63.52 75.41 71.31 71.31 48.36 49.18 52.87 33.61
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Nasdaq Composite Index 100.00 110.97 124.04 125.10 131.64 142.38 147.45 154.70 146.38 173.21 202.51 189.92
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Nasdaq Telecom Index 100.00 109.80 123.74 125.66 132.17 136.32 128.23 128.45 119.43 149.92 174.03 189.80
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Peer Group 100.00 133.07 197.11 195.79 124.24 119.10 86.24 96.26 70.18 120.18 98.80 195.55
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
-17-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, the members of the
Compensation Committee of the Company's Board of Directors initially consisted
of Messrs. Baumer and Schrader and Wade Woodson, who resigned from the Company's
Board of Directors effective as of February 25, 1998 after five years of
distinguished service to the Company. In May 1997, Mr. Woodson was replaced on
the Compensation Committee by Mr. Wilson, who between October 1997 and December
1997, was temporarily replaced on the Compensation Committee by Mr. Sharp.
Effective as of February 25, 1998, Mr. Wilson was replaced on the Compensation
Committee by Mr. Swett. Mr. Schrader is the Chairman of the Company's Board of
Directors, President and Chief Executive Officer of the Company. None of such
persons other than Mr. Schrader is an executive officer or employee of the
Company.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Strategic Alliance With IXC
General Terms. In February 1998, the Company acquired from IXC 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 system within
the United States (the "Available System"). The PSINet IRUs were acquired in
exchange for the issuance to IXC of 10,229,789 shares of common stock of the
Company, $.01 par value per share (the "Common Stock"), 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
$78,641,502 based on the closing market price per share of the Common Stock as
reported by The Nasdaq Stock Market on such date of $7.6875 (the "IXC Initial
Shares"), pursuant to an IRU and Stock Purchase Agreement, dated as of July 22,
1997, between the Company and IXC, as amended (the "IRU Purchase Agreement").
Under the IRU Purchase Agreement, if the fair market value of the IXC Initial
Shares (based on the volume-weighted average closing market price per share of
the Common Stock 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 PSINet IRUs or the fourth
anniversary of the closing of the transaction (i.e., February 25, 2002) (the
"Determination Date"), the Company will be obligated to provide IXC with
additional shares of Common Stock (the "IXC Additional Shares" and, together
with the IXC Initial Shares, the "IXC Transaction Shares") 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 IXC Additional
Shares and/or cash pursuant to the Contingent Payment Obligation will terminate
on such date as the fair market value of the IXC Initial Shares (as determined
above) is equal to or greater than $240 million.
IXC Transaction Shares. IXC has been granted certain demand and
"piggyback" registration rights with respect to the IXC Transaction Shares
pursuant to a registration rights agreement between IXC and the Company.
Pursuant to the IRU Purchase Agreement, Ralph J. Swett, IXC Communications'
chairman, was elected, effective as of the closing of the transaction, to the
Company's Board of Directors, and the IRU Purchase Agreement provides that the
Company's Chairman will recommend that Mr. Swett continue to be re-elected to
the Company's Board for so long as IXC continues to own at least 95% of the IXC
Initial Shares. In the event IXC proposes to sell or otherwise dispose of any of
the IXC Transaction Shares (other than pursuant to a pledge to an unaffiliated
third party lender), the Company has a right of first offer to acquire the
shares proposed to be sold at the closing market price per share of the Common
Stock (as reported by The Nasdaq Stock Market or the principal securities
exchange on which the Common Stock is then listed) on the date notice of such
proposed sale is given to the Company. In addition, neither IXC, IXC
Communications nor any of their controlled affiliates may sell or otherwise
dispose of any shares of the Company's Common Stock during the six-month period
preceding or following the Determination Date or during the six-month period
following the Acceleration Date. Other than as set forth above and except for
transfer restrictions existing from time to time under applicable federal and
state securities laws, the IXC Transaction Shares are not subject to any
transfer restrictions or to any voting restrictions or other agreements.
PSINet IRUs. The total amount of bandwidth corresponding to the PSINet
IRUs is contemplated to be delivered to the Company (to the extent then
available) in specified minimum increments every six months during the two year
period following the closing. IXC has granted the Company a security interest
in, among other collateral, a portion of the IRUs underlying the PSINet IRUs
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granted to IXC by IXC Carrier and in a portion of certain other IRUs in IXC's
fiber optic telecommunications system to secure the performance of IXC's
obligations under the IRU Purchase Agreement to deliver the PSINet IRUs.
IXC will provide customary operation and maintenance services with
respect to the bandwidth delivered to the Company at specified prices and terms,
the total cost of which to the Company on an annual basis is expected to be
approximately $1.15 million per each 1,000 equivalent route miles of OC-48
bandwidth accepted under the IRU Purchase Agreement. IXC also will furnish
multiplexing, reconfiguration and collocation services with respect to such
bandwidth as requested by the Company at agreed upon fees.
