<PAGE>
As filed with the Securities and Exchange Commission on December 4, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________
PSINET INC.
(Exact name of registrant as specified in its charter)
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New York 4813 16-1353600
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification No.)
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510 Huntmar Park Drive, Herndon, Virginia 20170
(703) 904-4100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
David N. Kunkel, Esq.
Senior Vice President, General Counsel and Secretary
PSINet Inc.
510 Huntmar Park Drive, Herndon, Virginia 20170
Telephone No.: (703) 904-4100/Facsimile No.: (703) 904-9527
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
______________
Copies To:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue, New York, New York 10022
Attention: Richard F. Langan, Jr., Esq.
Bruce E. Rosenthal, Esq.
Telephone No.: (212) 940-3140/Facsimile No.: (212) 940-3111
______________
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Title of Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Aggregate Offering Registration Fee
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11 1/2% Senior Notes Due $350,000,000 $1,048.75 $367,062,500 $102,043.37
2008, Series B
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(1) Based on the average of the closing bid and asked price of $1,048.75 per
$1,000 principal amount of the Initial Notes (as defined herein) at
close of business on December 2, 1998.
(2) Estimated solely for purposes of calculating the registration fee
calculated pursuant to the provisions of Rule 457(c) under the
Securities Act of 1933, as amended, as the market value of the
securities to be canceled in the exchange.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS
WILL BE AMENDED OR COMPLETED; DATED
DECEMBER 4, 1998
___________
PSINET INC.
EXCHANGE OFFER FOR
$350,000,000
11 1/2% SENIOR NOTES DUE 2008
___________
Investment in the Exchange Notes involves Risk. See "Risk Factors"
beginning on page 20.
THE COMPANY:
. We are a leading provider of Internet access services and related
products to businesses.
. PSINet Inc.
510 Hutmar Park Drive
Herndon, Virginia 20170
(703) 904-4100
[email protected]
PROPOSED TRADING FORMAT:
. The over-the-counter market, negotiated transactions, or a combination
of these methods.
THE EXCHANGE OFFER:
. The Exchange Offer expires at 5:00 p.m, New York City time, on
________, 199__, unless extended.
. The Exchange Offer is subject to certain customary conditions which we
may waive.
. All outstanding notes that are validly tendered and not withdrawn will
be exchanged.
. Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the Exchange Offer.
. The exchange of outstanding notes for exchange notes should not be a
taxable event for U.S. federal income tax purposes.
. We will not receive any proceeds from the Exchange Offer.
THE EXCHANGE NOTES:
. The terms of the exchange notes are substantially identical to the
outstanding notes, except that the exchange notes will be freely
tradable.
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TABLE OF CONTENTS
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PAGE
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.................. 1
DOCUMENTS INCORPORATED BY REFERENCE..................................... 2
PROSPECTUS SUMMARY...................................................... 3
RISK FACTORS............................................................ 20
USE OF PROCEEDS......................................................... 37
THE EXCHANGE OFFER...................................................... 38
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................... 48
CAPITALIZATION.......................................................... 52
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA...................... 53
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................. 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 63
BUSINESS................................................................ 78
MANAGEMENT.............................................................. 96
CERTAIN TRANSACTIONS.................................................... 100
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 102
DESCRIPTION OF NOTES.................................................... 104
DESCRIPTION OF CERTAIN INDEBTEDNESS..................................... 136
PLAN OF DISTRIBUTION.................................................... 139
LEGAL MATTERS........................................................... 139
EXPERTS................................................................. 139
AVAILABLE INFORMATION................................................... 140
GLOSSARY................................................................ 141
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
ANNEX A:FORM OF LETTER OF TRANSMITAL.................................... A-1
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____________________
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS PROSPECTUS, INCLUDING DOCUMENTS
INCORPORATED BY REFERENCE, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS, FOR
PURPOSES OF THE SECURITIES ACT AND THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SUCH FORWARD-LOOKING STATEMENTS MAY INVOLVE RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS AND
PERFORMANCE OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS OR
PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. CAUTIONARY STATEMENTS
REGARDING THE RISKS, UNCERTAINTIES AND OTHER FACTORS ASSOCIATED WITH SUCH
FORWARD-LOOKING STATEMENTS ARE DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE
20 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER
SUCH FACTORS.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY ARE EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
____________________
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents which we have filed with the Securities and
Exchange Commission are incorporated by reference in this Prospectus:
1. Our Annual Report on Form 10-K for our fiscal year ended December
31, 1997, which contains audited consolidated balance sheets of us and our
subsidiaries as of December 31, 1997 and 1996, and related consolidated
statements of operations, of changes in shareholders' equity and of cash
flows for the years ended December 31, 1997, 1996 and 1995.
2. Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998 and September 30, 1998.
3. Our Current Reports on Form 8-K dated July 31, 1997 (solely insofar
as it relates to our Shareholder Rights Agreement dated May 8, 1996, as
amended), August 20, 1997, January 7, 1998, January 22, 1998, February 12,
1998, March 10, 1998, March 26, 1998, April 8, 1998, April 22, 1998, June
15, 1998, September 15, 1998, October 16, 1998, October 28, 1998 and
November 10, 1998.
4. Our Registration Statement on Form 8-A dated April 7, 1995, as
amended (registration no. 0-25812).
5. Our Registration Statement on Form 8-A dated June 4, 1996, as
amended (registration no. 0-25812).
All reports and other documents that we file after the date of this
Prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
prior to the termination of the offering of securities under this Prospectus,
shall also be incorporated by reference in and considered to be a part of this
Prospectus from the date of filing of such reports and documents.
Any statement contained in this Prospectus or in a document which is
incorporated by reference in this Prospectus shall be modified or superseded for
purposes of this Prospectus to the extent that a statement in any document that
we file after the date of this Prospectus that also is incorporated by reference
in this Prospectus modifies or supersedes such prior statement. Any such
statement so modified or superseded shall not, except as so modified or
superseded, constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH ARE NOT PRESENTED
IN THIS PROSPECTUS OR DELIVERED TO YOU WITH IT. YOU MAY REQUEST, AND WE WILL
SEND TO YOU, WITHOUT CHARGE, COPIES OF THESE DOCUMENTS (OTHER THAN EXHIBITS TO
THESE DOCUMENTS, WHICH WE WILL SEND TO YOU FOR A REASONABLE FEE). REQUESTS
SHOULD BE DIRECTED TO THE OFFICE OF THE SECRETARY, PSINET INC., 510 HUNTMAR PARK
DRIVE, HERNDON, VIRGINIA 20170 (TELEPHONE (703) 904-4100). IN ORDER TO ASSURE
TIMELY DELIVERY OF THE REQUESTED MATERIALS BEFORE THE EXPIRATION OF THE EXCHANGE
OFFER, ANY REQUEST SHOULD BE MADE PRIOR TO __________, 199__.
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PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. Because
this is a summary, it may not contain all of the information that may be
important to you. To understand this Exchange Offer fully, you should read the
entire Prospectus, including the Risk Factors and the financial statements.
This Prospectus uses a number of technical terms, such as Internet
Protocol, intranet, backbone, OC-48, indefeasible rights of use and peering,
that are not easily understandable. Certain technical terms used in this
Prospectus are defined in the glossary which begins on page 141 of this
Prospectus.
We wrote this Prospectus using the Securities and Exchange Commission's
newly-adopted "Plain English" Rule. This rule requires that we write without the
"legalese" typically found in most documents filed with the Commission in order
to provide you with a more meaningful and understandable document. Unless the
context otherwise requires, "PSINet," the "Company," "we," "our," and "us" refer
to PSINet Inc. and its subsidiaries.
THE COMPANY
We are a leading global provider of Internet access services and related
products to businesses. We provide dedicated and dial-up Internet connections to
businesses in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 12 of the 20 largest global telecommunications markets. We also offer
Internet Protocol ("IP")-based value-added services and products to businesses.
Some of our services include corporate intranets, Web hosting and collocation,
remote user access, multi-currency electronic commerce, security and voice-over-
IP services. These services enable businesses to maximize utilization of their
corporate networks and the Internet. We also own and operate a technologically
advanced, high-speed frame relay network that is one of the primary backbones
that comprise the Internet. In addition to being an Internet Service Provider
("ISP") and operating our network, we also provide network backbone services to
other telecommunications carriers and ISPs to further utilize our network
capacity.
Our mission is to build a premier IP-based communications company. We have
grown by using multiple sales channels, including direct sales and resellers,
and by acquiring other ISPs and related businesses in key markets. We have
increased revenues by providing services and products that enhance our
customers' business processes by helping them to effectively use the Internet
and related tools.
We have increased our revenues from $8.7 million in 1993 to $121.9 million
in 1997, representing a 94% compounded annual growth rate. Over the last twelve
months, we have experienced rapid growth through the acquisition of 15 ISPs in
eight of the 20 largest global telecommunications markets. If our results of
operations were restated to give effect to these recent acquisitions as of
January 1, 1998 (that is, if our results of operations were presented on a pro
forma basis), our pro forma revenues for the nine months ended September 30,
1998 would have been $231.3 million.
We serve, as of October 1, 1998, approximately 53,000 business accounts,
including 141 ISPs. Our technologically advanced network is connected to over
500 points-of-presence ("POPs") in 12 countries and is connected with other
large ISPs at 27 public and private peering points. We believe that our
scaleable IP-optimized network, in combination with our highly trained, around-
the-clock customer care team, enables us to deliver superior performance and
reliability.
The following table provides a brief overview of our domestic and
international operations (based upon the location from which service is
provided).
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PRO FORMA
REVENUES WHOLESALE
FOR NINE BUSINESS AND
MONTHS POPS ACCOUNTS CONSUMER PLANNED
ENDED 9/30/98 (AT (AT ACCOUNTS BACKBONE COMMENCEMENT
(MILLIONS) 10/1/98) 10/1/98) (AT 10/1/98) BANDWIDTH OF OPERATIONS
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U.S. $115.1 245 22,800 483,700 2,400Mbps 1989
Canada 25.0 42 6,500 86,200 155 1996
Europe 28.2 151 9,600 23,700 155 1995
Asia 63.0 62 14,400 81,200 270+ 1994
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$231.3 500 53,300 674,800
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We have expanded and enhanced our network by acquiring or agreeing to
acquire significant amounts of global fiber-based telecommunications bandwidth,
including indefeasible rights of use ("IRUs") in 10,000 equivalent route miles
of OC-48 bandwidth (capable of transmitting data at speeds of up to 2.4 Gbps)
across the United States from IXC Internet Services, Inc. ("IXC"), a subsidiary
of IXC Communications, Inc., one of the largest suppliers of digital
transmission and long distance telecommunications services in the United States.
As of October 1, 1998, we had accepted delivery of and placed into operation
approximately 5,800 route miles of OC-12 (equivalent to approximately 1,450
route miles of OC-48) bandwidth connecting New York and Los Angeles and certain
major cities in between. In addition, we have recently acquired IRUs or other
rights in STM-1 (equivalent to OC-3) bandwidth connecting the United States, the
United Kingdom and continental Europe, 18 dark fiber optic strands connecting
the New York City and Washington, D.C. metropolitan areas and major metropolitan
areas in between, and bandwidth capacity equivalent to six DS-3s connecting the
United States and Japan. We have also joined a consortium of leading
telecommunications companies to build an undersea cable system, called the
Japan-U.S. Cable Network, connecting the United States and Japan on which we
will own, upon completion, IRUs in 22 STM-1s (increasing to 30 STM-1s as the
network is upgraded) of fiber-based bandwidth.
We believe each of these recent bandwidth acquisitions is capable of
transmitting data at speeds which exceed the highest speed network backbone
currently in use on the Internet. The acquisition of these bandwidth assets is
expected to increase the capacity of our current network by at least 50 times
and to reduce our future data communications costs by approximately 90% per
equivalent route mile as customer traffic is migrated on to the acquired
bandwidth from bandwidth we currently lease from IXC and other
telecommunications providers. The increased network capacity is expected to
enable us 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.
Internet access services is one of the fastest growing segments of the
global telecommunications services market. Growth in the demand for business
connectivity is being driven by a number of factors including an increase in
online market penetration, particularly in the small and mid-sized business
segments, and increased use of the Internet by businesses. As more businesses
evolve from establishing an Internet presence to utilizing securely connected
geographically dispersed locations, remote user access to corporate networks,
and business-to-business commerce solutions, the demand for high quality
Internet connectivity and value-added services will grow. Moreover, many
organizations are increasingly outsourcing certain information technology
functions, such as maintenance of corporate Web sites, e-mail and other key
business applications, to full-service ISPs in order to improve reliability and
reduce costs.
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. In the United States,
IDC estimates that total revenues from Internet access services and products
reached $3.3 billion in 1996 with business connectivity and value-added services
representing approximately 62% of the market. IDC forecasts the U.S. Internet
access services market to grow at a compound rate of over 50% per annum to $18.3
billion in 2000 with business connectivity and value-added services representing
over 75% of the market. In Europe, IDC estimates that the total market for
Internet access services and products reached $676 million in 1996 with business
connectivity and value-added services representing approximately 56% of the
market. IDC forecasts the European Internet access market to grow at a compound
rate of over 70% per annum to approximately $6.1 billion in 2000 with business
connectivity and value-added services representing approximately 65% of the
market. We believe,
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based on our operational knowledge of and experience in such markets, that the
Canadian and Asian Internet access services and products markets should grow at
least at the same rate as the European market.
We have grown rapidly by targeting sales to businesses in information-
intensive industries such as communications, education and research, energy,
aerospace and defense, finance, chemicals and pharmaceuticals. Our customers
consist primarily of medium-sized businesses and also include large
corporations, including 40 of the Fortune 100. We have invested in growing and
training our direct sales force and have developed significant reseller and
referral channels with selected telecommunications services companies, equipment
suppliers, systems integrators and computer retailers. We believe that utilizing
direct sales and value-added reseller channels is particularly effective in
targeting business customers, due to the technical nature of the sales process
and the requirement for turnkey solutions. Our core domestic operations are
organized into three customer-focused business units--Corporate Network
Services, Carrier and ISP Services, and Applications and Web Services--to more
effectively meet the emerging needs of the Internet marketplace. In addition, we
have recently streamlined our customer service and billing operations to provide
faster, more responsive and cost-effective service to our customers and are
implementing scaleable systems that will enable us to support a significantly
larger and increasingly international customer base. In executing our business
strategy, we have supplemented our executive management team through recent
additions of several senior-level executives from such multinational
telecommunications companies as MCIWorldCom, Sprint, Bell Atlantic, Lucent
Technologies, AT&T, British Telecommunications PLC, Concert Communications
Company and U.S. West Communications.
We provide high quality IP-based services and products that are tailored to
meet the needs of businesses. We believe that the business connectivity and
value-added services markets are particularly attractive due to low customer
churn characteristics and the early stage of market development. In addition, we
believe that there is a significant opportunity to upsell to higher service and
product levels and provide additional value-added services as business customers
expand from establishing basic Internet connectivity and corporate Web sites to
utilizing the Internet and corporate intranets for more advanced, mission-
critical applications. Moreover, we believe that smaller ISPs will continue to
seek network backbone services from large facilities-based ISPs that enable them
to sell Internet connectivity services without making significant investments in
facilities. Based on our broad product and service offerings, sophisticated IP-
optimized network architecture and Internet brand name, we are well-positioned
to continue to increase our account base and provide value-added IP-based
services and products to new and existing customers. To improve upon our ability
to provide these value-added services, we recently opened a new global Internet
hosting center for dedicated business applications, completed construction of an
additional global Internet hosting center in Switzerland, and plan to construct
and open eight additional global Internet hosting centers before January 1,
2000.
BUSINESS STRATEGY
Our objective is to be one of the top three providers of Internet access
services and related communications services and products in each of the 20
largest global telecommunications markets. The principal elements of our
business strategy are as follows:
. Pursue Internal Growth Through Multiple Sales Channels. We are
pursuing growth opportunities through multiple channels consisting of
our direct sales force, our reseller and referral program, and
strategic alliances.
-- Our sales force consists of approximately 340 persons, of whom more
than half are employed outside the United States. Our sales people
have a strong Internet technical background and product knowledge,
which enables them to effectively market our products and services
to targeted business customers.
-- We have forged an authorized reseller and referral program with
selected telecommunications services and equipment suppliers,
networking service companies, systems integrators and computer
retailers to enable us to utilize the sales and marketing resources
of our resellers and referral sources to offer PSINet Internet
access services and products to a broader and more diverse prospect
base.
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-- We seek to establish strategic alliances with selected
telecommunications carriers, such as we have with American
Communications Network, Inc., ATX Telecommunications Services,
e.Spire Communications, Inc. and IXC, to offer our IP-based
services and products to the carriers' customer base on a private
label or co-branded basis as part of an integrated package of
telecommunications and Internet services and products.
. Accelerate Growth Through Targeted Acquisitions. We intend to
accelerate our growth domestically and expand our presence in key
markets internationally by acquiring primarily business-focused ISPs
and related businesses and assets.
-- We intend to acquire local or regional ISPs in markets where we
have an established POP and can benefit from the increased network
utilization and local sales force. Given an increasingly
competitive environment and the large capital requirements required
to offer a broad base of IP services and products and to develop
access to a reliable, high-speed global network, we believe that
undercapitalized local and regional ISPs will continue to benefit
from combining their operations with us. We also believe that our
entrepreneurial environment will be attractive to and help retain
key employees of acquired ISPs.
-- We also intend to make strategic acquisitions in the eight largest
global telecommunications markets where we currently do not have a
presence or in those global telecommunications markets where our
current presence would be significantly enhanced.
-- We may also seek to acquire other businesses to broaden our market
presence and expand our strengths in key product areas, such as
application, Web hosting or data center companies, or data-
processing companies with legacy networks which would benefit by
migrating to IP-based technologies.
-- We seek acquisition targets that, once integrated into our existing
operations, generally will be accretive to EBITDA (as defined
below).
. Capture Economies of Scale by Integrating Operations. Once we have
acquired an ISP, we typically act to generate economies of scale and
cost savings by eliminating redundant operations and network
architecture and migrating the acquired ISP's customers on to the
PSINet network.
-- Connecting an acquired ISP's customers to the PSINet network
typically entails minimal incremental data communication costs and
enables us to significantly reduce transit costs.
-- We seek to generate cost savings by centralizing back office
operations, such as network monitoring, customer billing, human
resources and accounting. We also endeavor to realize efficiencies
by consolidating an acquired ISP's purchasing, product development
and marketing and sales operations into our established programs.
-- We believe this integration of operations improves the quality,
breadth, consistency and scaleability of the services and products
offered to customers of acquired ISPs.
. Increase Sales of Value-Added Services and Products. We intend to
capitalize on the trend of companies to increasingly outsource their
critical business applications and integrate Web-based services and
products as part of their core data networking strategy by
aggressively marketing value-added services and products to our
existing account base and prospective business customers.
-- We currently offer a number of value-added services, such as
corporate intranets, Web hosting and collocation, remote user
access, multi-currency electronic commerce, security and voice-over
IP services, that can be bundled with Internet access services to
provide complete, turnkey solutions.
-- In addition, the enhanced capacity resulting from our recent
acquisitions of global network bandwidth will enable us to offer a
wider variety of high quality Internet and Internet-related
services and products, such as IP-based voice, video and other
multimedia services.
-- We believe 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.
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-- We believe that there is a significant opportunity within our
existing account base to upgrade service levels and are actively
marketing additional services to these accounts.
-- To improve upon our ability to provide these value-added services,
we recently opened a new global Internet hosting center for
dedicated business applications, completed construction of an
additional global Internet hosting center, and plan to construct
and open eight additional global Internet hosting centers before
January 1, 2000.
. Continue to Acquire Network Facilities to Reduce Costs. We remain
focused on reducing costs as a percentage of revenue by maintaining a
scaleable network and increasing utilization of and controlling
strategic assets, such as telecommunications bandwidth through IRUs
and acquisition of dark fiber.
-- Our flexible network architecture utilizes advanced equipment that
is compatible with most networking standards. This network
architecture allows our network to cost-effectively scale the
number of POPs and the number of users accessing a POP in response
to customer demand.
-- We have enhanced our network significantly through several
strategic acquisitions of fiber-based telecommunications bandwidth,
including IRUs or other rights in up to 10,000 equivalent route
miles of OC-48 capacity across the United States, STM-1
transatlantic capacity connecting the United States, the United
Kingdom and continental Europe, 18 dark fiber optic strands
connecting the New York City and Washington, D.C. metropolitan
areas and major metropolitan areas in between, six DS-3s connecting
the United States and Japan, and an agreement with other leading
global telecommunications companies to build the Japan-U.S. Cable
Network. Additionally, we continue to evaluate alternative
broadband local loop strategies, including wireless, xDSL and cable
modem solutions.
. Enhance Brand Name Recognition. We were the first commercial ISP and
have established significant brand recognition among information
technology professionals in the United States.
-- In 1998, we launched a major program to develop and enhance the
PSINet brand name as a leading global facilities-based ISP.
-- Our branding program includes the rebranding of acquired ISP
operations and services under the PSINet name and the select use of
television commercials, print ads and direct mailings which target
key decision makers in the United States and abroad.
-- By combining this branding program with our multiple sales channel
distribution strategy, we seek to expand market share, increase
customer loyalty and develop global brand recognition in the
Internet market.
. Build Strong Customer Loyalty. We believe that superior customer
service is a critical element in attracting and retaining customers.
-- We have 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.
-- Our domestic and international technical support associates attend
an extensive technical training and certification program to ensure
consistency in the quality and approach to customer care.
-- We monitor and respond to customer needs with 24-hours per day,
seven-days per week technical support and service from our network
operations centers.
-- As part of our international expansion strategy, we recently opened
a new network operations center in Switzerland and we anticipate
adding and maintaining additional geographically centralized
support services, including a proposed new network operations
center in Asia in 1999, to increase operational efficiencies and
enhance the quality, consistency and scaleability of our customer
care.
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RECENT DEVELOPMENTS
Acquisitions. As part of our growth strategy, we have, over the last twelve
months, completed the acquisition of 15 ISPs in eight of the 20 largest global
telecommunications markets for an aggregate purchase price and related payments
of approximately $285.1 million in cash, resulting in the addition of
approximately 21,200 new business and Web services accounts, over 200,000 new
consumer dial-up customers and over 150 new POPs. We are also currently
evaluating additional acquisitions as well. However, there can be no assurance
that we will successfully complete any such acquisitions currently being
contemplated.
Expansion of Network. As part of our strategy to control strategic assets
and further expand and enhance our network to reduce operating costs, we have
recently acquired or agreed to acquire IRUs or other rights in STM-1 (equivalent
to OC-3) network bandwidth connecting the United States, the United Kingdom and
continental Europe, 18 dark fiber optic strands connecting the New York City and
Washington, D.C. metropolitan areas and major metropolitan areas in between, and
network bandwidth capacity equivalent to six DS-3s connecting the United States
and Japan. In addition, we have entered into an agreement with a group of
leading global telecommunications companies to build an undersea cable system,
called the Japan-U.S. Cable Network, connecting the United States and Japan on
which, upon completion, we will own IRUs in 22 STM-1s (increasing to 30 STM-1s
as the network is upgraded) of fiber-based bandwidth. As of October 1, 1998, we
had accepted delivery of and placed into operation approximately 5,800 route
miles of OC-12 (equivalent to approximately 1,450 route miles of OC-48)
bandwidth connecting New York and Los Angeles and certain major cities in
between. We are also currently evaluating the acquisition of additional
telecommunications bandwidth located in areas throughout the world complementary
with our existing network. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Position and Results of Operations--Commitments,
Capital Expenditures and Future Financing Requirements."
10% Senior Notes. In April 1998, we completed an offering of $600.0 million
aggregate principal amount of 10% Senior Notes due 2005 (the "10% Senior
Notes"). The net proceeds of the offering, after giving effect to discounts,
commissions and expenses and the establishment of a $138.7 million escrow
arrangement to fund when due the first five interest payments on the 10% Senior
Notes, were $442.3 million.
New Credit Facility. In September 1998, we entered into a new three year
senior secured revolving credit facility with The Chase Manhattan Bank, as
administrative agent, to replace our existing bank credit arrangements in the
United States (the "Credit Facility"). The Credit Facility consists of a
revolving credit facility in the aggregate principal amount of $110.0 million,
of which $108.5 million was drawn upon to finance a portion of the purchase
price for our acquisition of Tokyo Internet Corporation. Prior to the closing of
the initial offering of 11 1/2% Senior Notes described below, we repaid the
$108.5 million outstanding under the Credit Facility with other cash on hand.
See "--Acquisitions" and "Use of Proceeds."
11 1/2% Senior Notes. In November 1998, we completed offerings of $350.0
million aggregate principal amount of our 11 1/2% Senior Notes due 2008, Series
A. The aggregate net proceeds of these offerings, after giving effect to
discounts, commissions and estimated expenses, were approximately $342.8
million.
--------------------
Our principal executive offices are located at 510 Huntmar Park Drive,
Herndon, Virginia 20170. Our telephone number is (703) 904-4100 and, for further
information, we may be contacted by e-mail at [email protected].
-8-
<PAGE>
THE EXCHANGE OFFER
Notes Offered....................... $350,000,000 aggregate principal
amount of new 11 1/2% Senior Notes due
2008, Series B (the "Exchange Notes").
The Exchange Offer.................. We are offering to exchange $1,000
principal amount of Exchange Notes for
each $1,000 principal amount of 11
1/2% Senior Notes due 2008, Series A,
which we issued in November 1998 (the
"Initial Notes" and, together with the
Exchange Notes, the "Notes"). As of
the date of this Prospectus, there are
$350,000,000 aggregate principal
amount of Initial Notes outstanding.
We will issue the Exchange Notes
promptly after the Expiration Date.
Resales............................. Based on an interpretation by the
staff of the Securities and Exchange
Commission (the "Staff") set forth in
no-action letters issued to third
parties, we believe that Exchange
Notes issued pursuant to the Exchange
Offer in exchange for Initial Notes
may be offered for resale, resold and
otherwise transferred by you (unless
you are an "affiliate" of the Company
within the meaning of Rule 405 under
the Securities Act of 1933), or a
broker-dealer which acquired the
Initial Notes directly from the
Company) without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
provided that you are acquiring the
Exchange Notes in the ordinary course
of your business and that you have not
engaged in, do not intend to engage
in, and have no arrangement or
understanding with any person to
participate in the distribution of the
Exchange Notes. Each participating
broker-dealer that receives Exchange
Notes for its own account pursuant to
the Exchange Offer in exchange for
Initial Notes that were acquired as a
result of market-making or other
trading activity must acknowledge that
it will deliver a prospectus in
connection with any resale of the
Exchange Notes. See "Plan of
Distribution."
Any holder of Initial Notes who (i) is
an affiliate of the Company, (ii) does
not acquire Exchange Notes in the
ordinary course of its business, (iii)
tenders in the Exchange Offer with the
intention to participate, or for the
purpose of participating, in a
distribution of Exchange Notes, or
(iv) is a broker-dealer which acquired
the Initial Notes directly from the
Company, could not rely on the
position of the Staff enunciated in
the Exxon Capital No-Action Letter (as
defined), the Morgan Stanley No-Action
Letter (as defined) or similar no-
action letters and, in the absence of
an exemption therefrom, must comply
with the registration and prospectus
delivery requirements of the
Securities Act of 1933 in connection
with the resale of the Exchange Notes.
-9-
<PAGE>
Expiration Date..................... 5:00 p.m., New York City time, on
___________, 199__ (20 business days
after effectiveness of the
registration statement of which this
Prospectus is a part), unless we
extend the Exchange Offer in which
case the term "Expiration Date" means
the latest date and time to which the
Exchange Offer is extended.
Interest on the Exchange Notes
and the Initial Notes............... Each Exchange Note will bear interest
from November 3, 1998. If your Initial
Notes are accepted for exchange, you
will not receive accrued interest on
the Initial Notes, and will be deemed
to have waived the right to receive
any interest on the Initial Notes from
and after November 3, 1998.
Conditions to the Exchange Offer.... The Exchange Offer is subject to
certain customary conditions, which we
may waive. See "The Exchange Offer--
Conditions."
Procedures for Tendering Initial
Notes............................... If you wish to accept the Exchange
Offer, you must complete, sign and
date the accompanying Letter of
Transmittal, or a facsimile thereof,
in accordance with its instructions
and the instructions in this
Prospectus, and mail or otherwise
deliver the Letter of Transmittal, or
such facsimile, together with the
Initial Notes and any other required
documentation to the Exchange Agent
(as defined) at the address set forth
in the Letter of Transmittal. If you
hold Initial Notes through the
Depositary (initially The Depository
Trust Company ("DTC")) and wish to
accept the Exchange Offer, you must do
so pursuant to DTC's Automated Tender
Offer Program, by which you will agree
to be bound by the Letter of
Transmittal. By executing or agreeing
to be bound by the Letter of
Transmittal, you will represent to us
that, among other things, you or the
person receiving such Exchange Notes,
is acquiring the Exchange Notes in the
ordinary course of business and that
neither you nor any such other person
has any arrangement or understanding
with any person to participate in the
distribution of such Exchange Notes
within the meaning of the Securities
Act of 1933.
Special Procedures for Beneficial
Owners.............................. If you are a beneficial owner whose
Initial Notes are registered in the
name of a broker, dealer, commercial
bank, trust company or other nominee
and you wish to tender in the Exchange
Offer, you should contact the person
in whose name your Initial Notes are
registered promptly and instruct such
person to tender on your behalf. If
you wish to tender in the Exchange
Offer on your own behalf, you must,
prior to completing and executing the
Letter of Transmittal and delivering
your Initial Notes, either make
appropriate arrangements to register
ownership of the Initial Notes in your
name or obtain a properly completed
bond power from the person whose name
your Initial Notes are registered. The
transfer of registered ownership may
take considerable time.
-10-
<PAGE>
Guaranteed Delivery Procedures..... If you wish to tender your Initial
Notes in the Exchange Offer and your
Initial Notes are not immediately
available or you cannot deliver your
Initial Notes, the Letter of
Transmittal or any other documents
required by the Letter of Transmittal
to the Exchange Agent (or comply with
the procedures for book-entry
transfer) prior to the Expiration
Date, you must tender your Initial
Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................... Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City
time, on the Expiration Date pursuant
to the procedures described under "The
Exchange Offer--Withdrawals of
Tenders."
Acceptance of Initial Notes and
Delivery of Exchange Notes.......... We will accept for exchange any and
all Initial Notes that are properly
tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange
Notes issued pursuant to the Exchange
Offer will be delivered promptly after
the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Federal Income Tax
Consequences........................ The exchange of Initial Notes for
Exchange Notes in the Exchange Offer
should not have U.S. federal income
tax consequences. In addition, there
are certain U.S. federal income tax
consequences associated with
purchasing, holding and disposing of
the Notes. See "Certain Federal Income
Tax Consequences."
Effect on Holders of Initial Notes.. As a result of the making of this
Exchange Offer, we will have fulfilled
certain of our obligations under the
Registration Rights Agreements entered
into in connection with the sale of
the Initial Notes, and if you do not
tender your Initial Notes in the
Exchange Offer, you will not have any
further registration rights under the
Registration Rights Agreements or
otherwise (unless you were not
eligible to participate in the
Exchange Offer). See "The Exchange
Offer--Registration Rights." In such
event, you will continue to hold the
untendered Initial Notes and will be
entitled to all the rights and subject
to all the limitations applicable to
the Initial Notes under the indenture
governing the Notes, except to the
extent such rights or limitations, by
their terms, terminate or cease to
have further effectiveness as a result
of the Exchange Offer. All untendered
Initial Notes will continue to be
subject to certain restrictions on
transfer. Accordingly, if any Initial
Notes are tendered and accepted in the
Exchange Offer, the trading market for
the untendered Initial Notes could be
adversely affected. See "Risk
Factors--Restrictions on Resale;
Absence of Public Market for the
Securities."
Exchange Agent...................... Wilmington Trust Company is serving as
exchange agent in connection with the
Exchange Offer.
-11-
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes will be substantially the same
as the form and terms of the Initial Notes (which they replace) except that (i)
the Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof and (ii) the holders of
the Exchange Notes, except for limited instances involving the Initial
Purchasers and certain holders of the Initial Notes who are not eligible to
participate in the Exchange Offer, will not be entitled to further registration
rights under the Registration Rights Agreements, which rights will be satisfied
when the Exchange Offer is consummated, and will not be entitled to any payments
of Liquidated Damages (as defined) for failure to satisfy those rights. The
Exchange Notes will evidence the same debt as the Initial Notes and will be
entitled to the benefits of the Indenture under which the Initial Notes were
issued. From time to time in this Prospectus, the Exchange Notes and the Initial
Notes are collectively referred to as the "Notes." See "Description of Notes."
Notes Offered....................... $350,000,000 aggregate principal
amount of 11 1/2% Senior Notes due
2008.
Maturity Date....................... November 1, 2008.
Interest Payment Date............... Interest will accrue at the rate of 11
1/2% per annum and will be payable in
cash semi-annually on May 1 and
November 1 of each year, commencing
May 1, 1999.
Ranking............................. The Notes are senior unsecured
obligations ranking equal in right of
payment to all our existing and future
unsecured and unsubordinated
indebtedness and senior in right of
payment to all our existing and future
subordinated indebtedness. The Notes
are effectively subordinated to all
our secured indebtedness to the extent
of the value of the assets securing
such indebtedness and to the claims of
creditors and the holders of preferred
stock, if any, of our subsidiaries. If
our September 30, 1998 balance sheet
were restated to give effect to the
offerings of the Initial Notes (and
the application of those net proceeds)
and our acquisition of Tokyo Internet
Corporation, we would have had
approximately $1.185 billion of total
indebtedness, of which approximately
$231.5 million would have been secured
indebtedness. The total liabilities of
our subsidiaries (including trade
payables and accrued liabilities) to
which holders of Notes would have been
structurally subordinated would have
been approximately $100.8 million as
of that same balance sheet date. See
"Description of Notes--General."
Sinking Fund........................ None.
Optional Redemption................. We will be able to redeem the Notes,
at our option, on or after November 1,
2003, at specified redemption prices
described in this Prospectus, plus
accrued and unpaid interest. On or
prior to November 1, 2001, we will
also be able to redeem up to 35% of
the original aggregate principal
amount of the Notes at a redemption
price of 111.5% of the principal
amount thereof, plus accrued and
unpaid interest, with the net cash
proceeds of public equity offerings or
the sale of capital stock to one or
more strategic investors. See
"Description of Notes--Optional
Redemption."
Change of Control................... In the event of a Change of Control
(as defined), we will be
-12-
<PAGE>
required to make an offer to
purchase all of the Notes at a
purchase price equal to 101% of the
principal amount thereof, plus
accrued and unpaid interest. We may
not have sufficient funds or the
financial resources necessary to
satisfy our obligations to
repurchase the Notes and other debt
that may become repayable upon a
Change of Control. See "Risk
Factors--Change of Control" and
"Description of Notes--Change of
Control."
Certain Covenants......................... The Indenture governing the Notes
will restrict our ability, among
other things, to: (i) incur
indebtedness; (ii) make restricted
payments; (iii) engage in
transactions with affiliates; (iv)
permit liens to exist; (v) sell
assets; (vi) issue guarantees;
(vii) engage in sale and leaseback
transactions; (viii) issue and sell
subsidiary capital stock; (ix)
impose limitations on our
subsidiaries' ability to pay
dividends to us; (x) designate or
create unrestricted subsidiaries;
and (xi) change our business. We
will also have to comply with
certain affirmative covenants,
including the provision of
financial statements.
GENERAL
Federal Income Tax Consequences........... There are certain federal income
tax consequences associated with
purchasing, holding and disposing
of the Notes. You are urged to
consult your tax advisor regarding
the tax consequences of acquiring,
holding or disposing of the Notes.
See "Certain Federal Income Tax
Considerations."
Exchange Offer; Registration Rights....... To remove the transferability
restrictions on the Initial Notes,
we have agreed (i) to file the
registration statement of which
this Prospectus is a part with the
Securities and Exchange Commission
to exchange the Initial Notes for
the Exchange Notes by January 18,
1999, (ii) to use our best efforts
to cause the registration statement
to be declared effective under the
Securities Act by April 2, 1999 and
(iii) to keep the Exchange Offer
open for not less than 20 business
days and cause the Exchange Offer
to be consummated no later than the
30th business day after the
registration statement is declared
effective. If the exchange offer is
not permitted by applicable law or
Securities and Exchange Commission
policy, or a holder is not
otherwise able to exchange its
Initial Notes for certain reasons,
we will file with the Securities
and Exchange Commission, subject to
our receipt of certain information,
a shelf registration statement to
register restricted Initial Notes
for public resale. We will seek to
have any shelf registration
statement declared effective by the
Securities and Exchange Commission
on or before the 60th day after its
filing. If we default on any of
these registration obligations, we
will pay certain liquidated damages
to each holder of restricted
Initial Notes. See "The Exchange
Offer--Registration Defaults;
Liquidated Damages."
Use of Proceeds.......................... We will not receive any cash
proceeds from the Exchange Offer.
See "Use of Proceeds."
-13-
<PAGE>
RISK FACTORS
You should carefully consider all of the information in this Prospectus. In
particular, you should evaluate the specific risk factors set forth under "Risk
Factors," beginning on page 20, for a discussion of certain risks involved with
an investment in the Notes.
-14-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except per share, ratio and operating data)
The following summary consolidated financial and operating data as of and
for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998 have been derived from our Consolidated
Financial Statements. The summary pro forma consolidated statement of operations
data and balance sheet data ("pro forma information") for the year ended
December 31, 1997 and as of and for the nine months ended September 30, 1998
have been derived from the Unaudited Pro Forma Consolidated Financial
Information included elsewhere in this Prospectus. The unaudited pro forma
consolidated statement of operations data give effect to the acquisitions of
iSTAR internet inc. ("iSTAR"), ioNET Internetworking Services ("ioNet"), LinkAge
Online Limited ("LinkAge"), Interactive Networx GmbH ("INX"), Rimnet Corporation
("Rimnet"), Internet Prolink S.A. ("Iprolink"), Inet, Inc. ("Inet"), Interlog
Internet Services Inc. ("Interlog"), Serveur Telematique Internet S.A. (doing
business as "CalvaCom") and Tokyo Internet Corporation ("Tokyo Internet") as if
each of the transactions had been consummated on January 1, 1997, to the
issuance by us of both 10,229,789 shares of our common stock to IXC and $600.0
million principal amount of 10% Senior Notes and our borrowing of $108.5 million
under the Credit Facility, as if each of the transactions had occurred on
January 1, 1997. The unaudited pro forma consolidated balance sheet data give
effect to the acquisition of Tokyo Internet as if this transaction had been
consummated on September 30, 1998. The unaudited pro forma, as adjusted, (i)
balance sheet data and (ii) statement of operations data further adjusts the
unaudited pro forma amounts to give effect to the offerings of the Initial Notes
and the application of the net proceeds therefrom as of September 30, 1998 and
January 1, 1997, respectively. In the opinion of management, the pro forma
information includes all adjustments necessary for a fair statement of the
information set forth herein. The results of operations for the nine month
period ended September 30, 1998 may not be indicative of the results for the
entire year ended December 31, 1998. The information contained in this table
should be read in conjunction with "Selected Consolidated Financial and
Operating Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds," our Consolidated Financial
Statements and the notes thereto, Tokyo Internet's Financial Statements and the
notes thereto, iSTAR's Consolidated Financial Statements and the notes thereto,
and the Unaudited Pro Forma Consolidated Financial Information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997
------------------------------------
PRO FORMA,
1993 1994 1995 1996 ACTUAL PRO FORMA AS ADJUSTED
-------- -------- -------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
U.S........................ $ 8,665 $ 15,159 $ 36,252 $ 77,570 $103,952 $ 113,624 $ 113,624
International.............. -- 55 2,470 6,781 17,950 141,030 141,030
-------- -------- -------- -------- -------- --------- ---------
8,665 15,214 38,722 84,351 121,902 254,654 254,654
Other income, net............ -- -- -- 5,417 -- -- --
Operating costs and expenses:
Data communications
and operations........... 5,320 9,489 32,124 70,102 94,363 194,283 194,283
Sales and marketing........ 1,845 3,599 23,930 27,064 25,831 46,039 46,039
General and
administrative........... 1,666 3,605 10,569 20,648 22,947 52,010 52,010
Depreciation and
amortization............. 1,719 3,183 14,778 28,035 28,347 65,544 65,544
Charge for acquired
in-process research
and development.......... -- -- -- -- -- -- --
Intangible asset write-
down..................... -- -- 9,938 -- -- 12,570 12,570
-------- -------- -------- -------- -------- --------- ---------
Total operating costs
and expenses........... 10,550 19,876 91,339 145,849 171,488 370,446 370,446
-------- -------- -------- -------- -------- --------- ---------
Loss from operations......... (1,885) (4,662) (52,617) (56,081) (49,586) (115,792) (115,792)
Loss before income taxes..... (2,159) (5,342) (53,160) (55,256) (46,078) (192,116) (233,087)
Net loss..................... (1,913) (5,342) (53,160) (55,097) (45,602) (192,207) (233,178)
Return to preferred
shareholders............... -- -- -- -- (411) (411) (411)
-------- -------- -------- -------- -------- --------- ---------
Net loss available to
Common shareholders........ $ (1,913) $ (5,342) $(53,160) $(55,097) $(46,013) $(192,618) $(233,589)
======== ======== ======== ======== ======== ========= =========
Basic and diluted loss
per share(1)............... $ (0.42) $ (2.01) $ (1.40) $ (1.14) $ (3.81) $ (4.62)
======== ======== ======== ======== ========= =========
Shares used in computing
basic and diluted loss
per share (in thousands)... 12,805 26,485 39,378 40,306 50,536 50,536
======== ======== ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------------------- ----------- -------------
1997 1998 1998 1998
-------- --------- ----------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
U.S........................ $ 75,497 $ 110,703 $ 115,093 $ 115,093
International.............. 11,650 55,029 116,255 116,255
-------- --------- --------- ---------
87,147 165,732 231,348 231,348
Other income, net............ -- -- -- --
Operating costs and expenses:
Data communications
and operations........... 66,847 130,517 179,757 179,757
Sales and marketing........ 18,070 37,919 44,577 44,577
General and
administrative........... 16,976 29,439 42,789 42,789
Depreciation and
amortization............. 20,648 37,011 58,910 58,910
Charge for acquired
in-process research
and development.......... -- 40,400 40,400 40,400
Intangible asset write-
down..................... -- -- -- --
-------- --------- --------- ---------
Total operating costs
and expenses........... 122,541 275,286 366,433 366,433
-------- --------- --------- ---------
Loss from operations......... (35,394) (109,554) (135,085) (135,085)
Loss before income taxes..... (31,741) (130,006) (181,918) (212,646)
Net loss..................... (31,265) (130,071) (182,200) (212,928)
Return to preferred
shareholders............... -- (2,313) (2,313) (2,313)
-------- --------- --------- ---------
Net loss available to
Common shareholders........ $(31,265) $(132,384) $(184,513) $(215,241)
======== ========= ========= =========
Basic and diluted loss
per share(1)............... $ (0.78) $ (2.70) $ (3.60) $ (4.20)
======== ========= ========= =========
Shares used in computing
basic and diluted loss
per share (in thousands)... 40,264 49,120 51,204 51,204
======== ========= ========= =========
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(2):
U.S........................ $ (166) $ (772) $ (26,930) $ (20,562) $ (13,071) $ (9,275) $ (17,466)
International.............. -- (707) (971) (7,484) (8,168) (5,471) (14,677)
-------- --------- ---------- ---------- ---------- ---------- ----------
$ (166) $ (1,479) $ (27,901) $ (28,046) $ (21,239) $ (14,746) $ (32,143)
======== ========= ========== ========== ========== ========== ==========
Cash flows used in operating
activities................... $ (209) $ (1,097) $ (30,093) $ (32,543) $ (15,457) $ (13,009) $ (76,931)
Cash flows provided by (used in)
investing activities......... (3,656) (1,937) (21,958) (7,897) (15,560) 13,030 (326,028)
Cash flows provided by (used
in) financing activities..... 5,490 4,527 151,403 (10,529) 12,598 (12,206) (654,228)
Capital expenditures(3)........ 7,043 5,009 45,166 38,390 50,068 29,076 103,300
Ratio of earnings to
fixed charges(4)............. -- -- -- -- -- -- --
OTHER OPERATING DATA:
Number of POPs................. 68 82 241 350 350 350 475
Number of customer
accounts..................... 2,830 4,220 8,200 17,800 26,400 23,000 46,700
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
---------------------------------------------- ----------------------------------
PRO FORMA,
1993 1994 1995 1996 1997 ACTUAL PRO FORMA AS ADJUSTED
-------- -------- -------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................$ 1,865 $ 3,358 $ 102,710 $ 56,390 $ 33,322 $ 335,428 $222,627 $ 565,420
Restricted cash and investments............. -- -- -- 954 20,690 127,617 127,617 127,617
Total assets................................ 13,821 17,055 201,830 177,112 186,181 878,630 916,022 1,269,022
Lines of credit and current portion of
long-term debt and
capital lease obligations................. 2,540 3,369 16,643 26,915 39,633 44,746 51,388 51,388
Long-term debt and capital lease
obligations, less current
portion................................... 3,581 4,397 24,130 26,938 33,820 772,998 780,121 1,133,121
Redeemable preferred and common stock....... 6,725 13,617 -- -- -- -- -- --
Shareholders' equity (deficit).............. (1,427) (8,283) 143,230 89,783 73,429 (26,633) (26,633) (26,633)
</TABLE>
_______________
(1) Basic and diluted loss per share for 1993 is not considered relevant
given the significant changes in our capital structure in conjunction
with our initial public offering of shares of our common stock in 1995.
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense, other income (expense), income tax expense (benefit),
gain on sale of investments, equity in loss of affiliate, intangible
asset write-down and charge for acquired in-process research and
development. We have included information concerning EBITDA because we
understand 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 we define it, may not be
comparable to similarly titled measures used by other companies.
(3) Includes cash expenditures and amounts financed under equipment financing
agreements.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of
affiliate and fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt financing costs and that portion of
rental expense which believe to be representative of interest (deemed to
be one-third of rental expense). The deficiency for purposes of
calculating the ratio of earnings to fixed charges was $2,159,000,
$5,307,000, $52,956,000, $54,449,000, $46,078,000, $31,741,000 and
$130,006,000 for the years ended December 31, 1993, 1994, 1995, 1996 and
1997, and for the nine months ended September 30, 1997 and 1998,
respectively.
-16-
<PAGE>
ACQUISITIONS
RECENT ACQUISITIONS. As part of our growth strategy, over the last
twelve months we have acquired 15 ISPs in eight of the 20 largest global
telecommunications markets. The aggregate amount of the purchase prices and
related payments for these acquisitions was approximately $285.1 million,
exclusive of indebtedness assumed in connection with such acquisitions. Of such
amount, we have paid $247.1 million as of October 31, 1998 and retained the
balance to secure performance by certain sellers of indemnification or other
contractual obligations. The following table summarizes certain information
concerning these acquisitions:
<TABLE>
<CAPTION>
RANKING
NAME OF AMONG 20
ACQUIRED DATE OF PRINCIPAL BUSINESS CONSUMER LARGEST GLOBAL
COMPANY ACQUISITION MARKET TERRITORY ACCOUNTS (1) ACCOUNTS (1) TELECOM MARKETS
-------- ----------- ---------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
CalvaCom 10/97 France 1,500 2,300 5
Iprolink 1/98 Switzerland 2,400 2,600 14
iSTAR 2/98 Canada 2,700 47,000 10
ITL 4/98 Jersey, Channel Islands -- -- N/A
INX 5/98 Germany 650 15,600 3
IoNet 6/98 U.S. 2,300 21,500 1
LinkAge 6/98 Hong Kong 1,100 -- 19
CalvaPro 6/98 Sub-Sahara Africa 425 30 N/A
Interlog 7/98 Canada 2,100 41,000 10
Rimnet 8/98 Japan 260 56,000 2
TWICS 9/98 Japan 70 1,700 2
HKIGS 9/98 Hong Kong 200 -- 19
Inet 9/98 Korea 1,100 13,000 12
Tokyo Internet 10/98 Japan 6,500 10,000 2
IXE/USN 10/98 Netherlands 85 -- 13
------------ ------------
Total 21,390 210,730
============ ============
</TABLE>
_______________
(1) As of the respective dates of acquisition.
In October 1997, we acquired Serveur Telematique Internet S.A. (doing
business as "CalvaCom"), a leading ISP and Web hosting company in France. The
acquisition established our market presence in France with over 1,500 dedicated
and dial-up customer accounts through 24 POPs. CalvaCom also has a significant
commercial grade Web design and hosting business providing service to such
leading French companies as Total S.A. and La Chemise Lacoste S.A.
In January 1998, we acquired Internet Prolink S.A. ("Iprolink"), the
leading commercial ISP in Switzerland. This acquisition expanded our market
presence in Switzerland by adding approximately 2,400 dedicated and dial-up
customer accounts and 18 POPs in Switzerland and France. Iprolink also has
relationships with over 170 resellers located throughout Switzerland, France and
Germany to augment its direct sales force.
In February 1998, we acquired iSTAR internet inc. ("iSTAR"), one of the
leading Canadian providers of Internet services and solutions for business,
institutions and individuals. This acquisition established us as the largest ISP
in Canada with over 2,700 business and Web services customers as well as over
47,000 dial-up customer accounts through over 35 POPs. By eliminating redundant
network architecture and administrative functions and migrating iSTAR's
customers on to our integrated network backbone, we have realized, and believe
we will continue to realize, significant cost savings in our Canadian
operations.
In April 1998, we acquired Interactive Telephony Limited ("ITL"), the
largest ISP based in Jersey in the Channel Islands, and a 12.5% equity interest
in WorldPay Limited, a leading provider of electronic commerce payment solutions
also based in Jersey, Channel Islands.
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In May 1998, we acquired Interactive Networx GmbH ("INX"), the largest
ISP in Berlin and nationally recognized across Germany. This acquisition
expanded our market presence in Germany by adding approximately 650 business
customers, 15,600 consumer dial-up customers and ten POPs in Germany. The
combination of INX with our existing German operations has resulted in us
becoming one of the largest ISPs in Germany, which is the fastest growing
Internet market in Europe.
In June 1998, we acquired ioNet Internetworking Services ("ioNet"), a
provider of Internet and network systems integration services to businesses,
universities and residential customers in the south central region of the United
States. In addition, ioNet has developed a suite of vertical market Internet
services, including comprehensive banking, medical and telecommunications
Internet solutions, to enable customers to more efficiently meet their
internetworking needs. This acquisition resulted in the addition of
approximately 2,300 business and Web services accounts and 21,500 consumer
dial-up customers.
In June 1998, we acquired LinkAge Online Limited ("LinkAge"), a Hong
Kong-based supplier of Internet solutions, including Web hosting, managed
co-location, intranets and extranets, to businesses, professionals, government
agencies and other ISPs throughout Southeast Asia. This acquisition established
our market presence in Hong Kong, the fifth largest telecommunications market in
Asia, by adding approximately 1,100 business and Web services accounts.
In June 1998, we acquired SCII-CalvaPro ("CalvaPro"), a full service
business-to-business telecommunications company headquartered in Paris, France
that provides Internet applications and other communications services primarily
to banks and shipping and forwarding agencies in the sub-Saharan African market.
This acquisition gives us a market presence in sub-Saharan Africa by adding
approximately 425 business accounts and 30 consumer dial-up customers.
In July 1998, we acquired INTERLOG Internet Services Inc. ("Interlog"),
one of the first Internet-only service providers in Canada. This acquisition
further solidifies our market-leading presence in Canada by adding approximately
2,100 business and Web services accounts and 41,000 consumer dial-up customers.
In August 1998, we acquired Rimnet Corporation ("Rimnet"), one of
Japan's leading providers of Internet services and solutions to businesses. This
acquisition further strengthens our market presence in Japan, one of the 20
largest global telecommunications markets, by adding approximately 260 business
and Web services accounts and 56,000 consumer dial-up customers.
In September 1998, we acquired TWICS Co., Ltd., one of the original
ISPs in Japan, primarily serving the small-office/home-office market. This
acquisition added approximately 70 business and Web services accounts and 1,700
consumer dial-up customers to our market presence in Japan.
In September 1998, we acquired Hong Kong Internet & Gateway Services,
one of the original ISPs in Hong Kong, primarily serving the business market.
This acquisition enhances our recently established market presence in Hong Kong
by adding approximately 200 business accounts.
In September 1998, we acquired Inet, Inc. ("Inet"), one of Korea's
first ISPs that provides a comprehensive range of Internet access options,
applications, consulting services and education programs, including Web hosting
and content development, intranet application development and training. This
acquisition establishes our market presence in Korea, one of the 20 largest
global telecommunications markets, by adding approximately 1,100 business and
Web services accounts and 13,000 consumer dial-up customers.
In October 1998, we acquired Tokyo Internet Corporation ("Tokyo
Internet"), one of the most widely used ISPs in Japan serving businesses, the
small-office/home-office market and individual Internet users. Tokyo Internet
offers a comprehensive range of Internet services, including individual and
business dial-up connection services, leased-line LAN connectivity services and
high quality collocation and Web services. In addition, Tokyo Internet has
created an IP network infrastructure that directly links 23 of Japan's largest
metropolitan areas. The combination of Tokyo Internet with our existing Japanese
operations has resulted in us becoming the second largest ISP in Japan,
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based on customer domains serving business and commercial users, by adding
approximately 6,500 business and Web services accounts and 10,000 consumer dial-
up customers.
In October 1998, we acquired Internet Exchange Europe B.V. ("IXE"), the
first commercial top-level ISP in Holland to maintain its own Internet backbone,
and Unix Support Netherland B.V. ("USN"), a well-known provider of Internet
services, including Web hosting and maintenance, security and other customized
solutions, to businesses. These acquisitions provide us with additional business
Internet expertise to enhance our market presence in the Netherlands and Europe
by focusing on value-added products.
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RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks, including the ones listed below. You should carefully consider
these risk factors, as well as the other information contained in this
Prospectus, in evaluating an investment in our securities.
RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND OUR ABILITY TO SERVICE DEBT
The Company is highly leveraged and has significant debt service
requirements. As of September 30, 1998, after giving pro forma effect to the
offerings of the Initial Notes (and the application of the net proceeds
therefrom) and the acquisition of Tokyo Internet, our total indebtedness would
have been approximately $1.185 billion, representing 1.02% of total
capitalization, and our interest expense for the nine months ended September 30,
1998 would have been approximately $95.0 million. See "Unaudited Pro Forma
Consolidated Financial Information."
Our high level of indebtedness could have several important effects on
our future operations, which, in turn, could have important consequences for the
holders of our securities, including the following:
. a substantial portion of our cash flow from operations must be
used to pay interest on our indebtedness and, therefore, will not
be available for other business purposes;
. covenants contained in the agreements evidencing our debt
obligations require us to meet certain financial tests, and other
restrictions limit our ability to borrow additional funds or to
dispose of assets and may affect our flexibility in planning for,
and reacting to, changes in our business, including possible
acquisition activities and capital expenditures; and
. our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired.
Our ability to meet our debt service obligations and to reduce our
total indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. Based
on our current level of operations, management believes that working capital
from operations, existing credit facilities, capital lease financings and
proceeds of future equity or debt financings (including, without limitation,
from the offerings of the Initial Notes), will be adequate to meet our presently
anticipated future requirements for working capital, capital expenditures and
scheduled payments of interest on our debt (including the Notes). We cannot
assure, however, that our business will generate sufficient cash flow from
operations or that future working capital borrowings will be available in an
amount sufficient to enable us to service our debt (including the Notes) or to
make necessary capital expenditures. In addition, we cannot assure that we will
be able to raise additional capital for any such refinancing in the future.
RISK ASSOCIATED WITH OUR OPERATING DEFICIT AND CONTINUING LOSSES; POTENTIAL
FLUCTUATIONS IN OPERATING RESULTS; AND OPERATING LOSSES OF CERTAIN ACQUIRED
COMPANIES
Our 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, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons, and
continue to upgrade our technologies and commercialize our network services
incorporating such technologies. We cannot assure that we will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on our business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts in respect of our debt
(including the Notes). Although we have 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 and $165.7 million for the first nine months of
1998, we have incurred losses and experienced negative earnings before
depreciation and amortization, interest income and expense, other income (loss),
income tax expense (benefit), gain on sale of investments, equity in loss of
affiliate and intangible asset write-down and charge for acquired in-process
research and development ("EBITDA") during each of such periods. Management
expects to continue to operate at a net loss and experience negative EBITDA in
the near term as we continue our acquisition program and the expansion of our
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global network operations. We have incurred net losses available to common
shareholders of $53.2 million, $55.1 million and $46.0 million and have incurred
negative EBITDA of $27.9 million, $28.0 million and $21.2 million for each of
the years ended December 31, 1995, 1996 and 1997, respectively. Additionally, we
incurred net losses available to common shareholders of $132.4 million and
negative EBITDA of $32.1 million, respectively, for the nine months ended
September 30, 1998. At September 30, 1998, we had an accumulated deficit of
$295.0 million. We cannot assure that we will be able to achieve or sustain
profitability or positive EBITDA. Principal among factors that adversely
affected our operating performance in 1997 and the first nine months of 1998
were:
. delivery delays for Primary Rate Interface ("PRI")
telecommunications facilities required to meet customer demand;
. accelerated investment by the Company in our 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 our domestic Internet services.
We expect to focus in the near term on continuing to increase our
corporate customer base and geographic presence, and on expanding our Carrier
and ISP Services business unit strategy. This will require us to continue to
incur expenses for marketing, network infrastructure, personnel and the
development of new products and services. We also plan to continue to enhance
our network and the administrative and operational infrastructure necessary to
support our Internet access service domestically and internationally. We will
accomplish this through ownership interests or capital leases wherever possible.
This includes the acquisition of bandwidth, which must often be obtained in
anticipation of future revenue. Such expenses may adversely impact cash flow and
operating performance.
Our 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 our control. These factors, include, among others:
. general economic conditions and specific economic conditions in
the Internet access industry;
. user demand for Internet services;
. capital expenditures and other costs relating to the expansion of
operations our network;
. the ability to identify, acquire and integrate successfully
suitable acquisition candidates;
. changes related to acquisitions;
. the introduction of new services by the Company or our
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
our competitors;
. delays in obtaining sufficient supplies of sole or limited source
equipment and telecom facilities (i.e., PRIs); and
. potential adverse regulatory developments.
As a strategic response to a changing competitive environment, we may
elect from time to time to make certain pricing, service or marketing decisions
that could have a material adverse effect on our business, results of operations
and cash flow.
We have recently acquired a number of Internet-related companies.
Certain of these companies incurred net losses and had negative EBITDA prior to
their acquisition. We believe that after eliminating redundant network
architecture and administrative functions and taking other actions to integrate
the operations of these companies we will be able to realize significant cost
savings on our consolidated operations. However, we cannot assure that our
integration of the operations of these companies will be accomplished
successfully. Our inability to improve the operating performance of these
businesses or to successfully integrate their operations could have a material
adverse effect on our business, financial condition and results of operations.
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RISK ASSOCIATED WITH COMPANY STRUCTURE AND DEPENDENCE ON SUBSIDIARIES FOR
REPAYMENT OF DEBT
We are an operating entity which also conducts a significant portion of
our business through our subsidiaries. Our cash flow from operations and
consequently our ability to service our debt (including the Notes) is therefore
partially dependent upon our subsidiaries' earnings and their distributions of
those earnings to us. It may also be dependent upon loans, advances or other
payments of funds to us by those subsidiaries. Our subsidiaries have no
obligation, contingent or otherwise, to make any funds available to us for
payment of the principal of or interest on certain of our debt obligations
(including the Notes). Our subsidiaries' ability to make payments may be subject
to the availability of sufficient surplus funds, the terms of such subsidiaries'
indebtedness, applicable laws and other factors.
Our subsidiaries' creditors and holders of preferred stock, if any, of
such subsidiaries will have priority to the assets of such subsidiaries over the
claims of the Company and the holders of our indebtedness. One exception is that
if such subsidiaries have provided guarantees of our indebtedness and if loans
made by the Company to its subsidiaries are recognized as indebtedness, they
will not have such priorities. In any event, the Notes are effectively
subordinated in right of payment to all existing and future indebtedness and
other liabilities of our subsidiaries, including trade payables. As of September
30, 1998, after giving pro forma effect to the offerings of the Initial Notes
(and the application of the net proceeds therefrom) and the acquisition of Tokyo
Internet, our subsidiaries would have had approximately $100.8 million of total
liabilities (including trade payables and accrued liabilities). Under the terms
of certain agreements evidencing our debt obligations, certain subsidiaries of
the Company are restricted in their ability to incur debt in the future. We had
approximately $108.5 million of indebtedness outstanding under the Credit
Facility on September 30, 1998, which we repaid prior to the closing of the
initial offering of the Initial Notes.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
In order to maintain our competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing, we
expect to make significant capital expenditures. Our expected expenditures
include the following:
. up to $95.0 million through the end of the year 2000 to take full
advantage of the bandwidth acquired from IXC;
. approximately $1.2 million per year in operation and maintenance
fees per each 1,000 equivalent route miles of OC-48 bandwidth
accepted under the IRU Purchase Agreement (as defined);
. up to $35.0 million over the next three years in connection with
the anticipated buildout of our pan-European Internet network,
including in connection with our recent acquisition of IRUs in
transatlantic STM-1 bandwidth connecting the United States and
Europe, and for construction of our recently opened operations
center in Switzerland;
. approximately $45.0 million in connection with our acquisition of
dark fiber optic capacity connecting and encircling the New York
City and Washington, D.C. metropolitan areas;
. approximately $47.0 million in connection with our recent
acquisition of IRUs in and long-term capital leases of
transpacific DS-3 bandwidth connecting the United States and
Japan; and
. in excess of $100.0 million over 25 years in connection with our
recent agreement with a group of leading global telecommunications
companies to build the Japan-U.S. Cable Network.
In addition, we are also obligated, under one of our 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 us and deployed
in the customer's network. As of September 30, 1998, $1.4 million of this was
drawn. Furthermore, we may be obligated under the IRU Purchase Agreement to
provide IXC with additional shares of common stock and/or cash. For the specific
terms of this obligation, see "Certain Transactions--Strategic Alliance With
IXC." We also expect that we will require substantial capital for acquisitions
of Internet assets and businesses.
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We believe that we will have a reasonable degree of flexibility to
adjust the amount and timing of these capital expenditures in response to market
conditions, competition, our then-existing financing capabilities and other
factors. We also believe that working capital generated from the use of
bandwidth, together with other working capital from operations, existing credit
facilities, capital lease financings, proceeds of this and prior offerings and
proceeds of future equity or debt financings will be sufficient to meet the
presently anticipated working capital and capital expenditure requirements of
our operations.
However, we may need to raise additional funds in order to take
advantage of unanticipated opportunities, more rapid international expansion or
acquisitions of complementary businesses. In addition, we may need to raise
additional funds to develop new products or otherwise respond to changing
business conditions or unanticipated competitive pressures. We cannot assure
that we will be able to raise such funds on favorable terms. In the event that
we are unable to obtain such additional funds on acceptable terms, we may
determine not to enter into various expansion opportunities.
RISK ASSOCIATED WITH COMPETITION AND PRICING FLUCTUATIONS
The market for Internet connectivity and related services is extremely
competitive. We anticipate 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.
We believe that the primary competitive factors in our targeted market
are a reliable international network, knowledgeable salespeople and high quality
technical support. Price is usually secondary to these factors.
Our current and prospective competitors include: 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. We believe that our network, products
and customer service distinguish us from these competitors. However, some of
these competitors have a significantly greater market presence, brand
recognition and financial, technical and personnel resources than the Company.
We compete with all of the major long distance companies (also known as
interexchange carriers or IXCs), including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers ("LECs"), including
the Regional Bell Operating Companies ("RBOCs"), to enter the Internet
connectivity market. We believe that there is a move toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from ISPs to address the Internet connectivity
requirements of the current business customers of long distance and local
carriers. The WorldCom/MFS/UUNet consolidation, the WorldCom/MCI merger, the
ICG/NETCOM merger, Cable & Wireless' purchase of the internetMCI assets, the
Intermedia/DIGEX merger, GTE's acquisition of BBN and Frontier's acquisition of
Global Center are indicative of this trend. Accordingly, we expect to experience
increased competition from the traditional telecommunications carriers. Many of
these telecommunications carriers may have the ability to bundle Internet access
with basic local and long distance telecommunications services. Such bundling of
services may have an adverse effect on our ability to compete effectively with
the telecommunications providers and may result in pricing pressure on us that
would have an adverse effect on our business, financial condition and results of
operations.
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. Several
announcements also have recently been made by other alternative service
companies approaching the Internet connectivity market with various wireless
terrestrial and satellite-based service technologies.
The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network and Prodigy, have all entered the Internet access
business by engineering their current proprietary networks to include Internet
access capabilities. We compete to a lesser extent with these on-line service
providers. However, America Online's recently announced acquisition of Netscape
Communications Corporation and related strategic alliance with Sun Microsystems
will, if completed, enable it to offer a broader array of IP-based services and
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products that could significantly enhance its ability to appeal to the business
marketplace and, as a result, compete more directly with us.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services would include new technologies such as cable
modems and xDSL. These providers have initially targeted the residential
consumer. However, it is likely that their target markets will expand to
encompass business customers, which is our target market. This expansion could
affect the pricing of our service offerings.
As a result of the increase in the number of competitors and the
vertical and horizontal integration in the industry, we currently encounter and
expect to continue to encounter significant pricing pressure and other
competition in the future. Advances in technology as well as changes in the
marketplace and the regulatory environment are constantly occurring, and we
cannot predict the effect that ongoing or future developments may have on us or
on the pricing of our products and services. Increased price or other
competition could result in erosion of our market share and could have a
material adverse effect on our business, financial condition and results of
operations. We cannot assure that we will have the financial resources,
technical expertise or marketing and support capabilities to continue to compete
successfully.
As we continue to expand our operations outside the United States, we
will encounter new competitors and competitive environments. In some cases, we
will be forced to compete with and buy services from government-owned or
subsidized telecommunications providers. Some of these providers may enjoy a
monopoly on telecommunications services essential to our business. We cannot
assure that we will be able to purchase such services at a reasonable price or
at all. In addition to the risks associated with our previously described
competitors, foreign competitors may pose an even greater risk, as they may
possess a better understanding of their local markets and better working
relationships with local infrastructure providers and others. We cannot assure
that the Company can obtain similar levels of local knowledge. Failure to obtain
that knowledge could place us at a significant competitive disadvantage.
RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES
As part of our business strategy, we expect to continue to acquire
assets and businesses principally relating to or complementary to our current
operations. We may also seek to develop strategic alliances both domestically
and internationally. Any such future acquisitions or strategic alliances would
be accompanied by the risks commonly encountered in strategic alliances with or
acquisitions of companies. Such risks include, among other things:
. the difficulty of integrating the operations and personnel of the
companies;
. the potential disruption of our ongoing business;
. the inability of management to maximize our financial and
strategic position by the successful incorporation of licensed or
acquired technology and rights into our service offerings; and
. the inability to maintain uniform standards, controls, procedures
and policies and the impairment of relationships with employees
and customers as a result of changes in management.
We cannot assure that we will be successful in overcoming these risks
or any other problems encountered in connection with such acquisitions or
strategic alliances. We believe that after eliminating redundant network
architecture and administrative functions and taking other actions to integrate
the operations of acquired companies we will be able to realize cost savings.
However, we cannot assure that our integration of acquired companies' operations
will be successfully accomplished. Our inability to improve the operating
performance of acquired companies' businesses or to integrate successfully the
operations of acquired companies could have a material adverse effect on our
business, financial condition and results of operations. In addition, as we
proceed with acquisitions in which the consideration consists of cash, a
substantial portion of our available cash will be used to consummate such
acquisitions.
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Many of the businesses that might become attractive acquisition
candidates for us may have or generate significant goodwill and intangible
assets, and acquisition of these businesses, if accounted for as a purchase,
would typically result in increases in our amortization expenses and the length
of time over which they are reported. In connection with acquisitions, we could
incur substantial expenses, including the expenses of integrating the business
of the acquired company or the strategic alliance with our business. In this
regard, an intangible asset that frequently arises in connection with the
acquisition of a technology company is "acquired in-process research and
development," which under U.S. accounting standards, as presently in effect,
must be expensed immediately upon acquisition. Such expenses, in addition to the
financial impact of such acquisitions, could have a material adverse effect on
our business, financial condition and results of operations and could cause
substantial fluctuations in our quarterly and yearly operating results.
We expect that competition for appropriate acquisition candidates may
be significant. We may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
financial and other resources than we have. Competition for Internet companies
is based on a number of factors including price, terms and conditions, size and
access to capital, ability to offer cash, stock or other forms of consideration
and other matters. We cannot assure that we will be able to successfully
identify and acquire suitable companies on acceptable terms and conditions.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION
We have over 500 POPs and we plan to continue to expand the capacity of
existing POPs as customer-driven demand dictates. In addition, we have completed
a number of acquisitions of companies and telecommunications bandwidth during
1998 and plan to continue to do so. We anticipate that our Carrier and ISP
Services business unit, as well as other business growth, may require continued
enhancements to and expansion of our network. However, our rapid growth has
placed a strain on our administrative, operational and financial resources and
has increased demands on our systems and controls. The process of consolidating
the businesses and implementing the strategic integration of these acquired
businesses with the Company may take a significant amount of time. It may also
place additional strain on our resources and could subject us to additional
expenses. We cannot assure that we will be able to integrate these companies
successfully or in a timely manner. In addition, we cannot assure that our
existing operating and financial control systems and infrastructure will be
adequate to maintain and effectively monitor future growth.
Our continued growth may also increase our need for qualified
personnel. We cannot assure that we will be successful in attracting,
integrating and retaining such personnel. The following risks, associated with
the growth of our Company, could have a material adverse effect on our business,
results of operations and financial condition:
. our inability to continue to upgrade our networking systems or our
operating and financial control systems;
. our inability to recruit and hire necessary personnel or to
successfully integrate new personnel into our operations;
. our inability to successfully integrate the operations of acquired
companies or to manage our growth effectively; or
. our inability to adequately respond to the emergence of unexpected
expansion difficulties.
RISKS ASSOCIATED WITH ACQUISITIONS OF BANDWIDTH AND STRATEGIC ALLIANCE WITH IXC
We are subject to a variety of risks relating to our recent
acquisitions of fiber-based telecommunications bandwidth from IXC and various
other global network suppliers and the delivery, operation and maintenance of
such bandwidth. Such risks include, among other things, the following:
. the risk that financial, legal, technical and/or other matters may
adversely affect such suppliers' ability to perform their
respective operation, maintenance and other services relating to
such bandwidth, which may adversely affect our use of such
bandwidth;
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. the risk that we will not have access to sufficient additional
capital and/or financing on satisfactory terms to enable us to make
the necessary capital expenditures to take full advantage of such
bandwidth;
. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise
elect not to complete, their contemplated buildout of their
respective fiber optic telecommunications systems; and
. the risk that such buildout may be delayed or otherwise adversely
affected by presently unforeseeable legal, technical and/or other
factors.
In addition, we are subject to additional risks relating specifically
to our strategic alliance with IXC. Such risks include:
. the risk that, if the fair market value of the IXC Initial Shares
(as defined) is less than $240 million on the applicable date, our
payment of the shortfall, whether in cash, stock or a combination
thereof, could result in significant dilution to our shareholders
and in IXC's owning a significant, or even a controlling, portion
of our 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 us, our shareholders and
holders of our other securities;
. 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, our
use of the bandwidth acquired from IXC may be materially adversely
affected or curtailed;
. 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 us under the IRU Purchase
Agreement that would adversely affect our use of the bandwidth
acquired from IXC;
. the risk that IXC, as our largest shareholder and through its ex-
chairman's seat on our Board of Directors, could subject us to
certain conflicts of interest or could influence our management in
a manner that could adversely affect our business or control of the
Company; and
. the risk that future sales by IXC of substantial numbers of shares
of our common stock could adversely affect the market price of our
common stock and make it more difficult for us to raise funds
through equity offerings and to effect acquisitions of businesses
or assets in consideration for issuances of our common stock.
We cannot assure that we will be successful in overcoming these risks
or any other problems encountered in connection with our acquisitions of
bandwidth or our strategic alliance with IXC. See "Certain Transactions--
Strategic Alliance With IXC."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A component of our strategy is our planned expansion into international
markets. We may need to enter into joint ventures or other strategic
relationships with one or more third parties in order to conduct our foreign
operations successfully. However, we cannot assure that we will be able to
obtain the permits and operating licenses required for us 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 our ability to expand our
international presence, there are certain risks inherent in doing business on an
international level. Such risks include:
. unexpected changes in or delays resulting from regulatory
requirements, tariffs, customs, duties and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts
receivable;
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. political instability, expropriation, nationalization, war,
insurrection and other political risks;
. fluctuations in currency exchange rates and 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 our international operations.
We cannot assure that such factors will not have an adverse effect on
our future international operations and, consequently, on our business,
financial condition and results of operations. In addition, we cannot assure
that laws or administrative practice relating to taxation, foreign exchange or
other matters of countries within which we operate will not change. Any such
change could have a material adverse effect on our business, financial condition
and results of operations.
In particular, we have also recently made significant investments in
Japan, which is currently experiencing a severe economic recession. Other
Asian-Pacific countries in which we operate are also experiencing economic
difficulties and uncertainties. These economic difficulties and uncertainties
could have a material adverse effect on our business, financial condition and
results of operations.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
Our products and services are targeted toward users of the Internet,
which has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. Our future success will depend, in part, on our ability to
effectively use and develop leading technologies. In particular, we will strive
to:
. continue to develop our technical expertise;
. enhance our current services;
. develop new products and services that meet changing customer
needs;
. influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis;
. integrate technological advances into our current network; and
. address the compatibility and interoperability issues raised by
technological changes or new industry standards.
We cannot assure that we will be successful in responding to changing
technology or market trends. In addition, services or technologies developed by
others may render our services or technologies uncompetitive or obsolete.
Furthermore, changes to our services in response to market demand may require
the adoption of new technologies that could likewise render certain of our
assets technologically uncompetitive or obsolete. As we accept bandwidth from
IXC and our other existing global network suppliers or acquire bandwidth or
equipment from other suppliers that may better meet our needs than existing
bandwidth or equipment, certain of our assets could be determined to be obsolete
or excess. The disposition of obsolete or excess assets could have a material
adverse effect on our business, financial condition and results of operations.
Even if we do successfully respond to technological advances, the
integration of new technology may require substantial time and expense, and we
cannot assure that we will succeed in adapting our network infrastructure.
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DEPENDENCE ON KEY PERSONNEL
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 process of
locating such personnel with the combination of skills and attributes required
to carry out our strategies is often lengthy. Our success depends to a
significant degree upon our ability to attract and retain qualified management,
technical, marketing and sales personnel and upon the continued contributions of
such management and personnel. Our employees may voluntarily terminate their
employment with us at any time. We cannot assure that we will be successful in
attracting and retaining qualified executives and personnel. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel, could have a material adverse effect on our business, financial
condition or results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. A number of
lawsuits have sought to impose such liability for defamatory speech and
infringement of copyrighted materials. The U.S. Supreme Court has let stand a
lower court ruling which held that an Internet Service Provider was protected
from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not be
applicable in other circumstances. 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.
However, on October 21, 1998, new federal legislation was enacted that requires
limitations on access to pornography and other material deemed "harmful to
minors." This legislation has been attacked in court as a violation of the First
Amendment. We are unable to predict the outcome of this case. The imposition
upon ISPs or web server hosts of potential liability for materials carried on or
disseminated through their systems could require us to implement measures to
reduce our exposure to such liability. Such measures may require that we spend
substantial resources or discontinue certain product or service offerings. Any
of these actions could have a material adverse effect on our business, operating
results and financial condition.
We carry errors and omissions insurance with a policy limit of $5.0
million, subject to deductibles and exclusions. Such coverage may not be
adequate or available to compensate us 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 our 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.
REGULATORY MATTERS
Consistent with our growth and acquisition strategy, we are now engaged
in, or will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The Federal Communications Commission
("FCC") exercises jurisdiction over all facilities of, and services offered by,
telecommunications 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, as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
state and federal regulators share responsibility for implementing and enforcing
the domestic pro-competitive policies of the 1996 Act. In particular, state
regulatory commissions have substantial oversight over the provision of
interconnection and non-discriminatory network access by incumbent local
exchange carriers ("ILECs"). Municipal authorities generally have some
jurisdiction over access to rights of way, franchises, zoning and other matters
of local concern.
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Our Internet operations are not currently subject to direct regulation
by the FCC or any other governmental agency (other than regulations applicable
to businesses generally). However, due to the increasingly widespread use of the
Internet, it is possible that additional laws and regulations may be adopted.
Such additional laws could cover issues such as content, user pricing, privacy,
libel, intellectual property protection and infringement, and technology export
and other controls. We may be subject to similar or other laws and regulations
in non-U.S jurisdictions.
Moreover, the FCC continues to review its regulatory position on the
usage of the basic network and communications facilities by ISPs. Although in an
April 1998 Report the FCC determined that ISPs should not be treated as
telecommunications carriers and therefore not regulated, it is expected that
future ISP regulatory status will continue to be uncertain. Indeed, in that
report, the FCC concluded that certain services offered over the Internet, such
as phone-to-phone IP telephony, may be functionally indistinguishable from
traditional telecommunications service offerings and their non-regulated status
may have to be re-examined.
We are unable to predict what regulations may be adopted in the future,
or to what extent existing laws and regulations may be found applicable, or the
impact such new or existing laws may have on our business. We can give no
assurance that new laws or regulations relating to Internet services, or
existing laws found to apply to them, will not have a material adverse effect on
us.
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
Regional Bell Operating Companies ("RBOCs") or other telecommunications
companies, could have an adverse effect on our business. Although the FCC has
decided not to allow local telephone companies to impose per-minute access
charges on ISPs, and that decision has been upheld by the reviewing court,
further regulatory and legislative consideration of this issue is likely. 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 our
costs of serving dial-up customers and could have a material adverse effect on
our business, financial condition and results of operations.
In addition to our Internet activities, we have focused attention on
acquiring telecommunications assets and facilities, which is a regulated
activity. Our wholly-owned subsidiary, PSINetworks Company, has received an
international Section 214 license from the FCC to provide global
facilities-based telecommunications services, subjecting it to regulation as a
non-dominant international common carrier. In addition, our wholly-owned
subsidiary, PSINet Telecom UK Limited, has received an international facilities
license from DTI and OFTEL, the responsible telecommunications regulatory bodies
in the United Kingdom. Generally, the FCC and OFTEL have chosen not to closely
regulate the charges or practices of non-dominant carriers, such as our
subsidiaries. Nevertheless, these regulatory agencies act upon complaints
against such carriers for failure to comply with statutory obligations or with
the rules, regulations and policies of such regulatory agencies. These
regulatory agencies also have the power to impose more stringent regulatory
requirements on us and to change our regulatory classification. We believe that,
in the current regulatory environment, such regulatory agencies are unlikely to
do so. As we enter new markets, we anticipate obtaining similar licenses as
required by applicable telecommunications rules and regulations in order to
acquire and maintain telecommunications assets and facilities in such countries.
The laws relating to the provision of telecommunications services in
other countries, and in multinational organizations such as the International
Telecommunications Union, are also undergoing a process of development. As we
continue our program of acquisition and expansion into international markets,
these laws will have an increasing impact on our operations. We can give no
assurance that new or existing laws or regulations will not have a material
adverse effect on us.
PSINetworks Company has also received competitive local exchange
carrier ("CLEC") certification in Colorado and Texas, has applied for CLEC
certification in Virginia, California and New York, and is considering the
financial, regulatory and operational implications of becoming a CLEC in certain
other states. As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, we could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.
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The 1996 Act has caused fundamental changes in the markets for local
exchange services. In particular, the 1996 Act and the FCC rules issued pursuant
to it mandate competition in local markets and require that ILECs interconnect
with CLECs. Under the provisions of the 1996 Act, the FCC and state public
utility commissions share jurisdiction over the implementation of local
competition: the FCC was required to promulgate general rules and the state
commissions were required to arbitrate and approve individual agreements.
However, the FCC interconnection rules implementing the 1996 Act were appealed
and, in the case of the "national pricing" rules, vacated. The Supreme Court has
agreed to review this lower court decision and heard oral arguments on this
matter on October 13, 1998. Pending the Supreme Court's decision, state public
utility commissions are free to develop independent pricing policies for
interconnection, unbundled access, resale, and transport and termination of
local telecommunications traffic.
A critical issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic. We believe
that, under the 1996 Act and current FCC rules, CLECs are entitled to receive
reciprocal compensation from ILECs for the transport and termination of Internet
traffic. However, some ILECs have disputed payment of reciprocal compensation
for Internet traffic, arguing that ISP traffic is not local traffic. Most states
have required ILECs to pay ISPs reciprocal compensation. However, federal
regulators and some state regulators are currently considering the proper
jurisdictional classification of local calls placed to an ISP and whether ISP
calling triggers an obligation to pay reciprocal compensation. On October 30,
1998, the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. However, the
FCC specifically did not apply this decision to the question of whether local
exchange carriers are entitled to receive reciprocal compensation when they
deliver circuit-switched dial-up traffic to ISPs. It is expected that the FCC
will address this question in the near future. There can be no assurance that
any FCC decision on this matter will favor our position. An unfavorable result
may have an adverse effect on our potential future revenues as a CLEC as well as
increasing our costs for PRIs in general.
The 1996 Act was intended to increase opportunities for companies to
compete in the local exchange market. However, we cannot give assurance that
changes in current or future regulations by the FCC and state regulatory
commissions, or other legislative or jurisdictional initiatives relating to the
telecommunications industry would not have a material adverse effect on us.
As we become a competitor in local exchange markets, we will become
subject to state requirements regarding provision of intrastate services. This
may include the filing of tarriffs containing rates and conditions. As a new
entrant, without market power, we expect to face a relatively flexible
regulatory environment. Nevertheless, it is possible that some states could
require the approval of the public utilities commission for the issuance of debt
or equity or other transactions which would result in a lien on our property
used to provide intrastate services.
DEPENDENCE ON SUPPLIERS
We have few long-term contracts with our suppliers. We are dependent on
third party suppliers for our leased-line connections or bandwidth. Certain of
these suppliers are or may become competitors of ours, and such suppliers are
not subject to any contractual restrictions upon their ability to compete with
us. If these suppliers change their pricing structures, we may be adversely
affected. Due to the consummation of our transaction with IXC and our recent
acquisitions of telecommunications bandwidth from other global network
providers, we anticipate that our dependence upon certain of these suppliers
will be decreased as we accept delivery of OC-48 bandwidth from IXC and
bandwidth from our other global network providers. Nevertheless, until the fiber
optic telecommunications systems of IXC and our other global network providers
are completed (and in the case of IXC, it 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, in certain geographic areas,
even after such completion, we will continue to be dependent upon such
suppliers. Moreover, any failure or delay of IXC or such other network providers
to deliver bandwidth to us or to provide operations, maintenance and other
services with respect to such bandwidth in a timely or adequate fashion could
adversely affect us.
We are also dependent on certain third party suppliers of hardware
components. Although we attempt to maintain a minimum of two vendors for each
required product, certain components used by us in providing our networking
services are currently acquired or available from only one source. We have from
time to time experienced delays in the receipt of certain hardware components
and telecommunications facilities, including
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delays in delivery of PRI telecommunications facilities (which connect dial-up
customers to our 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 have a material adverse effect on
us. Our 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 our desire to maintain good relationships with the suppliers. As our
suppliers revise and upgrade their equipment technology, we may encounter
difficulties in integrating the new technology into our network.
Certain of the vendors from whom we purchase telecommunications
bandwidth, including the RBOCs, CLECs 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 which we are charged by the RBOCs and other carriers, which
could have a material adverse effect on our business, financial condition and
results of operations. Moreover, we are subject to the effects of other
potential regulatory actions which, if taken, could increase the cost of our
telecommunications bandwidth through, for example, the imposition of access
charges.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Certain of our financing arrangements are secured by substantially all
of our assets and stock of certain of our subsidiaries. These financing
arrangements require that we satisfy certain financial covenants. They also
currently prohibit us from paying dividends and repurchasing our capital stock
without the lender's consent. In the event that the Company is liquidated, our
secured lenders would be entitled to foreclose upon those assets in the event of
a default under the financing arrangements. They would also be entitled to be
repaid from the proceeds of the liquidation of those assets before the assets
would be available for distribution to the holders of our securities. In
addition, the collateral security arrangements under our existing financing
arrangements may adversely affect our ability to obtain additional borrowings.
RISK OF SYSTEM FAILURE OR SHUTDOWN
Our success depends upon our ability to deliver reliable, high-speed
access to the Internet and upon the ability and willingness of our
telecommunications providers to deliver reliable, high-speed telecommunications
service through their networks. Our network, and other networks providing
services to us, are 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. We have designed our network to minimize the risk of such system
failure, for instance, with redundant circuits among POPs to allow traffic
rerouting. In addition, we perform lab and field testing before integrating new
and emerging technology into the network, and we engage in capacity planning.
Nonetheless, we cannot assure that we will not experience failures or shutdowns
relating to individual POPs or even catastrophic failure of the entire network.
We carry business personal property insurance at both scheduled
locations and unscheduled locations, with a blanket property limit of $168.0
million and business interruption insurance with a blanket limit of $10.0
million. Such coverage, however, may not be adequate or available to compensate
us for all losses that may occur. In addition, we generally attempt to limit our
liability to customers arising out of network failures by contractually
disclaiming all such liability. In respect of certain services, we have also
contractually limited liability to a usage credit based upon the amount of time
that the system was not operational. We cannot assure, however, that such
limitations will be enforceable. In any event, significant or prolonged system
failures or shutdowns could damage our reputation and result in the loss of
customers.
NETWORK SECURITY RISKS; RISKS ASSOCIATED WITH PROVIDING SECURITY SERVICES
We have implemented certain network security measures, such as limiting
physical and network access to its routers. Nonetheless, the network's
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 our customers. Furthermore,
such inappropriate use of the Internet by third parties could also potentially
jeopardize the security of
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confidential information stored in the computer systems of our customers. This
could, in turn, 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 us.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
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 our business or reputation or on our ability to
attract and retain customers for our 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 our customer base and revenues.
RISK ASSOCIATED WITH DEPENDENCE ON TECHNOLOGY AND WITH PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our
technology and technical expertise and, to a lesser degree, on our proprietary
rights as well. In order to establish and protect our technology, we rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions. Nevertheless, we cannot assure that such measures are adequate to
protect our proprietary technology. It may be possible for a third party to copy
or otherwise obtain and use our products or technology without authorization or
to develop similar technology independently. In addition, our products may be
licensed or otherwise utilized in foreign countries where laws may not protect
our proprietary rights to the same extent as do laws in the United States. It is
our policy to require employees and consultants and, when obtainable, suppliers
to execute confidentiality agreements upon the commencement of their
relationships with us. Nonetheless, we cannot assure that these precautions will
be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In addition, we are also subject to the risk of adverse claims and
litigation alleging infringement by us of the intellectual property rights of
others. From time to time we have received claims that we have infringed other
parties' proprietary rights. While we do not believe that we have infringed the
proprietary rights of other parties, we cannot assure that third parties will
not assert infringement claims in the future with respect to our current or
future products. Such claims may require that we enter into license arrangements
or may result in protracted and costly litigation, regardless of the merits of
such claims. We cannot assure that any necessary licenses will be available or
that, if available, such licenses can be obtained on commercially reasonable
terms.
We have recently introduced new enterprise service offerings, including
value-added, IP-based enterprise communication services and xDSL-based Internet
access services in limited areas. The failure of these services to gain market
acceptance in a timely manner or at all, or the failure of xDSL-based services,
in particular, to achieve significant market coverage could have a material
adverse effect on our business, financial condition and results of operations.
Introduction by the Company of new or enhanced services with reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such services, which could adversely affect our ability to attract
new customers and subscribers. Our services may contain undetected errors or
defects when first introduced or as enhancements are introduced. Despite testing
by the Company or its customers, we cannot assure that errors will not be found
in new services after commencement of commercial deployment. Such errors could
result in additional development costs, loss of or delays in market acceptance,
diversion of technical and other resources from our other development efforts
and the loss of credibility with our customers and subscribers. Any such event
could have a material adverse effect on our business, financial condition and
results of operations.
Additionally, if we are unable to match our network capacity to
customer demand for our services, our network could become congested during
periods of peak customer demand. Such congestion could adversely affect the
quality of service we are able to provide. Conversely, due to the high fixed
cost nature of our infrastructure, if
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our network is under-utilized, it could adversely affect our ability to provide
cost-efficient services. The failure of the Company to match network capacity to
demand could have a material adverse effect on our business, financial condition
or results of operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined in the Indenture
governing the Notes), we will be required to make an offer to purchase any or
all of the Notes and the 10% Senior Notes at the prices stated in the respective
indentures governing such securities. However, our ability to repurchase such
securities upon a Change of Control may be limited by the terms of our then
existing contractual obligations and those of our subsidiaries. Our Credit
Facility requires that we pay all amounts outstanding under it before we
repurchase Notes or 10% Senior Notes upon a Change of Control. In addition, we
may not have adequate financial resources to effect such a purchase, and there
can be no assurance that we would be able to obtain such resources through a
refinancing of such securities to be purchased or otherwise. If we fail to
repurchase all of such securities tendered for purchase upon the occurrence of a
Change of Control, such failure will constitute an Event of Default under the
respective indentures governing such securities.
With respect to the sale of assets referred to in the definition of
Change of Control, the phrase "all or substantially all" as used in such
definition varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under the relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the assets of a
person and therefore it may be unclear whether a Change of Control has occurred
and whether such securities are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the holders
of the Notes protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or other similar transaction
involving us that may adversely affect the holders of the Notes, because such
transactions may not involve a shift in voting power or beneficial ownership or,
even if they do, may not involve a shift of the magnitude required under the
definition of Change of Control to trigger such provisions. Except as described
under "Description of Notes--Change of Control," the Indenture governing the
Notes will not contain provisions that permit the holders thereof to require us
to repurchase or redeem the Notes in the event of a takeover, recapitalization
or similar transaction.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
We will retain a significant amount of discretion over the application
of the net proceeds of the offerings of the Initial Notes. Because of the number
and variability of factors that determine our use of the net proceeds of the
offerings of the Initial Notes, there can be no assurance that such applications
will not vary substantially from our current intentions. Pending such
utilization, we intend to invest the net proceeds of the offerings of the
Initial Notes in short-term investment grade and government securities. See "Use
of Proceeds."
RESTRICTIONS ON RESALE; ABSENCE OF PUBLIC MARKET FOR THE SECURITIES
The Initial Notes have not been registered under the Securities Act or
any state securities laws, and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws. However, we are required to commence a registered exchange
offer for the Initial Notes or register resales of the Initial Notes under the
Securities Act. See " The Exchange Offer."
Any Initial Notes tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of the Initial Notes outstanding.
Following the consummation of the Exchange Offer, holders of Initial Notes who
did not tender their Initial Notes generally will not have any further
registration rights under the Registration Rights Agreements, and such Initial
Notes will continue to be subject to certain restrictions or transfer.
Accordingly, the liquidity of the market for such Initial Notes could be
adversely affected. The Initial Notes are currently eligible for sale pursuant
to Rule 144A through the Private Offerings, Resale and Trading through Automated
Linkages ("PORTAL") market of the National Association of Securities Dealers,
Inc. Because we
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anticipate that most holders of Initial Notes will elect to exchange such
Initial Notes, we anticipate that the liquidity of the market for any Initial
Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
The Exchange Notes will be new securities for which there currently is
no established trading market. We do not intend to apply for listing of the
Exchange Notes on any automated dealer quotation system. Although the initial
purchasers of the Initial Notes have informed us that they currently intend to
make a market in the Exchange Notes, the initial purchasers are not obligated to
do so, and any such market making may be discontinued at any time without
notice. The liquidity of any market for the Exchange Notes will depend upon the
number of holders of the Exchange Notes, the interest of securities dealers in
making a market in the Exchange Notes and other factors. Accordingly, there can
be no assurance as to the development or liquidity of any market for the
Exchange Notes. If an active trading market for the Exchange Notes does not
develop, the market price and liquidity of the Exchange Notes may be adversely
affected. If the Exchange Notes are traded, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar securities, our financial performance and certain other
factors. The liquidity of, and trading markets for, the Exchange Notes also may
be adversely affected by general declines in the market for non-investment grade
debt. Such declines may adversely affect the liquidity of, and trading markets
for, the Exchange Notes, independent of our financial performance or prospects.
Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that the
market, if any, for the Exchange Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on the holders of
the Exchange Notes.
PROCEDURE FOR TENDERING; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of Exchange Notes in exchange for the Initial Notes pursuant
to the Exchange Offer will only be made following the prior satisfaction of the
procedures and conditions set forth in "The Exchange Offer--Procedure for
Tendering." Such procedures and conditions include timely receipt by the
Exchange Agent (as defined) of such Initial Notes, and of a properly completed
and duly executed Letter of Transmittal. Initial Notes that are not tendered or
are tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be restricted securities and may not be offered or sold
except pursuant to any exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities law.
RISKS ASSOCIATED WITH YEAR 2000
The commonly referred to Year 2000 ("Y2K") problem results from the
fact that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and developed
without considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. We have identified two main areas of
Y2K risk:
1. Internal computer systems or embedded chips could be
disrupted or fail, causing an interruption or decrease in productivity
in our operations; and
2. Computer systems or embedded chips of third parties
including (without limitation) financial institutions, suppliers,
vendors, landlords, customers, international suppliers of
telecommunications services and others ("Material Third Parties") could
be disrupted or fail, causing an interruption or decrease in our
ability to continue our operations.
We have developed, or are in the process of developing, detailed plans
for implementation and testing of any necessary modifications to our key
computer systems and equipment with embedded chips to ensure that they are Y2K
compliant. We have engaged a third party consultant to perform an assessment of
our systems, domestically and internationally. We expect that the assessment,
which is being done in stages, will be complete by December 31, 1998. We
anticipate that our domestic internal systems will be Y2K ready by June 30,
1999, and our international systems will be Y2K compliant by the end of the
third quarter of 1999, which is consistent with prior
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plans. We believe that with these detailed plans and completed modifications,
the Y2K issue will not pose significant operational problems for us. However, if
the modifications and conversions are not made, or not completed in a timely
fashion, the Y2K issue could have a material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than
five percent (5%) of our information technology budget, but this amount will
increase as substantial consultants or personnel resources are required or if
operationally-important equipment must be remediated or replaced. The risk that
Y2K issues could present to us include, without limitation, disruption, delay or
cessation of operations, including operations that are subject to regulatory
compliance. In each case, the correction of the problem could result in
substantial expense and disruption or delay of our operations. The total cost of
Y2K assessments and remediation is funded through cash flows generated through
operations and available from other sources and, to date, we are expensing these
costs. The financial impact of making any required systems changes or other
remediation efforts cannot be known precisely at this time, but it is not
expected to be material to our financial position, results of operations, or
cash flows. We have not canceled any principal information technology projects
as a result of our Y2K effort, although we have rescheduled some tasks to
accommodate this effort.
In addition, we have identified and prioritized and are communicating
with Material Third Parties to determine their Y2K status and any probable
impact on us. We will continue to track and evaluate our long-term relationship
with Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material Third
Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer systems or operations due to Y2K non-compliance, it
could affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
domestic and international, to be Y2K ready in stages during 1999, we and our
customers who communicate internationally will be dependent upon the
Y2K-readiness of many foreign providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, we and
our customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on the business and
revenues of us and our customers. While many of these risks are outside our
control, we have instituted a program to identify Material Third Parties and to
address any non-compliance issues.
While we believe that we are adequately addressing the Y2K issue, there
can be no assurance that our Y2K analyses will be completed on a timely basis or
that the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We are
uncertain as to our most reasonably likely worst case Y2K scenario and have not
yet developed a contingency plan to handle a worst case scenario. We expect to
have a contingency plan to handle this situation by September 30, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
INVESTMENT COMPANY ACT
We do not propose to engage in investment activities in a manner or to
an extent which would require us to register as an investment company under the
Investment Company Act of 1940 (the "Investment Company Act"). The Investment
Company Act places restrictions on the capital structure and business activities
of companies registered thereunder. Accordingly, we will seek to limit our
holding of "investment securities" (as defined in the Investment Company Act) to
an amount which is less than 40% of the value of our total assets as calculated
pursuant to the Investment Company Act. The Investment Company Act permits a
company to avoid becoming subject to such Act for a period of up to one year
despite the holding of investment securities in excess of such amount if, among
other things, its Board of Directors has adopted a resolution which states that
it is not the company's intention to become an investment company. Our Board of
Directors may adopt such a resolution. Application of the provisions of the
Investment Company Act would have a material adverse effect on us.
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UNCERTAINTY OF ARBITRATION RESULTS
On November 25, 1997, Chatterjee Management Company ("Chatterjee")
initiated arbitration proceedings against us before the International Chamber of
Commerce, Court of Arbitration, in London, England. The claim was based upon a
joint venture agreement which we previously entered into with Chatterjee.
Following the signing of the agreement, we both acknowledged structural
difficulties associated with the joint venture as originally contemplated, which
prevented its implementation. Chatterjee alleges that we breached the joint
venture agreement by repudiating our obligations under the agreement and by
breaching a covenant not to compete. Chatterjee seeks an order directing us to
specifically perform our obligations under the agreement or, in the alternative,
to pay damages of not less than $25.0 million, plus actual or anticipated
profits of the Company in Europe plus the costs of arbitration, including
attorneys' fees and interest. The arbitration commenced on October 19, 1998 in
London, England.