Certain Restrictions on Use and Transfer of Bandwidth. 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 effect any sale, swap, lease or other
transfer of such bandwidth to any unaffiliated third party except (i) in
connection with the offering of Internet connectivity services or (ii) in
connection with a bona fide financing arrangement. Any transferee of bandwidth
acquired from IXC, other than in connection with a bankruptcy of the Company,
will be subject to the terms and conditions of the IRU Purchase Agreement,
including, without limitation, the foregoing restrictions.
Joint Marketing and Services Agreement. In connection with this
transaction, on July 22, 1997, PSINet and IXC also entered into a Joint
Marketing and Services Agreement (the "Marketing Agreement") pursuant to which
each party will be entitled to market the products and services of the other.
IXC. IXC is an indirect wholly owned subsidiary of IXC Communications.
IXC Communications is one of the largest suppliers of digital transmission and
long distance services in the United States. IXC Communications owns and
operates one of the newest nationwide digital networks and makes network
capacity available to local telephone companies, national and regional long
distance carriers, value-added carriers, cable and utility companies and ISPs
that offer residential and commercial customer services. IXC Communications
services include 1+ switched and 1+ dedicated outbound calling, 800/888 switched
and dedicated inbound calling, calling card and debit card services, high-speed
digital bandwidth products and broadband services. IXC's principal offices are
located at City View Center, 1122 Capitol of Texas Highway South, Austin, Texas
78746.
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PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, on the recommendation of the Audit Committee,
has appointed the firm of Price Waterhouse LLP, independent accountants, to
audit and report on the financial statements of the Company for the year ending
December 31, 1998. Price Waterhouse LLP has been employed by the Company as its
independent accountants since 1990.
Shareholders are asked to approve the action of the Board of Directors
in appointing Price Waterhouse LLP. It is intended that, unless marked to the
contrary, the shares represented by proxy shall be voted for the ratification of
such appointment.
It is expected that a representative of Price Waterhouse LLP will be
present at the Annual Meeting to answer questions of shareholders and will have
the opportunity, if desired, to make a statement.
SHAREHOLDER PROPOSALS
The Company's Certificate of Incorporation and By-laws require any
shareholder who wishes to bring any proposal before a meeting of shareholders or
to nominate a person to serve as a director to give written notice thereof and
certain related information to the Secretary of the Company at least 60 days
prior to the date one year from the date of the immediately preceding annual
meeting, if such proposal or nomination is to be submitted at an annual meeting,
and within ten days of the giving of notice to the shareholders, if such
proposal or nomination is to be submitted at a special meeting. The written
notice must set forth with particularity (i) the name and business address of
the shareholder submitting such proposal and all persons acting in concert with
such shareholder; (ii) the name and address of the persons identified in clause
(i), as they appear on the Company's books (if they so appear); (iii) the class
and number of shares of the Company beneficially owned by the persons identified
in clause (i); (iv) a description of the proposal containing all material
information relating thereto, including, without limitation, the reasons for
submitting such proposal; and (v) such other information as the Board of
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and shareholders of the Company to consider such proposal.
Management does not know of any matters which are likely to be brought
before the Annual Meeting other than those referred to in this Proxy Statement.
However, in the event that any other matters properly come before the Annual
Meeting, the persons named in the enclosed proxy will vote in accordance with
their judgment on such matters.
The presiding officer at the Annual Meeting may determine that any
shareholder proposal was not permissible under or was not made in accordance
with the foregoing procedures or is otherwise not in accordance with law and, if
he so determines, he may refuse to allow the shareholder proposal or nomination
to be considered at the Annual Meeting.
Under the rules of the SEC, shareholder proposals intended to be
presented at the next annual meeting (to be held in 1999) must be received by
the Secretary of the Company on or before December 11, 1998 in order to be
included in the proxy statement and proxy for that meeting. Proposals should be
directed to Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia
20170.
A copy of the Company's Annual Report to Shareholders, which includes
financial statements and related data, accompanies this Proxy Statement.
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According to SEC rules, the information presented in this Proxy
Statement under the captions "Compensation Committee Report on Executive
Compensation" and "Stock Price Performance" shall not be deemed to be
"soliciting material" or to be filed with the SEC under the Securities Act of
1933 or the Securities Exchange Act of 1934 and nothing contained in any
previous filings made by the Company under such Acts shall be interpreted as
incorporating by reference the information presented under the specified
captions.
By Order Of The Board Of Directors,
David N. Kunkel
Secretary
Dated: April 10, 1998
Herndon, Virginia
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