While the ultimate outcome of the arbitration is uncertain, we believe
that we have meritorious defenses to Chatterjee's claim and we intend to
continue to conduct a vigorous defense. An unfavorable outcome in this matter
could have a material adverse effect on our business, financial condition and
results of operations. See "Business--Legal Proceedings."
FORWARD-LOOKING STATEMENTS
Some of the information contained in this Prospectus may contain
forward-looking statements. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or similar words, or by discussions of strategy that
involve risks and uncertainties. These statements may discuss future
expectations or contain projections of results of operations or financial
condition or expected benefits to the Company resulting from certain
acquisitions or transactions. We cannot assure that the future results
indicated, whether expressed or implied, will be achieved. The Risk Factors
noted in this section and other factors noted throughout this Prospectus,
including certain risks and uncertainties, could cause our actual results to
differ materially from those contained in any forward-looking statement.
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USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer.
In consideration for issuing the Exchange Notes in exchange for the Initial
Notes, the Company will receive Initial Notes in like principal amount. The
Initial Notes surrendered in exchange for the Exchange Notes will be canceled by
the Company.
The net proceeds of the offerings of the Initial Notes, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company, were approximately $342.8 million. The Company expects to use the net
proceeds to finance capital expenditures including the acquisition of additional
telecommunications bandwidth and related facilities and equipment, and the
construction of Internet data centers, and general corporate purposes. In
addition, a portion of the net proceeds also is expected to be used to make
strategic investments in or acquisitions of certain businesses or assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Management will retain a significant amount of discretion over the
application of the net proceeds of the offerings of the Initial Notes. Because
of the number and variability of factors that determine the Company's use of the
net proceeds of the offerings of the Initial Notes, there can be no assurance
that such applications will not vary substantially from the Company's current
intentions. Pending such utilization, the Company intends to invest the net
proceeds of the offerings of the Initial Notes in short-term investment grade
and government securities.
Prior to the closing of the initial offering of the Initial Notes, the
Company repaid the $108.5 million of borrowings outstanding under its $110
million principal amount three-year secured credit facility with The Chase
Manhattan Bank, as administrative agent, and other lenders (the "Credit
Facility"), with other cash on hand. Such indebtedness, which bore interest at
8.125% per annum on October 15, 1998, was incurred as of September 29, 1998 to
finance a portion of the Company's acquisition of Tokyo Internet. Following the
closings of the offerings of the Initial Notes, the Company continues to have
borrowing capacity of up to $110 million under the Credit Facility, subject to
its terms. See "Description of Certain Indebtedness--Credit Facility."
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of
the Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreements), which are
exhibits to the Exchange Offer Registration Statement.
REGISTRATION RIGHTS
The Initial Notes were sold by the Company to Donaldson, Lufkin &
Jenrette Securities Corporation, Chase Securities Inc. and Morgan Stanley & Co.
Incorporated (the "Initial Purchasers") on November 3, 1998 (the "First Closing
Date") pursuant to an Offering Memorandum dated October 27, 1998 covering $200
million principal amount of the Initial Notes (the "First Initial Notes
Offering") and on November 13, 1998 (the "Second Closing Date") pursuant to an
Offering Memorandum dated November 9, 1998 covering $150 million principal
amount of the Initial Notes (the "Second Initial Notes Offering" and, together
with the First Initial Notes Offering, the "Initial Notes Offerings"). The
Initial Notes were then subsequently resold to qualified institutional buyers
("QIBs") pursuant to Rule 144A and Regulation S under the Securities Act. In
connection with the First Initial Notes Offering, the Company entered into a
Registration Rights Agreement dated as of November 3, 1998 (the "First
Registration Rights Agreement") and in connection with the Second Initial Notes
Offering, the Company entered into a Registration Rights Agreement dated as of
November 13, 1998 (the "Second Registration Rights Agreement" and, together with
the First Registration Rights Agreement, the "Registration Rights Agreements").
The Registration Rights Agreements require among other things, that the Company
(i) file with the Commission within 75 days following the First Closing Date and
within 65 days following the Second Closing Date (i.e., before January 18, 1998)
a Registration Statement (the "Exchange Offer Registration Statement") under the
Securities Act with respect to an issue of Exchange Notes of the Company
identical in all material respects to the Initial Notes (other than transfer
restrictions, registration rights and the requirement, under certain
circumstances, to pay Liquidated Damages), (ii) use its best efforts to cause
such Exchange Offer Registration Statement to become effective under the
Securities Act within 150 days after the First Closing Date and within 140 days
of the Second Closing Date (i.e., before April 2, 1999 and hereinafter, the
"Effectiveness Deadline"), (iii) upon the effectiveness of such Exchange Offer
Registration Statement, commence the Exchange Offer and keep the Exchange Offer
open for a period of not less than 20 Business Days, and (iv) use its best
efforts to cause the Exchange Offer to be consummated within 30 Business Days
after the Effective Date (such 30th day being the "Consummation Deadline").
The Exchange Offer would allow holders of the Initial Notes the
opportunity, with certain exceptions, to exchange their Initial Notes for a like
principal amount of Exchange Notes, which would be issued without a restrictive
legend and may generally be reoffered and resold by the Exchange Holder without
restrictions or limitations under the Securities Act, subject to the terms and
conditions enunciated by the staff of the Commission (the "Staff") in the Morgan
Stanley No-Action Letter (Morgan Stanley and Co., Inc. (available June 5, 1991))
----------------------------
and the Exxon Capital No-Action Letter (Exxon Capital Holdings Corporation
----------------------------------
(available May 13, 1988)), as interpreted in the Commission's letter to Shearman
--------
& Sterling dated July 2, 1993, and similar no-action letters. See "Prospectus
- ----------
Summary--The Exchange Offer," and "--Resale of Exchange Notes." However, any
holder of the Initial Notes who (i) is an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")), (ii) does not acquire the Exchange Notes in the ordinary
course of business, (iii) tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the
Exchange Notes, or (iv) is a broker-dealer which acquired such Initial Notes
directly from the Company, is not entitled to rely on the position of the Staff
in the no-action letters referred to above and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the resale of the Exchange
Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." The Company
has agreed to include in this Prospectus certain information necessary to allow
such broker-dealers to exchange such Initial Notes pursuant to the Exchange
Offer and to satisfy the
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prospectus delivery requirements in connection with resales of Exchange Notes
received by such broker-dealer in the Exchange Offer. The Company has also
agreed to maintain the effectiveness of the Exchange Offer Registration
Statement for such purposes for one year.
In addition, the Company agreed, pursuant to the Registration Rights
Agreements, to file a shelf registration statement pursuant to Rule 415 under
the Securities Act (the "Shelf Registration Statement"), registering for resale
(i) any Initial Notes held by persons who are not permitted by law or any policy
of the Commission to participate in the Exchange Offer and who satisfy certain
other conditions, (ii) any Exchange Notes acquired in the Exchange Offer by any
holder who must comply with the prospectus delivery requirements of the
Securities Act in connection with the resales of such Exchange Notes if this
Prospectus is not appropriate or available for such resales by such holder or
(iii) any Initial Notes held by a broker-dealer which were acquired directly
from the Company or one of its affiliates. To participate in such a shelf
registration, any such holder of Notes must so notify the Company within 10
Business Days following consummation of the Exchange Offer and provide to the
Company the information requested by the Company within 10 Business Days of such
request. The Company has agreed to file with the Commission such a shelf
registration statement no later than 30 days after the earlier of (i) the date
on which the Company determines that the Exchange Offer is not permitted by
applicable law or (ii) the date on which the Company receives the notice from
the holder as specified above, and to use its best efforts to cause such Shelf
Registration Statement to become effective under the Securities Act as soon as
practicable but in no event later than 60 days after the filing of the Shelf
Registration Statement (or such longer period, not to exceed 150 days after the
filing of the Shelf Registration Statement, as may be necessary to avoid
conflicts with existing contractual obligations of the Company) (such 60th day
or longer period the "Effectiveness Deadline"). In addition, the Company agreed
to use its best efforts to keep such Shelf Registration Statement continually
effective, supplemented and amended for a period of at least two years following
the First Closing Date, or such shorter period as will terminate when all
Initial Notes covered by such Shelf Registration Statement have been sold
pursuant thereto.
REGISTRATION DEFAULTS; LIQUIDATED DAMAGES
If the applicable registration statement or amendment is not timely
filed or declared effective or thereafter ceases to be effective or fails to be
usable for its intended purpose without being succeeded immediately by a
post-effective amendment that cures such failure and is itself immediately
declared effective, or if the Exchange Offer has not been consummated on or
prior to the Consummation Deadline (any of the above events a "Registration
Default"), the Company has agreed to pay liquidated damages ("Liquidated
Damages") to each holder of Initial Notes affected thereby in an amount equal to
$.05 per week for each $1,000 in principal amount of Notes held by such Holder
for each week or portion thereof that the Registration Default continues for the
first 90-day period immediately following the occurrence of such Registration
Default. The amount of such liquidated damages will increase by an additional
$.05 per week per $1,000 in principal amount of Initial Notes for each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of liquidated damages of $.50 per week per $1,000 in principal
amount of Initial Notes, provided that the Company shall in no event be required
to pay Liquidated Damages for more than one Registration Default at any given
time. Following the cure of any default, the payment of Liquidated Damages in
respect of the Notes will cease. Notwithstanding the fact that any Initial Notes
for which Liquidated Damages are due cease to be restricted securities within
the meaning of the Securities Act ("Transfer Restricted Securities"), all
obligations of the Company to pay Liquidated Damages with respect to such
securities outstanding prior to the time such Initial Notes ceased to be
Transfer Restricted Securities shall survive until such time as such obligations
shall have been satisfied in full.
Except as aforesaid, this Prospectus may not be used for any offer to
resell, resale or other transfer of Exchange Notes.
Except as set forth above, after consummation of the Exchange Offer,
holders of Notes have no registration or exchange rights under the Registration
Rights Agreements. See "--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
_________________, 199__ (20 Business Days after the effective date of the
Exchange Offer Registration Statement), unless the Company, in its
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sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date and time to which the Exchange Offer is
extended.
To extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice, followed by a public
announcement thereof no later than 9:00 a.m., New York City time, on the next
Business Day after the previously scheduled expiration date. In no event will
the Expiration Date be extended to a date more than 30 Business Days after
effectiveness of the Exchange Offer Registration Statement.
The Company reserves the right, in its reasonable judgment, (i) to
delay accepting any Initial Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Initial Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes accepted in the Exchange Offer. Holders of the Initial Notes
("Initial Holders") may tender some or all of their Initial Notes pursuant to
the Exchange Offer; however, Initial Notes may be tendered only in integral
multiples of $1,000. The form and terms of the Exchange Notes are substantially
the same as the form and terms of the Initial Notes except that (i) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) holders of the Exchange Notes
generally will not be entitled to certain rights under the Registration Rights
Agreements or Liquidated Damages, which rights generally will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Initial Notes and will be entitled to the benefits of the Indenture.
Initial Holders do not have any appraisal or dissenters' rights under
the New York Business Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Initial
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Initial Holders pursuant to the Exchange Agent Agreement for the purpose of
receiving the Exchange Notes from the Company.
If any tendered Initial Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Initial Notes will be
returned, without expense, to the tendering Initial Holder thereof as promptly
as practicable after the Expiration Date.
Initial Holders who tender their Initial Notes in the Exchange Offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Initial Notes pursuant to the Exchange Offer. The Company will pay
all charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses."
INTEREST ON EXCHANGE NOTES
Each Exchange Note will bear interest from the most recent date to
which interest has been paid or duly provided for on the Initial Note
surrendered in exchange for such Exchange Note or, if no such interest has been
paid or duly provided for on such Initial Note, from November 3, 1998. Holders
of the Initial Notes whose Initial Notes are accepted for exchange will not
receive accrued interest on such Initial Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Initial Notes prior to the
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original issue date of the Exchange Notes or, if no such interest has been paid
or duly provided for, will not receive any accrued interest on such Initial
Notes, and will be deemed to have waived the right to receive any interest on
such Initial Notes accrued from and after such Interest Payment Date or, if no
such interest has been paid or duly provided for, from and after November 3,
1998. Interest on the Notes will be payable semi-annually on May 1 and November
1 of each year, commencing May 1, 1999.
PROCEDURES FOR TENDERING INITIAL NOTES
Only Initial Holders may tender such Initial Notes in the Exchange
Offer. To tender in the Exchange Offer, an Initial Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Initial Notes and any other required documents, to the Exchange Agent so as
to be received by the Exchange Agent at the address set forth below prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Initial
Notes may be made by book-entry transfer of such Initial Notes into the Exchange
Agent's account at DTC ("Book-Entry Transfer") in accordance with the procedures
described below. Confirmation of such Book-Entry Transfer must be received by
the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Initial Holder will make
to the Company the representation set forth below in the second paragraph under
the heading "--Resale of Exchange Notes."
The tender by an Initial Holder and the acceptance thereof by the
Company will constitute an agreement between such Initial Holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Initial Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Initial Holder promptly and instruct
such registered Initial Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution (as defined
below) unless the Initial Notes tendered pursuant thereto (i) are signed by the
registered Initial Holder, unless such Initial Holder has completed the box
entitled "Special Exchange Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) are tendered for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Initial Holder of any Initial Notes listed therein, such Initial
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered Initial Holder as such registered Initial Holder's name
appears on such Initial Notes, with the signature thereon guaranteed by an
Eligible Institution.
If the Letter of Transmittal or any Initial Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
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capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Initial Notes and withdrawal of tendered
Initial Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Initial Notes not properly tendered or any Initial Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Initial Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Initial Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Initial Holders
of defects or irregularities with respect to tenders of Initial Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Initial Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Initial Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Initial Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
BOOK-ENTRY DELIVERY PROCEDURES
Promptly after the date of this Prospectus, the Exchange Agent will
establish accounts with respect to the Initial Notes at DTC (the "Book-Entry
Transfer Facility") for purposes of the Exchange Offer. Any financial
institution that is a participant in the Book-Entry Transfer Facility systems
may make book-entry delivery of the Initial Notes by causing DTC to transfer
such Initial Notes into the Exchange Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
such transfer. Timely book-entry delivery of Initial Notes pursuant to the
Exchange Offer, however, requires receipt of a confirmation of a Book-Entry
Transfer ("Book-Entry Confirmation") prior to the Expiration Date. In addition,
although delivery of Initial Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility, the
Letter of Transmittal (or a manually signed facsimile thereof), together with
any required signature guarantees and any other required documents, or an
Agent's Message in connection with a book-entry transfer, must, in any case, be
delivered or transmitted to and received by the Exchange Agent at its address
set forth on the back cover page of this Prospectus prior to the Expiration Date
to receive Exchange Notes for tendered Initial Notes, or the guaranteed delivery
procedure described below must be complied with. Tender will not be deemed made
until such documents are received by the Exchange Agent. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
TENDER OF INITIAL NOTES HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Initial Notes to the Exchange Agent in accordance with DTC's ATOP procedures for
transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received
by the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received an expressed acknowledgment from a participant in
DTC that is tendering Initial Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received and
agrees to be bound by the applicable Notice of Guaranteed Delivery), and that
the Company may enforce such agreement against such participant.
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GUARANTEED DELIVERY PROCEDURES
Initial Holders who wish to tender their Initial Notes and (i) whose
Initial Notes are not immediately available, (ii) who cannot deliver their
Initial Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting
forth the name and address of the Initial Holder, the certificate number(s) of
such Initial Notes and the principal amount of Initial Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three New
York Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Initial Notes (or a Book-Entry Confirmation transfer of such
Initial Notes into the Exchange Agent's account at DTC) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Initial Notes in proper form for transfer (or a Book-Entry Confirmation transfer
of such Initial Notes into the Exchange Agent's account at DTC) and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three New York Stock Exchange trading days after the Expiration
Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to Initial Holders who wish to tender their Initial Notes according
to the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Initial Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Initial Notes to be withdrawn (the "Depositor"),
(ii) identify the Initial Notes to be withdrawn (including the certificate
number(s) and principal amount of such Initial Notes, or, in the case of Initial
Notes transferred by book-entry transfer, the name and number of the account at
DTC to be credited), (iii) be signed by the Initial Holder in the same manner as
the original signature on the Letter of Transmittal by which such Initial Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Initial Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Initial Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time or receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Initial Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with respect
thereto unless the Initial Notes so withdrawn are validly retendered. Any
Initial Notes which have been tendered but which are not accepted for exchange
will be returned to such Initial Holder without cost to such Initial Holder as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Initial Notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering" at any
time prior to the Expiration Date.
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CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange any Initial Notes, and may terminate or
amend the Exchange Offer as provided herein before the acceptance of such
Initial Notes, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or
any part thereof contemplated herein violates any applicable law or
interpretation of the Staff;
(b) any action or proceeding shall have been instituted or threatened
in any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any such action or proceeding with
respect to the Company;
(c) any governmental approval has not been obtained, which approval
the Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on The Nasdaq Stock Market or any
exchange, or any banking moratorium, shall have occurred, as a result of which
the Company is unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any
state securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept any
Initial Notes and return all tendered Initial Notes to the tendering Initial
Holders, (ii) extend the Exchange Offer and retain all Initial Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of Initial Holders to withdraw such Initial Notes (see "--Withdrawals of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Initial Notes which have not
been withdrawn.
EXCHANGE AGENT
Wilmington Trust Company will act as Exchange Agent for the Exchange
Offer with respect to the Initial Notes.
Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal for the Initial Notes and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
By Registered or Certified Mail or Overnight Courier:
Attn: Kristin Long
Wilmington Trust Company
Corporate Trust Operations
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
By Facsimile (for Eligible Institutions Only): (302) 651-1079
Confirm by Telephone: (302) 651-1562
Kristin Long
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FEES AND EXPENSES
The expenses of soliciting Initial Notes for exchange will be borne by
the Company. The principal solicitation is being made by mail by the Exchange
Agent. However, additional solicitation may be made by telephone, facsimile or
in person by officers and regular employees of the Company and its affiliates
and by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith and pay other registration expenses, including fees and
expenses of the Trustee (as defined), filing fees, blue sky fees and printing
and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the
exchange of the Initial Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Initial Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the
Initial Notes tendered, or if tendered Initial Notes are registered in the name
of any person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of the Initial
Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Initial Holder or any other person) will be
payable by the tendering Initial Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, which is the aggregate principal amount of the Initial Notes, as
reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the Exchange Offer. The expenses of the Initial Notes Offering
and the Exchange Offer will be amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of
the Staff's Exxon Capital No-Action Letter, Morgan Stanley No-Action Letter,
Shearman & Sterling No-Action Letter, and other interpretive letters addressed
to third parties in other transactions; however, the Company has not sought its
own interpretive letter addressing such matters and there can be no assurance
that the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Initial Notes may be offered for resale, resold
and otherwise transferred by holders of such Exchange Notes ("Exchange
Holders"), other than an Exchange Holder who is a broker-dealer, without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Exchange Holder's business and that such Exchange Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. However, any Initial Holder who (i) is an "affiliate" of
the Company (within the meaning of Rule 405 under the Securities Act), (ii) does
not acquire such Exchange Notes in the ordinary course of its business, (iii)
intends to participate in the Exchange Offer for the purpose of distributing
Exchange Notes, or (iv) is a broker-dealer who purchased such Initial Notes
directly from the Company, (a) will not be able to rely on the interpretations
of the Staff set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Initial Notes in the Exchange Offer and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such Initial
Notes unless such sale is made pursuant to an exemption from such requirements.
In addition, as described below, if any broker-dealer holds Initial Notes
acquired for its own account (a "Participating Broker-Dealer"), then such
Participating Broker-Dealer may be deemed a statutory "underwriter" within the
meaning of the Securities Act and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
Exchange Notes.
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As a condition to its participation in the Exchange Offer, each Initial
Holder (including, without limitation, any holder who is a Participating
Broker-Dealer) shall furnish, upon the request of the Company, prior to the
consummation of the Exchange Offer, a written representation to the Company
(contained in the Letter of Transmittal) to the effect that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, and (iii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution (within the meaning of the
Securities Act) of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Initial Notes for its own account as a result
of market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, such a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff in the interpretive letters referred to
above, the Company believes that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes received
upon exchange of such Initial Notes with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Exchange Notes. Accordingly, this Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of Exchange Notes received in exchange for Initial Notes where such
Initial Notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other trading activities. Subject to
certain provisions set forth in the Registration Rights Agreements, the Company
shall use its best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for sales of Exchange Notes by Participating
Broker-Dealers, and to ensure that the Exchange Offer Registration Statement
conforms with the requirements of the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period of
one year from the Consummation Deadline or such shorter period as will terminate
when all Initial Notes covered by the Exchange Offer Registration Statement have
been sold pursuant thereto. See "Plan of Distribution." Any Participating
Broker-Dealer who is an affiliate of the Company may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Each Initial Holder and each Initial Purchaser who is required to
deliver a prospectus in connection with sales or market making activities, by
acquisition of an Initial Note, agrees that, upon receipt of notice from the
Company that (i) the issuance by the Commission of any stop order suspending the
effectiveness of the Exchange Offer Registration Statement under the Securities
Act or of the suspension by any state securities commission of the qualification
of the Initial Notes from offering or sale in any jurisdiction, or the
initiation of any proceeding for any of the preceding purposes; or (ii) the
existence of any fact or the happening of any event that makes any statement of
a material fact made in the Exchange Offer Registration Statement or this
Prospectus, or any amendment or supplement thereto or any document incorporated
by reference herein untrue, or that requires the making of any additions or
changes in the Exchange Offer Registration Statement or this Prospectus in order
to make the statements herein, in light of the circumstances under which they
were made, not misleading (in each case, a "Suspension Notice"), such holder or
person shall discontinue disposition of the Initial Notes pursuant to this
Prospectus until such holder or person has received copies of the supplemented
or amended Prospectus or such holder or person is advised in writing by the
Company that use of the Prospectus may be resumed and has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus (in each case, the "Recommencement Date"). In addition, each holder
or person will be deemed to have agreed that it will either (i) destroy any
Prospectuses, other than permanent file copies, then in such holder or person's
possession which have been replaced by the Company with more recently dated
Prospectuses or (ii) deliver to the Company (at the Company's expense) all
copies, other than permanent file copies, then in such holder's or person's
possession of the Prospectus covering such Initial Notes that was current at the
time of receipt of the Suspension Notice. The Company shall extend the time
period regarding the effectiveness of the Exchange Offer Registration Statement
by a number of days equal to the number of days in the period from and including
the date of delivery of the Suspension Notice to the date of delivery of the
Recommencement Date.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Any Initial Notes tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Initial Notes outstanding. Following
the consummation of the Exchange Offer, Initial Holders who did not tender their
Initial Notes generally will not have any further registration rights under the
Registration Rights Agreements, and such Initial Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Initial Notes could be adversely affected. The Initial Notes are
currently eligible for sale pursuant to Rule 144A through PORTAL. Because the
Company anticipates that most Initial Holders will elect to exchange such
Initial Notes for Exchange Notes pursuant to the Exchange Offer due to the
absence of restrictions on the resale of Exchange Notes (except for applicable
restrictions on any Exchange Holder who is an affiliate of the Company or is a
broker-dealer which acquired the Initial Notes directly from the Company) under
the Securities Act, the Company anticipates that the liquidity of the market for
any Initial Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreements,
and Initial Holders who do not tender their Initial Notes, except for certain
instances involving the Initial Purchasers or Initial Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreements or otherwise or
rights to receive Liquidated Damages for failure to register. Accordingly, any
Initial Holder that does not exchange its Initial Notes for Exchange Notes will
continue to hold the untendered Initial Notes and will be entitled to all the
rights and subject to all the limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result of the Exchange
Offer.
The Initial Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities within the meaning of the
Securities Act. Accordingly, such Initial Notes may be resold only (i) to the
Company or any of its subsidiaries, (ii) inside the United States to a QIB in a
transaction complying with Rule 144A under the Securities Act, (iii) inside the
United States to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act), an "accredited investor"
that, prior to such transfer, furnishes (or has furnished on its behalf by a
U.S. broker-dealer) to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Notes (the form of which letter can be obtained from such Trustee), (iv) outside
the United States in compliance with Rule 904 under the Securities Act, (v)
pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available), or (vi) pursuant to an effective registration
statement under the Securities Act. Each accredited investor that is not a QIB
and that is an original purchaser of any of the Initial Notes from the Initial
Purchasers will be required to sign a letter confirming that such person is an
accredited investor under the Securities Act and that such person acknowledges
the transfer restrictions summarized herein.
OTHER
Participation in the Exchange Offer is voluntary and Initial Holders
should carefully consider whether to accept the offer to exchange their Initial
Notes. Initial Holders are urged to consult their financial and tax advisors in
making their own decision on what action to take with respect to the Exchange
Offer. The Company may in the future seek to acquire untendered Initial Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Initial
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Initial Notes.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material United States federal income tax
consequences relevant in the opinion of Nixon, Hargrave, Devans & Doyle LLP,
counsel to the Company, to the exchange of Initial Notes for Exchange Notes
pursuant to the Exchange Offer and the purchase, ownership and disposition of
the Notes, but does not purport to be a complete analysis of all potential tax
effects. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, published
rulings and court decisions, all as in effect and existing on the date hereof
and all of which are subject to change at any time, which change may be
retroactive. Such counsel has relied upon representations by the Company and its
officers with respect to factual matters for purposes of this summary. This
summary is not binding on the Internal Revenue Service or on the courts, and no
ruling will be requested from the Internal Revenue Service on any issues
described below. There can be no assurance that the Internal Revenue Service
will not take a different position concerning the matters discussed below and
that such positions of the Internal Revenue Service would not be sustained.
This summary applies only to those persons who are the Initial Holders
of Notes, who acquired the Notes for cash and who hold Notes as capital assets.
It does not address the tax consequences to taxpayers who are subject to special
rules (such as financial institutions, tax-exempt organizations, insurance
companies and, except as discussed below under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders," persons who are not "U.S. Holders"). A
"U.S. Holder" means a beneficial owner of a Note who purchased the Notes
pursuant to the Initial Notes Offerings that is for U.S. federal income tax
purposes (i) a citizen or resident of the United States; (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof; (iii) an estate the income
of which is subject to U.S. federal income taxation regardless of its source; or
(iv) a trust if (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER
OF A NOTE IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF SUCH HOLDER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES.
EXCHANGE OF INITIAL NOTES FOR EXCHANGE NOTES
Pursuant to this Prospectus, the Company is offering to effect a
registered exchange offer for the Initial Notes, through which holders would be
entitled to exchange the Initial Notes for Exchange Notes that would be
substantially identical in all material respects to the Initial Notes, except
that the Exchange Notes would be registered and therefore would not be subject
to transfer restrictions. Alternatively, the Company may file a Shelf
Registration Statement with respect to the Notes which, if effective, would have
the effect of eliminating transfer restrictions on the Notes, thereby permitting
their resale. Neither participation in this Exchange Offer nor the filing of a
Shelf Registration Statement as described above should result in a taxable
exchange to the Company or any holder of a Note. No taxable exchange should
occur or should be deemed to occur because there would be no material alteration
in the terms of the Notes and any modification of the terms of the Notes
resulting from such an action would be by operation of the original terms of the
Notes pursuant to a unilateral act by the Company. As a result, counsel to the
Company is of the opinion that there should be no U.S. federal income tax
consequences to Initial Holders electing to exchange Initial Notes for Exchange
Notes. If, however, such transaction were treated as an "exchange" for U.S.
federal income tax purposes, the transaction should constitute a
recapitalization for U.S. federal income tax purposes. Under the rules
applicable to recapitalizations, counsel to the Company is of the opinion that
Initial Holders electing to exchange Initial Notes for Exchange Notes should not
recognize any gain or loss upon such exchange.
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INTEREST
The stated interest on the Notes generally will be taxable to a U.S.
Holder as ordinary income at the time that it is paid or accrued, in accordance
with the holder's method of accounting for federal income tax purposes.
TREATMENT OF PRE-ISSUANCE INTEREST
The purchase price for a Note issued in the Second Initial Notes
Offering includes pre-issuance interest accrued from November 3, 1998. For
federal income tax purposes, the issue price of such Notes will be equal to the
first price at which a substantial amount of Notes are initially sold reduced by
the amount of the purchase price for a Note that is allocable to pre-issuance
accrued interest on such Notes. Accordingly, the receipt of stated interest on
May 1, 1999 equal to such amount of pre-issuance interest on such Note will not
be treated as a payment of interest or principal on such Note but rather will be
a tax-free return of pre-issuance interest.
LIQUIDATED DAMAGES
If, within the applicable period after the original issuance of the
Initial Notes, the Company has not filed an Exchange Offer Registration
Statement or a Shelf Registration Statement with respect to the Initial Notes,
as the case may be, or if the Company otherwise defaults with respect to its
obligations under the Registration Rights Agreements, Liquidated Damages shall
become payable in cash with respect to the applicable Initial Notes. See "The
Exchange Offer--Registration Defaults; Liquidated Damages." Although the
characterization of such Liquidated Damages is uncertain, Liquidated Damages
probably would constitute contingent interest, which generally is not includible
in income before it is fixed or paid. If Liquidated Damages become fixed or
paid, they should be included in the Initial Holder's gross income in accordance
with the Initial Holder's method of accounting for federal income tax purposes.
According to regulations under the Code, the possibility of a change in
the interest rate will not affect the amount of interest income recognized by a
U.S. Holder if the likelihood of the change, as of the date the Notes are
issued, is remote. The Company believes that the likelihood of a change in the
interest rate on the Notes is remote and does not intend to treat the
possibility of a change in the interest rate as affecting the yield to maturity
of any Note. If, as anticipated, the issue price of the Notes equals their
stated principal amount, and the likelihood of a change in the interest rate is
remote, the Notes will not be issued with original issue discount.
AMORTIZABLE BOND PREMIUM
A U.S. Holder that purchases a Note for an amount in excess of the
principal amount (e.g., in the Second Initial Notes Offering) will be considered
to have purchased such Note at a "premium." A U.S. Holder generally may elect to
amortize the premium over the remaining term of such Note on a constant yield
method. However, a Note may be redeemed by the Company for an amount in excess
of the purchase price starting on November 1, 2003 until October 31, 2004.
Accordingly, a U.S. Holder may not begin to amortize bond premium until on and
after November 1, 2005. The bulk of the bond premium is amortizable on and after
November 1, 2006 until the maturity date at November 1, 2008. The amount
amortized in any year will be treated as a reduction of the U.S. Holder's
interest income from such Note, and any bond premium allocable to a year in
excess of such interest income allocable to the year will be allowed as a
deduction. Bond premium on a Note held by a U.S. Holder that does not make such
an election will decrease the gain or increase the loss otherwise recognized on
disposition of such Note. The election to amortize premium on a constant yield
method, once made, applies to all debt obligations held or subsequently acquired
by the electing U.S. Holder on or after the first day of the first taxable year
to which the election applies and may not be revoked without the consent of the
IRS. Holders of Notes purchased at a premium are urged to consult their tax
advisors regarding the election to amortize premium.
SALE, EXCHANGE AND REDEMPTION OF NOTES
A sale, exchange or redemption of Notes will result in taxable gain or
loss equal to the difference between the amount of cash or other property
received and the holder's adjusted tax basis in the Note. A holder's adjusted
tax basis for determining gain or loss on the sale or other disposition of a
Note will initially equal the cost of the Note to
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such holder and will be decreased by the amount of any principal payments
received by such holder, and any amortizable bond premium used to offset
interest income of such holder or otherwise allowed as a deduction. Gain or loss
upon a sale, exchange, or redemption of a Note will be capital gain or loss if
the Note is held as a capital asset. With respect to individual holders, if the
Note is held for more than 12 months, the maximum rate of tax on any capital
gain is 20%. The distinction between capital gain or loss and ordinary income or
loss is also relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following summary describes certain United States federal income
and estate tax consequences of the ownership of Notes as of the date hereof by
any Initial Holder who is a beneficial owner of a Note but is not a "U.S.
Holder" (a "Non-U.S. Holder").
Under present United States federal income and estate tax law, and
subject to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will
be required with respect to payment by the Company or any paying agent of
principal or interest on a Note owned by a Non-U.S. Holder, provided (i) that
the beneficial owner does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code and the regulations
thereunder, (ii) the beneficial owner is not a "controlled foreign corporation"
(as defined in Section 957 of the Code) that is related directly, indirectly or
constructively to the Company through stock ownership and (iii) the beneficial
owner satisfies the statement requirement (described generally below) set forth
in section 871(h) and section 881(c) of the Code and the regulations thereunder;
(b) generally no withholding of United States federal income tax will
be required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange or retirement of a Note; and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder generally will not be includible in the individual's gross
estate for the purposes of the United States federal estate tax as a result of
such individual's death, provided that such individual does not at the time of
death actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote within the meaning
of section 871(h)(3) of the Code and provided that the interest payments with
respect to such Note will not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
To satisfy the requirement referred to in (a)(iii) above, the
beneficial owner of such Note, or a financial institution holding the Note on
behalf of such owner, must provide, in accordance with specified procedures, the
Company or a paying agent of the Company with a statement to the effect that the
beneficial owner is not a U.S. person. Pursuant to current temporary
Regulations, these requirements will be met if (1) the beneficial owner provides
the payor his name and address, and certifies, under penalties of perjury, that
he is not a U.S. person (which certification may be made on an Internal Revenue
Service Form W-8 (or successor or substitute form)) or (2) a financial
institution that holds customers' securities in the ordinary course of its trade
or business and holds the Note on behalf of the beneficial owner certifies,
under penalties of perjury, that such statement has been received by it (or by
another financial institution acting on behalf of the Non-U.S.
Holder), and furnishes a paying agent with a copy thereof.
Regulations recently issued by the Internal Revenue Service, which will
be effective for payments made after December 31, 1999 (subject to certain
transition rules), make modifications to the certification procedures applicable
to Non-U.S. Holders. In general, these regulations unify certain certification
procedures and forms and clarify and modify reliance standards. A Non-U.S.
Holder should consult its own tax advisor regarding the effect of the new
Regulations.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to
Non-U.S. Holders will generally be subject to a 30% withholding tax, or such
-50-
<PAGE>
lower rate as may be specified by an applicable income tax treaty, unless the
beneficial owner of the Note provides the Company or its paying agent, as the
case may be, with a properly executed (1) Internal Revenue Service Form 1001 (or
successor form) claiming an exemption from withholding under the benefit of a
tax treaty or (2) Internal Revenue Service Form 4224 (or successor form) stating
that interest paid on the Note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
If a Non-U.S. Holder is engaged in a trade or business in the United
States and interest on the Note is effectively connected with the conduct of
such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will generally be subject to United States
federal income tax on such interest on a net income basis in the same manner as
if it were a United States person. In addition, if such holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, or such lower
rate as may be specified by an applicable income tax treaty, subject to
adjustments.
Any gain or income realized upon the sale, exchange or retirement of a
Note generally will not be subject to United States federal income tax unless
(i) such gain or income is effectively connected with a trade or business in the
United States of the Non-U.S. Holder, or (ii) in the case of a Non-U.S. Holder
who is a nonresident alien individual, such holder is present in the United
States for 183 days or more in the taxable year of such sale, exchange or
retirement, and certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The "backup" withholding and information reporting requirements may
apply to certain payments of principal and interest on a Note and to certain
payment of proceeds from the sale or retirement of a Note. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, is
required to withhold tax from any payment that is subject to backup withholding
at a rate of 31% of such payment if the holder fails to furnish his taxpayer
identification number (social security number or employer identification
number), or to certify that such holder is not subject to backup withholding
rules. Certain holders (including, among others, all corporations) are not
subject to the backup withholding and reporting requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof (in
its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in the third paragraph under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders" or has otherwise established an exemption
(provided that neither the Company nor such agent has actual knowledge that the
holder is a U.S. Holder or that the conditions of any other exemption are not in
fact satisfied). Payments of the proceeds from the sale by a holder who is not a
U.S. Holder of a Note made to or through a foreign office of a broker will not
be subject to U.S. information reporting or backup withholding, except that if
the broker is a U.S. person, a controlled foreign corporation for U.S. tax
purposes or a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period, U.S. information reporting may apply to such payments.
Payments of the proceeds from the sale of a Note to or through the
United States office of a broker is subject to U.S. information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
non-U.S. status or otherwise establishes an exemption from U.S. information
reporting and backup withholding.
In October 1997, Regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a Note or proceeds from the sale of a Note that are made after
December 31, 1999. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
general backup withholding requirements. Holders of the Notes should consult
their tax advisors concerning possible application of the final regulations to
any payments made on or with respect to the Notes.
Any amounts withheld under the backup withholding rules from a payment
to a holder may be claimed as a credit against such holder's United States
federal income tax liability.
-51-
<PAGE>
CAPITALIZATION
The following table sets forth the cash, cash equivalents and
short-term investments, restricted cash and short-term investments, and
capitalization of the Company as of September 30, 1998 on (i) an actual basis,
(ii) a pro forma basis to give effect to the acquisition of Tokyo Internet and
(iii) on a pro forma, as adjusted basis, which further adjusts the pro forma
amounts to give effect to the Initial Notes Offerings and the application of the
net proceeds therefrom, as if each of the foregoing had occurred on September
30, 1998. This table should be read in conjunction with the Consolidated
Financial Statements and notes thereto, the Unaudited Pro Forma Consolidated
Financial Information and notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Capital Structure" and "Use of
Proceeds" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments....................... $ 335,428 $ 222,627 $ 565,420
============== ============== ==============
Restricted cash and short-term investments.............................. $ 127,617 $ 127,617 $ 127,617
============== ============== ==============
Lines of credit and current portion of long-term debt and capital lease
obligations....................................................... $ 44,746 $ 51,388 $ 51,388
-------------- -------------- --------------
Long-term debt:
10% Senior Notes................................................... 600,000 600,000 600,000
Initial Notes (plus unamortized premium of $3,000,000)............. -- -- 353,000
Revolving credit facility.......................................... 108,500 108,500 108,500
Notes payable with banks........................................... 3,354 3,354 3,354
Other notes payable................................................ 220 220 220
Capital lease obligations.......................................... 60,924 68,047 68,047
-------------- -------------- --------------
Total long-term debt.......................................... 772,998 780,121 1,133,121
-------------- -------------- --------------
Shareholders' deficit:
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 28,637 28,637 28,637
Common stock, $.01 par value; 250,000,000 shares authorized;
51,790,340 shares outstanding................................... 519 519 519
Capital in excess of par value..................................... 400,949 400,949 400,949
Retained deficit................................................... (295,033) (295,033) (295,033)
Treasury stock, 99,556 shares, at cost............................. (2,005) (2,005) (2,005)
Accumulated other comprehensive income............................. (1,150) (1,150) (1,150)
Bandwidth asset to be delivered under IRU agreement................ (158,550) (158,550) (158,550)
-------------- -------------- --------------
Total shareholders' deficit................................... (26,633) (26,633) (26,633)
-------------- -------------- --------------
Total capitalization.......................................... $ 791,111 $ 804,876 $1,157,876
============== ============== ==============
</TABLE>
-52-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except per share, ratio and operating 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 which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and as of and for the nine
months ended September 30, 1997 and 1998 have been derived from the Company's
unaudited Consolidated Financial Statements. The following selected consolidated
financial and operating data are qualified by and should be read in conjunction
with the Company's 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 elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 8,665 $ 15,214 $ 38,722 $ 84,351 $ 121,902 $ 87,147 $ 165,732
Other income, net............................. -- -- -- 5,417 -- -- --
-------- --------- --------- --------- --------- --------- ---------
8,665 15,214 38,722 89,768 121,902 87,147 165,732
Operating costs and expenses:
Data communications and operations.......... 5,320 9,489 32,124 70,102 94,363 66,847 130,517
Sales and marketing......................... 1,845 3,599 23,930 27,064 25,831 18,070 37,919
General and administrative.................. 1,666 3,605 10,569 20,648 22,947 16,976 29,439
Depreciation and amortization............... 1,719 3,183 14,778 28,035 28,347 20,648 37,011
Charge for acquired in-process research and
development.............................. -- -- -- -- -- -- 40,400
Intangible asset write-down................. -- -- 9,938 -- -- -- --
-------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses.......... 10,550 19,876 91,339 145,849 171,488 122,541 275,286
-------- --------- --------- --------- --------- --------- ---------
Loss from operations.......................... (1,885) (4,662) (52,617) (56,081) (49,586) (35,394) (109,554)
Interest expense.............................. (311) (731) (1,964) (5,025) (5,362) (4,162) (38,193)
Interest income............................... 37 86 1,625 3,794 3,059 1,995 11,391
Other income.................................. -- -- -- 2,863 110 119 703
Gain on sale of investments................... -- -- -- -- 5,701 5,701 5,647
Equity in loss of affiliate................... -- (35) (204) (807) -- -- --
-------- --------- --------- --------- --------- --------- ---------
Loss before income taxes...................... (2,159) (5,342) (53,160) (55,256) (46,078) (31,741) (130,006)
Income tax expense (benefit).................. (246) -- -- (159) (476) (476) 65
-------- --------- --------- --------- --------- --------- ---------
Net loss...................................... (1,913) (5,342) (53,160) (55,097) (45,602) (31,265) (130,071)
Return to preferred shareholders.............. -- -- -- -- (411) -- (2,313)
-------- --------- --------- --------- --------- --------- ---------
Net loss available to common shareholders..... $ (1,913) $ (5,342) $ (53,160) $ (55,097) $ (46,013) $ (31,265) $(132,384)
======== ========= ========= ========= ========= ========= =========
Basic and diluted loss per share(1)........... $ (0.42) $ (2.01) $ (1.40) $ (1.14) $ (0.78) $ (2.70)
========= ========= ========= ========= ========= =========
Shares used in computing basic and diluted
loss per share (in thousands)............ 12,805 26,485 39,378 40,306 40,264 49,120
========= ========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Cash flows used in operating activities....... $ (209) $ (1,097) $ (30,093) $ (32,543) $ (15,457) $ (13,009) $ (76,931)
Cash flows provided by (used in) investing
activities............................... (3,656) (1,937) (21,958) (7,897) (15,560) 13,030 (326,028)
Cash flows provided by (used in) financing
activities............................... 5,490 4,527 151,403 (10,529) 12,598 (12,206) (654,228)
EBITDA(2)..................................... (166) (1,479) (27,901) (28,046) (21,239) (14,746) (32,143)
Capital expenditures(3)....................... 7,043 5,009 45,166 38,390 50,068 29,076 103,300
Ratio of earnings to fixed charges(4)......... -- -- -- -- -- -- --
</TABLE>
-53-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- --------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $ 1,865 $ 3,358 $ 102,710 $ 56,390 $ 33,322 $ 335,428
Restricted cash and short-term investments................. -- -- -- 954 20,690 127,617
Total assets............................................... 13,821 17,055 201,830 177,112 186,181 878,630
Lines of credit and current portion of long-term debt and
capital lease obligations............................... 2,540 3,369 16,643 26,915 39,633 44,746
Long-term debt and capital lease obligations, less current
portion................................................. 3,581 4,397 24,130 26,938 33,820 772,998
Redeemable preferred and common stock...................... 6,725 13,617 -- -- -- --
Shareholders' equity (deficit)............................. (1,427) (8,283) 143,230 89,783 73,429 (26,633)
OTHER OPERATING DATA:
Number of POPs............................................. 68 82 241 350 350 475
Number of customer accounts................................ 2,830 4,220 8,200 17,800 26,400 46,700
</TABLE>
_____________________
(1) Basic and diluted loss per share for 1993 is not considered relevant
given the significant changes in the capital structure of the Company in
conjunction with its initial public offering of shares of its common
stock in 1995.
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense, other income (expense), income tax expense (benefit),
gain on sale of investments, equity in loss of affiliate, intangible
asset write-down and charge for acquired in-process research and
development. 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.
(3) Includes cash expenditures and amounts financed under equipment financing
agreements.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of
affiliate and fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt financing costs and that portion of
rental expense which the Company believes to be representative of
interest (deemed to be one-third of rental expense). The deficiency for
purposes of calculating the ratio of earnings to fixed charges was
$2,159,000, $5,307,000, $52,956,000, $54,449,000, $46,078,000,
$31,741,000 and $130,006,000 for the years ended December 31, 1993, 1994,
1995, 1996 and 1997, and for the nine months ended September 30, 1997 and
1998, respectively.
-54-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet at
September 30, 1998 presents, on a pro forma basis, the Company's consolidated
financial position assuming the acquisition of Tokyo Internet had been
consummated on September 30, 1998. The following Unaudited Pro Forma
Consolidated Balance Sheet, as adjusted, at September 30, 1998 further gives
effect to the Initial Notes Offerings and the application of the net proceeds
therefrom as of September 30, 1998. The following Unaudited Pro Forma
Consolidated Statements of Operations for the year ended December 31, 1997 and
the nine months ended September 30, 1998 (collectively with the Unaudited Pro
Forma Consolidated Balance Sheet, the "Pro Forma Financial Information")
present, on a pro forma basis, the Company's consolidated results of operations
assuming (i) the acquisitions of iSTAR, ioNET, LinkAge, INX, Rimnet, Iprolink,
Inet, Interlog, CalvaCom and Tokyo Internet, (ii) the entering into the Credit
Facility and the borrowing of $108,500,000 thereunder (iii) the issuance by the
Company of 10,229,789 shares of common stock to IXC and (iv) the issuance by the
Company of $600,000,000 principal amount 10% Senior Notes had each occurred on
January 1, 1997. The following Unaudited Pro Forma Consolidated Statements of
Operations, as adjusted, for the year ended December 31, 1997 and the nine
months ended September 30, 1998 further give effect to the Initial Notes
Offerings and the application of the net proceeds therefrom as of January 1,
1997.
Each of the acquisitions has been accounted for as a purchase business
combination and, accordingly, the purchase price has been allocated to tangible
assets acquired and liabilities assumed, based upon their respective fair
values, with the excess allocated to intangible assets to be amortized over the
estimated economic lives of the intangible assets from the respective dates of
acquisition. The consolidated retained deficit reflected in the Unaudited Pro
Forma Consolidated Balance Sheet does not reflect any expense related to
intangible assets attributable to the value of purchased in-process research and
development associated with the acquisition of Tokyo Internet. The Company has
undertaken a study by an independent third party to determine the allocation of
the total purchase price of the Tokyo Internet acquisition to the various assets
acquired, including in-process research and development, and the liabilities
assumed. The portion of the purchase price allocated to in-process research and
development will be recognized in the Company's historical financial statements
in the fourth quarter of 1998, the period in which the acquisition occurred.
Such amounts related to the Tokyo Internet acquisition may be material.
The Pro Forma Financial Information is not intended to be indicative of
the results which would actually have been obtained had the transactions
described above occurred on the dates indicated or which may be obtained in the
future. The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable in the circumstances. The
Pro Forma Financial Information should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto, the iSTAR Consolidated
Financial Statements and notes thereto, and the Tokyo Internet Financial
Statements and notes thereto included elsewhere in this Prospectus.
-55-
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOKYO ISTAR TOKYO
PSINET INTERNET INTERNET OTHER INTERNET OTHER
INC.(1) CORPORATION(2) INC.(3) ACQUISITIONS(4) ADJUSTMENTS(5) ADJUSTMENTS(5)
------- -------------- -------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 121,902 $ 43,342 $ 29,338 $ 60,072
Operating cost and expenses:
Data communications and
operations................... 94,363 29,738 31,561 38,621
Sales and marketing............. 25,831 4,653 8,406 7,149
General and Administrative...... 22,947 5,687 9,082 14,294
Depreciation and amortization... 28,347 2,654 5,799 3,387 $ 13,500 (2a) $ 11,857 (2a)
Intangible asset writedown...... -- -- 12,570 --
--------- ---------- --------- ---------- ---------- ---------
Total operating costs and
Expenses................... 171,488 42,732 67,418 63,451 13,500 11,857
--------- ---------- --------- ---------- ---------- ---------
Income (loss) from operations..... (49,586) 610 (38,080) (3,379) (13,500) (11,857)
Interest expense.................. (5,362) (296) (1,016) (1,742) (9,452)(2b) (62,750)(2b)
Interest income................... 3,059 3 8 143
Other income (expense)............ 110 (932) -- (3,798)
Gain on sale of subsidiary........ 5,701 -- -- --
--------- ---------- --------- ---------- ---------- ---------
Loss before taxes................. (46,078) (615) (39,088) (8,776) (22,952) (74,607)
Income tax expense (benefit)...... (476) 26 -- 541
--------- ---------- --------- ---------- ---------- ---------
Net loss.......................... (45,602) (641) (39,088) (9,317) (22,952) (74,607)
Return to preferred shareholders.. (411) -- -- --
--------- ---------- --------- ---------- ---------- ---------
Net loss available to common
shareholders................. $ (46,013) $ (641) $ (39,088) $ (9,317) $ (22,952) $ (74,607)
========= ========== ========= ========== ========== =========
Basic and diluted loss per share.. $ (1.14)
=========
Shares used in computing basic and
diluted loss per share (in
thousands)....... ........... 40,306 10,230 (2c)
========== =========
<CAPTION>
PRO FORMA,
PRO OFFERING AS
FORMA(6) ADJUSTMENTS(5) ADJUSTED(7)
-------- -------------- -----------
<S> <C> <C> <C>
Revenue........................... $ 254,654 $ 254,654
Operating cost and expenses:
Data communications and
operations................... 194,283 194,283
Sales and marketing............. 46,039 46,039
General and Administrative...... 52,010 52,010
Depreciation and amortization... 65,544 65,544
Intangible asset writedown...... 12,570 12,570
---------- ---------- ----------
Total operating costs and
Expenses................... 370,446 370,446
---------- ---------- ----------
Income (loss) from operations..... (115,792) (115,792)
Interest expense.................. (80,618) $ (40,971)(2b) (121,589)
Interest income................... 3,213 3,213
Other income (expense)............ (4,620) (4,620)
Gain on sale of subsidiary........ 5,701 5,701
---------- ---------- ----------
Loss before taxes................. (192,116) (40,971) (233,087)
Income tax expense (benefit)...... 91 91
---------- ---------- ----------
Net loss.......................... (192,207) (40,971) (233,178)
Return to preferred shareholders.. (411) (411)
---------- ---------- ----------
Net loss available to common
shareholders................. $ (192,618) $ (40,971) $ (233,589)
========== ========== ==========
Basic and diluted loss per share.. $ (3.81) $ (4.62)
========== ==========
Shares used in computing basic and
diluted loss per share (in
thousands)....... ........... 50,536 50,536
========== ==========
</TABLE>
_____________________
(1) Reflects the audited consolidated results of operations of the Company
for the year ended December 31, 1997.
(2) Amounts have been derived from the unaudited results of operations of
Tokyo Internet for the twelve month period ended March 31, 1998 prepared
in accordance with accounting principles generally accepted in the
United States. Certain amounts have been reclassified to conform with
the Company's presentation.
(3) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the twelve months ended November 30, 1997
prepared in accordance with accounting principles generally accepted in
the United States. Certain amounts have been reclassified to conform
with the Company's presentation.
(4) Amounts have been derived from the unaudited results of operations of
CalvaCom for the ten months ended October 31, 1997, Iprolink for twelve
months ended December 31, 1997, ioNET for the twelve months ended
December 31, 1997, LinkAge for the twelve months ended December 31,
1997, INX for the twelve months ended December 31, 1997, Rimnet for the
twelve months ended September 30, 1997, Inet for the twelve months ended
December 31, 1997 and Interlog for the twelve months ended December 31,
1997. Amounts have been developed in accordance with accounting
principles generally accepted in the United States. The results of
operations of CalvaCom from November 1, 1997 to December 31, 1997 are
included in the Company's audited results of operations for the year
ended December 31, 1997.
(5) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 2--Pro Forma Adjustments).
(6) Reflects the results of operations of the Company, on a pro forma basis,
assuming (i) the acquisitions of Tokyo Internet, iSTAR, CalvaCom,
Iprolink, ioNET, LinkAge, INX, Rimnet, Inet and Interlog, (ii) the
entering into of the Credit Facility and the borrowing of $108.5 million
thereunder, (iii) the issuance by the Company of the 10% Senior Notes,
and (iv) the issuance by the Company of 10,229,789 shares of common
stock to IXC each had been consummated on January 1, 1997.
(7) Further gives effect to the Initial Notes Offerings and the application
of the net proceeds therefrom as of January 1, 1997.
-56-
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOKYO
PSINET TOKYO INTERNET ISTAR OTHER INTERNET
INC.(1) CORPORATION(2) INTERNET INC.(3) ACQUISITIONS(4) (ADJUSTMENTS(5)
------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 165,732 $ 29,762 $ 2,031 $ 33,823
Operating cost and expenses:
Data communications and
operations................... 130,517 20,208 4,038 24,994
Sales and marketing............ 37,919 2,694 914 3,050
General and administrative..... 29,439 4,042 815 8,493
Depreciation and
amortization................. 37,011 2,400 487 2,851 $ 10,125 (2d)
Charge for acquired in-
process research and
development.................. 40,400 -- -- --
--------- ----------- ---------- ---------- ---------
Total operating costs
and expenses............... 275,286 29,344 6,254 39,388 10,125
--------- ----------- ---------- ---------- ---------
Income (loss) from
operations..................... (109,554) 418 (4,223) (5,565) (10,125)
Interest expense................. (38,193) (223) (169) (1,752) (7,089)(2e)
Interest income.................. 11,391 17 -- 77
Other income (expense)........... 703 (174) -- (209)
Gain on sale
of investments................. 5,647 -- -- --
--------- ----------- ---------- ---------- ---------
Income (loss) before taxes....... (130,006) 38 (4,392) (7,449) (17,214)
Income tax expense............... 65 24 -- 193
--------- ----------- ---------- ---------- ---------
Net income (loss)................ (130,071) 14 (4,392) (7,642) (17,214)
Return to preferred
shareholders................... (2,313) -- -- --
--------- ----------- ---------- ---------- ---------
Net income (loss) available
to common shareholders......... $(132,384) $ 14 $ (4,392) (7,642) (17,214)
========= =========== ========== ========== =========
Basic and diluted loss
per share...................... $ (2.70)
=========
Shares used in computing
basic and diluted
loss per share (in thousands).. 49,120
=========
</TABLE>
<TABLE>
<CAPTION>
OTHER PRO FORMA,
ADJUST- PRO OFFERING AS
MENTS(5) FORMA(6) ADJUSTMENT(5) ADJUSTED(7)
-------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Revenue.............................. $ 231,348 $ 231,348
Operating cost and expenses:
Data communications and
operations....................... 179,757 179,757
Sales and marketing................ 44,577 44,577
General and administrative......... 42,789 42,789
Depreciation and amortization...... $ 6,036(2d) 58,910 58,910
Charge for acquired in-
process research and
development...................... 40,400 40,400
--------- ----------- ----------- -----------
Total operating costs
and expenses................... 6,036 366,433 366,433
--------- ----------- ----------- -----------
Income (loss) from
operations......................... (6,036) (135,085) (135,085)
Interest expense..................... (16,859)(2e) (64,285) $ (30,728)(2e) (95,013)
Interest income...................... 11,485 11,485
Other income (expense)............... 320 320
Gain on sale
of investments..................... 5,647 5,647
--------- ----------- ----------- -----------
Income (loss) before taxes........... (22,895) (181,918) (30,728) (212,646)
Income tax expense................... 282 282
--------- ----------- ----------- -----------
Net income (loss).................... (22,895) (182,200) (30,728) (212,928)
Return to preferred
shareholders....................... (2,313) (2,313)
--------- ----------- ----------- -----------
Net income (loss) available
to common shareholders............. $ (22,895) $ (184,513) $ (30,728) $ (215,241)
========= =========== =========== ===========
Basic and diluted loss
per share.......................... $ (3.60) $ (4.20)
=========== ===========
Shares used in computing
basic and diluted
loss per share (in thousands)...... 2,084(2c) 51,204 51,204
========= =========== ===========
</TABLE>
_______________________
(1) Reflects the unaudited consolidated results of operations of the Company
for the nine months ended September 30, 1998.
(2) Amounts have been derived from the unaudited results of operations of Tokyo
Internet for the nine months ended September 30, 1998 prepared in
accordance with accounting principles generally accepted in the United
States. Certain amounts have been reclassified to conform with the
Company's presentation. Included in the results of operations for the nine
months ended September 30, 1998 are revenues of $11,479,000 and net income
of $1,149,000 related to the three months ended March 31, 1998. Such
amounts are also included in the results of Tokyo Internet for the twelve
months ended March 31, 1998.
(3) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the one month ended January 31, 1998 prepared in
accordance with accounting principles generally accepted in the United
States. Certain amounts have been reclassified to conform with the
Company's presentation.
(4) Amounts have been derived from the unaudited results of operations of ioNET
for the six months ended June 30, 1998, LinkAge for the six months ended
September 30, 1998, INX for the five months ended May 31, 1998, Rimnet for
the eight months ended May 31, 1998, Inet for the nine months ended June
30, 1998 and Interlog for the seven months ended April 30, 1998. Amounts
have been developed in accordance with accounting principles generally
accepted in the United States. The results of operations of iSTAR,
Iprolink, ioNET, LinkAge, INX, Interlog, Rimnet and Inet are included in
the Company's unaudited results of operations for the nine months ended
September 30, 1998 from their respective dates of acquisition.
(5) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 2--Pro Forma Adjustments).
(6) Reflects the results of operations of the Company, on a pro forma basis,
assuming (i) the acquisitions of Tokyo Internet, iSTAR, Iprolink, ioNET,
LinkAge, INX, Rimnet, Inet and Interlog, (ii) the entering into of the
Credit Facility and the borrowing of $108.5 million thereunder, (iii) the
issuance by the Company of the 10% Senior Notes, and (iv) the issuance by
the Company of 10,229,789 shares of common stock to IXC each had been
consummated on January 1, 1997.
(7) Further gives effect to the Initial Notes Offerings and the application of
the net proceeds therefrom as of January 1, 1997.
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<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION
The Unaudited Pro Forma Consolidated Statements of Operations do not
give effect to any potential cost savings and synergies that could result from
the acquisitions included therein.
Management believes that the assumptions used in preparing the
Unaudited Pro Forma Consolidated Statements of Operations provide a reasonable
basis for presenting all of the significant effects of the acquisitions included
therein, that the pro forma adjustments give appropriate effect to those
assumptions and that the pro forma adjustments are properly applied in the
Unaudited Pro Forma Consolidated Statements of Operations.
NOTE 2--PRO FORMA ADJUSTMENTS
The pro forma adjustments outlined below present separate adjustments
related to the acquisition of Tokyo Internet and the adjustments related to the
other transactions reflected in the Unaudited Pro Forma Consolidated Statements
of Operations.
The purchase price of each acquisition has been allocated to tangible
assets acquired and liabilities assumed, based upon their respective fair
values, with the excess allocated to intangible assets to be amortized over the
estimated economic lives of the intangible assets of up to fifteen years from
the respective dates of acquisition.
The Company has undertaken a study by an independent third party to
determine the allocation of the total purchase price of Tokyo Internet. For
purposes of this Pro Forma Financial Information, the Company has attributed the
excess of the purchase price over the acquired net tangible assets for Tokyo
Internet of $135,000,000 to goodwill with a ten year useful life. To the extent
that a portion of the purchase price of Tokyo Internet is allocated to other
intangible assets with a shorter useful life than ten years, the adjustment for
amortization expense for the twelve months ended December 31, 1997 and for the
nine months ended September 30, 1998 would be higher. To the extent that a
portion of the purchase price of the Tokyo Internet acquisition is allocated to
purchased in-process research and development, a charge, which may be material,
would be recognized in the Company's consolidated operating results and the
adjustment for amortization expense reflected in the Pro Forma Financial
Information would be lower.
FOR THE YEAR ENDED DECEMBER 31, 1997
(a) Reflects the increase in depreciation and amortization resulting
from the allocation of the purchase price to the acquired net tangible and
intangible assets (principally tradename, customer relationships, goodwill,
assembled workforce and existing technology) relating to the acquisitions
included therein. The assigned lives of the acquired intangible assets range
from one to fifteen years.
<TABLE>
<CAPTION>
(IN THOUSANDS OF U.S. DOLLARS)
TOKYO INTERNET OTHERS
-------------- --------
<S> <C> <C>
Depreciation................................. $ -- $ 776
Amortization................................. 13,500 11,081
------------ ------
$ 13,500 $ 11,857
============ ===========
</TABLE>
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<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
NOTE 2--PRO FORMA ADJUSTMENTS--(CONTINUED)
(b) Reflects the following (tabular amounts in thousands of
U.S. dollars):
<TABLE>
<S> <C>
Tokyo Internet Adjustments:
Interest expense on the $108,500,000 principal amount of indebtedness drawn
under the Credit Facility......................................................... $ 8,816
Amortization of deferred financing costs associated with the Credit Facility........... 636
--------
$ 9,452
========
Other Adjustments:
Interest expense on the $600,000,000 principal amount 10% Senior Notes from
January 1, 1997--December 31, 1997................................................. $ 60,000
Amortization of deferred financing costs associated with the 10% Senior Notes
from January 1, 1997--December 31, 1997............................................ 2,750
--------
$ 62,750
========
Offering Adjustments:
Interest expense on the Notes ......................................................... $ 40,250
Amortization of deferred financing costs associated with the Initial Notes
Offerings (assumed $10,207,500)................................................... 1,021
Amortization of the premium on the Notes............................................... (300)
--------
$ 40,971
========
</TABLE>
(c) Reflects the adjustment to weighted average shares assuming the
issuance of 10,229,789 shares of common stock to IXC had occurred on January 1,
1997.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(d) Reflects the increase in depreciation and amortization resulting
from the allocation of the purchase price to the acquired net tangible and
intangible assets (principally tradename, customer relationships, goodwill,
assembled workforce and existing technology) relating to the acquisitions
included therein. The assigned lives of the acquired intangible assets range
from one to fifteen years.
<TABLE>
<CAPTION>
(IN THOUSANDS OF U.S. DOLLARS)
TOKYO INTERNET OTHERS
---------------- --------
<S> <C> <C>
Depreciation............................................ $ -- $ 65
Amortization............................................ 10,125 5,971
---------- -------
$ 10,125 $ 6,036
========== =======
</TABLE>
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<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
NOTE 2--PRO FORMA ADJUSTMENTS--(CONTINUED)
(e) Reflects the following (tabular amounts in thousands of U.S.
dollars):
<TABLE>
<S> <C>
Tokyo Internet Adjustments:
Interest expense on the $108,500,000 principal amount of indebtedness drawn under
the Credit Facility.............................................................. $ 6,612
Amortization of deferred financing costs associated with the Credit Facility.......... 477
---------
$ 7,089
=========
Other Adjustments:
Interest expense on the $600,000,000 principal amount 10% Senior Notes from
January 1, 1998--April 10, 1998 (date of issuance of the 10% Senior Notes)........ $ 16,500
Amortization of deferred financing costs associated with the 10% Senior Notes from
January 1, 1998--April 10, 1998 (date of issuance of the 10% Senior Notes)........ 688
Interest expense avoided through assumed repayment of the $20,000,000 Acquisition
Credit Facility from the proceeds of the 10% Senior Notes offering. The
Acquisition Credit Facility was incurred in conjunction with the acquisition
of iSTAR in February 1998 and repaid from the proceeds of the 10% Senior
Notes in April 1998.............................................................. (329)
---------
$ 16,859
=========
Offering Adjustments:
Interest expense on the Notes......................................................... $ 30,187
Amortization of deferred financing costs associated with the Initial Notes
Offerings (assumed $10,207,500).................................................. 766
Amortization of the premium on the Notes.............................................. (225)
---------
$ 30,728
=========
</TABLE>
NOTE 3--BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share are computed using net loss available
to common shareholders divided by the weighted average number of shares of the
Company's common stock that were outstanding during the periods presented and
assumes that the issuance of 10,229,789 shares of common stock to IXC had
occurred on January 1, 1997. As all common stock equivalents and contingently
issuable shares are antidilutive, basic and diluted loss per share are the same
for all periods presented.
NOTE 4--INTANGIBLE ASSET WRITE-DOWN
During the twelve months ended November 30, 1997, iSTAR wrote-off $12.6
million related to the permanent impairment of certain intangible assets, mainly
customer lists and goodwill, which resulted from iSTAR's acquisitions of
consumer-oriented ISPs and Internet-oriented professional service companies. In
accordance with guidelines of the Commission, this non-recurring charge has not
been eliminated from the Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997.
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<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
TOKYO
PSINET TOKYO INTERNET INTERNET PRO OFFERING PRO FORMA,
INC.(1) CORPORATION(2) ADJUSTMENTS(3) FORMA(4) ADJUSTMENTS(3) AS ADJUSTED(5)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 282,586 $ 624 $(113,425) $ 169,785 $ 342,793 $ 512,578
Restricted cash and short-term
investments........................... 127,617 -- 127,617 127,617
Short-term investments.................. 52,842 -- 52,842 52,842
Accounts receivable, net................ 36,932 5,549 42,481 42,481
Notes receivable........................ 1,347 -- 1,347 1,347
Prepaid expenses........................ 5,052 228 5,280 5,280
Other current assets.................... 16,906 8 16,914 16,914
--------- -------- --------- --------- --------- ----------
Total current assets................ 523,282 6,409 (113,425) 416,266 342,793 759,059
Property and equipment, net............. 221,390 7,714 229,104 229,104
Goodwill and other intangibles, net..... 103,504 1,270 135,000 239,774 239,774
Other assets and deferred charges....... 30,454 424 30,878 10,207 41,085
--------- -------- --------- --------- --------- ----------
Total assets............................ $ 878,630 $ 15,817 $ 21,575 $ 916,022 $ 353,000 $1,269,022
========= ======== ========= ========= ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Lines of credit and short-term debt..... $ -- $ -- $ -- $ --
Current portion of long-term debt....... 44,746 6,642 51,388 51,388
Trade accounts payable.................. 34,727 1,588 36,315 36,315
Accrued payroll and related expenses.... 7,646 -- 7,646 7,646
Other accounts payable and accrued
liabilities........................... 25,667 814 $ 21,216 47,697 47,697
Deferred revenue........................ 9,878 -- 9,878 9,878
--------- -------- --------- --------- --------- ----------
Total current liabilities........... 122,664 9,044 21,216 152,924 152,924
Long-term debt.......................... 772,998 7,123 780,121 $ 353,000 1,133,121
Other liabilities....................... 9,601 9 9,610 9,610
--------- -------- --------- --------- --------- ----------
Total liabilities....................... 905,263 16,176 21,216 942,655 353,000 1,295,655
--------- -------- --------- --------- --------- ----------
Shareholders' equity (deficit):
Preferred stock......................... -- -- -- --
Convertible preferred stock............. 28,637 -- 28,637 28,637
Common Stock............................ 519 10,221 (10,221) 519 519
Capital in excess of par value.......... 400,949 -- 400,949 400,949
Treasury stock.......................... (2,005) -- (2,005) (2,005)
Retained earnings (deficit)............. (295,033) (10,214) 10,214 (295,033) (295,033)
Accumulated other comprehensive
income ............................... (1,150) (366) 366 (1,150) (1,150)
Bandwidth asset to be delivered under
IRU agreement......................... (158,550) -- (158,550) (158,550)
--------- -------- --------- --------- --------- ----------
Total shareholders' equity (deficit).... (26,633) (359) 359 (26,633) (26,633)
--------- -------- --------- --------- --------- ----------
Total liabilities and shareholders'
equity (deficit)...................... $ 878,630 $ 15,817 $ 21,575 $ 916,022 $ 353,000 $1,269,022
========= ======== ========= ========= ========= ==========
</TABLE>
_____________________
(1) Reflects the unaudited consolidated financial position of the Company as
of September 30, 1998.
(2) Reflects the unaudited financial position of Tokyo Internet as of
September 30, 1998 which has been prepared in accordance with accounting
principles generally accepted in the United States.
(3) See Notes to Unaudited Pro Forma Consolidated Balance Sheet (Note 2--Pro
Forma Adjustments).
(4) Reflects the consolidated financial position of the Company, on a pro
forma basis, assuming the acquisition of Tokyo Internet had been
consummated on September 30, 1998.
(5) Further gives effect to the Initial Notes Offerings and the application
of the net proceeds therefrom as of September 30, 1998.
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<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
NOTE 1--BASIS OF PRESENTATION
Management believes that the assumptions used in preparing the
Unaudited Pro Forma Consolidated Balance Sheet provide a reasonable basis for
presenting all of the significant effects of the acquisition of Tokyo Internet
and that the pro forma adjustments give appropriate effect to those assumptions
and that the pro forma adjustments are properly applied in the Unaudited Pro
Forma Consolidated Balance Sheet.
NOTE 2--PRO FORMA ADJUSTMENTS
Reflects the acquisition of Tokyo Internet, including (i) cash paid at
closing, (ii) goodwill adjustment as discussed below, (iii) estimated additional
consideration to be paid at a future date and acquisition costs, and (iv) the
elimination of the equity accounts of Tokyo Internet.
The Company has undertaken a study by an independent third party to
determine the allocation of the total purchase price of Tokyo Internet. For
purposes of this Unaudited Pro Forma Consolidated Financial Information, the
Company has attributed the excess of the purchase price over the acquired net
tangible assets of Tokyo Internet of $135,000,000 to goodwill with a ten year
useful life. To the extent that a portion of the purchase price is allocated to
in-process research and development, a charge against operating results, which
may be material, would be recognized in the period in which this acquisition
occurred with a corresponding decrease in the recorded amount of goodwill.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. The results shown herein are not necessarily indicative of the
results to be expected in any future periods. This discussion contains certain
forward-looking statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events could differ
materially from the forward-looking statements as a result of a number of
factors. For a discussion of the risk factors that could cause actual results to
differ materially from the forward-looking statements, you should read the "Risk
Factors" section which begins on page 20.
GENERAL
We were founded in 1989, were the first commercial Internet Service
Provider ("ISP") and offered Internet connectivity to businesses. In 1993, we
commenced offering dial-up Internet connectivity to individual consumers in the
U.S. on a nationwide basis. We funded the initial buildout of our domestic
network and expansion of our operations through the private placement of equity
securities and through capital lease financings. Since 1993, we have pursued a
strategy of both internal growth and growth through acquisitions of
complementary businesses to increase both individual and business customer
accounts, enter into new geographic markets and increase our service and product
offerings. During 1995, we raised net proceeds of $47.3 million through an
initial public offering of common stock and an additional $86.6 million through
a follow-on public offering of common stock to continue the buildout of our
domestic network and to increase our sales, marketing and customer support
infrastructure.
In mid-1996, in order to avoid increasing pricing competition and the
high marketing and customer care costs of providing consumer access and to
better utilize our network backbone, we altered our strategy to focus on
providing wholesale access services to consumer-oriented ISPs in the United
States, rather than providing consumer access services directly. To further
refine our focus on providing business Internet services, in February 1997, we
sold our software subsidiary for cash consideration of $12.0 million and $8.5
million as repayment of intercompany debt owed by the subsidiary to us. In
December 1997, we realigned our core domestic operations into three
customer-focused business units to more effectively meet the emerging needs of
the Internet marketplace. These business units are comprised of the (1)
Corporate Network Services group, which provides high quality Internet
connectivity services to business customers, (2) the Carrier and ISP Services
group, which delivers Internet access services on a private-label basis to other
ISPs and telecommunications services providers, and (3) the Applications and Web
Services group, which provides value-added IP-based services and products to new
and existing business customers. Beginning in the third quarter of 1996, we
hired several new executive officers with extensive experience in the
telecommunications industry to assist us in executing our business strategy.
We derive a majority of our revenues from providing Internet access
services to business customers and other ISPs. Business customers are typically
signed to contracts that range from one to three years. Revenues generated from
business customers are typically comprised of recurring monthly fees,
installation and start-up charges and sales of related equipment and services.
Revenues from other ISPs are generated pursuant to network access agreements
which typically require a minimum number of subscribers and obligate the ISP
customers to pay specified monthly fees for each subscriber using the PSINet
network. In addition, we provide a variety of value-added services, including,
among others, corporate intranets, Web hosting, security services, commerce
solutions and other advanced IP-based applications, such as Internet fax.
Revenues from value-added services are typically in the form of monthly charges
and are often bundled with Internet access services.
Since the commencement of our operations, we have undertaken a program
of developing and expanding our data communications network. In connection with
this program, we have made significant investments in telecommunications
circuits and equipment to produce an IP-optimized, geographically dispersed,
ATM, ISDN and SMDS compatible frame relay network. These investments generally
are made in advance of anticipated customer growth and resulting revenue. As
part of our ongoing efforts to further expand and enhance our network, we have
acquired or agreed to acquire significant amounts of global fiber-based
telecommunications bandwidth, including IRUs or other rights in:
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<PAGE>
. up to 10,000 equivalent route miles of OC-48 capacity across the
United States,
. STM-1 transatlantic capacity connecting the United States, the
United Kingdom and continental Europe,
. dark fiber connecting the New York City and Washington, D.C.
metropolitan areas and major metropolitans areas in between, and
. six DS-3s of transpacific capacity connecting the United States and
Japan.
In addition, we have entered into an agreement with other leading
global telecommunications companies to build the Japan-U.S. Cable Network. The
acquisition of these bandwidth assets is expected to increase our network
capacity by at least 50 times and to reduce significantly our future data
communications and operations costs per equivalent mile. In addition, the
increased network capacity is expected to enable us to offer a wider variety of
higher-speed Internet and Internet-related services to a larger customer base.
As a result, we anticipate that our data communications and operations costs as
a percentage of revenue will decrease as we substitute the acquired bandwidth
for leased circuit arrangements with various telecommunications carriers.
INTERNATIONAL OPERATIONS
We currently have operations in 12 of the 20 largest international
telecommunications markets including, in addition to the United States, Africa,
Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, the Netherlands,
Republic of Korea, Switzerland and the United Kingdom. We typically enter a new
market through an investment in a start-up company within the particular market
or by acquiring a local ISP. Revenue from international operations continues to
increase as a percentage of consolidated results, comprising 38.1% of revenue in
the third quarter of 1998. By comparison, it was 18% of revenue in the fourth
quarter of 1997, 28% in the first quarter of 1998 and 31% in the second quarter
of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
Revenue. We generate revenue primarily from the sale of Internet access
and related services to businesses. Revenue was $165.7 million for the nine
months ended September 30, 1998, an increase of $78.6 million, or 90%, from
$87.1 million for the nine months ended September 30, 1997. The 90% year-to-date
revenue growth is broken down into 55% from those operations that were in
existence at September 30, 1997 and 35% from companies acquired since that date.
Our organic growth is attributable to a number of factors, including an increase
in the number of business customer and ISP accounts, an increase in the average
annual revenue realized per new customer account, and an increase in the
business account retention rate.
Our customer account base increased by 103% to 46,700 business accounts
including 141 ISPs at September 30, 1998, from 23,000 business accounts
including 41 ISPs at September 30, 1997. Average annual new contract value
increased to $5,900 from $5,800 in the second quarter of 1998, which we believe
reflects an increasing demand for value-added services and higher levels of
bandwidth.
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 $130.5 million (78.8% of revenue) for the nine months
ended September 30, 1998, an increase of $63.7 million from $66.8 million (76.7%
of revenue) for the nine months ended September 30, 1997. The increase in
expenses related principally to increases in (1) leased long distance, dedicated
customer and dial-up circuit costs, (2) expenditures for additional primary rate
interfaces ("PRIs") to support the growth of our Carrier and ISP Services
business, and (3) personnel costs resulting from the expansion of our network
operations, customer support and field service staff, including through
acquisitions. Circuit costs relating to our new and expanded POPs and PRIs
generally are incurred by us in advance of anticipated growth in our customer
base. Although we expect that data communications and operations expenses will
continue to increase as our customer base grows, we anticipate that such
expenses will decrease over time as a percentage of revenue due to decreases in
unit costs and continued increases in network
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<PAGE>
utilization. In particular, we anticipate that costs for data communications and
operations as a percentage of revenue will decrease as we substitute network
bandwidth purchased or acquired under capital lease agreements for bandwidth
currently taken under operating lease agreements. This will, in turn, result in
increases in depreciation and amortization expense.
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 $37.9 million (22.9%
of revenue) for the nine months ended September 30, 1998, an increase of $19.8
million from $18.1 million (20.7% of revenue) for the nine months ended
September 30, 1997. The increase resulted principally from costs related to a
branding and advertising campaign and from costs associated with the growth of
our sales force in conjunction with our growth and acquisition strategy. All
advertising and marketing costs are expensed in the period incurred.
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 $29.4 million (17.8% of revenue) for
the nine months ended September 30, 1998, an increase of $12.4 million from
$17.0 million (19.5% of revenue) for the nine months ended September 30, 1997.
The increase resulted from the addition of management staff and related
operating expenses across the organization, including in conjunction with our
growth and acquisition strategy, and increases in the provision for doubtful
accounts receivable associated with our growth in revenue.
Depreciation and Amortization. Depreciation and amortization costs were
$37.0 million (22.3% of revenue) for the nine months ended September 30, 1998,
an increase of $16.4 million from $20.6 million (23.7% of revenue) for the nine
months ended September 30, 1997. Depreciation and amortization costs have
increased as a result of capital expenditures associated with network
infrastructure enhancements and amortization of intangible assets related to
acquisitions. We anticipate that our depreciation and amortization expenses will
continue to increase significantly as a percentage of revenue as we substitute
network bandwidth purchased or acquired under capital lease agreements for
bandwidth currently taken under operating lease agreements, and as we record
depreciation and amortization on tangible and intangible assets related to
business combinations and expansion of our operations.
Acquired In-Process Research and Development. The results for the nine
months ended September 30, 1998 include a $40.4 million charge (24.4% of
revenue) for acquired in-process research and development. The charges were
based on independent valuations and reflect technologies acquired prior to
technological feasibility and for which there is no alternative future use.
There were no comparable charges in 1997.
Interest Expense. Interest expense was $38.2 million for the nine
months ended September 30, 1998, an increase of $34.0 million from $4.2 million
for the nine months ended September 30, 1997. The increase was due to interest
on our issuance of $600.0 million aggregate principal amount of 10% Senior
Notes, as well as to increased borrowings and capital lease obligations incurred
to finance our network expansion and to fund our working capital requirements.
We expect interest expense to increase in future quarters as a result of the
issuance of the 11 1/2% Senior Notes.
Interest Income. Interest income was $11.4 million for the nine months
ended September 30, 1998, an increase of $9.4 million from $2.0 million for the
nine months ended September 30, 1997. The increases were due to interest
received on the net proceeds of our offering of the 10% Senior Notes, which
proceeds are invested in U.S. Government securities, A-1/P-1 rated certificates
of deposit or A-1/P-1 rated commercial paper until such time as they are used
for other purposes.
Gain on Sale of Investment. The gain on the sale of investments of $5.6
million for the nine months ended September 30, 1998 relates to the recognition
of realized gains on equity securities that we sold during the third quarter.
The gain on the sale of investments of $5.7 million for the nine months ended
September 30, 1997 relates to the sale in the first quarter of 1997 of our
software subsidiary.
Net Loss to Common Shareholders and Loss per Share. Our net loss to
common shareholders for the nine months ended September 30, 1998 was $132.4
million, or $2.70 basic and diluted loss per share, a $101.1 million
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<PAGE>
increase from a net loss to common shareholders for the nine months ended
September 30, 1997 of $31.3 million, or $0.78 basic and diluted loss per share.
The return to preferred shareholders, which comprises the dividends with respect
to our Series B 8% Convertible Preferred Stock ("Series B Preferred Stock") and
accretion of the related conversion premium on the Series B Preferred Stock, is
subtracted from net loss in determining the net loss to common shareholders.
Because inclusion of common stock equivalents is antidilutive, basic and diluted
loss per share are the same for each period presented.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
Revenue. We generate revenue 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 in the average annual revenue realized per new customer
account and an increase in sales by our international subsidiaries. The growth
was driven by an expansion of our 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 our individual consumer accounts and related assets and by the sale in
1997 of our 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, our 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 our
customer retention rate from 94% in 1996 to 82% in 1997, which was attributable
in part to an initiative by us to remove certain non-performing accounts.
Our 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. Our 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 our operations in the United
Kingdom, Japan and Canada.
Other Income, Net. We 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 our 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:
. leased long distance, dedicated customer and dial-up circuit costs,
. expenditures for additional PRIs to support the growth of our
Carrier and ISP Services business, and
. personnel costs resulting from the expansion of our network
operations, customer support and field service staff.
Circuit costs relating to our new and expanded POPs and PRIs generally
are incurred by us in advance of anticipated growth in our customer base.
Although we expect that data communications and operations expenses will
continue to increase as our customer base grows, we anticipate 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, we anticipate that costs for data communications and operations as a
percentage of revenue will decrease as we accept delivery of bandwidth from IXC
and, in connection therewith, substitute this bandwidth for leased circuit
arrangements with IXC as well as with other telecommunications carriers.
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<PAGE>
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 our individual consumer subscribers and related
infrastructure in 1996 and the sale of our software operations in 1997, which
were offset in part by an increase in sales and marketing expenses relating to
the expansion of our operations. All advertising and marketing costs are
expensed in the period incurred. We expect that as a result of continued
emphasis on expanding all of our lines of business and increasing our 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 addition of management staff and related
operating expenses across the organization, including in conjunction with our
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 our 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. We anticipate that as we accept delivery of bandwidth from IXC,
and as the operations and assets of companies we have recently acquired are
integrated with existing operations, our 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 us to
finance network expansion and to fund working capital requirements. As we
continue the international expansion of our network and positions ourself to
take advantage of certain anticipated benefits resulting from the recently
completed transaction with IXC, we expect, subject to applicable financing
agreements, to incur increased borrowings and capital lease obligations which
will further increase the amount of the our 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 us.
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 our software
subsidiary as discussed above.
Net Loss and Loss Per Share. As a result of the factors discussed
above, our 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 our 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.
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<PAGE>
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 our sales force, and greater
public awareness and utilization of the Internet.
Our 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. Our 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 our individual consumer subscribers
and certain related tangible and intangible assets in connection with the
implementation of our Carrier and ISP strategy during the second and third
quarters of 1996. We did not have other income, net, in 1995.
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 our business customers and (ii) circuit costs relating to
our 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 our 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 us 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 our 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 us 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 our 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 us, which
we did not have in 1995.
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<PAGE>
Net Loss and Loss Per Share. As a result of the factors discussed
above, our 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, we 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 our ownership. In accordance with
generally accepted accounting principles, we have provided a valuation allowance
for net deferred tax assets arising from these carryforwards since realization
of these benefits cannot be reasonably assured.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial
data, and such data expressed as a percentage of revenue, for the eleven
quarters ended September 30, 1998. 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
Charge for acquired in-
process research
and development................ -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------- ---------
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 (expense)............. 1,068 1,776 19 -- (25) (32) 177 (10)
Gain on sale of investments........ -- -- -- -- 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 expense (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 and 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
======== ======== ======== ======== ======== ========= ========= =========
<CAPTION>
QUARTER ENDED
------------------------------------
1998
------------------------------------
MAR 31 JUNE 30 SEP. 30
--------- --------- ----------
<S> <C> <C> <C>
Revenue............................ $ 44,469 $ 53,713 $ 67,550
Other income, net.................. -- -- --
--------- --------- ----------
44,469 53,713 67,550
Operating costs and expenses:
Data communications and
operations..................... 36,666 41,943 51,908
Sales and marketing.............. 10,732 12,486 14,701
General and administrative....... 7,585 10,287 11,566
Depreciation and
amortization................... 9,465 12,889 14,658
Charge for acquired in-
process research
and development................ 7,000 20,000 13,400
--------- --------- ----------
Total operating costs and
expenses..................... 71,448 97,605 106,233
--------- --------- ----------
Loss from operations............... (26,979) (43,892) (38,683)
Interest expense................... (2,579) (16,892) (18,722)
Interest income.................... 585 6,059 4,747
Other income (expense)............. (99) 1,103 (301)
Gain on sale of investments........ -- -- 5,647
Equity in loss of affiliate........ -- -- --
--------- --------- ----------
Loss before income taxes........... (29,072) (53,622) (47,312)
Income tax expense (benefit)....... -- 29 36
--------- --------- ----------
Net loss........................... (29,072) (53,651) (47,348)
Return to preferred
shareholders................... (782) (763) (768)
--------- --------- ----------
Net loss available to common
shareholders................... $(29,854) $(54,414) $ (48,116)
========= ========= ==========
Basic and diluted loss per
share(1)....................... $ (0.67) $ (1.06) $ (0.93)
========= ========= ==========
Shares used in computing
loss per share (in
thousands)..................... 44,596 51,111 51,659
========= ========= ==========
</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 or year-to-date for 1998.
-69-
<PAGE>
<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
Charge for acquired in-process
research and development............ -- -- -- -- -- -- -- --
-------- -------- ------- -------- -------- ------- -------- --------
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 (expense)................... 6.2 8.8 0.1 -- (0.1) (0.1) 0.6 (0.1)
Gain on sale of investments.............. -- -- -- -- 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 expense (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)%
======== ======== ======= ======== ======== ======= ======== ========
<CAPTION>
QUARTER ENDED
---------------------------------
1998
---------------------------------
MAR 31 JUNE 30 SEP. 30
-------- --------- ---------
<S> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0%
Other income, net......................................... -- -- --
-------- --------- ---------
100.0 100.0 100.0
Operating costs and expenses:
Data communications and
operations........................................... 82.5 78.1 76.8
Sales and marketing..................................... 24.1 23.2 21.8
General and administrative.............................. 17.1 19.2 17.1
Depreciation and amortization........................... 21.3 24.0 21.7
Charge for acquired in-process
research and development............................. 15.7 37.2 19.8
-------- --------- ---------
Total operating costs and
expenses........................................... 160.7 181.7 157.3
-------- --------- ---------
Loss from operations...................................... (60.7) (81.7) (57.3)
Interest expense.......................................... (5.8) (31.4) (27.7)
Interest income........................................... 1.3 11.3 7.0
Other income (expense).................................... (0.2) 2.0 (0.4)
Gain on sale of investments............................... -- -- 8.4
Equity in loss of affiliate............................... -- -- --
-------- --------- ---------
Loss before income taxes.................................. (65.4) (99.8) (70.0)
Income tax expense (benefit).............................. -- 0.1 0.1
-------- --------- ---------
Net loss.................................................. (65.4)% (99.9)% (70.1)%
======== ========= =========
</TABLE>
Our quarterly operating results have fluctuated and will continue to
fluctuate from period to period depending upon such factors as:
. the success of our efforts to expand our customer base,
. changes in and the timing of expenditures relating to the continued
expansion of our 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 us or our competitors, and
. certain factors relating to our acquisition strategy as further
described under "--Liquidity and Capital Resources."
In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be relied
upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future. We
expect to focus in the near term on building and increasing our customer base
and increasing our network utilization both through internal growth and through
acquisitions which may require us from time to time to increase our expenditures
for personnel, marketing, network infrastructure and the development of new
services.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our 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 debt
and equity securities.
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Cash flows used in operating activities were $76.9 million and $13.0
million for the nine months ended September 30, 1998 and 1997, respectively.
Cash flows used in operating activities can vary significantly from
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<PAGE>
period to period depending upon our net income or loss in addition to the timing
of operating cash receipts and payments, especially accounts receivable, prepaid
expenses and other assets, and accounts payable and accrued liabilities.
Cash flows used in investing activities were $326.0 million and cash flows
provided by investing activities were $13.0 million for the nine months ended
September 30, 1998 and 1997, respectively. Purchases of short-term investments
related to the 10% Senior Notes offering during the nine months ended September
30, 1998 were $247.2 million, offset by proceeds from the sale of short-term
investments of $200.0 million. The change in restricted cash, including the
escrow for interest on the 10% Senior Notes, was $106.2 million. The expansion
of our network resulted in capital expenditures of $103.3 million and $29.1
million for the nine months ended September 30, 1998 and 1997, respectively
(which included capital expenditures financed under equipment financing
agreements aggregating $54.9 million and $20.0 million, respectively).
Acquisition activities resulted in the use of $123.8 million of cash for the
nine months ended September 30, 1998, net of cash acquired. Cash flows provided
by investing activities for the nine months ended September 30, 1997 benefited
from the sale in February 1997 of our software subsidiary for cash consideration
of $12.0 million and the receipt of $8.5 million as repayment of intercompany
debt owed by our software subsidiary.
Cash flows provided by financing activities were $654.2 million and cash
flows used in financing activities were $12.2 million for the nine months ended
September 30, 1998 and 1997, respectively. The financing cash flow in 1998
primarily relates to issuance of the 10% Senior Notes and borrowings under the
Credit Facility, offset by repayments on our financing facilities. During the
nine months ended September 30, 1998 and 1997, we made repayments aggregating
$61.5 million and $19.6 million, respectively, on such financing facilities.
As of September 30, 1998, we had $463.0 million of cash, cash equivalents,
restricted cash and short-term investments, and short-term investments and
marketable securities, including $122.8 million escrowed for the repayment of
interest on the 10% Senior Notes.
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, our net loss was the primary component of cash
used in operating activities, offset by significant non-cash depreciation and
amortization expenses relating to our 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 our
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 sale of our 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 us. 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 our behalf in conjunction with
the acquisition of iSTAR. This restriction was removed in February 1998 when we
finalized the funding for this acquisition. During 1997, we 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 us.
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, we completed a private placement of 600,000 shares of our Series B
Preferred Stock for gross proceeds of $30.0 million. In 1997, 1996 and 1995, we
made repayments aggregating $27.7 million, $19.8 million and $5.8 million,
respectively, on our 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, we had net
proceeds from three separate common and preferred stock offerings totaling
$146.9 million.
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<PAGE>
As of December 31, 1997, we had $54.0 million of cash, cash equivalents,
restricted cash and short-term investments.
CAPITAL STRUCTURE
Our capital structure at September 30, 1998 consisted of lines of credit,
capital lease obligations and notes payable (including the 10% Senior Notes),
preferred stock and common stock.
Total borrowings at September 30, 1998 were $817.7 million, which included
$44.7 million in current obligations and $773.0 million in long-term capital
lease obligations and notes payable. We also had $0.6 million of letters of
credit outstanding as of September 30, 1998. As of that date, the aggregate
unused portion under our various financing arrangements for purchases of
equipment and other fixed assets was $60.4 million. The aggregate unused portion
of our operating lines of credit (some of which are subject to a borrowing base
formula) was $0.4 million.
Prior to the closing of the First Initial Notes Offering, we repaid, with
other cash on hand, $108.5 million of borrowings outstanding under the Credit
Facility. Following the closings of the Initial Notes Offerings, we continue to
have borrowing capacity of up to $110 million under the Credit Facility, subject
to its terms.
Our bank financing arrangements in the United States, which are secured by
substantially all of our assets, require us to satisfy certain financial
covenants such as those relating to consolidated revenue, leverage, liquidity
and EBITDA (as defined therein), and prohibit us from paying cash dividends and
repurchasing our capital stock without the lender's consent. In particular, we
are prohibited from permitting:
. consolidated revenue for any period of four consecutive fiscal
quarters to be less than $215.0 million on or after December 31, 1998
but prior to June 30, 1999, $285.0 million on or after June 30, 1999
but prior to December 31, 1999, $350.0 million on or after December
31, 1999 but prior to June 30, 2000, $425.0 million on or after June
30, 2000 but prior to December 31, 2000, and $500.0 million on
December 31, 2000 and thereafter;
. the ratio of consolidated debt minus cash (excluding cash escrowed
with respect to the payment of obligations) to annualized consolidated
revenue for the most recent fiscal quarter for which financial
statements have been delivered (as adjusted to give pro forma effect
to any acquisitions completed during or after such fiscal quarter) to
exceed 2.5 to 1 at any time;
. the sum of cash (excluding cash escrowed with respect to the payment
of obligations) and available borrowing capacity under the Credit
Facility at any time to be less than $100.0 million; and
. EBITDA (as defined therein), to be less than negative $45.0 million,
negative $40.0 million, negative $29.0 million, negative $15.0
million, $0, $15.0 million, $25.0 million, $40.0 million and $50.0
million for any period of four consecutive fiscal quarters ending on
each of December 31, 1998, March 31, 1999, June 30, 1999, September
30, 1999, December 31, 1999, March 31, 2000, June 30, 2000, September
30, 2000 and December 31, 2000, respectively. See "Description of
Certain Indebtedness--Credit Facility."
In April 1998, we completed an offering of $600.0 million aggregate amount
of 10% Senior Notes and, in November 1998, we completed the Initial Notes
Offerings. The aggregate net proceeds of these offerings, after giving effect to
discounts, commissions and estimated expenses and the establishment of a $138.7
million escrow arrangement to fund when due the first five interest payments on
the 10% Senior Notes, were $785.1 million.
The indentures governing the 10% Senior Notes and the Notes contain certain
financial covenants with which we must comply relating to, among other things,
the following matters:
. limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such
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payment, repurchase or investment, certain operating cash flow
coverage tests are met, excluding certain permitted payments and
investments;
. limitation on our incurrence and our subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence,
our ratio of debt to annualized operating cash flow would be less
than or equal to 6.0 to 1.0 prior to April 1, 2001 and less than
or equal to 5.5 to 1.0 on or after April 1, 2001, excluding
certain permitted incurrences of debt;
. limitation on our incurrence and our subsidiaries' incurrence of
liens, unless the 10% Senior Notes and the Notes are secured
equally and ratably with the obligation or liability secured by
such lien, excluding certain permitted liens;
. limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the
payment of dividends or other distributions on their capital
stock, payment of indebtedness owed to us or to any of our other
subsidiaries, making of investments in us or in any of our other
subsidiaries, or transfer of any of their properties or assets to
us or any of our other subsidiaries, excluding certain permitted
encumbrances and restrictions;
. limitation on certain mergers, consolidations and sales of assets
by us or our subsidiaries;
. limitation on certain transactions with our affiliates;
. limitation on the ability of any of our subsidiaries to guarantee
or otherwise become liable with respect to any of our indebtedness
unless such subsidiary provides for a guarantee of the 10% Senior
Notes and the Notes on the same terms as the guarantee of such
indebtedness;
. limitation on certain sale and leaseback transactions by us or our
subsidiaries;
. limitation on certain issuances and sales of capital stock of our
subsidiaries; and
. limitation on the ability of us or our subsidiaries to engage in
any business not substantially related to a telecommunications
business. See "Description of Notes" and "Description of Certain
Indebtedness--10% Senior Notes."
In November 1997, we completed a private placement of 600,000 shares
of our 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 our option, additional shares of our Series B Preferred Stock. The
Series B Preferred Stock is convertible into a number of shares of our 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 common stock's then current market value. At the
third anniversary date, the conversion price may be reset, under certain
circumstances, to 95% of the common stock's then current market value. To
reflect the nature of these conversion rights, preferred stock has been reduced
by $1.5 million with a corresponding increase to capital in excess of par value.
The Series B Preferred Stock may be redeemed, at our 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 that may be made pursuant to the IRU Purchase Agreement, neither we nor
any of our subsidiaries will:
. redeem, purchase or otherwise acquire directly or indirectly any
common stock or other junior securities,
. 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
our 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
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. 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).
We may, however, redeem, purchase or otherwise acquire and set aside
funds for and apply funds to the purchase, redemption or acquisition of common
stock or other junior securities:
. for up to an aggregate amount not to exceed, at any point in time
the sum of: (1) $10.0 million plus (2) an amount equal to 100% of
the aggregate net cash proceeds received by us 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 (3) an amount equal to 50% of our
cumulative consolidated positive earnings before interest, taxes,
depreciation and amortization as reported by us in respect of each
fiscal quarter commencing with the fiscal quarter ending December
31, 1997, or
. pursuant to the right of first offer granted pursuant to the IRU
Purchase Agreement, provided that immediately after giving effect
thereto, our consolidated shareholders' equity will not be less
than $20.0 million.
We have a credit facility with a Canadian bank which provides
borrowing availability to our Canadian subsidiary in three components:
. a revolving credit facility of Cdn. $150,000;
. a term loan of Cdn. $1,000,000, having a balance outstanding of
Cdn. $281,000 as of September 30, 1998, repayable in February
1999; and
. an equipment leasing facility of Cdn. $1,000,000 having a balance
outstanding of Cdn. $773,000 as of September 30, 1998, and a final
maturity date of March 2001.
Borrowings under the revolving credit facility and the term loan bear
interest at the applicable prime rate of the bank plus 1.5%. Borrowings under
the equipment lease facility bear interest at an average rate of 8.7%. See
"Description of Certain Indebtedness--Canadian Credit Facility."
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of September 30, 1998, we had commitments to certain
telecommunications vendors totaling $80.2 million. The commitments require
minimum monthly usage levels of data and voice communications over the next five
years. Additionally, we have various agreements to lease office space and
facilities and, as of September 30, 1998, were obligated to make future minimum
lease payments of $35.5 million on non-cancellable operating leases expiring in
various years through 2005. We are obligated, under the terms of one of our
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 us and deployed in the customer's network. At September 30, 1998, we had
provided $1.4 million of equipment under this facility. In certain cases we also
obtain local customer circuits under multi-year agreements that permit us to
redesignate the circuit to a different customer but which obligate us for that
circuit until expiration.
In order to take full advantage of the bandwidth acquired from IXC, in
addition to other planned capital expenditures, we expect to incur capital
expenditures through the end of the year 2000 of up to $95.0 million. We expect
to incur these capital expenditures in the deployment of high activity POPs
throughout the United States 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, we expect to incur on an annual basis $1.2 million in operation and
maintenance fees for each 1,000 equivalent route miles of OC-48 bandwidth
accepted from IXC. Other planned capital expenditures expected to be incurred by
us over the next four years include up to $35.0 million in connection with the
anticipated build-out of our pan-European Internet network, including in
connection with our recent acquisition of IRUs in transatlantic
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STM-1 bandwidth connecting the United States, the United Kingdom and the
Netherlands, and for construction of our recently opened network operations
center in Switzerland. In addition, we expect to incur capital expenditures of
(1) approximately $45.0 million over the next several years in connection with
our acquisition, lighting and utilization of 18 dark fiber optic strands
connecting the New York City to Washington, D.C. metropolitan areas and major
metropolitan areas in between, (2) approximately $47.0 million in connection
with our recent acquisition of IRUs in transpacific DS-3 bandwidth connecting
the United States and Japan, and (3) in excess of $100.0 million of total costs
over the 25 year term of the agreement in connection with our agreement with a
group of leading global telecommunications companies to build the Japan-U.S.
Cable Network. We currently anticipate that these expenditures will be financed
through a combination of capital leases, a portion of the net proceeds from the
10% Senior Notes offering and the Initial Notes Offerings, and with other
sources of financing. We expect to continue to seek opportunities to acquire
bandwidth to enhance our global network capabilities.
We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth corresponding to the PSINet IRUs, in outfitting
our POPs with appropriate telecommunications and computer equipment, and in
controlling the pace and scope of our anticipated buildout of our international
Internet network, that we will have a reasonable degree of flexibility to adjust
the amount and timing of such capital expenditures in response to our then
existing financing capabilities, market conditions, competition and other
factors. Accordingly, we believe 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,
from the proceeds of the 10% Senior Notes offering and the Initial Notes
Offerings and from future equity or debt financings (which we presently expect
to be able to obtain when needed), will be sufficient to meet the currently
anticipated working capital and capital expenditure requirements of our
operations. There can be no assurance, however, that we will have access to
sufficient additional capital and/or financing on satisfactory terms to enable
us to meet our capital expenditure and working capital requirements. See "Risk
Factors--Need for Additional Capital to Finance Growth and Capital
Requirements."
As more fully described in "Notes to Consolidated Financial Statements
(Note 11 - Strategic Alliances, Acquisitions and Dispositions)," we could be
obligated in accordance with the Contingent Payment Obligation to provide IXC
with additional shares of our common stock and/or cash, at our sole option, as
of the Determination Date or the Acceleration Date (as defined), as applicable.
In the event the Contingent Payment Obligation to IXC becomes payable, we
presently believe that, because it may be satisfied by us, at our sole option,
by delivery of additional shares of common stock or cash or a combination
thereof, we 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 us. See
"Risk Factors--Risks Associated with Acquisitions of Bandwidth and Strategic
Alliance with IXC."
We have certain payment obligations related to earnout and purchase
price retention arrangements pursuant to certain agreements between us and third
parties.
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We anticipate that we 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 our existing
business. Certain of these strategic relationships may involve other
telecommunications companies that desire to enter into joint marketing and
services arrangements with us pursuant to which we would provide Internet and
Internet-related services to such companies. Such transactions, if deemed
appropriate by us, may also be effected in conjunction with an equity and/or
debt investment by such companies in us. Such relationships and acquisitions may
require additional financing and may be subject to the consent of our lenders
and other third parties.
We have not, in the past, used in any material respect financial
instruments as hedges against certain financial and currency risks or for
trading. However, as a result of the recent increase in our foreign operations,
we may begin to use various financial instruments, including derivative
financial instruments, in the ordinary course of business, for purposes other
than trading. These instruments could include letters of credit, guarantees of
debt, interest rate swap agreements and foreign currency exchange contracts
relating to intercompany payables of foreign subsidiaries. We do not intend to
use derivative financial instruments for speculative purposes. Foreign currency
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exchange contracts would be used to mitigate foreign currency exposure and with
the intent of protecting the U.S. dollar value of certain currency positions and
future foreign currency transactions. Interest rate swap agreements would be
used to reduce our exposure to risks associated with interest rate fluctuations.
By their nature, all such instruments would involve risk, including the risk of
nonperformance by counterparties, and our maximum potential loss may exceed the
amount recognized in our balance sheet. We would attempt to control our exposure
to counterparty credit risk through monitoring procedures and by entering into
multiple contracts.
RISKS ASSOCIATED WITH YEAR 2000
The commonly referred to Year 2000 ("Y2K") problem results from the
fact that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and developed
without considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. We have identified two main areas of
Y2K risk:
. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
. Computer systems or embedded chips of third parties including
(without limitation) financial institutions, suppliers, vendors,
landlords, customers, international suppliers of
telecommunications services and others ("Material Third Parties")
could be disrupted or fail, causing an interruption or decrease in
our ability to continue our operations.
We have developed, or are in the process of developing, detailed plans
for implementation and testing of any necessary modifications to our key
computer systems and equipment with embedded chips to ensure that they are Y2K
compliant. We have engaged a third party consultant to perform an assessment of
our systems, domestically and internationally. We expect that the assessment,
which is being done in stages, will be complete by December 31, 1998. We
anticipate that our domestic internal systems will be Y2K ready by June 30,
1999, and our international systems will be Y2K compliant by the end of the
third quarter of 1999, which is consistent with prior plans. We believe that
with these detailed plans and completed modifications, the Y2K issue will not
pose significant operational problems for us. However, if the modifications and
conversions are not made, or not completed in a timely fashion, the Y2K issue
could have a material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than
five percent (5%) of our information technology budget, but this amount will
increase as substantial consultants or personnel resources are required or if
operationally- important equipment must be remediated or replaced. The risk that
Y2K issues could present to us include, without limitation, disruption, delay or
cessation of operations, including operations that are subject to regulatory
compliance. In each case, the correction of the problem could result in
substantial expense and disruption or delay of our operations. The total cost of
Y2K assessments and remediation is funded through cash flows generated through
operations and available from other sources and, to date, we are expensing these
costs. The financial impact of making any required systems changes or other
remediation efforts cannot be known precisely at this time, but it is not
expected to be material to our financial position, results of operations, or
cash flows. We have not canceled any principal information technology projects
as a result of our Y2K effort, although we have rescheduled some tasks to
accommodate this effort.
In addition, we have identified and prioritized and are communicating
with Material Third Parties to determine their Y2K status and any probable
impact on us. We will continue to track and evaluate our long-term relationship
with Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material Third
Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer
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systems or operations due to Y2K non- compliance, it could affect our ability to
process transactions or otherwise engage in similar normal business activities.
For example, while we expect our internal systems, domestic and international,
to be Y2K ready in stages during 1999, we and our customers who communicate
internationally will be dependent upon the Y2K-readiness of many foreign
providers of telecommunication services and their vendors and suppliers. If
these providers and others are not Y2K ready, we and our customers will not be
able to send and receive data and other electronic transmissions, which would
have a material adverse effect on the business and revenues of us and our
customers. While many of these risks are outside our control, we have instituted
a program to identify Material Third Parties and to address any non-compliance
issues.
While we believe that we are adequately addressing the Y2K issue, there
can be no assurance that our Y2K analyses will be completed on a timely basis or
that the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We are
uncertain as to our most reasonably likely worst case Y2K scenario and have not
yet developed a contingency plan to handle a worst case scenario. We expect to
have a contingency plan to handle this situation by September 30, 1999. See
"Risk Factors--Risks Associated With Year 2000."
RECENT ACCOUNTING PRONOUNCEMENTS
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. We will adopt
the Statement's disclosure requirements in the financial statements as of and
for the year ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into such transactions in the future, we will
adopt the Statement's disclosure requirements in the financial statements for
the year ending December 31, 2000.
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BUSINESS
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 connections to businesses in 90 of the 100 largest metropolitan
statistical areas in the U.S. and in 12 of the 20 largest global
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,
security and voice-over-IP 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.
PSINet's mission is to build a premier IP-based communications company.
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. By providing services and products that enhance its customers'
business processes through the effective use of the Internet and related tools,
the Company has increased revenues from $8.7 million in 1993 to $121.9 million
in 1997, representing a 94% compounded annual growth rate. Over the last twelve
months, PSINet has experienced rapid growth through the acquisition of 15 ISPs
in eight of the 20 largest global telecommunications markets. On a pro forma
basis, after giving effect to these recent acquisitions, revenues for the nine
months ended September 30, 1998 would have been approximately $231.3 million.
The Company owns and operates a technologically advanced, high-speed
frame relay network. As of October 1, 1998, the PSINet network served over
53,000 business accounts, including 141 ISPs, and connected to over 500 POPs in
12 countries. The PSINet network is one of the primary backbones that comprise
the Internet and is connected with other large ISPs at 27 public and private
peering points. The Company believes that its scaleable IP-optimized network, in
combination with its highly trained, around-the-clock customer care team,
enables the Company to deliver superior performance and reliability.
INDUSTRY OVERVIEW
OVERVIEW. Internet access services is one of the fastest growing
segments of the global telecommunication services market place. According to
IDC, 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" 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 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 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.
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MARKET SIZE AND GROWTH. The domestic Internet service market is
forecast to continue its rapid growth for the foreseeable future. IDC estimates
that the U.S. Internet service market's aggregate annual revenues may grow from
$3.3 billion in 1996 to $18.3 billion in the year 2000, reflecting a compounded
annual growth rate of over 50%. According to IDC estimates, in 1996, business
connectivity and value-added services represented approximately 62% of this
market.
Growth in U.S. demand for business connectivity is being driven by a
number of factors, including an increase in online market penetration,
particularly in the small and medium-sized business segments, and increased use
of the Internet by businesses. Specifically, IDC forecasts dedicated business
connectivity revenues to grow from approximately $1.9 billion in 1996 to $6.7
billion in 2000, representing a compounded annual growth rate of approximately
36%. In addition, as more businesses evolve from establishing an Internet
presence to utilizing secure connectivity between geographically-dispersed
locations, remote access to corporate networks and business-to-business commerce
solutions, the demand for high quality Internet connectivity and value-added
services and products should grow. IDC forecasts that value-added services
revenues will grow rapidly from $125.0 million in 1996 to $7.0 billion in 2000,
representing a compounded annual growth rate of approximately 174%.
In Europe, IDC estimates that the total market for Internet access
services and products reached $676.0 million in 1996 with business connectivity
and value-added services representing approximately 56% of the market. IDC
forecasts the European Internet access and services market to grow at a compound
rate of over 70% per annum to approximately $6.1 billion in 2000 with business
connectivity and value-added services representing approximately 65% of the
market. The Company believes, based on its operational knowledge of and
experience in such markets, that the Canadian and Asian Internet access services
and products markets should grow at least at the same rate as the European
market.
GROWTH IN BUSINESS USE OF THE INTERNET. 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. Moreover, businesses are seeking national and global ISPs that can
securely and efficiently connect multiple, geographically-dispersed locations,
provide global remote access capabilities and offer a full range of value-added
services that meet their particular networking needs.
THE PSINET SOLUTION
PSINet provides high quality IP-based services and products that are
tailored to meet the needs of businesses. The Company offers Internet access
services ranging from low-cost dial-up connections to high-speed continuous
access in the U.S. and 12 of the 20 largest international telecommunications
markets. The Company also offers a variety of value-added services such as the
provisioning of corporate intranets, Web hosting, security, multi-currency
electronic commerce solutions and advanced applications which can be bundled
with Internet access services to provide complete, turnkey solutions. 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.
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THE PSINET STRATEGY
PSINet's objective is to be one of the top three providers of Internet
access services and related communications services and products in each of the
20 largest global telecommunications markets. The principal 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, which, as of
October 1, 1998, consisted of approximately 340 individuals (more than
half of whom are employed outside of the United States). PSINet's sales
people have a strong Internet technical background and product
knowledge, which assist them in effectively marketing the Company's
products and services to 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. As of October 1,
1998, the Company's reseller and referral program consisted of
approximately 720 resellers and referral sources in the United States
and 730 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 American Communications Network, Inc.,
ATX Telecommunications Services, e.Spire Communications, Inc. and IXC,
to offer the Company's IP-based services and products to the carriers'
customer base on a private label or co-branded basis as part of an
integrated package of telecommunications and Internet services and
products.
. ACCELERATE GROWTH THROUGH TARGETED ACQUISITIONS. PSINet intends to
accelerate its growth domestically and expand its presence in key
markets internationally by acquiring primarily business-focused ISPs
and related businesses and assets. The Company intends to acquire local
or regional ISPs in markets where it has an established POP and can
benefit from the increased network utilization and local sales force.
Given an increasingly competitive environment and the large capital
requirements required to offer a broad base of IP services and products
and to develop access to a reliable, high-speed global network, the
Company believes that undercapitalized local and regional ISPs will
continue to benefit from combining their operations with the Company.
In addition, the Company believes that its entrepreneurial environment
will be attractive to and help retain key employees of acquired ISPs.
The Company also intends to make strategic acquisitions in the eight
largest global telecommunications markets where it currently does not
have a presence or in those global telecommunications markets where the
Company's current presence would be significantly enhanced. The Company
may also seek to acquire other businesses relating or complementary to
the Company's existing business to broaden its market presence and
expand its strengths in key product areas, such as application, Web
hosting or data center companies, or data-processing companies with
legacy networks which would benefit by migrating to IP-based
technologies. The Company seeks acquisition targets that, once
integrated into the Company's existing operations, generally will be
accretive to EBITDA. The Company plans to effect future acquisitions
through the use of existing cash, cash generated from operations and
from then available credit facilities, issuances of shares of its
common stock and preferred stock and a portion of the net proceeds of
the Initial Notes Offerings.
. CAPTURE ECONOMIES OF SCALE BY INTEGRATING OPERATIONS. After PSINet has
acquired an ISP, it typically acts to generate economies of scale and
cost savings by eliminating redundant operations and network
architecture and migrating the acquired ISP's customers on to the
PSINet network. Connecting an acquired ISP's customers to the PSINet
network typically entails minimal incremental data communication costs
and enables the Company to significantly reduce its transit costs. The
Company seeks to generate cost savings by centralizing back office
operations, such as network monitoring, customer billing, human
resources and accounting. The Company also endeavors to realize
efficiencies by consolidating an acquired ISP's purchasing, product
development and marketing and sales operations into the Company's
established programs. PSINet believes this integration of operations
improves the quality, breadth, consistency and scaleability of the
services and products offered to customers of acquired ISPs.
. INCREASE SALES OF VALUE-ADDED SERVICES AND PRODUCTS. PSINet intends to
capitalize on the trend of companies to increasingly outsource their
critical business applications and integrate Web-based services
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and products as part of their core data networking strategy by
aggressively marketing value-added services and products to its
existing account base and prospective business customers. The Company
currently offers a number of value-added services, such as corporate
intranets, Web hosting and collocation, remote user access, multi-
currency electronic commerce, security and voice-over IP services, that
can be bundled with Internet access services to provide complete,
turnkey solutions. In addition, the enhanced capacity resulting from
the Company's recent acquisitions of global network bandwidth will
enable the Company to offer a wider variety of high quality Internet
and Internet-related services and products, such as IP-based voice,
video and other multimedia services. 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 services. 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. To improve upon its ability to
provide these value-added services, the Company recently opened a new
global Internet hosting center for dedicated business applications,
completed construction of an additional global Internet hosting center
in Switzerland, and plans to construct and open eight additional global
Internet hosting centers before January 1, 2000.
. CONTINUE TO ACQUIRE NETWORK FACILITIES TO REDUCE COSTS. PSINet remains
focused on reducing costs as a percentage of revenue by maintaining a
scaleable network and increasing utilization of and controlling
strategic assets, such as telecommunications bandwidth through IRUs and
acquisition of dark fiber. 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 has enhanced its network significantly through
several strategic acquisitions of fiber-based telecommunications
bandwidth, including acquisitions of IRUs or other rights in up to
10,000 equivalent route miles of OC-48 capacity across the United
States, STM-1 transatlantic capacity connecting the United States, the
United Kingdom and continental Europe, 18 dark fiber optic strands
connecting the New York City and Washington, D.C. metropolitan areas
and major metropolitan areas in between, six DS-3s connecting the
United States and Japan, and an agreement with other leading global
telecommunications companies to build the Japan-U.S. Cable Network.
These transactions represent an important strategic step in PSINet's
objective to be a leading global facilities-based ISP. Additionally,
the Company continues to evaluate alternative broadband local loop
strategies, including wireless, xDSL and cable modem solutions.
. ENHANCE BRAND NAME RECOGNITION. PSINet was the first commercial ISP
and has established significant brand recognition among information
technology professionals in the United States. In 1998, the Company
launched a major program to develop and enhance the PSINet brand name
as a leading global facilities-based ISP. The Company's branding
program includes the rebranding of acquired ISP operations and services
under the PSINet name and the select use of television commercials,
print ads and direct mailings which target key decision makers in the
United States and abroad. By combining this branding program with the
Company's multiple sales channel distribution strategy, PSINet seeks to
expand market share, increase customer loyalty and develop global brand
recognition in the Internet market.
. BUILD STRONG CUSTOMER LOYALTY. PSINet believes that superior customer
service is a critical element in attracting and retaining 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. 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 recently opened a fully redundant NOC in Switzerland and
anticipates adding a third NOC in Asia in 1999. By maintaining
geographically centralized support services, the Company seeks to
increase operational efficiencies and enhance the quality, consistency
and scaleability of its customer care.
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,
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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 services 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 Kbps to 45 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.
. 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 at speeds of up to 56 Kbps. PSINet's LAN-ISDN
service provides dial-up access through digital ISDN lines at
speeds of up to 128 Kbps.
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, Web
hosting, electronic commerce, collocation, remote access, security services,
applications, including fax and electronic mail, and voice-over-IP designed to
meet the diverse networking needs of businesses. In addition, in order to
capitalize on its technologically advanced, high-capacity network, 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 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.
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. 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 first 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
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 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.
. VOICE-OVER-INTERNET PROTOCOL. PSIVoice(SM) enables companies with
multiple business locations to communicate by voice among these
sites and with select third parties, such as business partners,
customers and suppliers, outside their corporate intranets via
low-cost IP telephony links. PSIVoice is a turnkey service
allowing for such enhanced features as desktop faxing, conference
calling and unified messaging services and includes all the
hardware and network management services required for high
quality, private-line voice connections among geographically
dispersed offices. By providing voice
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and Internet traffic on the same circuit, customers are able to
use existing bandwidth more efficiently, resulting in savings of
20%-50% over traditional long-distance telephone calling.
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 consumer-based ISPs,
such as Earthlink Network, Inc. and MindSpring Enterprises, Inc., 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, the Company has the opportunity to significantly increase
its distribution channel.
. CONSUMER DIAL-UP ACCESS. The Company provides dial-up access to
consumer-oriented 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 287 POPs in the
United States and Canada as of October 1, 1998. 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. In addition, in
certain domestic and international markets, the Company provides
dial-up access services directly to individual customers.
. 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, 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.
. WEB FILTERING. PSIChoice(SM) enables PSINet's carrier and ISP
customers to offer their consumers the option to protect
themselves from objectionable content on the World Wide Web by
restricting access to sites that contain undesirable information.
PSIChoice is hosted on the technologically advanced PSINet network
and utilizes content proxy services to screen Web content accessed
by end-users. PSICHOICE requires no software implementation on the
consumer's computer and is initially available in the United
States.
SERVICES AND PRODUCT DEVELOPMENT. As part of PSINet's ongoing efforts
to develop IP-based services and products that enable businesses to take maximum
advantage of their corporate networks and the Internet, PSINet has continually
invested in service and product development programs. Since its inception, the
Company has introduced to the Internet marketplace several major new services,
including the first LAN-based dial-up TCP/IP access service, the first managed
Internet security service, the first ISP electronic commerce service and the
first ISP intranet service. Major services and products currently under
development include multimedia services, such as video conferencing over the
Internet, and higher speed connectivity services.
PSINET'S NETWORK
OVERVIEW. PSINet owns and operates a global high capacity, IP-optimized
network which, as of October 1, 1998, was comprised of over 500 POPs, of which
245 were within the United States with the remainder located throughout Canada,
Europe and Asia. The Company's network employs architecture designed to deliver
superior dedicated or dial-up Internet connections, reliable packet control and
intelligent data traffic routing. PSINet has strengthened its position as a
leading facilities-based ISP through several recent acquisitions of high
capacity,
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fiber optic telecommunications bandwidth and other strategic network assets that
have significantly reduced the Company's incremental data communications costs.
The combination of the Company's technologically advanced network architecture
and global network infrastructure has positioned the Company to deliver the high
level of IP-based services, such as Web hosting and a broad array of multimedia
Internet services, increasingly demanded by businesses.
NETWORK ARCHITECTURE. 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 scaleable,
flexible, fault tolerant, open standards-based and remotely manageable.
. SCALEABLE. 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 over 500 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 NOCs, 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.
GLOBAL NETWORK INFRASTRUCTURE. As part of PSINet's ongoing efforts to
control strategic assets and further expand and enhance its network, the Company
has recently acquired or agreed to acquire significant amounts of fiber-based
telecommunication bandwidth located throughout the world.
. In February 1998, PSINet acquired from IXC IRUs in up to 10,000
equivalent route miles of OC-48 network bandwidth across the
United States (including such major metropolitan areas as Atlanta,
Chicago, Cleveland, Dallas, Houston, Los Angeles, New York,
Philadelphia, Phoenix and Washington D.C.), in exchange for
approximately 20% of the Company's Common Stock. As of October 1,
1998, approximately 5,800 route miles of OC-12 (equivalent to
approximately 1,450 route miles of OC-48) bandwidth, connecting
New York and Los Angeles (and certain major cities in between),
have been accepted by the Company and placed into operation on the
PSINet network and approximately 7,000 additional route miles of
OC-12 bandwidth, extending the network to, among other locations,
Washington, D.C., Atlanta, Houston and San Francisco (and certain
major cities in between), are
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expected to be placed into operation prior to the end of the first
quarter of 1999. The Company currently anticipates delivery of the
remaining bandwidth from IXC over the next 18 to 24 months. For
more detailed information concerning PSINet's strategic alliance
with IXC, see "Certain Transactions--Strategic Alliance With IXC."
. In March 1998, PSINet acquired from Global Crossing Ltd. IRUs in
12,000 route miles of STM-1 (equivalent to OC-3) network bandwidth
on the Atlantic Crossing undersea fiber optic system connecting
the United States, the United Kingdom and continental Europe. As
of October 1, 1998, the portion of this bandwidth linking New York
City and the United Kingdom is operational and integrated with the
OC-12 bandwidth previously acquired from IXC.
. In May 1998, PSINet acquired from Metromedia Fiber Network 18
dark fiber optic strands connecting the New York City and
Washington, D.C. metropolitan areas and major metropolitan areas
in between. Using currently available technology, this fiber will
be capable of carrying 96 Gbps of data in the New York to
Washington, D.C. corridor, which currently handles approximately
35% of the telecommunications traffic in the United States and is
a vital route connecting Internet traffic between Europe and the
United States. The Company expects to receive delivery of the 18
dark fibers on or about the end of 1998.
. In August and September 1998, PSINet acquired from Pacific
Telecom Cable, Inc. in the United States and from International
Digital Communications, Inc. and Cable & Wireless PLC in Japan
bandwidth capacity equivalent to six DS-3s in the North Pacific
Cable undersea fiber optic system connecting the United States and
Japan through a combination of IRUs and long-term capital leases.
As of October 1, 1998, one DS-3 equivalent connecting Portland,
Oregon and Tokyo is operational and the Company expects a second
DS-3 (also linking Portland and Tokyo) to become operational prior
to the end of 1998, with the remainder of the capacity expected to
become operational in stages during the first half of 1999.
. In August 1998, PSINet entered into an agreement with a group of
leading telecommunications companies to build the Japan-U.S. Cable
Network, an undersea cable system connecting the United States
(through California and Hawaii) and Japan, on which the Company
will own IRUs in 22 STM-1s (increasing to 30 STM-1s as the network
is upgraded) of bandwidth. Upon completion, the Japan-U.S. Cable
Network will initially operate at 80 Gbps, increasing to 155 Gbps
as the network is upgraded, and is currently anticipated to become
operational in the second quarter of 2000. Completion of the
undersea cable system is subject to a number of risks associated
with construction projects. See "Risk Factors--Risks Associated
with Acquisitions of Bandwidth and Strategic Alliance With IXC."
PSINet expects to further expand its network in North America, Europe
and Asia, as well as in other select international markets, and to acquire
fiber-based IRUs and dark fiber in these regions to support demand growth and
reduce costs. The Company is targeting cities with a high concentration of
businesses for global expansion with the objective, over the long-term, of
providing local access to its services and products to 80% of the businesses in
those cities. In furtherance of this plan, the Company recently entered into
agreements in Germany and Switzerland that enable it to offer local telephone
call access to the Company's services and products throughout each of these
countries. The Company already offers local call access to 80% of the business
markets in the United States, Canada, Japan, the Netherlands, Hong Kong and
France.
The following table summarizes the Company's bandwidth facilities as of
October 1, 1998.
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<TABLE>
<CAPTION>
LOCATION CAPACITY CONNECTION POINTS OWNERSHIP
-------------- --------------------------- --------------------------------------- ---------------
<S> <C> <C> <C>
United States 5,800 route miles of OC-12 New York--Chicago--Dallas--Los Angeles IRU
7,000 route miles of OC-12 Expanding to Washington, D.C.--Atlanta--Houston IRU
--San Francisco (During Q1 1999)
18 high capacity dark fibers New York-Washington, DC (on or about year-end 1998) Purchased
T-3 Intercontinental Leased
Trans-Atlantic 12,000 miles of STM-1 (OC-3) New York, NY--London, England IRU
Trans-Pacific 6,000 miles of 6 DS-3s US--Japan IRU/Long-term lease
22 STM-1s (increasing to 30) Japan-Hawaii-US (During Q2 2000) IRU
Canada T-3 Intercontinental Leased
Europe E-1 Intercontinental Leased
</TABLE>
INTERNET DATA CENTERS. The Company has recently opened a
technologically advanced, 10,000 square foot, global Internet hosting facility
in Herndon, Virginia, completed construction of a 10,000 square foot global
Internet hosting facility in Neuchatel, Switzerland, is currently in the process
of constructing a planned 45,000 square foot global Internet hosting facility in
London, and has plans for construction of seven additional global Internet
hosting facilities throughout the world, including in the United States, Canada,
England, France, Germany, the Netherlands, Switzerland and Japan, anticipated to
be completed by the end of 1999. The additional facilities will range from
10,000-50,000 square feet, will be specifically designed for application
hosting, collocation services and high capacity access to the PSINet network,
and will be equipped with uninterruptible power supply and backup generators,
fire suppression, raised floors, HVAC, 24-hours per day, seven-days per week
operations and physical security. The Company's partnership with Hewlett-Packard
Company further supports its ability to provide high-end Web services consisting
of shared hosting, dedicated hosting and collocation hosting.
PRI CIRCUITS. In key geographically-dispersed cities located along the
configuration of the PSINet network (e.g., Atlanta, Chicago, Dallas, Los Angeles
and Washington, D.C.), PSINet is also investing in PRI circuits, which provide
dial-up access to its POPs, in order to increase the capacity available for its
consumer-oriented ISP customers. Through agreements with certain CLECs, the
Company has lowered its average cost per PRI by approximately 15-20%. As of
October 1, 1998, the Company has more than doubled its dial-up capacity from
December 31, 1997 as a result of its investment in PRIs, which the Company
believes will enhance revenue growth in its Carrier and ISP Services business
unit. As of October 1, 1998, nearly 100% of the Company's dial-up capacity is
accessible at 56 Kbps modem speeds. The Company anticipates that all newly
deployed modems will support this technology.
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. As of October 1, 1998, the Company maintained more than 2,000 Mbps (2.0
Gbps) of peering connectivity with 20 private agreements and seven public
connections strategically placed throughout the United States, the United
Kingdom, 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
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experiences service interruptions or other difficulties. PSINet has recently
opened its European Technical Center 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 during 1999.
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 marketing
resources of the resellers, 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, which, as of
October 1, 1998, consisted of approximately 340 individuals (more than 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 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 who, 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, as
of October 1, 1998, approximately 720 formal and informal arrangements in the
United States and 730 outside of 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 Hewlett-Packard Company, a
provider of computer hardware and networking products. 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
18 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 customers and
increase the Company's network utilization. It is anticipated that, in most
cases, 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.
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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 ISPCon, 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 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 October 1, 1998, over 53,000 business customers,
including 141 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. The following is a list of certain business customers in
each of ten selected industry groups to which the Company provided Internet
access and related services in September 1998:
AEROSPACE AND DEFENSE COMPUTER & DATA SERVICES
Boeing Company Automatic Data Processing, Inc.
Lockheed Martin Corporation Computer Sciences Corporation
Northrop Grumman Corporation Dun & Bradstreet Corp.
Raytheon Corporation Electronic Data Services
Microsoft Corporation
Oracle Corporation
Xerox Corporation
AIRLINES ELECTRONICS
AMR/The Sabre Group Applied Material, Inc.
Continental Airlines, Inc. Litton Applied Technology
Trans World Airlines, Inc. Motorola, Inc.
United Airlines, Inc.
BANKS ISPS
BankAmerica Corporation Earthlink Network, Inc.
Chase Manhattan Bank MindSpring Enterprises, Inc.
First Chicago NBD Corporation IDT Corporation
First Union Corporation WebTV Networks, Inc.
Wells Fargo Bank NA
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FINANCIAL SERVICES TELECOMMUNICATIONS
American Express Company AT&T Corporation
Cigna Corporation Bell Atlantic Corporation
Donaldson, Lufkin & Jenrette Bell South Corporation
Federal National Mortgage Association GTE Corporation
Lehman Brothers Inc. MCI WorldCom
Merrill Lynch & Co.
Morgan Stanley Dean Witter & Co.
PaineWebber Incorporated
Travelers Group Inc.
COMPUTERS
Apple Computer, Inc.
Compaq Computer Corporation
Hewlett-Packard Company
International Business Machines Corporation
Lucent Technologies, Inc.
Sun Microsystems, Inc.
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. As of October 1, 1998, the
Company's technical support group consisted of over 540 individuals. 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 has recently opened a
fully redundant NOC in Switzerland and anticipates adding a third in Asia in
1999. 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 implementing a new
high quality, cost-effective and scaleable billing system to replace its
existing system in order to provide customers on a global basis with uniform and
easy-to-understand invoicing.
COMPETITION
The market for Internet connectivity and related services is extremely
competitive. The Company anticipates 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.
The Company believes that a reliable international network,
knowledgeable salespeople and the quality of technical support currently are the
primary competitive factors in the Company's targeted market and that the price
is usually secondary to these factors.
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
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communications providers and on-line service providers. While the Company
believes that its network, products and customer service distinguish it from
these competitors, some of these competitors have a significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than the Company.
ISPS. According to industry sources, there were 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 competitors include
other ISPs with a significant national presence which focus on business
customers, such as UUNet Technologies, Inc. ("UUNet"), GTE Internetworking
(formerly BBN), Concentric Network and DIGEX. 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 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, MCIWorldCom, Cable &
Wireless/IMCI and 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 ILECs, including the 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 recent
MCI/WorldCom merger (and the WorldCom/MFS/UUNet consolidation), GTE's recent
acquisition of BBN, the recent acquisition by ICG Communications, Inc. of Netcom
and the recent acquisition by Frontier Corp. of Global Center 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 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' DirecPC product that provides 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; Cellularvision's
announcement that it is offering Internet access vial high-speed wireless LMDS
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. The Company believes that there is a trend toward
horizontal integration involving cable companies through acquisitions or joint
ventures between cable companies and telecommunications carriers. The
acquisition of TCI by AT&T is indicative of this trend.
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. However, America
Online's recently announced acquisition of Netscape Communications Corporation
and related strategic alliance with Sun Microsystems will, if completed, enable
it to offer a broader array of IP-based services and products that could
significantly enhance its ability to appeal to the business marketplace and, as
a result, compete more directly with the Company. While CompuServe recently
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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 is a key 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
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; Pricing Fluctuation."
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 a number of U.S. and foreign
legislative and other initiatives seeking to control or affect the content of
information provided over the Internet. Some of these initiatives would impose
criminal liability upon persons sending or displaying, in a manner available to
minors, indecent material or material harmful to minors. Liability would also be
imposed on an entity 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, including the Company.
Both the provision of Internet access service and the provision of
underlying telecommunications services are affected by federal, state and local
regulation. The Federal Communications Commission ("FCC") exercises jurisdiction
over all facilities of, and services offered by, telecommunications 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, as a result of the passage of the
Telecommunications Act of 1996 (the "1996 Act"), state and federal regulators
share responsibility for implementing and enforcing the domestic pro-competitive
policies of the 1996 Act. In particular, state regulatory commissions have
substantial oversight over the provision of interconnection and
non-discriminatory network access by incumbent local exchange carriers
("ILECs"). Municipal authorities generally have some jurisdiction over access to
rights of way, franchises, zoning and other matters of local concern.
PSINet's Internet operations are not currently subject to direct
regulation by the FCC or any other U.S. governmental agency (other than
regulations applicable to businesses generally). However, the FCC continues to
review its regulatory position on the usage of the basic network and
communications facilities by ISPs. Although in an April 1998 Report, the FCC
determined that ISPs should not be treated as telecommunications carriers and
therefore not regulated, it is expected that future ISP regulatory status will
continue to be uncertain. Indeed, in that report, the FCC concluded that certain
services offered over the Internet, such as phone-to-phone IP telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings, and their non-regulated status may have to be re-examined.
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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
Regional Bell Operating Companies ("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, and that decision has been upheld by the reviewing
court, further regulatory and legislative consideration of this issue is likely.
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.
In addition to its Internet activities, PSINet has recently focused
attention on acquiring telecommunications assets and facilities, which is a
regulated activity. The Company's wholly-owned subsidiary, PSINetworks Company,
has received an international Section 214 license from the FCC to provide global
facilities-based telecommunications services, subjecting it to regulation as a
non-dominant international common carrier. In addition, the Company's
wholly-owned subsidiary, PSINet Telecom UK Limited, has received an
international facilities license from DTI and OFTEL, the responsible
telecommunications regulatory bodies in the United Kingdom. Generally, the FCC
and OFTEL have chosen not to closely regulate the charges or practices of
non-dominant carriers, such as our subsidiaries. Nevertheless, these regulatory
agencies act upon complaints against such carriers for failure to comply with
statutory obligations or with the rules, regulations and policies of such
regulatory agencies. These regulatory agencies also have 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, such regulatory agencies are unlikely to do so. As the Company
enters new markets, it anticipates obtaining similar licenses as required by
applicable telecommunications rules and regulations in order to acquire and
maintain telecommunications assets and facilities in such countries.
The laws relating to the provision of telecommunications services in
other countries, and in multinational organizations such as the International
Telecommunications Union, are also undergoing a process of development. As the
Company continues its program of acquisition and expansion into international
markets, these laws will have an increasing impact on the Company's operations.
There can be no assurance that new or existing laws or regulations will not have
a material adverse effect on the Company.
PSINetworks Company has also received competitive local exchange
carrier ("CLEC") certification in Colorado and Texas, has applied for CLEC
certification in Virginia, California and New York, and is considering the
financial, regulatory and operational implications of becoming a CLEC in certain
other states. As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, the Company could become
subject to further regulation by the FCC and/or another regulatory agency,
including state and local entities.
The 1996 Act has caused fundamental changes in the markets for local
exchange services. In particular, the 1996 Act and the FCC rules issued pursuant
to it mandate competition in local markets and require that ILECs interconnect
with CLECs. Under the provisions of the 1996 Act, the FCC and state public
utility commissions share jurisdiction over the implementation of local
competition: the FCC was required to promulgate general rules and the state
commissions were required to arbitrate and approve individual agreements.
However, the FCC interconnection rules implementing the 1996 Act were appealed
and, in the case of the "national pricing" rules, vacated. The Supreme Court has
agreed to review this lower court decision and heard oral arguments on this
mater on October 13, 1998. Pending the Supreme Court's decision, state public
utility commissions are free to develop independent pricing policies for
interconnection, unbundled access, resale, and transport and termination of
local telecommunications traffic.
A critical issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic. The Company
believes that, under the 1996 Act and current FCC rules, CLECs are entitled to
receive reciprocal compensation from ILECs. However, some ILECs have disputed
payment of reciprocal compensation for Internet traffic, arguing that ISP
traffic is not local traffic. Most states have required ILECs to pay ISPs
reciprocal compensation. However, federal regulators and some state regulators
are currently considering the proper jurisdictional classification of local
calls placed to an ISP and whether ISP calling triggers an obligation to pay
reciprocal compensation. On October 30, 1998, the FCC determined that dedicated
Digital Subscriber Line
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service is an interstate service and properly tariffed at the interstate level.
However, the FCC specifically did not apply this decision to the question of
whether local exchange carriers are entitled to receive reciprocal compensation
when they deliver circuit-switched dial-up traffic to ISPs. It is expected that
the FCC will address this question in the near future. There can be no assurance
that any FCC decision on this matter will favor the Company's position. An
unfavorable result may potentially have an adverse effect on the Company's
potential future revenues as a CLEC as well as increasing its costs for PRIs in
general.
As PSINet becomes a competitor in local exchange markets, it will
become subject to state requirements regarding provision of intrastate services.
This may include the filing of tarriffs containing rates and conditions. As a
new entrant, without market power, the Company expects to face a relatively
flexible regulatory environment. Nevertheless, it is possible that some states
could require the approval of the public utilities commission for the issuance
of debt or equity or other transactions which would result in a lien on the
Company's property used to provide intrastate services.
EMPLOYEES
As of October 1, 1998, the Company had approximately 1,643 full-time
employees (735 in the United States and 908 outside of the United States),
including approximately 840 in data communications and operational positions,
522 in sales and marketing and 281 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.
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, and 14,200 square feet of this space 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.
All of the Company's regional offices and subsidiaries also lease their
facilities, except for the Company's principal European administrative,
operational, marketing and sales facilities, which total approximately 3,900
square feet and are owned by the Company in Switzerland. The Company also 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.
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 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" and
"Risk Factors--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 dated as of September 19, 1996 previously entered into
by 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 purpose of building an
Internet network across Europe and
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providing Internet-related services in Europe. Such investment group was to
invest up to $41.0 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 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 $25.0 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. The arbitration commenced on
October 19, 1998 in London, England. While the ultimate outcome of the
arbitration is uncertain, the Company believes that it has meritorious defenses
to Chatterjee's claim and intends to continue to conduct a vigorous defense. An
unfavorable outcome in this matter could have a material adverse effect on the
Company's business, financial condition and results of operations.
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.
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MANAGEMENT
The following sets forth certain information as of November 15, 1998
concerning the directors and certain executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
SENIOR EXECUTIVE OFFICERS:
William L. Schrader(1)(3)................... 46 Chairman of the Board of Directors and Chief
Executive Officer (Founder)
Harold S. Wills............................. 56 President, Chief Operating Officer and Director
David N. Kunkel............................. 55 Executive Vice President, General Counsel and
Director
Edward D. Postal............................ 43 Senior Vice President and Chief Financial Officer
Geoffrey E. Axton........................... 41 Senior Vice President, Business and Corporate
Development
Harry G. Hobbs.............................. 44 Senior Vice President and President, PSINet Europe
Chi H. Kwan................................. 47 Senior Vice President and President, PSINet
Asia/Pacific
Robert D. Leahy............................. 46 Senior Vice President, Corporate Marketing and
Communications
CERTAIN OTHER OFFICERS:
Sandra L. Blaisdell......................... 43 Vice President, Field Services
James R. Davin.............................. 42 Vice President and Chief Technical Officer
E. A. Davis................................. 52 President, Network Division
Mark S. Fedor............................... 34 Vice President, Engineering
James A. Haid............................... 49 Vice President, Network Operations
John F. Kraft............................... 41 Vice President, Carrier and ISP Services
Mitchell Levinn............................. 39 Vice President, Technical Design of Data Center/
Web Hosting
Michael Mael................................ 42 Vice President, Application and Web Services
Michael J. Malesardi........................ 38 Vice President and Controller
William A. Opet............................. 42 President, Corporate Network Services
Lawrence Winkler............................ 33 Vice President and Treasurer
NON-EXECUTIVE DIRECTORS:
William H. Baumer(1)(2)(3).................. 66 Director
Ian P. Sharp(2)(3).......................... 66 Director
Ralph J. Swett(1)(2)........................ 64 Director
</TABLE>
_______________
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Financing Committee.
WILLIAM L. SCHRADER is the founder of the Company and has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since its inception and as President of the Company from its inception to
September 1998. Prior to forming the Company, Mr. Schrader served as President
and Chief Executive Officer of NYSERNet Inc., a provider of data networking
services in New York State ("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. Mr. Schrader's term of office as a director of
the Company expires in 1999.
HAROLD S. WILLS has served as President of the Company since September
1998 and as a director and Chief Operating Officer of the Company since April
1996, and served as Executive Vice President of the Company from
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April 1996 to September 1998. Mr. Wills served as Chief Operating Officer of
Hospitality Information Networks, Inc., a provider of information services for
the hospitality industry, from July 1995 through January 1996. Mr. Wills also
held various positions including, Managing Director, International Computer
Services, Technical Service Director and Sales Director of Granada Group PLC, a
computer services provider, from September 1991 through September 1995. Mr.
Wills's term of office as a director of the Company expires in 2000.
DAVID N. KUNKEL has served as Executive Vice President since 1998, 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. Mr. Kunkel's term of office as a director of the Company expires in
1999.
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 in 1985, and, prior thereto, held various
positions at Touche Ross & Co. (currently Deloitte & Touche LLP).
GEOFFREY E. AXTON has served as Senior Vice President, Business and
Corporate Development of the Company since October 1998. Prior to joining the
Company, Mr. Axton served as Vice President of Strategy and Commercial
Development for Concert Communications, the former business telecommunications
joint venture between British Telecom and MCI, from May 1995 to October 1998.
Prior thereto, Mr. Axton served in various international management positions
with British Telecom from 1977 to May 1995, culminating in Head of Alliance
Management.
HARRY G. HOBBS has served as Senior Vice President and President,
PSINet Europe of the Company since September 1998 and served as Vice President,
Customer Administration of the Company from September 1997 to September 1998.
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.
CHI H. KWAN has served as Senior Vice President and President, PSINet
Asia/Pacific of the Company since October 1998. Prior to joining the Company,
Mr. Kwan served as Vice Chairman and Representative Director of Montblanc Japan
K.K., a maker of luxury branded products, from May 1997 to September 1998. Prior
thereto, Mr. Kwan served in several executive management positions with Pitney
Bowes Corporation and its affiliates, including Vice Chairman and Director and
Vice President Market Development, Asia Pacific, from October 1995 to April
1997, and President and Representative Director of Dodwell Pitney Bowes
Corporation from April 1992 to September 1995. From 1975 to April 1992, Mr. Kwan
held various senior management positions with Nicolet Japan, K.K., Finnegan-Mat
Instruments Inc. and H.B. Fuller Japan Inc.
ROBERT D. LEAHY has served as Senior Vice President, Corporate
Marketing and Communications of the Company since July 1998. Prior to joining
the Company, Mr. Leahy was a Senior Vice President and Senior Communications
Advisor to the Office of the Chairman at the National Association of Securities
Dealers, Inc. from June 1997 to July 1998. Prior thereto, Mr. Leahy served as
Vice President of Corporate Relations to Bowater, Incorporated, a manufacturer
of newsprint and other paper products, from March 1993 to May 1997, Director of
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Media Communications for International Paper Company from October 1993 to March
1993 and Vice President, Corporate Communications for Ardal Corp. from October
1987 to October 1989. Mr. Leahy has also served in senior positions with the
International Telecommunications Satellite Organization (Intel Sat), as well as
Manhattan and Washington D.C.-based government and public relations agencies
representing both domestic and international clients.
SANDRA L. BLAISDELL has served as Vice President of Field Services of
the Company since October 1998. Prior to joining the Company, Ms. Blaisdell was
President of her own consulting firm, where she worked with cable companies in
the United States and the United Kingdom assisting them in entering the local
and long distance telecommunications markets, from April 1996 to June 1998.
Prior thereto, Ms. Blaisdell served as General Manager of Networks Operation and
in various division level positions in operations, strategic planning and sales
and marketing with Mountain Bell Telephone and US West Communications from 1980
to April 1996.
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.
E. A. "TED" DAVIS has served as President--PSINet's Network Division of
the Company since October 1998. Prior to joining the Company, Mr. Davis served
as Vice President of Customer Technical Support for Lucent Technologies
(formerly the network services division of AT&T), from January 1995 to April
1998. Prior thereto, Mr. Davis served in various technical and management
positions with AT&T since beginning his career there in June 1968.
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.
JAMES A. HAID has served as Vice President, Network Operations of the
Company since October 1998. Prior to joining the Company, Mr. Haid served in
various management positions with AT&T from July 1972 to September 1998, most
recently as Vice President of Government Market Organizations for AT&T Business
Communications Service.
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 1996.
MITCHELL LEVINN has served as Vice President, Technical Design of Data
Center/Web Hosting of the Company since October 1998, served as Vice President,
Network Operations of the Company from February 1995 to September 1998. Prior
thereto, Mr. Levinn had served as 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 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.
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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.
WILLIAM A. OPET has served as President, Corporate Network Services of
the Company since July 1998. Prior to joining the Company, Mr. Opet served in
several capacities at Geotek Data Company from April 1994 until June 1998,
including Senior Vice President of Marketing and Sales, Senior Vice President of
Business Development, Vice President of Marketing, and most recently, as
President and Chief Executive Officer. Prior thereto, Mr. Opet served as Vice
President of Marketing for LIN Broadcasting from June 1990 until April 1994,
Vice President of Sales and Marketing of Metrophone-LIN Broadcasting from May
1986 until June 1990, Director of Sales Management for ARGO Communications from
April 1983 until May 1986 and Manager of Revenues and Planning for CTEC
Corporation from December 1978 until April 1983.
LAWRENCE WINKLER has served as Vice President and Treasurer of the
Company since September 1998 and served as Director of Capital Markets for the
Company from November 1997 to September 1998. Prior to joining the Company, Mr.
Winkler was Director of Investor Relations for the Mills Corporation where he
was responsible for investor relations and capital markets. From 1988 to 1990,
Mr. Winkler served in various senior financial management and consulting roles
for the Black and Decker Corporation, CRI Inc. and Arthur Andersen &
Co./Andersen Consulting.
WILLIAM H. BAUMER has served as a director of the Company since 1993.
Mr. Baumer has been a Professor of Philosophy at the University at Buffalo since
1971 and was the Acting Chairman of the Department of Economics at the
University at Buffalo from June 1992 until June 1995. Mr. Baumer also served as
Treasurer and Vice President of NYSERNet from January 1986 to December 1990 and
from December 1989 to December 1990, respectively. Mr. Baumer's term of office
as a director of the Company expires in 2000.
IAN P. SHARP has served as a director of the Company since September
1996. Mr. Sharp is currently retired and was the President and founder of I.P.
Sharp Associates, a software development company, from December 1964 through
July 1989. Mr. Sharp's term of office as a director of the Company expires in
1999.
RALPH J. SWETT has served as a director of the Company since February
25, 1998, effective upon the closing of the Company's transaction with IXC as
described herein under "Certain Transactions--Strategic Alliance with IXC." Mr.
Swett is currently retired, is a director of IXC Communications and was Chairman
of IXC Communications from its formation in July 1992 through April 1998, and
served as Chief Executive Officer and President of IXC Communications from July
1992 to October 1997. Prior thereto, Mr. Swett served as Chairman of the Board
and Chief Executive Officer of Communications Transmission, Inc. ("CTI") from
1986 to 1992. From 1969 to 1986, Mr. Swett 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, and as a Vice President of Times Mirror from 1981 to 1986. Mr. Swett
served as Chairman of IXC Carrier from 1979 through April 1998, and served as
its Chief Executive Officer from 1986 to October 1997 and its President from
1991 to October 1997. Mr. Swett has managed communications businesses for the
past 26 years. Mr. Swett's term of office as a director of the Company expires
in 2000. See "Certain Transactions--Strategic Alliance With IXC."
Pursuant to the IRU Purchase Agreement between the Company and IXC,
Ralph J. Swett, the former Chairman of IXC Communications Inc. ("IXC
Communications"), was elected, effective as of the closing of the transaction,
to the Company's Board of Directors. 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. IXC is an indirect wholly owned subsidiary of IXC
Communications. See "Certain Transactions--Strategic Alliance With IXC."
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<PAGE>
CERTAIN TRANSACTIONS
STRATEGIC ALLIANCE WITH IXC
General Terms. In February 1998, the Company acquired from IXC Internet
Services, Inc. ("IXC") 20-year noncancellable indefeasible rights of use for
specified purposes 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") 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 $78.6 million 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"), 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 Company's 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 $240.0
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 $240.0 million.
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. As of October 1, 1998, approximately 5,800 route
miles of OC-12 (equivalent to approximately 1,450 route miles of OC-48)
bandwidth corresponding to the PSINet IRUs connecting New York and Los Angeles
(and certain major cities in between) have been accepted by the Company and
placed into operation on the PSINet network and approximately 7,000 additional
route miles of bandwidth, extending the network to, among other locations,
Washington D.C., Atlanta, Houston and San Francisco (and certain major cities in
between) are expected to be made available to the Company and placed into
operation prior to the end of the first quarter of 1999. The Company currently
anticipates delivery of the remaining bandwidth corresponding to the PSINet IRUs
over the next 18 to 24 months. IXC has granted the Company a security interest
in, among other collateral, a portion of the IRUs underlying the PSINet IRUs
granted to IXC by IXC Carrier, Inc., its direct parent company, 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 $1.2 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.
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<PAGE>
Joint Marketing and Services Agreement. In connection with this
transaction, 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 under its own brand.
Pursuant to the Marketing Agreement, the Company has agreed to provide IXC with
managed connectivity services, value-added services and opportunity consulting
services for specified fees which, in light of the strategic importance to the
Company of the PSINet IRUs and the Company's other arrangements with IXC
described herein, the Company has agreed will be, or will be equal to, the
lowest offered by the Company.
Other Transactions. In addition to the transactions described above,
the Company and IXC Communications or its affiliates are parties to transactions
in the ordinary course of business which the Company believes are on terms no
more favorable than could be obtained on an arms' length basis with independent
third parties.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's common stock, as of November 15, 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 of the Company who owns shares of the Company's
common stock; (iii) each of the Company's present senior executive officers
named in the compensation table appearing in the Company's definitive Proxy
Statement on Schedule 14A dated April 10, 1998, which is incorporated by
reference herein; and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
AMOUNT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS
----------------------- --------------------- ----------------
<S> <C> <C>
IXC Internet Services, Inc................................. 10,229,789(2) 19.7%
William L. Schrader........................................ 5,737,477(3) 11.1
Harold S. Wills............................................ 317,028(4) *
David N. Kunkel............................................ 303,572(5) *
Edward D. Postal........................................... 132,749(6) *
William H. Baumer.......................................... 90,988(7) *
Ralph J. Swett............................................. 16,000(8) *
Ian P. Sharp............................................... 6,250(9) *
Executive officers and directors as a group (31 persons)... 7,933,932(10) 15.3
</TABLE>
_______________________
* 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.
(2) These shares were issued to IXC in consideration for the Company's
acquisition of the PSINet IRUs on February 25, 1998 upon the closing of the
transaction with IXC under the IRU Purchase Agreement (which number of
shares is equal to 19.99999% of the issued and outstanding shares of common
stock 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 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) 1,000 shares
which are pledged with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") in respect of a non-recourse loan relating to a margin
brokerage account Mr. Schrader maintains with Merrill Lynch, of which
$22,541.95 (including principal and interest) was outstanding as of
November 15, 1998, at a standard margin interest rate currently equal to
approximately 10% 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 $4,750,000 on an aggregate basis, of which $4,334,774.55
(including principal and interest) was outstanding as of November 15, 1998,
at an interest rate equal to the 30 day LIBOR rate plus 1.75% 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 310,937 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
414,063 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(5) Includes 301,043 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
250,150 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.
(footnotes continue on next page)
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<PAGE>
(footnotes continued from previous page)
(6) Includes 117,949 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
257,051 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(7) Includes (i) 50,000 shares issuable upon the exercise of outstanding
warrants and (ii) 1,000 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not include
6,000 shares issuable upon the exercise of options which are not deemed to
be presently exercisable.
(8) Includes 2,500 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include (i)
7,500 shares issuable upon the exercise of options which are not deemed to
be presently exercisable, (ii) 6,500 shares beneficially owned by Mr.
Swett's wife, and (iii) 10,229,789 shares beneficially owned by IXC, of
which Mr. Swett is a director and was the chairman of the board. Mr. Swett
disclaims beneficial ownership of the shares beneficially owned by (i) his
wife and (ii) IXC. See "Certain Transactions--Strategic Alliance With IXC."
(9) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
8,750 shares issuable upon the exercise of options which are not deemed to
be presently exercisable.
(10) See notes (3) through (9) above. Includes also approximately 2,227,724
shares issuable upon the exercise of vested options and options which are
deemed to be presently exercisable granted to 31 executive officers and
directors. Does not include approximately 3,339,714 shares issuable upon
the exercise of outstanding options granted to 30 executive officers and
directors which are not deemed to be presently exercisable.
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DESCRIPTION OF NOTES
The Initial Notes were issued and the Exchange Notes will be issued
under the Indenture dated as of November 3, 1998, as amended by the First
Supplemental Indenture, dated as of November 12, 1998 (the "Indenture"), between
the Company and Wilmington Trust Company, as trustee (the "Trustee"), a copy of
which will be made available to holders of the Notes ("Holders") upon request to
the Company.
The following summaries of the material provisions of the Indenture and
the Registration Rights Agreements do not purport to be complete, and where
reference is made to particular provisions of the Indenture and the Registration
Rights Agreements, such provisions, including the definitions of certain terms,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture and the Registration
Rights Agreements by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Initial Notes have not been registered under the Securities
Act and are subject to certain transfer restrictions. For definitions of certain
capitalized terms used in the following summary, see "--Certain Definitions" or
"The Exchange Offer--Registration Defaults; Liquidated Damages."
GENERAL
The Notes will mature on November 1, 2008 and are limited to $350.0
million aggregate principal amount. Each Note will bear interest at the rate set
forth on the cover page hereof from November 3, 1998 or from the most recent
interest payment date to which interest has been paid, payable semiannually on
May 1 and November 1 in each year, commencing May 1, 1999, to the Person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the April 15 or October 15 immediately preceding such interest
payment date. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in the City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
All payments of principal and interest will be made by the Company in
same day funds. The Notes will trade in the Same-Day Funds Settlement System of
The Depository Trust Company (the "Depositary" or "DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in same
day funds.
OPTIONAL REDEMPTION
On or after November 1, 2003, the Notes will be redeemable at the
option of the Company, in whole at any time, or in part from time to time, on
not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning on November 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................... 105.750%
2004........................................... 103.833%
2005........................................... 101.917%
2006 and thereafter............................ 100.000%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the date of redemption (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
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<PAGE>
In addition, on or prior to November 1, 2001, the Company may, at its
option, use the Net Cash Proceeds of one or more Public Equity Offerings or the
sale of Capital Stock of the Company (other than Disqualified Stock) to a
Strategic Investor in a single transaction or a series of related transactions,
to redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price equal to 111.5% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
following such redemption. In order to effect the foregoing redemption, the
Company must mail a notice of redemption no later than 45 days after the related
Public Equity Offering or sale to a Strategic Investor and must consummate such
redemption within 60 days of the closing of the Public Equity Offering or sale
to a Strategic Investor.
If less than all of the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each Holder shall
have the right to require that the Company purchase all such Holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash, in an amount equal to 101% of the
principal amount of such Notes or portion thereof, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date"), pursuant to the offer described below (the "Change of Control Offer")
and in accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes, by first-class mail, postage prepaid, at his or her address appearing
in the security register, stating that a Change of Control has occurred and the
date of such event, the circumstances and relevant facts regarding such Change
of Control; the purchase price and the purchase date, which shall be fixed by
the Company on a business day no earlier than 30 days nor later than 60 days
from the date such notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act; that any Note not tendered will
continue to accrue interest; that, unless the Company defaults in the payment of
the Change of Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and certain other procedures that a Holder must follow to
accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that
the Company will have sufficient funds or financial resources necessary to pay
the Change of Control Purchase Price for all of the Notes that might be
delivered by Holders seeking to accept the Change of Control Offer. The
Company's Credit Facility prohibits the Company from repurchasing Notes upon a
Change of Control unless it has paid all amounts outstanding under the Credit
Facility prior thereto. See "Risk Factors--Change of Control." The failure of
the Company to make or consummate the Change of Control Offer or pay the Change
of Control Purchase Price when due will give the Trustee and the Holders the
rights described under "Events of Default."
The term "all or substantially all" as used in the definition of
"Change of Control" has not been definitively interpreted under New York law
(which is the governing law of the Indenture) to represent a specific
quantitative test. As a consequence, in the event the Holders elected to
exercise their rights under the Indenture and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret the phrase.
The existence of a Holder's right to require the Company to repurchase
such Holder's Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
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The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with a Change of Control Offer.
RANKING
The Notes will be senior unsecured obligations of the Company, and the
Indebtedness represented by the Notes and the payment of principal of, premium,
if any, and interest on the Notes will rank pari passu in right of payment with
all other existing and future unsecured and unsubordinated indebtedness of the
Company and senior in right of payment to all existing and future Subordinated
Indebtedness of the Company. The Notes will be effectively subordinated to
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. The Notes will also be effectively subordinated to
the claims of creditors of the Company's subsidiaries and to the interests of
holders of preferred stock, if any, of such subsidiaries. As of September 30,
1998, on a pro forma basis after giving effect to the Initial Notes Offerings
(and the application of the net proceeds therefrom) and the acquisitions of the
Acquired Companies, there would have been approximately $231.5 million of total
secured indebtedness outstanding to which Holders would have been effectively
subordinated in right of payment and approximately $100.8 million of total
liabilities of the Company's subsidiaries (including trade payables and accrued
liabilities) to which Holders would have been structurally subordinated.
The Notes will not be entitled to any security and will not be entitled
to the benefit of any guarantees except under the limited circumstances
described under "--Certain Covenants--Limitation on Issuances of Guarantees of
Indebtedness."
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company shall not, and shall not
cause or permit any Subsidiary to, directly or indirectly, Incur any
Indebtedness (other than the Notes); provided, however, that the Company may
Incur Indebtedness, and the Company or any Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 6.0 to 1.0 prior to
April 1, 2001, or less than or equal to 5.5 to 1.0 on or after April 1, 2001.
(b) The foregoing limitations of paragraph (a) of this covenant will
not apply to any of the following, each of which shall be given independent
effect:
(i) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness (other than Acquired Indebtedness) consisting of Capital
Lease Obligations, Purchase Money Obligations, installment sales,
mortgage financings or other obligations incurred for the purpose of
financing all or any part of the purchase price, cost of design,
development, acquisition, construction or improvement of real or
personal property (including, without limitation, rights of
indefeasible use or similar rights), tangible or intangible, used or to
be used in connection with the Telecommunications Business or a credit
facility or a master lease arrangement entered into for the purpose of
providing such financing, provided that such Indebtedness (exclusive of
the interest portion thereof and reasonable costs of financing) does
not exceed the lesser of Fair Market Value or the purchase price and
related costs of design, development, acquisition, construction or
improvement of such assets or property at the time of such Incurrence;
(ii) the Incurrence by the Company or any of its Subsidiaries of
any Indebtedness, and any refinancings (as defined) of such
Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $50 million at any one time outstanding;
(iii) the Incurrence by the Company of Indebtedness (other than
Acquired Indebtedness) in an aggregate principal amount not to exceed
two (2) times the sum of the Net Cash Proceeds received by the Company
after April 13, 1998 (other than from the issuance of Disqualified
Stock in any case) in connection with any Public Equity Offerings or
sale of Capital Stock (other than Disqualified Stock) to any Strategic
Investor to the extent that such Net Cash Proceeds have not been used
pursuant to clause (a)(3) or
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clause (b)(viii) of "--Limitation on Restricted Payments" described
below; provided that such Indebtedness does not mature prior to the
Stated Maturity of the Notes or has an Average Life to Stated Maturity
at least equal to the Notes;
(iv) the Incurrence by the Company or any Subsidiary of any
Indebtedness entered into in the ordinary course of business (a)
pursuant to Interest Rate Agreements entered into to protect the
Company or any Subsidiary against fluctuations in interest rates in
respect of Indebtedness of the Company or any Subsidiary as long as the
notional principal amount of such Interest Rate Agreements does not
exceed the aggregate principal amount of such Indebtedness then
outstanding, (b) under any Currency Hedging Arrangements entered into
to protect the Company or any Subsidiary against fluctuations in the
value of any currency or (c) under any Commodity Price Protection
Agreements entered into to protect the Company or any Subsidiary
against fluctuations in the price of any commodity;
(v) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds,
standby letters of credit and appeal or surety bonds entered into in
the ordinary course of business and not in connection with the
borrowing of money;
(vi) Indebtedness outstanding under the Notes or the Indenture
(or Guarantees of the Notes issued under the Indenture), other
Indebtedness existing on the date of the Indenture (other than
Indebtedness described in clause (viii) below) or other Indebtedness
represented by shares of Series B Preferred Stock issued on or after
the date of the Indenture as a dividend on shares of Series B Preferred
Stock outstanding on the date of the Indenture (or shares of Series B
Preferred Stock issued as a dividend in respect of any such shares of
additional Series B Preferred Stock so issued);
(vii) the Incurrence of (a) Indebtedness of any Subsidiary owed
to and held by the Company or another Subsidiary and (b) Indebtedness
of the Company owed to and held by any Subsidiary or represented by a
guarantee of Indebtedness of any Subsidiary which such Subsidiary is
otherwise permitted to Incur under the Indenture; provided that upon
either (i) the transfer or other disposition by a Subsidiary or the
Company of any Indebtedness so permitted to a Person other than the
Company or a Subsidiary or (ii) the issuance, sale, transfer or other
disposition of Capital Stock (including by amalgamation, consolidation
or merger) of a Subsidiary (such that upon such sale, transfer or other
disposition such Subsidiary would no longer meet the definition of a
Subsidiary) to a Person other than the Company or a Subsidiary, the
provisions of this clause (vii) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been
Incurred at the time of such issue, sale, transfer or other
disposition;
(viii) Indebtedness incurred by the Company or any Subsidiary
under a Permitted Credit Facility or Debt Securities, provided that the
aggregate principal amount at any time outstanding under this clause
(viii) does not exceed $150 million; and
(ix) any amendments, supplements, modifications, deferrals,
renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi), (vii) and (viii) above,
and this clause (ix), including any successive refinancings so long as
the borrower under such refinancing is the Company or, if not the
Company, the same as the borrower (or its successor) of the
Indebtedness being refinanced and the aggregate principal amount of
Indebtedness and accrued interest represented thereby (or the accreted
value thereof as of the date of refinancing) is not increased by such
refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of
expenses of the Company or such borrower incurred in connection with
such refinancing and, in the case of any refinancing of Indebtedness
that is Subordinated Indebtedness, such new Indebtedness is made
subordinated to the Notes at least to the same extent as the
Indebtedness being refinanced and such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such
Subordinated Indebtedness.
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(c) For purposes of determining any particular amount of Indebtedness
under this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness may be Incurred through paragraph (a) of this
covenant or by meeting the criteria of one or more of the types of Indebtedness
described in paragraph (b) of this covenant (or the definitions of the terms
used therein), the Company, in its sole discretion, (i) may classify such item
of Indebtedness under and comply with either of such paragraphs (or any of such
definitions), as applicable, (ii) may classify and divide such item of
Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and (iii) may elect to comply with such paragraphs (or definitions),
as applicable, in any order.
Limitation on Restricted Payments. (a) The Company will not, and will
not permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on
any shares of the Company's Capital Stock (other than dividends or
distributions solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital
Stock of any Affiliate of the Company (other than Capital Stock of any
Wholly Owned Subsidiary of the Company) or options, warrants or other
rights to acquire such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
principal payment, sinking fund payment or maturity, any Subordinated
Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital
Stock of any Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Subsidiaries or (b) to all holders of any
class, series or the same type of Capital Stock of such Subsidiary on a
pro rata basis; provided that in the case of this clause (b) such
dividend or distribution shall not constitute Indebtedness or
Disqualified Stock); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v),
other than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted Payment,
if other than cash, as determined, in good faith, by the Board of Directors of
the Company, whose determination shall be conclusive and evidenced by a board
resolution), unless (1) immediately before and immediately after giving effect
to such proposed Restricted Payment on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing; (2) immediately before and
immediately after giving effect to such Restricted Payment on a pro forma basis,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under paragraph (a) of the provisions described under
"--Limitation on Indebtedness;" and (3) after giving effect to the proposed
Restricted Payment, the aggregate amount of all such Restricted Payments
declared or made after April 13, 1998, does not exceed the sum (A) (i) the
Cumulative Operating Cash Flow determined at the time of such Restricted Payment
less (ii) 150% of cumulative Consolidated Interest Expense determined for the
period (treated as one accounting period) commencing on April 13, 1998 and
ending on the last day of the most recent fiscal quarter immediately preceding
the date of such Restricted Payment for which consolidated financial information
of the Company is required to be available; plus (B) the aggregate Net Cash
Proceeds received after April 13, 1998 by the Company from the issuance or sale
(other than to any of its Subsidiaries) of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such Qualified Capital
Stock of the Company (except to the extent such proceeds are used to purchase,
redeem or otherwise retire Capital Stock or Subordinated Indebtedness as set
forth below in clause (ii) or (iii) of paragraph (b) below); plus (C) the
aggregate Net Cash Proceeds received after April 13, 1998 by the Company (other
than from
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any of its Subsidiaries) upon the exercise of any options, warrants or rights to
purchase Qualified Capital Stock of the Company; plus (D) the aggregate Net Cash
Proceeds received after April 13, 1998 by the Company from the conversion or
exchange, if any, of debt securities or Redeemable Capital Stock of the Company
or its Subsidiaries into or for Qualified Capital Stock of the Company plus, to
the extent such debt securities or Redeemable Capital Stock were issued after
April 13, 1998 the aggregate of Net Cash Proceeds from their original issuance;
plus (E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the lesser of (x) the cash
return of capital with respect to such Investment (less the cost of disposition
and taxes, if any) and (y) the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii)
through (vi) below, so long as there is no Default or Event of Default
continuing, the foregoing provisions shall not prohibit the following actions
(each of clauses (i) through (x) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date
of declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration;
(ii) the repurchase, redemption, or other acquisition or
retirement for value of any shares of any class of Capital Stock of the
Company in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege in connection with which
cash is paid in lieu of the issuance of fractional shares or scrip), or
out of the Net Cash Proceeds of a substantially concurrent issuance and
sale for cash (other than to a Subsidiary) of, other shares of
Qualified Capital Stock of the Company; provided that the Net Cash
Proceeds from the issuance of such shares of Qualified Capital Stock
are excluded from clause (3)(B) of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Redeemable Capital Stock in exchange for, or in an
amount not in excess of the Net Cash Proceeds of, a substantially
concurrent issuance and sale for cash (other than to any Subsidiary of
the Company) of any Qualified Capital Stock of the Company, provided
that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph
(a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal of any
Subordinated Indebtedness (other than Redeemable Capital Stock) through
the substantially concurrent issuance of new Subordinated Indebtedness
of the Company, provided that any such new Subordinated Indebtedness
(1) shall be in a principal amount that does not exceed the principal
amount and accrued interest thereon so refinanced or the accreted value
thereof as of the date of refinancing (or, if such Subordinated
Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration
thereof, then such lesser amount as of the date of determination), plus
the lesser of (I) the stated amount of any premium or other payment
required to be paid in connection with such a refinancing pursuant to
the terms of the Indebtedness being refinanced or (II) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing; (2) has an
Average Life to Stated Maturity greater than the remaining Average Life
to Stated Maturity of the Notes; (3) has a Stated Maturity for its
final scheduled principal payment later than the Stated Maturity for
the final scheduled principal payment of the Notes; and (4) is
expressly subordinated in right of payment to the Notes at least to the
same extent as the Subordinated Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of any Redeemable Capital
Stock through the substantially concurrent issuance of new Redeemable
Capital Stock of the Company, provided that any such new Redeemable
Capital Stock (1) shall have an aggregate liquidation preference that
does not exceed the aggregate liquidation preference of the amount so
refinanced; (2) has an Average Life to Stated Maturity greater than the
remaining Average Life to Stated Maturity of the Notes; and (3) has a
Stated Maturity later than the Stated Maturity for the final scheduled
principal payment of the Notes;
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(vi) the repurchase of shares of, or options to purchase shares
of, common stock of the Company or any of its Subsidiaries from
employees, officers, consultants or directors or any former employees,
officers, consultants or directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, officers,
consultants or directors or former employees, officers, consultants or
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) or other
arrangements or transactions approved by the Board of Directors under
which such individuals purchase or sell or are granted the option to
purchase or sell, shares of such common stock; provided, however, that
the aggregate amount of such repurchases in any calendar year shall not
exceed $1 million and $3 million in the aggregate pursuant to this
clause (vi);
(vii) the (a) payment of dividends on the Company's Series B
Preferred Stock (in the form of cash or additional shares of Series B
Preferred Stock) in an aggregate amount not to exceed $3 million in any
calendar year (provided that such amounts may, to the extent not
previously paid, be aggregated through the period prior to the
conversion or redemption of such Series B Preferred Stock) and (b)
redemption of any shares of Series B Preferred Stock outstanding on
April 13, 1998 (including any shares of Series B Preferred Stock issued
on or after April 13, 1998 as dividends thereon or in respect of such
additional shares so issued) pursuant to the terms of such shares of
Series B Preferred Stock as in effect on April 13, 1998 (or as such
terms may be amended, from time to time, to the extent that any such
amendment has been determined by the Board of Directors, in good faith,
not to adversely affect the holders of the Notes);
(viii) Investments in any Person engaged principally in the
Telecommunications Business on the date of such Investments; provided
that the aggregate amount of any such Investments made pursuant to this
clause (viii) does not exceed the sum of (A) the amount of the Net Cash
Proceeds received by the Company after April 13, 1998 as a capital
contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
except to the extent that such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (iii) of paragraph (b) under the
covenant described above under "--Limitation on Indebtedness" or to
make Restricted Payments pursuant to clause (3) of paragraph (a), or
clauses (ii), (iii) or (iv) of this paragraph (b), of this "Limitation
on Restricted Payments" covenant, plus (B) the net reduction in
Investments made pursuant to this clause (viii) resulting from
distributions on or repayments of such Investments or from the Net Cash
Proceeds from the sale of any such Investments (except in each case to
the extent any such payments or proceeds are included in the
calculation of Consolidated Net Income) or from such Person becoming a
Wholly Owned Subsidiary (valued in each case as provided in the
definition of "Permitted Investments");
(ix) the payment or declaration of any dividend or the making of
any distribution on or the redemption of rights or any securities
issued pursuant to the Company Rights Agreement;
(x) the payment of cash in lieu of the issuance of fractional
shares pursuant to any agreement, warrant or option and any repurchase
or other acquisition of fractional shares from time to time; and
(xi) the acquisition of Capital Stock of the Company by the
Company in connection with the cashless exercise of any options,
warrants or similar rights issued by the Company on or prior to January
1, 1998.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (vi), (vii), (viii), (ix)
and (x) shall be included, without duplication, as Restricted Payments and shall
not be deemed a Permitted Payment for purposes of the calculation required by
paragraph (a) of this covenant.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with or for the benefit of any Affiliate of the Company (other than
the Company or a Wholly Owned Subsidiary) unless such transaction or series of
related transactions is entered into in good faith and in writing and (a) such
transaction or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those that
would be reasonably expected to be available in a comparable transaction in
arm's-length dealings with an
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unrelated third party, (b) with respect to any transaction or series of related
transactions involving aggregate value in excess of $5 million, the Company
delivers an officers' certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (a) above,
and (c) with respect to any transaction or series of related transactions
involving aggregate value in excess of $10 million, either (A) such transaction
or series of related transactions has been approved by a majority of the
Disinterested Directors of the Company, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (B) the Company
delivers to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transactions or series of related transactions is fair to the Company or such
Subsidiary from a financial point of view; provided, however, that this covenant
shall not apply to: (a) compensation, severance and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Subsidiaries, if such transaction does not otherwise violate the terms of the
Indenture; (c) any transaction otherwise permitted by the terms of the section
of the Indenture described under "--Limitations on Restricted Payments"; (d) the
execution and delivery of or payments made under any tax sharing agreement
between or among any of the Company and any Subsidiary; (e) licensing or
sublicensing of use of any intellectual property by the Company or any
Subsidiary to the Company, any other Subsidiary of the Company or to any
Permitted Joint Venture; provided that the licensor shall continue to have
access to such intellectual property to the extent necessary for the conduct of
its business and, in the case of any Permitted Joint Venture, that the terms of
any such arrangement are fair and reasonable to the Company or any such
Subsidiary as determined in good faith by the Board of Directors; (f)
arrangements between the Company and any Subsidiary of the Company for the
purpose of providing services or employees to the Company or such Subsidiary;
and (g) transactions undertaken pursuant to the IXC Agreement and other
agreements entered into in connection therewith and in effect on or after April
13, 1998 (or as such other agreements may be amended, from time to time, to the
extent that any such amendment has been determined by the Board of Directors, in
good faith, not to adversely affect the Holders).
LIMITATION ON LIENS. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any
kind upon any property or assets (including any intercompany notes) of the
Company or any Subsidiary owned on April 13, 1998 or acquired after April 13,
1998, or any income or profits therefrom, unless the Notes are directly secured
equally and ratably with (or, in the case of Subordinated Indebtedness, prior or
senior thereto, with the same relative priority as the Notes shall have with
respect to such Subordinated Indebtedness) the obligation or liability secured
by such Lien except for any Permitted Liens.
LIMITATION ON SALE OF ASSETS. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, consummate an Asset
Sale unless (i) at least 75% of the consideration from such Asset Sale is
received in cash or other comparable consideration (as described below) and (ii)
the Company or such Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject to
such Asset Sale (as determined by the Board of Directors of the Company and
evidenced in a board resolution). The following types of consideration shall be
deemed "comparable consideration" for the purposes of this covenant: (A) Cash
Equivalents, (B) liabilities (contingent or otherwise) of the Company or a
Subsidiary assumed by the transferee (or its designee) such that the Company or
such Subsidiary has no further liability therefor, and (C) any securities, notes
or other obligations received by the Company or any such Subsidiary from such
transferee that, within 60 days after receipt, are converted by the Company or
such Subsidiary into cash.
(b) The Company or a Subsidiary may, within 365 days of the Asset Sale,
invest the Net Cash Proceeds thereof in Telecommunications Assets or to repay
any Pari Passu Indebtedness of the Company or any Subsidiary (including the
repurchase of Notes). The amount of such Net Cash Proceeds not used or invested
within 365 days of the Asset Sale as set forth in this paragraph constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million,
the Company will apply the Excess Proceeds to the repayment of the Notes and any
other Pari Passu Indebtedness outstanding with similar provisions requiring the
Company to make an offer to purchase such Indebtedness with the proceeds from
any Asset Sale as follows: (A) the Company will make an offer to purchase (an
"Offer") from all Holders in accordance with the procedures set forth in the
Indenture in the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased out of an amount (the "Note Amount") equal to the
product of such Excess Proceeds
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multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes, and the denominator of which is the sum of the outstanding
principal amount of the Notes and such Pari Passu Indebtedness (subject to
proration in the event such amount is less than the aggregate Offered Price (as
defined herein) of all Notes tendered) and (B) to the extent required by such
Pari Passu Indebtedness to permanently reduce the principal amount of such Pari
Passu Indebtedness, the Company will make an offer to purchase or otherwise
repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an amount
(the "Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over
the Note Amount; provided that in no event will the Company be required to make
a Pari Passu Offer in a Pari Passu Debt Amount exceeding the principal amount of
such Pari Passu Indebtedness plus the amount of any premium required to be paid
to repurchase such Pari Passu Indebtedness. The offer price for the Notes will
be payable in cash in an amount equal to 100% of the principal amount of the
Notes plus accrued and unpaid interest, to the date (the "Offer Date") such
Offer is consummated (the "Offered Price"), in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate Offered Price of
the Notes tendered pursuant to the Offer is less than the Note Amount relating
thereto or the aggregate amount of Pari Passu Indebtedness that is purchased in
a Pari Passu Offer is less than the Pari Passu Debt Amount, the Company will use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes and Pari Passu Indebtedness surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon the completion of the purchase
of all the Notes tendered pursuant to an Offer and the completion of a Pari
Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
(d) The Indenture will provide that, if the Company becomes obligated
to make an Offer pursuant to clause (c) above, the Notes and the Pari Passu
Indebtedness shall be purchased by the Company, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 30 days and not later than 60 days from the date the notice of
the Offer is given to Holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. (a) The Company
will not permit any Subsidiary, directly or indirectly, to guarantee, assume or
in any other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness of the Company unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the Notes on the same terms as the guarantee of such Indebtedness
except that (A) such guarantee need not be secured unless required pursuant to
"--Limitation on Liens" and (B) if such Indebtedness is by its terms expressly
subordinated to the Notes, any such assumption, guarantee or other liability of
such Subsidiary with respect to such Indebtedness shall be subordinated to such
Subsidiary's Guarantee of the Notes at least to the same extent as such
Indebtedness is subordinated to the Notes; provided that this paragraph shall
not apply to any guarantee or assumption of liability of Indebtedness permitted
under the Indenture as described in clauses (i), (ii), (iv), (v), (vii) and
(viii) of paragraph (b) of "--Limitation on Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
Notes shall provide by its terms that it (and all Liens securing the same) shall
be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all the assets of, such
Subsidiary, which transaction is in compliance with the terms of the Indenture
and such Subsidiary is released from its guarantees of other Indebtedness of the
Company or any Subsidiaries.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company will not,
and will not permit any Subsidiary of the Company to, directly or indirectly,
enter into any Sale-Leaseback Transaction with respect to any property or assets
(whether now owned or hereafter acquired) unless (i) the sale or transfer of
such property or assets to be leased is treated as an Asset Sale and complies
with the "--Limitation on Sale of Assets" covenant and (ii) the Company or such
Subsidiary would be entitled under the "--Limitation on Indebtedness" covenant
to incur any Indebtedness (with the lease obligations being treated as
Indebtedness for purposes of ascertaining compliance with
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this covenant unless such lease is properly classified as an operating lease
under GAAP) in respect of such sale and leaseback transaction.
The foregoing restriction does not apply to any Sale-Leaseback
Transaction if (i) the lease is for a period, including renewal rights, not in
excess of three years; (ii) the transaction is solely between the Company and
any Wholly Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly
Owned Subsidiary; and (iii) the transaction is consummated within 180 days of
the acquisition by the Company or its Subsidiary of the property or assets
subject to such sale-leaseback or entered into within 180 days after the
purchase or substantial completion of the construction of such property or
assets (or 270 days in the event that the only condition delaying such
consummation is the receipt of applicable regulatory approvals).
LIMITATION ON ISSUANCE AND SALE OF SUBSIDIARY CAPITAL STOCK. The
Company will not permit (a) any Subsidiary of the Company to issue any Capital
Stock, except for (i) Capital Stock issued or sold to, held by or transferred to
the Company or a Wholly Owned Subsidiary, (ii) Capital Stock issued by a Person
prior to the time (A) such Person becomes a Subsidiary, (B) such Person merges
with or into a Subsidiary or (C) a Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) (excluding for purposes of this proviso, shares of Capital Stock issued in
connection with customary accelerated vesting provisions contained in option or
similar plans or agreements which are accelerated as a result of a change of
control of such Person and which option or similar plans or agreements were not
adopted or implemented solely in anticipation of or in connection with such
transaction) or (b) any Person (other than the Company or a Wholly Owned
Subsidiary) to acquire Capital Stock of any Subsidiary from the Company or any
Subsidiary, except, in the case of each of clause (a) or (b), (1) upon the
acquisition of all the outstanding Capital Stock of such Subsidiary in
accordance with the terms of the Indenture, (2) if, immediately after giving
effect to such issuance or sale, such Subsidiary would no longer constitute a
Subsidiary, and any Investment in such Person remaining after giving effect to
such issuance or sale would have been permitted to be made under "--Limitations
on Restricted Payments" if made on the date of such issuance or sale, (3)
issuances of director's qualifying shares, or sales to foreign nationals of
shares of Capital Stock of foreign Subsidiaries, to the extent required by
applicable law or to maintain the limited liability status of such foreign
Subsidiaries or (4) issuances or sales of common stock of a Subsidiary, provided
that the Company or such Subsidiary applies the Net Cash Proceeds, if any, in a
manner which does not violate the provisions of the Indenture to the extent
applicable (excluding for purposes of this proviso, shares of Capital Stock
issued in connection with customary accelerated vesting provisions contained in
option or similar plans or agreements which are accelerated as a result of a
change of control of such Person and which option or similar plans or agreements
were not adopted or implemented solely in anticipation of or in connection with
such transaction).
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Subsidiary
to (i) pay dividends or make any other distribution on its Capital Stock, (ii)
pay any Indebtedness owed to the Company or any other Subsidiary, (iii) make any
Investment in the Company or any other Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Subsidiary, except for: (a) any
encumbrance or restriction, with respect to a Subsidiary that was not a
Subsidiary of the Company on April 13, 1998, in existence at the time such
Person becomes a Subsidiary of the Company and not incurred in connection with,
or in contemplation of, such Person becoming a Subsidiary; (b) encumbrances or
restrictions (I) by reason of applicable law, (II) under the Indenture, or (III)
in any agreement, instrument or indenture governing or relating to Indebtedness
in respect of any Permitted Credit Facility; (c) customary non-assignment
provisions of any contract or lease of any Subsidiary entered into in the
ordinary course of business; (d) encumbrances or restrictions imposed pursuant
to Indebtedness or contracts entered into in connection with Permitted Liens,
but solely to the extent such encumbrances or restrictions affect only the
property or assets subject to such Permitted Lien; (e) any encumbrance or
restriction imposed pursuant to contracts for the sale of assets with respect to
the assets to be sold pursuant to such contract; and (f) any encumbrance or
restriction existing under any agreement that extends, renews, refunds,
refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (a) through (e), or in this clause (f),
provided that the terms and conditions of any such encumbrances or restrictions
are no more restrictive in any material respect than those under or pursuant to
the agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced.
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LIMITATIONS ON UNRESTRICTED SUBSIDIARIES. The Company will not make,
and will not permit its Subsidiaries to make, any Investment in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such Investments
would exceed the amount of Restricted Payments then permitted to be made
pursuant to the "--Limitation on Restricted Payments" covenant. Any Investments
in Unrestricted Subsidiaries permitted to be made pursuant to this covenant will
be treated as a Restricted Payment in calculating the amount of Restricted
Payments made by the Company.
PROVISION OF FINANCIAL STATEMENTS. After the earlier to occur of the
consummation of the Exchange Offer and the 150th calendar day following the date
of original issue of the Notes, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with the Commission the annual reports, quarterly
reports and other documents which the Company would have been required to file
with the Commission pursuant to Sections 13(a) or 15(d) if the Company were so
subject, such documents to be filed with the Commission on or prior to the date
(the "Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in any
event (x) within 15 days of each Required Filing Date (i) transmit by mail to
all Holders, as their names and addresses appear in the security register,
without cost to such Holders and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to Sections 13(a) or 15(d) of the
Exchange Act if the Company were subject to either of such Sections and (y) if
filing such documents by the Company with the Commission is not permitted under
the Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder at the Company's cost. If any Guarantor's financial
statements would be required to be included in the financial statements filed or
delivered pursuant to the Indenture if the Company were subject to Section 13(a)
or 15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Notes remain outstanding,
the Company will make available to any prospective purchaser of Notes or
beneficial owner of Notes in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act, until the earlier of such
time as the Company has completed its offer to exchange the Notes for securities
identical in all material respects which have been registered under the
Securities Act or such time as the Holders thereof have disposed of such Notes
pursuant to an effective registration statement under the Securities Act.
LIMITATION ON BUSINESS. The Company will not, and will not permit any
of the Subsidiaries to, engage in a business which is not substantially a
Telecommunications Business.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis to any other Person or group of affiliated Persons, unless at the time and
after giving effect thereto (i) either (a) the Company will be the continuing
corporation in the case of a consolidation or merger involving the Company or
(b) the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis (the "Surviving Entity") will be a corporation duly organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form reasonably satisfactory to the Trustee, all the obligations
of the Company under the Notes, the Indenture and the Registration Rights
Agreement, as the case may be, and the Notes, the Indenture and the Registration
Rights Agreement will remain in full force and effect as so supplemented; (ii)
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any of
its Subsidiaries which becomes the obligation of the Company or any of its
Subsidiaries as a result of such transaction as having been incurred at the time
of such transaction), no Default or Event of Default will have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company (or the Surviving Entity if the
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Company is not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under paragraph (a)
of the provisions of "--Certain Covenants--Limitation on Indebtedness;" (iv) at
the time of the transaction, each Guarantor, if any, unless it is the other
party to the transactions described above, will have by supplemental indenture
confirmed that its Guarantee shall apply to such Person's obligations under the
Indenture and the Notes; and (v) at the time of the transaction the Company or
the Surviving Entity will have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
transaction and the supplemental indenture in respect thereof comply with the
Indenture. Notwithstanding the foregoing, the Company (i) may merge or
consolidate with any Wholly Owned Subsidiaries, and (ii) the Company may merge
or consolidate into any Person in a transaction designed solely for the purpose
of effecting a change in the jurisdiction of incorporation of the Company within
the United States of America.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, such Surviving Person shall
succeed to, and be substituted for, and exercise every right and power of, the
Company, and the Company shall be discharged from all obligations and covenants
under the Indenture, the Notes and the Registration Rights Agreement.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on
any Note when it becomes due and payable, and such default shall
continue for a period of 30 days;
(ii) there shall be a default in the payment of the principal of
(or premium, if any, on) any Note at its Maturity (upon acceleration,
optional or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach,
of any covenant or agreement of the Company or any Guarantor under the
Indenture, the Registration Rights Agreement or any Guarantee (other
than a default in the performance, or breach, of a covenant or
agreement which is specifically dealt with in clause (i), (ii) or in
clause (b), (c) or (d) of this clause (iii)) and such default or breach
shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee or (y) to
the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes; (b) there shall be a default
in the performance or breach of the provisions described in "--
Consolidation, Merger or Sale of Assets;" (c) the Company shall have
failed to make or consummate an Offer in accordance with the provision
described in "--Certain Covenants--Limitation on Sale of Assets;" or
(d) the Company shall have failed to make or consummate a Change of
Control Offer in accordance with the provisions of "--Change of
Control;"
(iv) (a) any default by the Company or any Subsidiary in the
payment of the principal, premium, if any, or interest has occurred
with respect to amounts in excess of $10 million under any agreement,
indenture or instrument evidencing Indebtedness when the same shall
become due and payable in full and such default shall have continued
after any applicable grace period and shall not have been cured or
waived and, if not already matured at its final maturity in accordance
with its terms, the holder of such Indebtedness shall have the right to
accelerate such Indebtedness or (b) any event of default as defined in
any agreement, indenture or instrument of the Company evidencing
Indebtedness in excess of $10 million shall have occurred and the
Indebtedness thereunder, if not already matured at its final maturity
in accordance with its terms, shall have been accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for
any reason be asserted in writing by any Guarantor or the Company not
to be, in full force and effect and enforceable in accordance with its
terms, except to the extent contemplated by the Indenture and any such
Guarantee;
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(vi) one or more judgments or orders for the payment of money in
excess of $10 million, either individually or in the aggregate, shall
be rendered against the Company and not paid unless covered by
financially sound third-party insurers, or any Subsidiary or any of
their respective properties and is not discharged and for which there
shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment or order, by reason of an appeal or
otherwise, shall not be in effect;
(vii) any holder or holders of at least $10 million in aggregate
principal amount of Indebtedness of the Company or any Subsidiary after
a default under such Indebtedness shall notify the Trustee of its
commencement of proceedings to foreclose on any assets of the Company
or any Subsidiary that have been pledged to or for the benefit of such
holder or holders to secure such Indebtedness or shall commence
proceedings, or take any action (including by way of set-off), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of Indebtedness, assets of the
Company or any Subsidiary (including funds on deposit or held pursuant
to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the
Company or any Significant Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or (b) a decree or order
adjudging the Company or any Significant Subsidiary bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Significant
Subsidiary under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or any Significant Subsidiary or
of any substantial part of their respective properties, or ordering the
winding up or liquidation of their respective affairs, and any such
decree or order for relief shall continue to be in effect, or any such
other decree or order shall be unstayed and in effect, for a period of
60 consecutive days; or
(ix) (a) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (b)
the Company or any Significant Subsidiary consents to the entry of a
decree or order for relief in respect of the Company or such
Significant Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, (c) the Company or any
Significant Subsidiary files a petition or answer or consent seeking
reorganization or relief under any applicable federal or state law, (d)
the Company or any Significant Subsidiary (I) consents to the filing of
such petition or the appointment of, or taking possession by, a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or such Significant Subsidiary or of
any substantial part of the Company's Consolidated properties, (II)
makes an assignment for the benefit of creditors or (III) admits in
writing its inability to pay its debts generally as they become due or
(e) the Company or any Significant Subsidiary takes any corporate
action in furtherance of any such actions in this paragraph (ix).
If an Event of Default (other than as specified in clauses (viii) and
(ix) of the prior paragraph with respect to the Company) shall occur and be
continuing with respect to the Indenture, the Trustee or the Holders of not less
than 25% in aggregate principal amount of the Notes then outstanding may, and
the Trustee at the request of such holders shall, declare all unpaid principal
of, premium, if any, and accrued interest on all Notes to be due and payable, by
a notice in writing to the Company (and to the Trustee if given by the Holders)
and upon any such declaration, such principal, premium, if any, and interest
shall become due and payable immediately. If an Event of Default specified in
clause (viii) or (ix) of the prior paragraph occurs with respect to the Company
and is continuing, then all the Notes shall ipso facto become and be due and
payable immediately in an amount equal to the principal amount of the Notes,
together with accrued and unpaid interest, to the date the Notes become due and
payable, without any declaration or other act on the part of the Trustee or any
holder. Thereupon, the Trustee may, at its discretion, proceed to protect and
enforce the rights of the Holders by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree
for payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its
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agents and counsel, (ii) all overdue interest on all Notes then outstanding,
(iii) the principal of and premium, if any, on any Notes then outstanding which
have become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest at the rate borne by the
Notes; and (b) all Events of Default, other than the non-payment of principal of
the Notes which have become due solely by such declaration of acceleration, have
been cured or waived as provided in the Indenture. No such rescission shall
affect any subsequent default or impair any right consequent thereon.
The Holders of not less than a majority in aggregate principal amount
of the Notes outstanding may on behalf of the Holders of all outstanding Notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or interest on any
Note or in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the Holder of each Note affected
by such modification or amendment.
The Company is also required to notify the Trustee within 30 days of
the occurrence of any Default unless such Default shall have been cured. The
Company is required to deliver to the Trustee, on or before a date not more than
60 days after the end of each fiscal quarter and not more than 120 days after
the end of each fiscal year, a written statement as to compliance with the
Indenture, including whether or not any Default has occurred that is not cured.
The Trust Indenture Act contains limitations on the rights of the
Trustee, should it become a creditor of the Company or any Guarantor, if any, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions, provided that if it
acquires any conflicting interest it must eliminate such conflict upon the
occurrence of an Event of Default or resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such defeasance
means that the Company, any such Guarantor and any other obligor under the
Indenture shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders of
such outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee and (iv) the defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company and any Guarantor released with respect to certain covenants that
are described in the Indenture ("covenant defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Notes. In the event covenant defeasance
occurs, certain events (not including non-payment, bankruptcy and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid or Notes whose payment has been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust as provided for in the Indenture) have been delivered to the
Trustee for cancellation or (ii) all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable at their Stated Maturity within one year, or (z) are to be called
for redemption within one year under arrangements reasonably satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company; and the Company or any Guarantor has irrevocably
deposited or caused to be deposited
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with the Trustee as trust funds in trust an amount in United States dollars
sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, including principal of,
premium, if any, and accrued interest at such Maturity, Stated Maturity or
redemption date; (b) the Company or any Guarantor has paid or caused to be paid
all other sums payable under the Indenture by the Company and any Guarantor; and
(c) the Company has delivered to the Trustee an officers' certificate and an
opinion of independent counsel each stating that (i) all conditions precedent
under the Indenture relating to the satisfaction and discharge of such Indenture
have been complied with and (ii) such satisfaction and discharge will not result
in a breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company, any Guarantor or
any Subsidiary is a party or by which the Company, any Guarantor or any
Subsidiary is bound.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the
Company, each Guarantor, if any, and the Trustee with the consent of the Holders
of at least a majority in aggregate principal amount of the Notes then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Note affected thereby: (i)
change the Stated Maturity of the principal of, or any installment of interest
on, or change to an earlier date any redemption date of, or waive a default in
the payment of the principal, or interest on, any such Note or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the coin or currency in which the
principal of any such Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) amend, change or modify the obligation of the Company to
make and consummate an Offer to such holder with respect to any Asset Sale or
Asset Sales in accordance with "--Certain Covenants--Limitation on Sale of
Assets" or the obligation of the Company to make and consummate a Change of
Control Offer in the event of a Change of Control in accordance with "--Change
of Control," including, in each case, amending, changing or modifying any
definitions relating thereto; (iii) reduce the percentage in principal amount of
such outstanding Notes, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver or compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of such outstanding Notes
required for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
such Note affected thereby; (v) except as otherwise permitted under
"--Consolidation, Merger or Sale of Assets," consent to the assignment or
transfer by the Company or any Guarantor of any of its rights and obligations
under the Indenture; or (vi) amend or modify any of the provisions of the
Indenture in any manner which subordinates the Notes issued thereunder in right
of payment to any other Indebtedness of the Company or which subordinates any
Guarantee in right of payment to any other Indebtedness of the Guarantor issuing
any such Guarantee.
Notwithstanding the foregoing, without the consent of any Holders, the
Company, any Guarantor and the Trustee may modify or amend the Indenture or any
Guarantee: (a) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor in the Indenture, the Notes, the Registration Rights
Agreement and in any Guarantee in accordance with "--Consolidation, Merger or
Sale of Assets"; (b) to add to the covenants of the Company, any Guarantor or
any other obligor upon the Notes for the benefit of the Holders or to surrender
any right or power conferred upon the Company or any Guarantor or any other
obligor upon the Notes, as applicable, in the Indenture, in the Notes or in any
Guarantee; (c) to cure any ambiguity, or to correct or supplement any provision
in the Indenture, the Notes or any Guarantee which may be defective or
inconsistent with any other provision in the Indenture, the Notes or any
Guarantee or make any other provisions with respect to matters or questions
arising under the Indenture, the Notes or any Guarantee; provided that, in each
case, such provisions shall not adversely affect the interest of the Holders;
(d) to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act; (e)
to add a Guarantor under the Indenture; (f) to evidence and provide the
acceptance of the appointment of a successor Trustee under the Indenture; or (g)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the Holders as additional security for the payment
and performance of the Company's and any Guarantor's obligations under the
Indenture, in any property, or assets, including any of which are required to be
mortgaged, pledged or hypothecated, or in which a security interest is required
to be granted to the Trustee pursuant to the Indenture or otherwise.
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The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
GOVERNING LAW
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the internal laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue as Trustee with such conflict or resign as Trustee.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at
the time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from (or merger or consolidation with or into) such
Person, in each case, other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary or such acquisition, as the
case may be, provided that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of, or substantially
contemporaneously with, the consummation of the transactions by which such
Person becomes a Subsidiary or such asset acquisition shall not constitute
Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any
other Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers
of cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Subsidiary to any
other Person, or any acquisition or purchase of Capital Stock of any other
Person by the Company or any Subsidiary, in either case pursuant to which such
Person shall become a Subsidiary or shall be consolidated, merged with or into
the Company or any Subsidiary or (ii) any acquisition by the Company or any
Subsidiary of the assets of any Person which constitute substantially all of an
operating unit or line of business of such Person or which is otherwise outside
of the ordinary course of business of the Company or such Subsidiary.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of: (i) any
Capital Stock of any Subsidiary; (ii) all or substantially all of the properties
and assets of any division or line of business of the Company or its
Subsidiaries; or
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(iii) any other properties or assets of the Company or any Subsidiary other than
in the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include any transfer of properties and assets (A)
that is governed by the provisions described under "--Consolidation, Merger or
Sale of Assets," (B) that is by the Company to any Wholly Owned Subsidiary or by
any Wholly Owned Subsidiary to the Company or any other Wholly Owned Subsidiary
in a manner which does not violate the terms of the Indenture, (C) that is of
obsolete equipment in the ordinary course of business, (D) the Fair Market Value
of which in the aggregate does not exceed $5 million in any transaction or
series of related transactions, (E) that is made in accordance with the
provisions described under "--Certain Covenants--Limitations on Restricted
Payments," (F) which constitutes the granting of any Permitted Lien and (G) that
is transferred in exchange for Telecommunications Assets; provided, that if the
Fair Market Value of the assets to be transferred by the Company or such
Subsidiary under this clause (G), plus the Fair Market Value of any other
consideration paid or credited by the Company or such Subsidiary exceeds $10
million, such transaction shall require approval of the Board of Directors of
the Company.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978,
as amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions or trust companies in
The City of New York or the city in which the Corporate Trust Office of the
Trustee is located are authorized or obligated by law, regulation or executive
order to be closed.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of common stock and preferred stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership, membership or other
equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not
more than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital and
surplus and undivided profits of not less than $500 million, whose short term
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's Investors Service, Inc. ("Moody's") or
any successor rating agency or "A-1" (or higher) according to Standard & Poor's
Corporation ("S&P") or any successor rating agency, (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized and
existing under the laws of the United States of America with a rating, at the
time as of which any investment therein is made, of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P and (iv) any money market
deposit accounts issued or offered by a domestic commercial bank having capital
and surplus in excess of $500 million; provided that the short term debt of such
commercial bank has a rating, at the time of Investment, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following
events: (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have beneficial ownership of all shares that such Person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the
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Company (other than IXC, IXC Communications, Inc. or any controlled affiliate
thereof, in any case pursuant to the issuance by the Company of shares of
Capital Stock in satisfaction of any obligations under the terms of the IXC
Agreement); (ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such board or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of such Board of Directors then in office; (iii) the Company
consolidates with or merges with or into any Person or conveys, transfers or
leases all or substantially all of its assets to any Person, or any corporation
consolidates with or merges into or with the Company in any such event pursuant
to a transaction in which the outstanding Voting Stock of the Company is changed
into or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company is not changed or
exchanged at all (except to the extent necessary to reflect a change in the
jurisdiction of incorporation of the Company or where no "person" or "group"
owns, immediately after such transaction, directly or indirectly, more than 50%
of the total outstanding Voting Stock of the surviving corporation); or (iv) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "--Consolidation, Merger or Sale of Assets." The good faith
determination of the Board, based upon the advice of outside counsel, of the
beneficial ownership of securities of the Company within the meaning of Rules
13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary
controlling judicial precedent or contrary written interpretation published by
the Commission.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body performing
such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Company" means PSINet Inc., a corporation incorporated under the laws
of New York, until a successor Person shall have become such pursuant to the
applicable provisions of the Indenture, and thereafter "Company" shall mean such
successor Person.
"Company Rights Agreement" means the Rights Agreement, dated as of May
8, 1996, between the Company and First Chicago Trust Company of New York, as in
effect on the date of the Indenture (or as amended, from time to time, to the
extent that such amendment has been determined by the Board of Directors, in
good faith, not to adversely affect the holders of the Notes).
"Consolidated" means consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period,
the provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without
duplication, for any period, the sum of (a) the interest expense of such Person
and its subsidiaries for such period, on a Consolidated basis in accordance with
GAAP, including, without limitation, (i) amortization of debt discount, (ii) the
net costs associated with Interest Rate Agreements, Currency Hedging Agreements
and Commodity Price Protection Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such Person
and its subsidiaries plus (c) the interest expense actually paid by such Person
under any Guaranteed Debt of such Person and any subsidiary to the extent not
included under clause (a)(iv) above, plus (d) the aggregate amount for such
period of cash or non-cash dividends on any Redeemable Capital Stock or
Preferred Stock of the Company and its Subsidiaries, in each case as determined
on a Consolidated basis in accordance with GAAP.
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"Consolidated Net Income" means, with respect to any period, the net
income of the Company and any Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (a) all
extraordinary gains or losses for such period; (b) all gains or losses from the
sales or other dispositions of assets out of the ordinary course of business
(net of taxes, fees and expenses relating to the transaction giving rise
thereto) for such period; (c) that portion of such net income derived from or in
respect of investments in Persons other than Subsidiaries, except to the extent
actually received in cash by the Company or any Subsidiary (subject, in the case
of any Subsidiary, to the provisions of clause (f) of this definition); (d) the
portion of such net income (or loss) allocable to minority interests in any
Person (other than a Subsidiary) for such period, except to the extent the
Company's allocation portion of such Person's net income for such period is
actually received in cash by the Company or any Subsidiary (subject, in the case
of any Subsidiary, to the provisions of clause (f) of this definition); (e) the
net income (or loss) of any other Person combined with the Company or any
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination; and (f) the net income of any Subsidiary to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is not at the time (regardless of any waiver) permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Subsidiary or its Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by (a) Consolidated
Income Tax Expense for such period; (b) Consolidated Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for such
period (other than any non-cash item which requires the accrual of, or a reserve
for, cash charges for any future period) of the Company and any Subsidiary,
including, without limitation, amortization of capitalized debt issuance costs
for such period, all of the foregoing determined on a consolidated basis in
accordance with GAAP minus non-cash items to the extent they increase
Consolidated Net Income (including the partial or entire reversal of reserves
taken in prior periods) for such period.
"Consummation Deadline" means the consummation of the Exchange Offer in
accordance with the provisions described in "The Exchange Offer--Registration
Rights."
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on April 13, 1998 and ending on the last day of the
most recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Debt Securities" means any debt securities issued by the Company in a
public offering or private placement.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a)
the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow for
the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Subsidiary on the Determination Date (or would become a Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed to have
been a Subsidiary at all times during such Measurement Period, (ii) any Person
that is not a Subsidiary on such Determination Date (or would cease to be a
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Subsidiary shall have in any manner (x) acquired
(through an Acquisition or the commencement of activities constituting such
operating business) or (y) disposed of (by an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of
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such period and on or prior to such Determination Date, such calculation will be
made on a pro forma basis in accordance with GAAP as if, in the case of an
Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow the exclusions set forth in clauses (a) through (f) of the
definition of Consolidated Net Income shall apply to an Acquired Person as if it
were a Subsidiary).
"Default" means any event which is, or after notice or passage of any
time or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Sale of Assets"
and "Change of Control" described above and such Capital Stock specifically
provides that such person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Sale of Assets" and
"Change of Control" provisions described above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Agent" means Wilmington Trust Company, as exchange agent
under the Exchange Agent Agreement, until a successor replaces it in accordance
with the provisions of the Exchange Agent Agreement and thereafter means such
successor.
"Exchange Notes" means Notes issued in exchange for Initial Notes
pursuant to the Registration Rights Agreements.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market Value
shall be determined by the Board of Directors of the Company acting in good
faith and shall be evidenced by a resolution of the Board of Directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, as in
effect on April 13, 1998.
"Guarantee" means the guarantee by any Guarantor of the Company's
Indenture Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the
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holder of such Indebtedness against loss, (iii) to supply funds to, or in any
other manner invest in, the debtor (including any agreement to pay for property
or services without requiring that such property be received or such services be
rendered), (iv) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition of
the debtor or (v) otherwise to assure a creditor against loss; provided that the
term "guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the Notes pursuant to the "Limitation on Issuance of Guarantees
of Indebtedness" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing). Indebtedness of a Person existing at the time
such Person becomes a Subsidiary or is merged or consolidated with or into the
Company or any Subsidiary shall be deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements, Currency
Hedging Agreements or Commodity Price Protection Agreements of such Person, (v)
all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is guaranteed by such Person or which is otherwise
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not directly assumed or become liable
for the payment of such Indebtedness, (vii) all Redeemable Capital Stock issued
by such Person valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends, and (viii) any
refinancing of any liability of the types referred to in clauses (i) through
(vii) above. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value to be determined in good faith by the Board of
Directors of the issuer of such Redeemable Capital Stock. In no event shall
"Indebtedness" include any trade payable or other current liabilities arising in
the ordinary course of business. The amount of any item of Indebtedness shall be
the amount of such Indebtedness properly classified as a liability on a balance
sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of the Company and any
other obligor under the Indenture or under the Notes (including any Guarantor)
to pay principal of, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
Holders under the Indenture and the Notes, according to the respective terms
thereof.
"Initial Notes" means Notes issued in the Initial Notes Offerings.
"Interest Rate Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
interest rate protection agreements (including, without limitation, interest
rate
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swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan (including guarantees), or other extension of credit or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase, acquisition or ownership by such Person of any Capital
Stock, bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a balance
sheet prepared in accordance with GAAP.
"IXC" means IXC Internet Services, Inc., a Delaware corporation, and
any successors or assigns under the IXC Agreement.
"IXC Agreement" means the IRU and Stock Purchase Agreement, dated as of
July 22, 1997, between the Company and IXC, as amended, pursuant to which the
Company acquired from IXC 20-year noncancellable indefeasible rights of use, as
in effect on the date of the Indenture (or as further amended, from time to
time, to the extent that such amendment has been determined by the Board of
Directors, in good faith, not to adversely affect the Holders).
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, hypothecation, or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property which such Person has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement, other than (i) any lease properly classified as an
operating lease under GAAP, (ii) intellectual property licensing arrangements or
(iii) cancellation or termination rights or provisions contained in agreements
governing any indefeasible rights of use or similar property rights which do not
materially impair the use of the property or interest which is the subject of
such cancellation or termination rights or provisions.
"Liquidated Damages" has the meaning provided in Section 5 of the
Registration Rights Agreements.
"Maturity" means, when used with respect to the Notes, the date on
which the principal of the Notes becomes due and payable as therein provided or
as provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any Wholly
Owned Subsidiary) net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of such Asset
Sale, (iv) amounts required to be paid to any Person (other than the Company or
any Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale and (v) amounts contractually required to be deposited into escrow or
similar trust arrangements and other appropriate amounts to be provided by the
Company or any Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against, any liabilities associated with such Asset Sale and retained by
the Company or any Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale or reimbursement
obligations related to letters of credit issued against liabilities associated
therewith, all as reflected in an officers' certificate delivered to the Trustee
(which amounts shall become Net Cash Proceeds only at such time as they are
released from escrow or such trust arrangements or otherwise cease to be
reserved or subject to other obligations to third parties) and (b) with respect
to any issuance or sale of Capital Stock or options, warrants or rights to
purchase Capital Stock, or debt securities or Capital Stock that have been
converted into or exchanged for Capital Stock as referred to under "--Certain
Covenants--Limitation on Restricted Payments," the proceeds of such
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issuance or sale in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed of for, cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Subsidiary), net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale (or conversion in the case of debt
securities or Capital Stock that have been converted) and net of taxes paid or
payable as a result thereof.
"Notes" means the Initial Notes and the Exchange Notes issued from time
to time under the Indenture.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company
that is pari passu in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Permitted Credit Facility" means any unsubordinated commercial term
loan and/or revolving credit facility entered into principally with commercial
banks and/or other financial institutions typically party to commercial loan
agreements and any refinancing thereof.
"Permitted Investment" means (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of, or in connection with, such
Investment, (a) becomes a Wholly Owned Subsidiary or (b) is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to, or is liquidated into, the Company or any Wholly Owned
Subsidiary; (ii) Indebtedness of the Company or a Subsidiary described under
clauses (iv) and (vii) of paragraph (b) under "--Certain Covenants--Limitation
on Indebtedness"; (iii) Investments in any of the Notes; (iv) Investments in
Cash Equivalents; (v) Investments acquired by the Company or any Subsidiary in
connection with an Asset Sale permitted under "--Certain Covenants--Limitation
on Sale of Assets" to the extent such Investments are non-cash proceeds as
permitted under such covenant; (vi) Investments in existence or contractually
committed to on or after April 13, 1998 and any extension, modification or
renewal of any such Investment that does not increase the amount of such
Investment; (vii) guarantees of Indebtedness of a Wholly Owned Subsidiary given
by the Company or another Wholly Owned Subsidiary and guarantees of Indebtedness
of the Company given by any Subsidiary, in each case, not otherwise in violation
of the terms of the Indenture; (viii) advances to employees or officers of the
Company in the ordinary course of business so long as the aggregate amount of
such advances shall not exceed $2 million outstanding at any one time; (ix) any
Investment in the Company by any Subsidiary of the Company; provided, that any
such Investment in the form of Indebtedness shall be Subordinated Indebtedness;
(x) accounts receivable created or acquired in the ordinary course of business
of the Company or any Subsidiary and Investments arising from transactions by
the Company or any Subsidiary with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any plan
of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement of a
claim); (xi) loans in the ordinary course of business to employees, officers or
directors of the Company or a Subsidiary to purchase Capital Stock of the
Company pursuant to the terms of stock benefit plans; (xii) Investments the
consideration of which is Capital Stock of the Company; (xiii) Investments in or
acquisitions of Capital Stock or other obligations, property or securities of
Persons (other than Affiliates) received in the bankruptcy or reorganization of
or by such Person or otherwise taken in settlement or satisfaction of claims,
disputes or judgments, and, in each case, extensions, modifications and renewals
thereof; (xiv) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and workers' compensation, performance and other
similar deposits; (xv) Investments, not to exceed $100 million at any one time
outstanding, to obtain noncancellable indefeasible rights of use to, or capacity
in, fiber-based bandwidth (or similar network bandwidth), related equipment
and/or other Telecommunications Assets in the ordinary course of the Company's
business; and (xvi) any other Investments in an aggregate amount not to exceed
$50 million at any one time outstanding. In connection with any assets or
property contributed or transferred to any Person as an Investment, such
property and assets shall be equal to the Fair Market Value (as determined by
the Company's Board of Directors) at the time of such Investment.
"Permitted Joint Venture" means a corporation, partnership or other
Person engaged in a Telecommunications Business over which the Company has,
directly or indirectly, the power to direct the policies, management and affairs
in all material respects.
"Permitted Lien" means:
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(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or
order of any court, so long as such Lien is adequately bonded and any
appropriate legal proceedings which may have been duly initiated for
the review of such judgment, decree or order shall not have been
finally terminated or the period within which such proceedings may be
initiated shall not have expired; (2) taxes not yet delinquent or which
are being contested in good faith; (3) security for payment of workers'
compensation or other insurance or arising under workers' compensation
laws or similar legislation; (4) good faith deposits in connection with
bids, tenders, leases, contracts (other than contracts evidencing
Indebtedness); (5) zoning restrictions, easements, licenses,
reservations, title defects, rights of others for rights of way,
utilities, sewers, electric lines, telephone or telegraph lines, and
other similar purposes, provisions, covenants, conditions, waivers,
restrictions on the use of property or irregularities of title (and
with respect to leasehold interests, mortgages, obligations, liens and
other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which
materially impairs the use of any parcel of property material to the
operation of the business of the Company or any Subsidiary or the value
of such property for the purpose of such business; (6) deposits to
secure public or statutory obligations, or in lieu of surety or appeal
bonds; or (7) operation of law in favor of landlords, carriers,
warehousemen, bankers, mechanics, materialmen, laborers, employees or
suppliers, incurred in the ordinary course of business for sums which
are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof;
(c) any Lien to secure the performance bids, trade contracts,
leases (including, without limitation, statutory and common law
landlord's liens), statutory obligations, surety and appeal bonds,
letters of credit and other obligations of a like nature and incurred
in the ordinary course of business of the Company or any Subsidiary;
(d) any Lien securing obligations in connection with
Indebtedness permitted under that section of the Indenture described in
clause (i) of paragraph (b) of "--Certain Covenants--Limitation on
Indebtedness" which attaches within 180 days of the incurrence of such
Indebtedness or the date of delivery of such property or asset
(whichever occurs later); provided that such Liens only extend to such
acquired, developed or constructed property and any accessories,
accessions, additions, replacements and proceeds thereof;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with
Indebtedness permitted under that section of the Indenture described in
clauses (ii), (iv) or (viii) of paragraph (b) of "--Limitation on
Indebtedness;"
(g) any Lien in favor of the Company or any Wholly Owned
Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover
any property or assets of the Company or any of its Subsidiaries other
than the property or assets of the Acquired Person covered thereby or
the property assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the
Holders or the Trustee arising under the provisions in the Indenture;
(j) any Lien encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of the Company or any Subsidiary if and to the extent
arising in the ordinary course of business, including rights of offset
and set-off;
(k) any Lien in favor of customs or revenue authorities to
secure payment of customs duties in connection with the importation of
goods in the ordinary course of business;
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(l) leases, subleases, licenses or other similar rights
granted to third Persons not interfering with the ordinary course of
business of the Company or its Subsidiaries;
(m) any Lien securing reimbursement obligations with respect
to letters of credit that encumber documents and other property
relating to such letters of credit; and
(n) any Lien securing any refinancing, in whole or in part, of
any obligation or Indebtedness described in the foregoing clauses (a)
through (m) (other than clause (e)) so long as no additional collateral
is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock
of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of Capital
Stock (other than Disqualified Stock) of the Company with gross proceeds to the
Company of at least $25 million pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act (other
than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions, replacements,
modifications and accessions thereto, which are purchased by the Company at any
time after the Notes are issued; provided that (i) the security agreement or
conditional sales or other title retention contract pursuant to which the Lien
on such assets is created (collectively a "Purchase Money Security Agreement")
shall be entered into within 180 days after the purchase or substantial
completion of the construction of such assets and shall at all times be confined
solely to the assets so purchased or acquired, any additions, replacements,
modifications and accessions thereto and any proceeds and products therefrom,
(ii) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of fees and
other obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement are entered into exceed 100% of the
purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions, replacements, modifications and accessions
thereto and any proceeds and products therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock
of such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to such Stated Maturity, or is convertible into or exchangeable
for debt securities at any time prior to such Stated Maturity at the option of
the holder thereof.
"Registration Default" has the meaning provided in Section 5 of the
Registration Rights Agreements.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which the Company or a Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
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"Shelf Registration Statement" means a shelf registration statement
pursuant to Rule 415 under the Securities Act.
"Stated Maturity" means, when used with respect to any Indebtedness or
any installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled
Affiliate of any Person which is or a controlled Affiliate of which is) engaged
principally in the Telecommunications Business and which has a Total Market
Capitalization of at least $500 million.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor expressly subordinated by its terms in right of payment to the Notes
or the Guarantee of such Guarantor, as the case may be.
"subsidiary" means, with respect to any Person, a corporation,
association or other business entity (i) of which outstanding Capital Stock
having at least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
subsidiaries of such Person.
"Subsidiary" means any subsidiary of the Company other than an
Unrestricted Subsidiary.
"Telecommunications Assets" means all assets (including Capital Stock),
rights (contractual or otherwise) and properties, real or personal, whether
tangible or intangible, used or intended for use in connection with a
Telecommunications Business.
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in (i) the business of
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii) the business
of creating, developing or marketing communications related network equipment or
services or computer-based information or (iii) businesses reasonably related
thereto, which determination shall, in any such case, be made in good faith by
the Board of Directors.
"Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and any Subsidiary, on a Consolidated basis in accordance with GAAP,
outstanding as of such date of determination, after giving effect to any
Incurrence of Indebtedness and the application of the proceeds therefrom giving
rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists with
respect to shares of any such class, the value of such shares for purposes of
clause (b) of the preceding sentence shall be determined by the Board in good
faith and evidenced by a resolution of the Board filed with the Trustee.
Notwithstanding the foregoing, unless the Person's Common Stock is listed on any
national securities exchange or on The Nasdaq National Market, the "Total Market
Capitalization" of the Person shall mean, as of any day of determination, the
enterprise value (without duplication) of the Person and any subsidiaries
(including the fair market value of their debt and equity), as determined by an
independent banking firm of national standing with experience in such valuations
and evidenced by a written opinion in customary form filed with the Trustee;
provided that for purposes of any such determination, the enterprise value of
the Person shall be calculated as if the Person were a publicly held corporation
without a controlling stockholder. For purposes of any such determination, such
banking firm's written opinion may state that such fair market value is no less
than a specified amount and such opinion may be as of a date no earlier than 90
days prior to the date of such determination.
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"Trading Day" with respect to a securities exchange or automated
quotation system means a day on which such exchange or system is open for a full
day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"Trustee" means Wilmington Trust Company, until a successor trustee
shall have become such pursuant to the applicable provisions of the Indenture,
and thereafter "Trustee" shall mean such successor trustee.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company that
at the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any subsidiary of the Company (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Subsidiaries
provides credit support for Indebtedness of such subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness); (b) such
subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness; (c) any Investment
in such subsidiary made as a result of designating such subsidiary an
Unrestricted Subsidiary shall not violate the provisions of the "--Certain
Covenants--Limitation on Unrestricted Subsidiaries" covenant and such
Unrestricted Subsidiary is not party to any agreement, contract, arrangement or
understanding at such time with the Company or any Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company, and (d)
such Unrestricted Subsidiary does not own any Capital Stock in any Subsidiary of
the Company which is not simultaneously being designated an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company shall
be evidenced to the Trustee by filing with the Trustee a board resolution giving
effect to such designation and an officers' certificate certifying that such
designation complies with the foregoing conditions and shall be deemed a
Restricted Payment on the date of designation in an amount equal to the greater
of (1) the net book value of such Investment or (2) the fair market value of
such Investment as determined in good faith by the Company's Board of Directors.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
as a Subsidiary; provided that (i) immediately after giving effect to such
designation, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the restrictions under "--Certain
Covenants--Limitation on Indebtedness" and (ii) all Indebtedness of such
Subsidiary shall be deemed to be incurred on the date such Unrestricted
Subsidiary becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Subsidiary is directly or indirectly liable (by virtue of the
Company or any such Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness), except Guaranteed Debt
of the Company or any Subsidiary to any Affiliate, in which case (unless the
incurrence of such Guaranteed Debt resulted in a Restricted Payment at the time
of incurrence) the Company shall be deemed to have made a Restricted Payment
equal to the principal amount of any such Indebtedness to the extent guaranteed
at the time such Affiliate is designated an Unrestricted Subsidiary and (ii)
which, upon the occurrence of a default with respect thereto, does not result
in, or permit any holder of any Indebtedness of the Company or any Subsidiary to
declare, a default on such Indebtedness of the Company or any Subsidiary or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which is owned by the Company or another Wholly Owned Subsidiary. For the
purposes of this definition, any director qualifying shares or investments by
foreign nationals mandated by, or required to maintain its limited liability
status under, applicable law shall be disregarded in determining the ownership
of a Subsidiary.
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BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Notes sold to Qualified Institutional Buyers initially will be in
the form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
will be deposited with the Trustee, as custodian for The Depository Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or its
nominee for credit to the accounts of DTC's Direct and Indirect Participants (as
defined below). The Notes being offered and sold in offshore transactions in
reliance on Regulation S, if any, initially will be in the form of one or more
registered, global book-entry Notes without interest coupons (the "Reg S Global
Notes"). The Reg S Global Notes will be deposited with the Trustee, as custodian
for DTC, in New York, New York and registered in the name of a nominee of DTC
for credit to the accounts of Indirect Participants participating in DTC through
the Euroclear System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL").
Beneficial interests in the Reg S Global Notes may be transferred to a person
that takes delivery in the form of an interest in the U.S. Global Notes.
Beneficial interests in the U.S. Global Notes may be transferred to a person
that takes delivery in the form of an interest in the Reg S Global Notes,
provided, in each case, that the certification requirements described below are
complied with. See "--Transfers of Interests in One Global Note for Interests in
Another Global Note." All registered global notes are referred to herein
collectively as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer and
will bear a restrictive legend as described under "Notice to Investors." In
addition, transfer of beneficial interests in any Global Notes will be subject
to the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and CEDEL), which may
change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations,
including Euroclear and Cedel. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect, custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants").
DTC has also advised the Company that, pursuant to DTC's procedures,
(i) upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes that have been allocated to them by the Initial
Purchasers, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes. The Company expects that payments by Direct
Participants to owners of beneficial interests in such Global Notes held through
such Direct Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in the name of nominees for such customers. Such payments will be the
responsibility of such Direct Participants.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S
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Global Notes may hold their interests therein directly through Euroclear or
CEDEL or indirectly through organizations that are participants in Euroclear or
CEDEL. Investors may also hold interests in the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of CEDEL (each a "Nominee" of DTC for the benefit of Euroclear and
CEDEL, respectively). Therefore, they will each be recorded on DTC's records as
the holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL must maintain on their own records the
ownership interests, and transfers of ownership interests by and between, their
own customers' securities accounts. DTC will not maintain such records. All
ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC.
The laws of some states in the United States require that certain
persons take physical delivery in definitive, certificated form, of securities
that they own. This may limit or curtail the ability to transfer beneficial
interests in a Global Note to such persons. Because DTC can act only on behalf
of Direct Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global Note to
pledge such interest to persons or entities that are not Direct Participants in
DTC, or to otherwise take actions in respect of such interests, may be affected
by the lack of physical certificates evidencing such interests. For certain
other restrictions on the transferability of the Notes, see "--Reg S Global
Notes" and "--Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Notes are registered (including Notes
represented by Global Notes) as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, Liquidated Damages, if any, and interest on Global Notes
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC or its nominee as the registered holder under the Indenture. Consequently,
neither the Company, the Trustee nor any agent of the Company or the Trustee has
or will have any responsibility or liability for (i) any aspect of DTC's records
or any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such as
the Notes is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will be settled in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
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Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures of
Euroclear or CEDEL and within their established deadlines (Brussels time for
Euroclear and UK time for CEDEL). Indirect Participants who hold interest in the
Notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an
Indirect Participant who holds an interest in the Notes through Euroclear or
CEDEL purchasing an interest in a Global Note from a Direct Participant in DTC
will be credited, and any such crediting will be reported to Euroclear or CEDEL
during the European business day immediately following the settlement date of
DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have access
to the cash amount credited to their accounts as a result of a sale of an
interest in a Reg S Global Note to a DTC Participant until the European business
day for Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Reg S Global Notes and in
the U.S. Global Notes among Direct Participants, including Euroclear and CEDEL,
they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Company, the Initial Purchasers or the Trustee shall have any responsibility for
the performance by DTC, Euroclear or CEDEL or their respective Direct and
Indirect Participants of their respective obligations under the rules and
procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
REG S GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Global Notes
through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case may be,
with a certificate in the form required by the Indenture certifying that such
Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the Trustee)
a certificate in the form required by the Indenture prior to the payment of
interest or principal with respect to such Indirect Participant's beneficial
interests in such Reg S Global Notes.
"U.S. Person" means (i) any individual resident in the United States,
(ii) any partnership or corporation organized or incorporated under the laws of
the United States, (iii) any estate of which an executor or administrator is a
U.S. Person (other than an estate governed by foreign law and of which at least
one executor or administrator is a non-U.S. Person who has sole or shared
investment discretion with respect to its assets), (iv) any trust of which any
trustee is a U.S. Person (other than a trust of which at least one trustee is a
non-U.S. Person who has sole or shared investment discretion with respect to its
assets and no beneficiary of the trust (and no settlor, if the trust is
revocable) is a U.S. Person), (v) any agency or branch of a foreign entity
located in the United States, (vi) any non-
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discretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a U.S. Person, (vii) any
discretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary organized, incorporated or (if an individual) resident
in the United States (other than such an account held for the benefit or account
of a non-U.S. Person), (viii) any partnership or corporation organized or
incorporated under the laws of a foreign jurisdiction and formed by a U.S.
Person principally for the purpose of investing in securities not registered
under the Securities Act (unless it is organized or incorporated and owned by
"accredited investors" within the meaning of Rule 501(a) under the Securities
Act who are not natural persons, estates or trusts); provided, however that the
term "U.S. Person" shall not include (A) a branch or agency of a U.S. Person
that is located and operating outside the United States for valid business
purposes as a locally regulated branch or agency engaged in the banking or
insurance business, (B) any employee benefit plan established and administered
in accordance with the law, customary practices and documentation of a foreign
country and (C) the international organizations set forth in Section 902(o)(7)
of Regulation S under the Securities Act and any other similar international
organizations, and their agencies, affiliates and pension plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
An Indirect Participant who holds an interest in Reg S Global Notes
will be permitted to transfer its interest to a U.S. Person who takes delivery
in the form of an interest in U.S. Global Notes only upon receipt by the Trustee
of a written certification from the transferor to the effect that such transfer
is being made in accordance with the restrictions on transfer set forth under
"--Notice to Investors" and set forth in the legend printed on the Reg S Global
Notes.
A Direct or Indirect Participant who holds an interest in U.S. Global
Notes may transfer its interests to a person who takes delivery in the form of
an interest in Reg S Permanent Global Notes only upon receipt by the Trustee of
a written certification from the transferor to the effect that such transfer is
being made in accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S
Global Notes for a beneficial interest in U.S. Global Notes or vice versa will
be effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount at maturity of the one Global Note and a corresponding increase
in the principal amount at maturity of the other Global Note, as applicable. Any
beneficial interest in the one Global Note that is transferred to a person who
takes delivery in the form of the other Global Note will, upon transfer, cease
to be an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in
registered, certificated form without interest coupons ("Certificated Notes") if
(i) DTC (x) notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify the
Trustee in writing that, upon surrender by the Direct and Indirect Participants
of their interest in such Global Note, Certificated Notes will be issued to each
person that such Direct and Indirect Participants and DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
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In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
Neither the Company nor the Trustee will be liable for any delay by the
holder of any Global Note or DTC in identifying the beneficial owners of Notes,
and the Company and the Trustee may conclusively rely on, and will be protected
in relying on, instructions from the holder of the Global Note or DTC for all
purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The summaries contained herein of certain of the indebtedness of the
Company do not purport to be complete and are qualified in their entirety by
reference to the provisions of the various agreements and indentures related
thereto, copies of which have been filed with the Commission and to which
reference is hereby made. See "Available Information."
CREDIT FACILITY
In September 1998, the Company entered into a new three-year senior secured
revolving credit facility, pursuant to which The Chase Manhattan Bank ("Chase")
is acting as administrative agent, to replace the Company's existing bank credit
arrangements in the United States (the "Credit Facility"). The Credit Facility
is a secured revolving credit facility with borrowing availability thereunder in
the maximum principal amount of $110 million, $108.5 million of which was drawn
upon to finance a portion of the purchase price for the acquisition of Tokyo
Internet. Prior to the closing of the First Initial Notes Offering, the Company
repaid, with other cash on hand, all borrowings outstanding under the Credit
Facility. Following the closings of the Initial Notes Offerings, the Company
continues to have borrowing capacity of up to $110 million under the Credit
Facility, subject to its terms.
Interest. Borrowings under the Credit Facility bear interest at the
Company's option, at (i) the London interbank offered rate for deposits in U.S.
Dollars for the relevant period multiplied by the statutory reserve rate plus
the Applicable Margin ("Eurodollar Rate") or (ii) the higher of Chase's prime
rate or the Federal Funds effective rate plus 1/2 of 1%, plus the Applicable
Margin ("ABR Rate"). The Applicable Margin varies based on the Leverage Ratio
(as defined in the Credit Facility) as of the most recent determination date.
Currently, the Applicable Margin is 1.75% for ABR Rate borrowings and 2.75% for
Eurodollar Rate borrowings.
Guarantees and Security. The Company's obligations under the Credit
Facility are guaranteed by each existing and subsequently acquired or organized
significant domestic subsidiary of the Company (a subsidiary which owns or
maintains at least $1,000,000 in assets or generates at least $1,000,000 in
annual revenues) and are secured by a lien on substantially all of the assets of
the Company and each subsidiary guarantor and by a pledge by the Company and
each subsidiary guarantor of all capital stock and other equity interests it
owns (65% in the case of equity interests in foreign subsidiaries).
Covenants. The Credit Facility contains covenants and provisions that
restrict, among other things, the Company and its subsidiaries' ability to: (i)
make dividends and distributions on, and redemptions and repurchases of, capital
stock and other similar payments; (ii) make prepayments, redemptions and
repurchases of indebtedness; (iii) incur liens and enter into sale-leaseback
transactions; (iv) make certain loans and investments; (v) incur additional
indebtedness and certain contingent obligations; (vi) effect certain mergers,
acquisitions and asset sales; (vii) engage in certain transactions with
affiliates; (viii) effect certain changes in business conducted by the Company;
and (ix) amend and waive certain debt and other agreements. The Credit Facility
also requires the satisfaction of certain financial covenants, including a
minimum annual consolidated revenue test, a minimum debt-to-annualized adjusted
revenue ratio, a minimum aggregate balance of nonrestricted cash and available
borrowings and a minimum EBITDA test. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Capital Structure." In
addition, the Credit Facility requires a reduction in the maximum amount of
availability and prepayments (if required as a result of such reduction) equal
to the net proceeds received from certain asset sales aggregating more than $5
million and from certain casualty events.
Events of Default. Events of default under the Credit Facility include
various events of default customary for such type of agreement, such as failure
to pay scheduled payments when due, cross defaults with and cross acceleration
to other indebtedness (including the 10% Senior Notes), the occurrence of a
change in control (as defined in the Credit Facility) and certain events of
bankruptcy, insolvency and reorganization.
CANADIAN CREDIT FACILITY
The Company has a credit facility with a Canadian bank ("Canadian Credit
Facility") which provides availability of loans to the Company's Canadian
subsidiary in three components: (i) a revolving credit facility of
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Cdn. $150,000; (ii) a term loan of Cdn. $1,000,000, having a balance outstanding
of Cdn. $336,000 as of September 1, 1998, repayable in February 1999 and (iii)
an equipment leasing facility of Cdn. $1,000,000 having a balance outstanding of
Cdn. $534,000 as of September 1, 1998, and a final maturity date of March 2001.
Interest. Borrowings under the revolving credit facility and the term
loan bear interest at the applicable prime rate of the bank plus 1.5%.
Borrowings under the equipment lease facility bear interest at an average rate
of 8.7%.
10% SENIOR NOTES
In April 1998, the Company completed its offering of $600.0 million
aggregate principal amount of 10% Senior Notes due 2005, Series A (the "Initial
10% Senior Notes"). The Initial 10% Senior Notes were issued and sold in
accordance with Rule 144A and Regulation S under the Securities Act. In June
1998, the Company completed an exchange offer of the Initial 10% Senior Notes
for equivalent 10% Senior Notes due 2005, Series B (the "Exchange 10% Senior
Notes" and, together with the Initial 10% Senior Notes, the "10% Senior Notes"),
which have been registered under the Securities Act. The 10% Senior Notes are
senior unsecured obligations of the Company ranking equivalent in right of
payment to all existing and future unsecured and unsubordinated indebtedness of
the Company and senior in right of payment to all existing and future
subordinated indebtedness of the Company. The 10% Senior Notes were issued under
an Indenture dated as of April 13, 1998 between the Company and Wilmington Trust
Company, as Trustee (the "10% Senior Notes Indenture").
The 10% Senior Notes will mature on February 15, 2005. Interest on the 10%
Senior Notes is payable semi-annually on August 15 and February 15 of each year,
commencing August 15, 1998. The 10% Senior Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after February 15 of 2002,
2003 and 2004 at 105%, 102.5% and 100% of the principal amount thereof,
respectively, in each case, plus accrued and unpaid interest to the date of
redemption. In addition, on or prior to February 15, 2001, the Company may
redeem up to 35% of the original aggregate principal amount of the 10% Senior
Notes at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of certain public equity offerings or the sale of stock to one or more
strategic investors, provided that at least 65% of the original aggregate
principal amount of the 10% Senior Notes remains outstanding immediately after
such redemption. Upon the occurrence of a Change of Control (as defined in the
10% Senior Notes Indenture), the Company will be required to make an offer to
purchase all of the 10% Senior Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Company may not have sufficient funds or the financial
resources necessary to satisfy its obligations to repurchase the 10% Senior
Notes upon a Change of Control. The Credit Facility prohibits the Company from
repurchasing 10% Senior Notes upon a Change of Control unless it has paid all
amounts outstanding under the Credit Facility prior thereto.
The 10% Senior Notes Indenture contains certain financial covenants with
which the Company must comply relating to, among other things, the following
matters: (i) limitation on the Company's payment of cash dividends, repurchase
of capital stock, payment of principal on subordinated indebtedness and making
of certain investments, unless after giving effect to each such payment,
repurchase or investment, certain operating cash flow coverage tests are met,
excluding certain permitted payments and investments; (ii) limitation on the
Company's and its subsidiaries' incurrence of additional indebtedness, unless at
the time of such incurrence, the Company's ratio of debt to annualized operating
cash flow would be less than or equal to 6.0 to 1.0 prior to April 1, 2001 and
less than or equal to 5.5 to 1.0 on or after April 1, 2001, excluding certain
permitted incurrences of debt; (iii) limitation on the Company's and its
subsidiaries' incurrence of liens, unless the 10% Senior Notes are secured
equally and ratably with the obligation or liability secured by such lien,
excluding certain permitted liens; (iv) limitation on the ability of any
subsidiary of the Company to create or otherwise cause to exist any encumbrance
or restriction on the payment of dividends or other distributions on its capital
stock, payment of indebtedness owed to the Company or any other subsidiary,
making of investments in the Company or any other subsidiary, or transfer of any
properties or assets to the Company or any other subsidiary, excluding certain
permitted encumbrances and restrictions; (v) limitation on certain mergers,
consolidations and sales of assets by the Company or its subsidiaries; (vi)
limitation on certain transactions with affiliates of the Company; (vii)
limitation on the ability of any subsidiary of the Company to guarantee or
otherwise become liable with respect to any indebtedness of the Company unless
such subsidiary provides for a guarantee of the 10% Senior Notes on the same
terms as the guarantee of such indebtedness; (viii)
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limitation on certain sale and leaseback transactions by the Company or its
subsidiaries; (ix) limitation on certain issuances and sales of capital stock of
subsidiaries of the Company; and (x) limitation on the ability of the Company or
its subsidiaries to engage in any business not substantially related to a
telecommunications business.
The events of default under the 10% Senior Notes Indenture include various
events of default customary for such type of agreement, including, among others,
the failure to pay principal and interest when due on the 10% Senior Notes,
cross-defaults on other indebtedness for borrowed monies in excess of $10
million (which indebtedness would therefore include indebtedness outstanding
under the Credit Facility), certain judgments or orders for payment of money in
excess of $10 million, and certain events of bankruptcy, insolvency and
reorganization.
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PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by Participating Broker-Dealers in connection with resales of
Exchange Notes received in exchange for Initial Notes where such Initial Notes
were acquired as a result of market-making activities or other trading
activities. Each Participating Broker-Dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed that under certain circumstances, the Company shall use its
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended to the extent necessary to ensure that it is
available for sales of Exchange Notes by Participating Broker-Dealers, and to
ensure that the Exchange Offer Registration Statement conforms with the
requirements of the Securities Act and the policies, rules and regulations of
the Commission as announced from time to time, for a period of one year from the
Consummation Deadline or such shorter period as will terminate when all Transfer
Restricted Securities covered by the Exchange Offer Registration Statement have
been sold pursuant thereto.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that acquired Initial Notes as a result of market making
activities or other trading activities and who resells Exchange Notes that were
received by it pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon by
Nixon, Hargrave, Devans & Doyle LLP, New York, New York, counsel for the
Company. Certain attorneys with Nixon, Hargrave, Devans & Doyle LLP currently
own in the aggregate less than one percent of the Company's common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997 included in this Prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of iSTAR internet inc. as of May 31,
1997 and 1996, and for each of the two years in the period ended May 31, 1997
included in this Prospectus, have been audited by KPMG LLP, independent
auditors, as stated in their report appearing herein.
The financial statements of Tokyo Internet Corporation as of March 31,
1998, 1997 and 1996 and for each of the three years in the period ended March
31, 1998 included in this Prospectus, have been so included in reliance on the
report of Price Waterhouse, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of ioNET, Inc. as of December 31, 1997 and 1996
and for each of the two years in the period ended December 31, 1997 are
incorporated by reference in this Prospectus from the Company's Current Report
on Form 8-K as filed with the Commission on September 15, 1998 (the "September
15, 1998 Form 8-K"),
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and have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their report included in the September 15, 1998 Form 8-K and
incorporated by reference herein.
The financial statements of Rimnet Corporation as of August 31, 1997 and
for the year then ended are incorporated by reference in this Prospectus from
the September 15, 1998 Form 8-K, and have been audited by Chuo Audit
Corporation, independent certified public accountants, as stated in their report
included in the September 15, 1998 Form 8-K and incorporated by reference
herein.
The financial statements of LinkAge Online Limited as of December 31, 1997
and for the year then ended, appearing in the September 15, 1998 Form 8-K, have
been audited by Ernst and Young, independent auditors, as set forth in their
report thereon included therein and incorporated by reference herein. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of Ernst and Young as experts in accounting and
auditing.
The financial statements of Interactive Networx GmbH as of and for the year
ended December 31, 1997 are incorporated by reference in this Prospectus from
PSINet Inc.'s September 15, 1998 Form 8-K, and have been so incorporated by
reference in reliance on the report of Price Waterhouse GmbH, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act and in
accordance with the Exchange Act we file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). You
may read and copy any of such information on file with the Commission at the
Commission's public reference facilities at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at Seven World Trade Center, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of filed documents can be obtained, at prescribed rates, by mail from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 or by telephone at 1-800-SEC-0330, or
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's Web site (http://www.sec.gov). Our common
stock is listed on The Nasdaq Stock Market and copies of such reports and other
information can also be read and obtained at the offices of The Nasdaq Stock
Market, Reports Section, Demised Premises, N.W., Washington, D.C. 20006.
We have filed with the Commission a registration statement on Form S-4
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Exchange Notes offered by this Prospectus. As permitted by the
rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to us and the Exchange Notes, reference is made to the Registration
Statement, including its exhibits and the financial statements, notes and
schedules filed as a part of it, which you may read and copy at the public
reference facilities of the Commission referred to above. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the full text of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
We furnish our stockholders with annual reports containing our audited
financial statements and with proxy material for our annual meetings complying
with the proxy requirements of the Exchange Act.
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GLOSSARY
Set forth below are definitions of some of the terms used in this
Prospectus.
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. A
category of telephone service provider
that offers services similar to the
former monopoly local telephone
company. A CLEC may also provide other
types of telecommunications.
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.
Dark Fiber Fiber which does not have connected to
it the electronics required to transmit
data on such fiber.
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. The
local exchange carrier that was the
monopoly carrier, prior to the opening
of local exchange services to
competition.
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.
IXC Interexchange carrier. A provider of
telecommunications services that extend
between exchanges, or cities.
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.
NOC Network operation center.
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.
OC-48 OC-48 SONET high capacity optical
telecommunications line capable of
transmitting data at 2488.32 Mbps.
-142-
<PAGE>
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. One of
the LECs created by the Divestiture of
the local exchange business by AT&T.
These include BellSouth, Bell Atlantic,
Ameritech, US West, SBC, and PacTel.
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. Packet-switching is
a method of delivering voice and data
traffic.
SONET Synchronous Optical Network.
TCP/IP Transmission Control Protocol/Internet
Protocol. A compilation of network and
transport-level protocols that allow
computers with different architectures
and operating system software to
communicate with other computers on the
Internet.
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.
VOIP Voice over internet protocol.
-143-
<PAGE>
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.
xDSL A term referring to a variety of new
Digital Subscriber Line technologies.
Some of these varieties are asymmetric
with different data rates in the
downstream and upstream directions.
Others are symmetric. Downstream speeds
range from 384 kilobits (or "SDSL") to
1.5-8 Mbps (or "ADSL").
-144-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
PSINET INC.
- -----------
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 (audited) and
September 30, 1998 (unaudited)........................................... F-3
Consolidated Statements of Operations for the three years ended December
31, 1997 (audited) and nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the three years ended December 31, 1997 (audited) and nine months ended
September 30, 1998 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 1997 (audited) and nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
ISTAR INTERNET INC.
- -------------------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report to the Directors......................................... F-28
Consolidated Balance Sheets as of May 31, 1996 and 1997................... F-29
Consolidated Statements of Operations and Deficit for the years ended May
31, 1996 and 1997........................................................ F-30
Consolidated Statements of Changes in Financial Position for the years
ended May 31, 1996 and 1997.............................................. F-31
Notes to Consolidated Financial Statements................................ F-32
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of February 28, 1997 and January 31, 1998
(Unaudited).............................................................. F-42
Consolidated Statements of Operations and Deficit for the nine months
ended February 28, 1997 and the eight months ended January 31, 1998
(Unaudited).............................................................. F-43
Consolidated Statements of Changes in Financial Position for the nine
months ended February 28, 1997 and eight months ended January 31, 1998
(Unaudited).............................................................. F-44
Notes to Consolidated Financial Statements (Unaudited).................... F-45
TOKYO INTERNET CORPORATION
- --------------------------
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants......................................... F-47
Balance Sheets as of March 31, 1996, 1997 and 1998........................ F-48
Statements of Operations and Undisposed Deficit for the years ended March
31, 1996, 1997 and 1998.................................................. F-49
Notes to the Financial Statements......................................... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of PSINet Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows 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.
PricewaterhouseCoopers LLP
Washington, D.C.
February 6, 1998, except as to paragraphs 1, 2 and 6 of Note 11,
which are as of February 25, 1998
F-2
<PAGE>
PSINET INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 51,741 $ 33,322 $ 282,586
Restricted cash and short-term
investments............................. 954 20,690 127,617
Short-term investments and marketable
securities.............................. 4,649 -- 52,842
Accounts receivable, net of allowances of
$1,909,000, $2,101,000 and $4,420,000
(unaudited)............................. 17,421 11,022 36,932
Notes receivable......................... 747 7,224 1,347
Prepaid expenses......................... 1,963 1,478 5,052
Other current assets..................... 4,836 5,162 16,906
--------- --------- ---------
Total current assets................... 82,311 78,898 523,282
Property and equipment, net................ 72,061 95,619 221,390
Goodwill and other intangibles, net of
accumulated amortization of $9,778,000,
$2,057,000 and $8,263,000 (unaudited)..... 16,673 4,675 103,504
Other assets and deferred charges.......... 6,067 6,989 30,454
--------- --------- ---------
Total assets........................... $ 177,112 $ 186,181 $ 878,630
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit.......................... $ 2,000 $ 5,648 $ --
Current portion of long-term debt........ 24,915 33,985 44,746
Trade accounts payable................... 19,868 25,031 34,727
Accrued payroll and related expenses..... 3,098 4,636 7,646
Other accounts payable and accrued
liabilities............................. 3,632 2,382 25,667
Deferred revenue......................... 5,612 5,944 9,878
--------- --------- ---------
Total current liabilities.............. 59,125 77,626 122,664
Long-term debt............................. 26,938 33,820 772,998
Deferred income taxes...................... 476 -- --
Other liabilities.......................... 790 1,306 9,601
--------- --------- ---------
Total liabilities...................... 87,329 112,752 905,263
--------- --------- ---------
Commitments and contingencies (Notes 11 and
12)
Shareholders' equity (deficit):
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 28,637
Common stock, $.01 par value; 100,000,000
shares authorized; 40,212,790,
40,577,342 and 51,889,896 (unaudited)
shares issued........................... 402 406 519
Capital in excess of par value........... 208,000 210,162 400,949
Retained deficit......................... (116,636) (162,649) (295,033)
Treasury stock, 99,556 shares, at cost... (2,005) (2,005) (2,005)
Accumulated other comprehensive income... 22 (620) (1,150)
Bandwidth asset to be delivered under IRU
agreement............................... -- -- (158,550)
--------- --------- ---------
Total shareholders' equity (deficit)... 89,783 73,429 (26,633)
--------- --------- ---------
Total liabilities and shareholders'
equity (deficit)...................... $ 177,112 $ 186,181 $ 878,630
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue.................... $ 38,722 $ 84,351 $121,902 $ 87,147 $ 165,732
Other income, net.......... -- 5,417 -- -- --
-------- -------- -------- -------- ---------
38,722 89,768 121,902 87,147 165,732
-------- -------- -------- -------- ---------
Operating costs and
expenses:
Data communications and
operations.............. 32,124 70,102 94,363 66,847 130,517
Sales and marketing...... 23,930 27,064 25,831 18,070 37,919
General and
administrative.......... 10,569 20,648 22,947 16,976 29,439
Depreciation and
amortization............ 14,778 28,035 28,347 20,648 37,011
Intangible asset write-
down.................... 9,938 -- -- -- --
Charge for acquired in-
process research and
development (Note 14)... -- -- -- -- 40,400
-------- -------- -------- -------- ---------
Total operating costs
and expenses.......... 91,339 145,849 171,488 122,541 275,286
-------- -------- -------- -------- ---------
Loss from operations....... (52,617) (56,081) (49,586) (35,394) (109,554)
Interest expense........... (1,964) (5,025) (5,362) (4,162) (38,193)
Interest income............ 1,625 3,794 3,059 1,995 11,391
Other income............... -- 2,863 110 119 703
Gain on sale of
subsidiary................ -- -- 5,701 5,701 --
Gain on sale of
investment................ -- -- -- -- 5,647
Equity in loss of
affiliate................. (204) (807) -- -- --
-------- -------- -------- -------- ---------
Loss before income taxes... (53,160) (55,256) (46,078) (31,741) (130,006)
Income tax provision
(benefit)................. -- (159) (476) (476) 65
-------- -------- -------- -------- ---------
Net loss................... (53,160) (55,097) (45,602) (31,265) (130,071)
Return to preferred
shareholders.............. -- -- (411) -- (2,313)
-------- -------- -------- -------- ---------
Net loss available to
common shareholders....... $(53,160) $(55,097) $(46,013) $(31,265) $(132,384)
======== ======== ======== ======== =========
Basic loss per share....... $ (2.01) $ (1.40) $ (1.14) $ (0.78) $ (2.70)
======== ======== ======== ======== =========
Diluted loss per share..... $ (2.01) $ (1.40) $ (1.14) $ (0.78) $ (2.70)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted loss per
share (thousands)......... 26,485 39,378 40,306 40,264 49,120
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- -------------- ----- CAPITAL IN
OUTSTANDING OUTSTANDING PAR EXCESS RETAINED
SHARES AMOUNT SHARES VALUE OF PAR DEFICIT
----------- ------- -------------- ----- ---------- ---------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......................... -- $ -- 11,202,791 $ 112 $ -- $ (8,379)
Comprehensive income:
Net loss......................................... (53,160)
Unrealized holding gains (losses)................
Foreign curreny translation adjustment...........
Total comprehensive income....................... [(53,160)]
Accretion of redeemable common and convertible
preferred stock.................................. (1,377)
Issuance of common stock to employees under
revenue bonus plan............................... 18,300 77
Issuance of common stock for acquisitions........... 4,514,304 45 43,509
Conversion of redeemable preferred stock into common
stock............................................ 10,042,680 100 26,671
Expiration of redemption rights on redeemable
common stock..................................... 1,838,475 18 402
Initial public offering, net of expenses............ 4,370,000 44 47,229
Issuance of common stock pursuant to exercise of
stock warrants................................... 1,384,863 14 2,390
Issuance of common stock pursuant to exercise of
stock options..................................... 493,003 5 759
Public offering, net of expenses.................... 4,000,000 40 86,599
Employee stock option loan program.................. (224)
Issuance of common stock in escrow for acquisition
of World Online................................... 50,516 1
----------- ------- ----------- ----- ---------- ---------
BALANCE, DECEMBER 31, 1995.......................... -- -- 37,914,932 379 206,035 (61,539)
Comprehensive income:
Net loss......................................... (55,097)
Unrealized holding gains (losses)................
Foreign currency translation adjustment..........
Total comprehensive income....................... [(55,097)]
Retirement of treasury stock........................ (49)
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
Issuance of common stock in escrow for acquisition
of World Online................................... 32,368
Repayments under employee stock option loan
program........................................... 232
Interest under employee stock options loan
program........................................... (10)
----------- ------- ----------- ----- ---------- ---------
BALANCE, DECEMBER 31, 1996.......................... -- -- 40,113,234 402 208,000 (116,636)
Comprehensive income:
Net loss......................................... (45,602)
Unrealized holding gains (losses)................
Foreign currency translation adjustment..........
Total comprehensive income....................... [(45,602)]
Issuance of common stock pursuant to exercise of
stock warrants.................................... 164,185 2 3
Issuance of common stock pursuant to exercise of
stock options..................................... 283,251 3 659
Issuance of Series B convertible preferred stock,
net of expenses................................... 600,000 28,064 1,500
Return to preferred shareholders.................... 71 (411)
Cancellation of common stock for acquisition
of World Online.................................... (82,884) (1)
----------- ------- ----------- ----- ---------- ---------
BALANCE, DECEMBER 31, 1997.......................... 600,000 $28,135 40,477,786 406 210,162 (162,649)
Comprehensive income (unaudited):
Net loss (unaudited)............................. (130,071)
Foreign currency translation adjustment
(unaudited)...................................
Total comprehensive income (unaudited)........... [(130,071)]
Issuance of common stock pursuant to exercise of
stock warrants (unaudited)........................ 174,274 2 279
Issuance of common stock pursuant to exercise of
stock options (unaudited)......................... 908,491 9 4,636
Issuance of common stock and contingent obligation
to IXC (unaudited)................................ 10,229,789 102 185,872
Acceptance of bandwidth under IRU agreement
(unaudited).......................................
Issuance of Series B convertible preferred stock,
net of expenses (unaudited)...................... (11)
Return to preferred shareholders (unaudited)........ 513 (2,313)
----------- ------- ----------- ----- ---------- ----------
BALANCE, SEPTEMBER 30, 1998 (unaudited)............. 600,000 $28,637 51,790,340 $ 519 $400,949 $(295,033)
=========== ======= =========== ===== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
BANDWIDTH
ACCUMULATED ASSET TO BE TOTAL
OTHER DELIVERED SHAREHOLDERS'
TREASURY COMPREHENSIVE UNDER EQUITY
STOCK INCOME IRU (DEFICIT)
-------- ------------- ----------- -------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......................... $ -- $ (16) -- $ (8,283)
Comprehensive income:
Net loss......................................... (53,160)
Unrealized holding gains (losses)................ 813 813
Foreign currency translation adjustment.......... (388) (388)
Total comprehensive income....................... [425] [(52,735)]
Accretion of redeemable common and convertible
preferred stock................................... (1,377)
Issuance of common stock to employees under
revenue bonus plan................................ 77
Issuance of common stock for acquisitions........... 43,554
Conversion of redeemable preferred stock into common
stock............................................. 26,771
Expiration of redemption rights on redeemable
common stock...................................... 420
Initial public offering, net of expenses............ 47,273
Issuance of common stock pursuant to exercise of
stock warrants.................................... (2,005) 399
Issuance of common stock pursuant to exercise of
stock options..................................... (49) 715
Public offering, net of expenses.................... 86,639
Employee stock option loan program.................. (224)
Issuance of common stock in escrow for acquisition
of World Online................................... 1
-------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1995.......................... (2,054) 409 -- 143,230
Comprehensive income:
Net loss......................................... (55,097)
Unrealized holding gains (losses)................ (813) (813)
Foreign currency translation adjustment.......... 426 426
Total comprehensive income....................... [(387)] [(55,484)]
Retirement of treasury stock........................ 49
Issuance of common stock pursuant to exercise of
stock warrants....................................
Issuance of common stock pursuant to exercise of
stock options..................................... 1,815
Issuance of common stock in escrow for acquisition
of World Online...................................
Repayments under employee stock option loan
program........................................... 232
Interest under employee stock options loan
program........................................... (10)
-------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1996.......................... (2,005) 22 -- 89,783
Comprehensive income:
Net loss......................................... (45,602)
Unrealized holding gains (losses)................
Foreign currency translation adjustment.......... (642) (642)
Total comprehensive income....................... [(642)] [(46,244)]
Issuance of common stock pursuant to exercise of
stock warrants.................................... 5
Issuance of common stock pursuant to exercise of
stock options..................................... 662
Issuance of Series B convertible preferred stock,
net of expenses................................... 29,564
Return to preferred shareholders.................... (340)
Cancellation of common stock for acquisition of
World Online....................................... (1)
-------- ------------- ----------- -------------
BALANCE, DECEMBER 31, 1997.......................... (2,005) (620) 73,429
Comprehensive income (unaudited):
Net loss (unaudited)............................. (130,071)
Foreign currency translation adjustment
(unaudited).................................... (530) (530)
Total comprehensive income (unaudited)........... [(530)] [(130,601)]
Issuance of common stock pursuant to exercise of
stock warrants (unaudited)........................ 281
Issuance of common stock pursuant to exercise of
stock options (unaudited)......................... 4,645
Issuance of common stock and contingent obligation
to IXC (unaudited)................................ (185,974)
Acceptance of bandwidth under IRU agreement
(unaudited)....................................... 27,424 27,424
Issuance of Series B convertible preferred stock,
net of expenses (unaudited)....................... (11)
Return to preferred shareholders (unaudited)........ (1,800)
-------- ------------- ----------- -------------
BALANCE, SEPTEMBER 30, 1998 (unaudited)............. $(2,005) $(1,150) $(158,550) $ (26,633)
======== ============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(53,160) $(55,097) $(45,602) $(31,265) $(130,071)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 14,778 28,035 28,347 20,648 37,011
Purchased R&D write off... -- 40,400
Gain on sale of
investments.............. -- (2,863) (20) -- (5,647)
Gain on sale of InterCon.. -- -- (5,701) (5,701) --
Gain on sale of assets to
MindSpring............... -- (5,417) -- -- --
Provision for allowances.. 724 3,130 5,426 4,956 3,807
Equity in loss of
affiliate................ 204 807 -- -- --
Intangible asset write-
down..................... 9,938 -- -- -- --
(Increase) decrease in
accounts receivable...... (2,394) (14,320) 430 (1,823) (16,512)
(Increase) decrease in
notes receivable......... -- (56) (5,648) (3,277) 4,619
(Increase) decrease in
prepaid expenses and
other current assets..... (5,733) 311 296 838 (12,430)
Increase in other assets
and deferred charges..... (779) (509) (258) (889) (474)
Increase in accounts
payable and accrued
liabilities.............. 5,640 11,545 6,568 3,300 1,806
Increase in deferred
revenue.................. 71 2,367 635 279 484
Decrease in deferred
taxes.................... (37) (159) (476) -- --
Increase (decrease) in
other liabilities........ 655 (317) 546 (22) (1,273)
Other..................... -- -- -- (53) 1,349
-------- -------- -------- -------- ---------
Net cash used in
operating activities.... (30,093) (32,543) (15,457) (13,009) (76,931)
-------- -------- -------- -------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment, net........... (16,095) (12,814) (12,613) (9,120) (48,635)
Purchases of short-term
investments.............. -- (17,167) (3,000) (3,000) (247,223)
Proceeds from maturity or
sale of investments...... -- 15,769 7,649 4,649 200,044
Proceeds from sale of
assets to MindSpring..... -- 8,451 691 -- --
Proceeds from sale of
InterCon, net............ -- -- 20,353 20,353 --
Loan to affiliate......... -- (311) -- -- --
Capitalized software
costs.................... (435) (816) -- -- --
Investments in certain
business, net of cash
acquired................. (5,428) (69) (8,551) -- (123,797)
Change in restricted cash
and short-term
investments, net......... -- (954) (19,736) -- (106,212)
Other..................... -- 14 (353) 148 (205)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) investing
activities.............. (21,958) (7,897) (15,560) 13,030 (326,028)
-------- -------- -------- -------- ---------
Cash flows from financing
activities:
Net proceeds (payments) on
lines of credit.......... 1,159 (1,012) 3,702 1,000 (5,603)
Proceeds from issuance of
10% senior notes......... -- -- -- -- 580,494
Proceeds from issuance of
debt..................... 8,250 8,281 6,408 5,988 138,081
Repayments of debt........ (1,441) (4,654) (5,670) (5,290) (37,313)
Principal payments under
capital lease
obligations.............. (4,379) (15,117) (22,071) (14,313) (24,205)
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 -- 279
Proceeds from exercise of
common stock options..... 502 1,815 662 -- 4,645
Proceeds from repayment of
employee notes
receivable............... -- 232 -- -- --
Other..................... -- (74) (2) 409 (10)
Dividends paid to
preferred shareholders... -- -- -- -- (2,140)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities.............. 151,403 (10,529) 12,598 (12,206) 654,228
-------- -------- -------- -------- ---------
Effect of exchange rate
changes on cash........... -- -- -- -- (2,005)
-------- -------- -------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents............... 99,352 (50,969) (18,419) (12,185) 249,264
Cash and cash equivalents,
beginning of period....... 3,358 102,710 51,741 51,471 33,322
-------- -------- -------- -------- ---------
Cash and cash equivalents,
end of period............. $102,710 $ 51,741 $ 33,322 $ 39,286 $ 282,586
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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 12 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 1995 and 1996, 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.
F-7
<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 accumulated other comprehensive
income and included as a component of shareholders' equity (deficit).
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
F-8
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
used, including the discount rate and estimates as to the amounts and timing
of future cash flows. In this regard, 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.
Comprehensive Income--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 has adopted the
Statement's disclosure requirements in the accompanying financial statements.
Recent Pronouncements--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 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging securities. To the extent the Company begins to enter into such
transactions in the future, the Company will adopt the Statement's
requirements in the financial statements for fiscal year 2000. Currently, as
the Company has no derivitive instruments, the adoption of SFAS No. 133 would
have no impact on the Company's financial condition or results of operations.
F-9
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited interim financial information--The consolidated condensed
financial statements at September 30, 1998 and for the nine months ended
September 30, 1997 and 1998 and the related footnote information are unaudited
and have been prepared on a basis substantially consistent with the audited
consolidated financial statements as of and for the year ended December 31,
1997. In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of the Company at September 30, 1998 and the
results of its operations and cash flows for the nine months ended September
30, 1997 and 1998. The results of operations for the nine months ended
September 30, 1998 may not be indicative of the results expected for any
succeeding quarter or for the entire year ending December 31, 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,
1996 and 1997 was $2,769,000 and $2,078,000, respectively.
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, 1996 and 1997, 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 amortization........ (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>
F-10
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total depreciation and leasehold amortization expense in 1995, 1996 and 1997
was $6,462,000, $16,572,000, and $25,099,000, 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 1995, 1996 and 1997 was $8,227,000,
$11,104,000 and $2,712,000, respectively.
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.
F-11
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On September 29, 1998, the Company entered into a new senior secured credit
facility, to replace its then existing bank credit arrangement in the United
States pursuant to which The Chase Manhattan Bank ("Chase") is acting as
administrative agent, to replace the Company's existing bank credit
arrangements in the United States (the "Credit Facility"). The Credit Facility
is in the maximum principal amount of $110 million and has a final maturity
date of September 29, 2001.
Interest. Borrowings under the Credit Facility bear interest at the
Company's option, at (i) the London interbank offered rate for deposits in
U.S. Dollars for the relevant period multiplied by the statutory reserve rate
plus the Applicable Margin ("Eurodollar Rate") or (ii) the higher of Chase's
prime rate or the Federal Funds effective rate plus 1/2 of 1%, plus the
Applicable Margin ("ABR Rate"). The Applicable Margin varies based on the
Leverage Ratio as of the most recent determination date. On September 29,
1998, the Applicable Margin was 1.75% for ABR Rate borrowings and 2.75% for
Eurodollar Rate borrowings.
Guarantees and Security. The Company's obligations under the Credit Facility
are guaranteed by each existing and subsequently acquired or organized
significant domestic subsidiary of the Company (a subsidiary which owns or
maintains at least $1,000,000 in assets or generates at least $1,000,000 in
annual revenues) and are secured by a lien on substantially all of the assets
of the Company and each subsidiary guarantor and by a pledge by the Company
and each subsidiary guarantor of all capital stock and other equity interests
it owns (65% in the case of equity interests in foreign subsidiaries).
Covenants. The Credit Facility contains covenants and provisions that
restrict, among other things, the Company and its subsidiaries' ability to:
(i) make dividends and distributions on, and redemptions and repurchases of,
capital stock and other similar payments; (ii) make prepayments, redemptions
and repurchases of indebtedness; (iii) incur liens and enter into sale-
leaseback transactions; (iv) make certain loans and investments; (v) incur
additional indebtedness and certain contingent obligations; (vi) effect
certain mergers, acquisitions and asset sales; (vii) engage in certain
transactions with affiliates; (viii) effect certain changes in business
conducted by the Company; and (ix) amend and waive certain debt and other
agreements. The Credit Facility also requires the satisfaction of certain
financial covenants, including a minimum annual consolidated revenue test, a
minimum debt-to-annualized adjusted revenue ratio, a minimum aggregate balance
of nonrestricted cash and available borrowings and a minimum EBITDA test and
requires the reduction in the maximum amount of availability and prepayments
(if required as a result of such reduction) equal to the net proceeds received
from certain asset sales greater than $5 million and certain casualty events.
Events of Default. Events of default under the Credit Facility include
various events of default customary for such type of agreement, such as
failure to pay scheduled payments when due, cross defaults with and cross
acceleration to other indebtedness (including the $600 million aggregate
principal amount of 10% Senior Notes due 2005 ("10% Senior Notes")), the
occurrence of a change in control (as defined therein) and certain events of
bankruptcy, insolvency and reorganization.
F-12
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The Company has various financing arrangements accounted for as capital
leases for the acquisition of equipment and other fixed assets. During 1995,
1996 and 1997, the Company incurred capital lease obligations under these
arrangements of $29,071,000, $25,576,000 and $37,455,000, 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>
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, 1995, 1996 and 1997, cash paid for
interest was $1,869,000, $5,083,000 and $5,559,000, respectively.
At December 31, 1996 and 1997, the estimated fair value of the capital lease
obligations was approximately $40,730,000 and $55,565,000, respectively, and
other long-term debt was approximately $12,189,000 and $11,370,000,
respectively.
F-13
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT--1998 (UNAUDITED)
On April 13, 1998, the Company completed an offering of $600.0 million
(unaudited) aggregate principal amount of 10% Senior Notes due 2005, Series A
(the "Initial Notes"). The Initial Notes were issued and sold in accordance
with Rule 144A and Regulation S under the Securities Act of 1933, as amended
(the "Securities Act"). On June 11, 1998, the Company completed an exchange
offer of the Initial Notes for equivalent 10% Senior Notes due 2005, Series B
(the "Exchange Notes" and, together with the Initial Notes, the "Notes") which
have been registered under the Securities Act. The Notes are senior unsecured
obligations of the Company ranking equivalent in right of payment to all
existing and future unsecured and unsubordinated indebtedness of the Company
and senior in right of payment to all existing and future subordinated
indebtedness of the Company. The net proceeds of the offering, after deducting
discounts and commissions and expenses payable by the Company, were
approximately $581.0 million (unaudited).
Concurrently with the closing of the offering, the Company deposited $138.7
million (unaudited) of such net proceeds into an escrow account, which,
together with the proceeds of the investment thereof, is expected to be
sufficient to pay when due the first five semi-annual interest payments on the
Notes. Of the remaining net proceeds of the offering, $20.0 million
(unaudited) was used to repay certain indebtedness incurred primarily to
finance the Company's acquisition of iSTAR internet inc. ("iSTAR") and the
balance is expected to be used to finance capital expenditures (including,
without limitation, facilities and equipment in connection with the
development and expansion of the Company's domestic and international network)
and working capital requirements (including, without limitation, debt service
obligations) of the Company.
During the nine months ended September 30, 1998, the Company incurred
capital lease obligations of $54.9 million (unaudited) upon the execution of
leases for new equipment and other fixed assets.
At September 30, 1998, the aggregate unused portion under the Company's
various financing arrangements for purchases of equipment and other fixed
assets was $60.4 million (unaudited). The aggregate unused portion of the
Company's operating lines of credit was $0.4 million (unaudited) at September
30, 1998.
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.
F-14
<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
F-15
<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
F-16
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with acquisitions, mergers, strategic alliances and other business
combinations and transactions by the Company 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
F-17
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
used for stock options granted in 1995, 1996 and 1997, respectively: no annual
dividends for any year, expected volatility of 80%, 80% and 76%, risk-free
interest rate of 6.85%, 5.98% and 6.36% and expected life of 6.5 years, 5.0
years and 5.0 years. The weighted-average fair value of the stock options
granted in 1995, 1996 and 1997, was $6.90, $4.89 and $4.88, respectively.
Under the above model, the total value of stock options granted in 1995,
1996 and 1997, was $10,572,000, $28,624,000 and $23,616,000, 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, $54,760,000 and $2.07 in 1995,
$63,897,000 and $1.62 in 1996 and $53,113,000 and $1.32 in 1997. 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 $199,000 and $275,000 in 1995 and 1996, 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 WEIGHTED
COMMON STOCK AVERAGE
---------------------- PRICE PER EXERCISE
OPTIONS WARRANTS SHARE 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>
F-18
<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-
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
------------------------ --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$.05-$5.88.............. 2,110,114 4.6 $ 2.62 1,295,342 $ 1.81
$6.13-6.88.............. 224,776 9.0 $ 6.46 56,754 $ 6.24
$6.94-7.00.............. 2,460,822 9.1 $ 7.00 446,649 $ 7.00
$7.25-9.38.............. 3,110,449 8.5 $ 8.77 983,074 $ 9.12
$9.56-13.50............. 653,999 8.6 $10.49 267,336 $10.39
--------- ---------
$.05-$13.50............. 8,560,160 7.7 $ 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 $131,000, $622,000
and $525,000 during 1995, 1996 and 1997, 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) --
-------- --------
(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 $8,936,000, $20,948,000 and $18,756,000 in 1995, 1996 and 1997,
respectively. The changes primarily relate to additional losses in those
years.
F-19
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 $159,000 in
1996 and $476,000 in 1997.
No cash was paid for income taxes in 1995, 1996 or 1997.
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 IRU Purchase Agreement permits the Company to use the bandwidth acquired
from IXC for any purpose in connection with the provision of Internet services
and at a rate of DS-3 or less for non-Internet telecommunications transport, but
restricts the Company 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. The Company expects to incur on an
annual basis approximately $1.15 million in operations and maintenance fees with
respect to the PSINet IRUs 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.
F-20
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Contingent Payment Obligation was recorded as capital in excess of par
value based on its fair value of $107.3 million. The fair value of the
Contingent Payment Obligation was determined utilizing a Black-Scholes
valuation model using an assumed term of four years, the closing market price
per share of the common stock on the date of the closing ($7.6875), an
exercise price of $23.46 (which is the price per share required in order for
the calculation of the IXC Initial Shares to result in a value equal to $240.0
million), expected volatility of 76% and an interest rate of 11%. The amount
recorded for the fair value of the Contingent Payment Obligation could be
adjusted upward in a future period under certain circumstances (unaudited).
The amount representing the initial aggregate of the fair value of the IXC
Initial Shares and the Contingent Payment Obligations, $186.0 million, was
recorded as an offset to shareholders' equity similar to a stock subscription
receivable. Such amount will be reduced, and a long-term asset relating to the
PSINet IRUs will be recorded, as each bandwidth unit corresponding to the PSINet
IRUs is accepted by the Company. The Company expects to amortize the capitalized
amount of the asset relating to the PSINet IRUs ratably over the 20-year period
during which the Company has the right to utilize the bandwidth corresponding to
the PSINet IRUs (unaudited).
The 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 closing. At September 30,
1998, the Company had accepted from IXC 1,475 equivalent route miles of OC-48
bandwidth and had recorded $27.4 million as an increase to fixed assets and a
decrease to "Bandwidth assets to be delivered under IRU agreement" in
shareholders' equity (unaudited).
ISTAR INTERNET INC.
Between January 30, 1998 and February 12, 1998, the Company acquired
approximately 23,400,000 (or 79.7%) of the outstanding common shares of iSTAR
internet inc. ("iSTAR"), a Canadian ISP. The excess of the purchase price over
the fair values of the tangible assets acquired and liabilities assumed was
$19,500,000. This acquisition 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.
F-21
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 $2,077,000, $3,601,000 and $4,968,000 in 1995,
1996 and 1997, respectively.
F-22
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 TELECOMMUNICATIONS
31, 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 PSINET INC. 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 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.
F-23
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-24
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--INVESTMENTS IN AND ACQUISITIONS OF CERTAIN BUSINESSES (UNAUDITED)
During the nine months ended September 30, 1998, the company acquired 12
companies. The Company also acquired an equity interest in one company. The
following table summarizes certain financial information concerning these
acquisitions or investments:
<TABLE>
<CAPTION>
OWNERSHIP
BUSINESS NAME LOCATION ACQUISITION DATE INTEREST
------------- -------- ---------------- ---------
<S> <C> <C> <C>
Internet Prolink S.A.... Switzerland January 1998 100%
iSTAR Internet Inc...... Canada February and May 1998 100%
Interactive Telephony
Limited................ Channel Islands, Jersey April 1998 100%
WorldPay Ltd*........... Channel Islands, Jersey April 1998 12.5%
Interactive Networx
GmbH................... Germany May 1998 100%
LinkAge Online Limited.. Hong Kong June 1998 100%
IoNET Internetworking
Services............... United States June 1998 100%
SCII-CalavaPro.......... Sub-Sahara Africa June 1998 100%
INTERLOG Internet
Services, Inc.......... Canada July 1998 100%
Rimnet Corporation...... Japan August 1998 100%
TWICS Co., Ltd.......... Japan September 1998 100%
Hong Kong Internet &
Gateway Services....... Hong Kong September 1998 100%
Inet, Inc............... Korea September 1998 100%
</TABLE>
- ---------------------
* The investment in WorldPay is accounted for under the cost method.
Certain portions of the purchase prices have been retained to secure
performance by certain sellers of indemnification or other contractual
obligations.
Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's financial statements
since the acquisition dates. The purchase price of the acquisitions was
allocated to assets acquired, including intangible assets and liabilities
assumed, based on their respective fair values at the acquisition dates. The
excess of the purchase price over the fair value of the net tangible assets of
the acquisitions is being amortized over periods up to 15 years from the dates
of acquisition.
In connection with these acquisitions, the Company recorded a $40.4 million
charge in the nine months ended September 30, 1998 for acquired in-process
research and development. This represents the value of purchased in-process
technology on projects that have not yet reached technological feasibility and
have no alternative future use. The charge is comprised of $7.0 million in the
first quarter of 1998 relating to the acquisition of iSTAR, $20.0 million in
the second quarter relating to the acquisitions of INX, ioNet and LinkAge, and
$13.4 million in the third quarter relating to the acquisitions of Interlog,
Rimnet and Inet.
The amount of purchase price allocated to in-process research and
development was determined using appropriate valuation techniques, including
percentage-of-completion which utilizes the key milestones to estimate the
stage of development of each in-process research and development project at
the date of acquisition, estimating cash flows resulting from the expected
revenues generated from such projects, and discounting the net cash flows back
to their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the
purchased in-process technology.
The value assigned to purchased in-process technology was determined by
identifying research projects in areas including network applications such as
Internet Protocol telephony, access technologies such as asymmetric digital
subscriber line access and wireless local loop access, and other technologies
for which technological
F-25
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
feasibility has not been established. The value of the in-process projects was
adjusted to reflect the relative value and contribution of the acquired
research and development. In doing so, consideration was given, as
appropriate, to the stage of completion, the complexity of the work completed
to date, the difficulty of completing the remaining development, costs already
incurred, and the projected cost to complete the projects. The value assigned
to purchased in-process technology was based on the following assumptions.
The estimated revenue associated with the respective business enterprise
valuations assumed five-year compound annual revenue growth rates of between
22% to 45%. Revenue growth rates for each technology were developed
considering, among other things, the current and expected industry trends,
acceptance of the technologies and historical growth rates for similar
industry products. Estimated total revenue from the purchased in-process
technology projects generally peak in the year 2003 and decline through 2007
as other new products are expected to be introduced. These revenue projections
were based on management's estimates of market size and growth, expected
trends in technology and the expected timing of new product introductions. The
estimated net cash flows were discounted back to their present value using a
discount rate of between 17.0% and 27.5%, which represents a premium to the
Company's cost of capital. The estimated percentage-of-completion of the
various in-process research and development projects ranged from 50% to 85%
complete.
The resulting net cash flows from such projects were based on the Company's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes associated with such
projects.
If none of these projects is successfully developed, the Company's sales and
profitability may be adversely affected in future periods. However, the
failure of any particular individual project in-process would not have a
material impact on the Company's financial condition or its results of
operations. Additionally, the failure of any particular individual project in-
process could impair the value of other intangible assets acquired. The
Company expects to begin to benefit from the purchased in-process technology
in late 1998 or early 1999.
All of the companies acquired are Internet service providers ("ISPs"), or
data transmission companies, offering a wide range of Internet-protocol based
solutions for businesses, institutions and small-office/home-office users.
Depending on the particular business activities of the company acquired,
revenue may also be derived from service to consumer users, network
integration, web hosting, managed co-location, as well as vertical market
Internet services, including comprehensive banking, medical and
telecommunications Internet solutions.
The purchase price relating to one transaction may be increased by up to $8
million pursuant to an earnout provision in the event the acquired company
achieves certain levels of operating results in the period following the
acquisition. Such amount will be recorded as additional cost of the acquired
company and reflected as additional purchased goodwill when it becomes
probable that the amount will be paid.
In connection with the acquisition of these companies, liabilities assumed
were as follows (in thousands of U.S. dollars):
<TABLE>
<S> <C>
Fair value of assets acquired.................................. $ 211,502
Cash paid for the capital stock................................ (141,580)
---------
Liabilities.................................................. $ 69,922
=========
</TABLE>
The following presents the unaudited pro forma results of operations of the
Company for the nine month periods ended September 30, 1997 and 1998 as if all
of the companies acquired since the beginning of 1998 in business combinations
accounted for under the purchase method had been consummated at the beginning
of the periods presented. The pro forma results of operations include certain
pro forma adjustments, including the
F-26
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortization of intangible assets and the write-off of intangible assets
consisting of in-process research and development costs relating to the
acquisitions. The pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of the periods
presented or the results which may occur in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1998
------------- -------------
(IN MILLIONS OF U.S.
DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenue............................................. $ 154.6 $ 201.6
Net loss............................................ $(120.1) $(150.8)
Basic and diluted loss per share ................... $ (2.98) $ (3.07)
</TABLE>
In August 1998, the Company entered into an agreement with a group of
leading global telecommunications companies to build an undersea cable system,
called the Japan-US Cable Network, that will connect from the United States to
Japan. Under the agreement, PSINet will have the right to 22 STM-1s (each
equivalent to an OC-3, or 155 MBPS) along with additional rights as the system
is upgraded. The system is scheduled for completion by the second quarter of
2000. PSINet's portion of the total investment in this facility, including
equipment and local interconnection, is expected to be in excess of $100
million over the 25 year term of the agreement. It is currently anticipated
that this expenditure will be financed through a combination of capital leases
and a portion of the net proceeds from the Company's recently completed 10%
Senior Notes offering along with other sources of financing over the term of
the agreement.
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITIONS OF TOKYO INTERNET AND IXE
In October 1998, the Company acquired two additional Internet service
providers, Tokyo Internet Corporation ("Tokyo Internet") in Japan and Internet
Exchange Europe, B.V./Unix Support Netherland B.V. in The Netherlands. The
aggregate amount of the purchase prices and related payments for these
acquisitions was approximately $147.7 million, exclusive of indebtedness
assumed in connection with such acquisitions. The Company borrowed $108.5
million under its Credit Facility to finance a portion of the purchase price
of Tokyo Internet.
11.5% SENIOR NOTES DUE 2008
On November 3, 1998, the Company completed an offering of $200,000,000
principal amount of 11.5% senior notes due 2008 (the "October 11.5% Notes").
The October 11.5% Notes were sold at par, before giving effect to the initial
purchasers' discounts and commissions, and are unsecured and junior in ranking
to secured obligations and to liabilities of the Company's subsidiaries. The
indenture governing the October 11.5% Notes contains certain financial and
other covenants which, among other things, will restrict the Company's ability
to incur further indebtedness and sell assets.
On November 13, 1998, the Company completed an offering of $150,000,000
principal amount of 11.5% senior notes due 2008 (the "November 11.5% Notes").
The November 11.5% Notes were sold at 102% of par, before giving effect to the
initial purchasers' discounts and commissions, and are unsecured and junior in
ranking to secured obligations and to the liabilities of the Company's
subsidiaries. The indenture governing the October 11.5% Notes also governs the
November 11.5% Notes, and contains certain financial and other covenants
which, among other things, will restrict the Company's ability to incur
further indebtedness and sell assets.
Prior to the closing of the October 11.5% Notes, the Company repaid the $108.5
million of borrowings outstanding under its Credit Facility.
F-27
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
ISTAR INTERNET INC.
YEARS ENDED MAY 31, 1997 AND 1996
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of iSTAR internet inc. as at
May 31, 1997 and 1996 and the consolidated statements of operations and
deficit and changes in financial position for the years ended May 31, 1997 and
1996. 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 in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at May 31,
1997 and 1996 and the results of its operations and the changes in its
financial position for the years then ended in accordance with Canadian
generally accepted accounting principles.
Significant differences between Canadian and United States generally
accepted accounting principles are quantified and explained in Note 20 to the
financial statements.
KPMG LLP
Chartered Accountants
Ottawa, Canada
July 10, 1997, except for notes 12, 18, 19 and 20 which are as at December 5,
1997
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern,
such as those described in Note 19 to the financial statements which is as at
December 5, 1997. Canadian reporting standards do not permit a reference to
such events and conditions in the auditor's report when these are adequately
disclosed in the financial statements.
KPMG LLP
Chartered Accountants
Ottawa, Canada
December 5, 1997
F-28
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 AND 1997
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and marketable securities (note 3)..................... $16,733 $12,073
Accounts receivable (note 4)................................ 8,595 10,027
Inventory................................................... 284 371
Other assets (note 5)....................................... 731 606
------- -------
26,343 23,077
Property and equipment (note 6)............................... 12,640 16,343
Customer lists and goodwill (notes 2 and 7)................... 16,497 --
------- -------
$55,480 $39,420
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 8).................................. $ -- $ 3,500
Accounts payable and accrued liabilities.................... 10,310 14,829
Deferred revenue............................................ 1,858 1,630
Current portion of capital lease obligations................ 1,999 3,139
------- -------
14,167 23,098
Capital lease obligations (note 9)............................ 1,730 4,540
Deferred leasehold inducements................................ 321 710
Shareholders' equity:
Share capital (note 10)..................................... 55,656 83,015
Share purchase warrants (note 10(d))........................ 2,013 218
Contributed surplus (note 10(e))............................ 2,871 2,871
Deficit..................................................... (21,278) (75,032)
------- -------
39,262 11,072
------- -------
Commitments (note 11).........................................
Contingencies (note 12)....................................... $55,480 $39,420
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
YEARS ENDED MAY 31, 1996 AND 1997
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Sales...................................................... $ 19,405 $ 34,043
Cost of sales.............................................. 13,596 30,558
-------- --------
Gross margin............................................... 5,809 3,485
Selling, general and administration expenses............... 22,147 32,624
-------- --------
Operating loss before undernoted items..................... (16,338) (29,139)
Depreciation and amortization.............................. 2,947 6,519
Interest and bank charges, net (note 9).................... (546) 113
-------- --------
Operating loss before non-recurring charges................ (18,739) (35,771)
Integration costs.......................................... 1,699 585
Write-off of customer lists and goodwill (note 7).......... -- 17,398
-------- --------
Net loss................................................... $(20,438) $(53,754)
Deficit, beginning of year................................. (840) (21,278)
-------- --------
Deficit, end of year....................................... $(21,278) $(75,032)
======== ========
Net loss per share (note 14)............................... $ (1.70) $ (2.42)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
YEARS ENDED MAY 31, 1997 AND 1996
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cash provided by (used in):
Operations:
Net loss.................................................. $(20,438) $(53,754)
Add non-cash items:
Depreciation and amortization........................... 2,947 6,519
Write-off of customer lists and goodwill................ -- 17,398
Non-cash operating working capital........................ (381) 3,286
-------- --------
(17,872) (26,551)
Financing:
Common shares and warrants issued, net of issue costs..... 57,245 25,564
Capital lease obligations, net............................ 3,457 3,950
Due from related parties.................................. (373) --
Payments on long-term debt, net........................... (578) --
Contributed surplus....................................... 2,871 --
-------- --------
62,622 29,514
Investing:
Purchase of property and equipment........................ (10,158) (8,635)
Acquisition of companies and businesses................... (17,921) (2,488)
-------- --------
(28,079) (11,123)
-------- --------
Increase (decrease) in cash position........................ 16,671 (8,160)
Cash position, beginning of year............................ 62 16,733
-------- --------
Cash position, end of year.................................. $ 16,733 $ 8,573
======== ========
</TABLE>
Cash position is defined as cash and marketable securities less bank
indebtedness.
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
iSTAR internet inc. provides advanced Internet services for businesses,
institutions, and individuals. The Company provides customers with a range of
networking expertise and Web-based products and services including business
solutions with high-speed connection to the Internet through a national
backbone network.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated on consolidation.
(b) Marketable securities:
Marketable securities are stated at cost, which approximates market value.
(c) Inventory
Inventory is stated at the lower of cost and net realizable value.
(d) Property and equipment:
Property and equipment is stated at cost. Depreciation and amortization are
provided on the straight-line basis using the following annual rates:
<TABLE>
<CAPTION>
ASSET TYPE RATE
---------- ------
<S> <C>
Computer and network equipment..................................... 33%
Computer software.................................................. 50%
Furniture and equipment............................................ 20%
Leasehold improvements............................................. 16.67%
Trade show equipment............................................... 50%
</TABLE>
(e) Customer lists and goodwill:
Customer lists and goodwill represent the excess of the purchase price of
acquired companies and businesses over the fair value assigned to the
identifiable net assets acquired. Customer lists and goodwill are being
amortized on a straight-line basis over a 12 year period. On an ongoing basis
management reviews the valuation and amortization of customer lists and
goodwill, taking into consideration any events and circumstances which might
have impaired fair value. The amount of customer lists or goodwill impairment,
if any, is measured based on management's estimate of fair value.
(f) Leases:
Leases are classified as either capital or operating in nature. Capital
leases are those which substantially transfer the benefits and risks of
ownership to the lessee. Assets acquired under capital leases are depreciated
at the same rates as those described in note 1 (d). Obligations recorded under
capital leases are reduced by rental payments net of imputed interest.
(g) Deferred leasehold inducements:
The Company amortizes deferred leasehold inducements on a straight-line
basis over the terms of the respective leases.
F-32
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(h) Revenue recognition:
Revenues from dial-up access, direct connect, consulting and training
services are recognized at the time services are rendered. Billings in advance
of services are recorded as deferred revenue and recognized at the time
services are rendered. Revenue from the sale of software, including sales to
distributors and resellers, is recognized when the products are installed.
2. ACQUISITIONS OF COMPANIES AND BUSINESSES:
On August 10, 1995, the Company amalgamated with NSTN Incorporated (NSTN),
an Internet service provider operating primarily in Eastern Canada. This
transaction has been accounted for by the purchase method with the results of
operations of NSTN included in the Company's financial statements from the
date of amalgamation.
During fiscal 1996, the Company acquired eight other companies and
businesses engaged in providing Internet services. These acquisitions have
been accounted for by the purchase method and the results of operations have
been included from the respective dates of acquisition.
The total consideration provided by the Company in exchange for all the
issued and outstanding shares of the companies and business assets acquired is
as follows:
<TABLE>
<CAPTION>
MAY 31,
1996
-------
<S> <C>
Net identifiable assets acquired:
Non-cash current assets........................................ $ 2,001
Property, plant & equipment.................................... 3,241
Bank indebtedness.............................................. (295)
Due to related parties......................................... (373)
Current liabilities............................................ (3,789)
Long term debt................................................. (613)
-------
172
Customer lists and goodwill...................................... 17,454
-------
$17,626
=======
Consideration provided:
Cash........................................................... $ 8,094
Common shares (3,507,976.5 shares)............................. 4,648
Contributed surplus............................................ 2,871
Performance warrants........................................... 2,013
-------
$17,626
=======
</TABLE>
During 1997, additional common shares and share warrants in the amount of
$2,089,606 were recorded for these acquisitions. At May 31, 1996, this
consideration was contingent on certain events that were resolved during 1997.
The additional consideration was recorded as an increase to customer lists and
goodwill.
3. CASH AND MARKETABLE SECURITIES:
Cash and marketable securities includes marketable securities of $6,281,663
(1996--$14,676,792). The marketable securities mature within 30 days and bear
interest at rates ranging from 2.75% to 3.05% (1996--4.75% to 5.05%).
F-33
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
4. ACCOUNTS RECEIVABLE:
Included in accounts receivable is an allowance for doubtful accounts of
$1,902,251 (1996--$1,139,095).
5. OTHER ASSETS:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Prepaid expenses................................................ $520 $495
Employee loans.................................................. 211 111
---- ----
$731 $606
==== ====
</TABLE>
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ACCUMULATED 1996 1997
DEPRECIATION NET NET
AND BOOK BOOK
COST AMORTIZATION VALUE VALUE
------- ------------ ------- -------
<S> <C> <C> <C> <C>
Property under capital leases:
Computer equipment...................... $10,510 $2,359 $ 3,597 $ 8,151
Furniture and equipment................. 536 107 536 429
Computer and network equipment............ 8,908 3,894 6,497 5,014
Computer software......................... 1,862 649 445 1,213
Furniture and equipment................... 1,170 342 757 828
Leasehold improvements.................... 803 167 634 636
Trade show equipment...................... 204 132 174 72
------- ------ ------- -------
$23,993 $7,650 $12,640 $16,343
======= ====== ======= =======
</TABLE>
Cost and accumulated depreciation and amortization at May 31, 1996 amounted
to $15,398,828 and $2,759,034, respectively.
7. CUSTOMER LISTS AND GOODWILL:
Management has evaluated that there has been a permanent impairment in the
fair value of customer lists and goodwill in that the future benefit is
unlikely. This is due to many factors including the evolution of the Company
from a provider of primarily access-related products to a provider of business
solutions products and services. Therefore, the entire balance of $17,398,250
has been written off.
8. BANK INDEBTEDNESS:
Bank indebtedness comprises an operating loan in the amount of $3,500,000
that was repaid in June 1997 (see note 18(b)).
F-34
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
9. CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
1997............................................................. $2,294 $ --
1998............................................................. 1,485 3,676
1999............................................................. 200 3,345
2000............................................................. 145 1,757
2001............................................................. 83 67
------ ------
Total minimum lease payments..................................... 4,207 8,845
Less amount representing interest at an average rate of 9.3%..... 478 1,166
------ ------
Present value of minimum lease payments.......................... 3,729 7,679
Current portion of obligations under capital leases.............. 1,999 3,139
------ ------
$1,730 $4,540
====== ======
</TABLE>
Included in interest and bank charges is interest on capital lease
obligations of $276,254 (1996--$202,119).
10. SHARE CAPITAL:
The number of shares and amounts per share in these financial statements
have been retroactively adjusted to give effect to a 2.5 for 1 share split,
pursuant to articles of amendment filed on November 9, 1995.
(a) Authorized:
The Company has an unlimited number of authorized common shares.
(b) Issued:
The Company's common share transactions are as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES AMOUNT
------------ -------
<S> <C> <C>
Issued for cash........................................... 1,818,787.5 $ 424
------------ -------
Balance, May 31, 1995..................................... 1,818,787.5 424
Issued:
For cash in initial public offering, net of issue
costs.................................................. 3,275,980.0 35,508
On conversion of special warrants, net of issue costs... 6,000,000.0 11,078
For acquisitions........................................ 3,507,976.5 4,648
For cash................................................ 2,661,212.5 3,156
On conversion of options................................ 300,000.0 600
To employees, directors................................. 1,295,814.0 242
------------ -------
Balance, May 31, 1996..................................... 18,859,770.5 55,656
Issued:
For cash in public and private offerings, net of issue
costs.................................................. 5,290,918.0 23,720
On conversion of share purchase warrants................ 289,853.5 2,008
On conversion of performance and litigation warrants.... 174,437.0 1,631
------------ -------
Balance, May 31, 1997..................................... 24,614,979.0 $83,015
============ =======
</TABLE>
F-35
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
On May 29, 1997, the Company issued 2,220,869 common shares in exchange for
all of the outstanding shares of a corporation in which two of the Company's
directors were shareholders. The only asset of this corporation is 2,220,869
iSTAR internet inc. common shares issued in previous periods. As a result of
this transaction the Company indirectly holds iSTAR internet inc. shares.
These shares have been removed from the transaction summary provided above.
(c) Stock options:
At May 31, 1997, 2,070,537 options exercisable between $2.20 and $12.00 were
outstanding. These options may be exercised between one month and 5 years from
the date of grant.
(d) Warrants:
On September 24, 1996, the Company issued 366,750 warrants in connection
with a private offering. At May 31, 1997, 48,107 warrants are outstanding and
exercisable at a price of $4.10 per warrant until September 28, 1998.
On October 29, 1996, the Company issued 1,450,000 warrants in connection
with the public offering. At May 31, 1997, these warrants are outstanding and
exercisable at a price of $6.75 until November 12, 1997.
At May 31, 1997, the Company has warrants outstanding and exercisable into
46,940 common shares relating to 1996 acquisitions.
(e) Contributed surplus:
The statutory amalgamation on August 10, 1995 of the Company and NSTN
Incorporated resulted in contributed surplus of $2,871,199.
11. COMMITMENTS:
The Company is committed to payments under operating leases for office space
and office equipment. Annual payments are: 1998--$923,478; 1999--$929,662;
2000--$932,802; 2001--$865,675; 2002--$655,186; and $2,138,236 thereafter.
The Company is also committed to payments under operating leases for
computer and network equipment. Annual payments are: 1998--$3,420,247; 1999--
$3,230,011; and 2000--$2,383,576.
12. CONTINGENCIES:
(a) The Company is the defendant and counter-claimant in a claim arising
from the normal course of business. Since this claim is in its early stages,
legal counsel cannot determine what the outcome will be. However, management
expects that the financial impact arising from this claim will not be
material.
On November 26, 1997, the plaintiff accepted a settlement offer from the
Company, which will be recorded in the financial statements of the Company for
the second quarter ended November 30, 1997.
(b) The Company has $2,875,000 of letters of credit outstanding in favour of
three of its major suppliers.
F-36
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
During the second quarter of fiscal 1998 all letters of credit were released
by suppliers in exchange for renegotiated equipment leasing arrangements that
included accelerated lease payments.
13. INCOME TAXES:
The Company has income tax losses of approximately $58,600,000 (1996--
$21,400,000) which include tax losses acquired on the acquisition of certain
subsidiaries. These losses are generally available to reduce future taxable
income up to 2004. The benefit of these losses has not been recognized in
these financial statements.
14. NET LOSS PER SHARE:
The net loss per share figures are calculated based on the weighted average
number of common shares outstanding of 22,224,230 shares (1996--12,053,453
shares).
The potential exercise of stock options and warrants would not have a
dilutive impact on the net loss per common share.
15. RELATED PARTY TRANSACTIONS:
During the year ended May 31, 1997, the Company purchased $1,003,740 (1996--
$1,814,829) of software, hardware and management services from a corporation
in which a Company director is a shareholder.
The Company paid consulting fees of $244,549 (1996--$517,904) to a
corporation in which two of the Company's directors are shareholders.
During the year, the Company purchased $982,374 (1996--$618,278) of software
and hardware from a corporation in which one of the corporation's shareholders
is a director of the Company.
During the year, the Company purchased $63,036 (1996--$Nil) of financial
services from a corporation that is a shareholder and holds a seat on the
board of directors of the Company. The Company also sold $252,688 (1996--$Nil)
of services to this same corporation.
Included in accounts receivable as at May 31, 1997 are amounts due from
related parties of $168,465 (1996--$81,456). Included in accounts payable and
accrued liabilities as at May 31, 1997 are amounts due to related parties of
$473,198 (1996--$828,705).
16. SEGMENTED INFORMATION:
Management has determined that the Company operates in one dominant industry
segment, being commercially-focused Internet products, and in one dominant
geographic segment, being Canada.
17. FINANCIAL INSTRUMENTS:
The carrying values of cash and marketable securities, accounts receivable,
bank indebtedness, accounts payable and accrued liabilities and capital lease
obligations approximate their fair values.
F-37
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
18. SUBSEQUENT EVENTS:
(a) Special warrants:
On July 31, 1997, the Company issued 4,500,000 special warrants at a price
of $2.00 each for proceeds of $9,000,000. Each special warrant was convertible
without further payment into common shares of the Company on a one-for-one
basis. The proceeds from the issuance of the special warrants were held in
escrow until a receipt was issued by the appropriate Canadian securities
regulatory authorities for a final prospectus qualifying the issue of the
underlying common shares. The receipt was issued on September 10, 1997 and the
proceeds released from escrow on September 16, 1997. The warrants were
converted into common shares on September 18, 1997.
(b) Credit facility:
On August 1, 1997, the Company entered into a loan agreement with The Bank
of Nova Scotia, Jefferson Partners Capital Limited and Jefferson Partners
Holdco Inc. for up to $4,000,000. As at August 8, 1997, $2,000,000 was
advanced and another $2,000,000 was advanced upon execution of the Network
Provisioning Agreement (note 19). The principal portion of the fees payable to
the lenders for this facility was 200,000 warrants convertible into common
shares for no additional consideration. This credit facility is secured by
existing security in favour of The Bank of Nova Scotia and by a general
assignment of book debts in favour of Jefferson Partners Capital Limited. The
proceeds of the Special Warrants (note 18(a)) was used to repay the amount
outstanding under this facility and the warrants were converted into common
shares on September 18, 1997.
19. NETWORK PROVISIONING AGREEMENT, PROPOSED SALE OF BUSINESS AND THE GOING
CONCERN ASSUMPTION:
On August 29, 1997, the Company signed a network provisioning agreement
(NPA) with Bell Sygma Inc. (Bell) to supply the Company with
telecommunications facilities and services over five years. The fees for
certain services performed by Bell between July 1, 1997 and June 30, 1999, up
to $20,000,000, do not have to be paid prior to July 1, 1999 and are interest
free. After this date, Bell has the right to demand repayment of the deferred
fees on an interest free basis over the next three years in equal monthly
installments.
The Company is obligated to pay Fonorola Inc. an amount which has not been
finally determined but which is anticipated by the Company to be no more than
$1,800,000, resulting from the early termination of the Company's supply
agreement with Fonorola Inc. Under the NPA, Bell Sygma Inc. has agreed to pay
50% of this amount, which it will include in invoices to the Company in equal
monthly amounts over the next five years.
The implementation schedule of the NPA contemplated that Bell and the
Company would complete the migration of the Company's network to Bell's
network over a period of time ending on December 31, 1997. During the course
of the migration, the Company expected it would realize increasing levels of
deferral of its telecommunication costs with the full benefit of the NPA being
achieved once the migration was completed.
In mid-October, the Company learned that there were significant delays in
the migration of the Company's network to the Bell system. This impacted the
anticipated cash benefits of the NPA during the first six months of the 1998
fiscal year and into the third quarter. At that time the Company continued to
focus on maintaining adequate capital resources until the full financial
benefit of the NPA could be realized. As a result of the significant delays in
the migration, the Company has used its cash resources to fund operating
losses through the second quarter of fiscal 1998 and into the third quarter.
The Company anticipates it will continue to generate operating losses over the
next several quarters and will require additional amounts of capital to fund
these operating losses.
F-38
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
As a result of the demand on cash, the Company explored various options
including seeking a purchaser. In late October 1997 the Company entered into
discussions with PSINet Inc. (PSINet) and on November 10, 1997, PSINet, a
United States internet service provider and iSTAR internet inc. announced that
PSINet plans to acquire the Company and to merge it with its privately held
Canadian subsidiary, PSINet Limited.
Under the merger arrangement, the Company's shareholders will be entitled to
receive, for each common share of the Company, one $1.206, 8% exchangeable
redeemable preference share (an "Amalco Non-voting Exchangeable Share") in the
company ("Amalco") continuing from the amalgamation of iSTAR with PSINet
Limited. Dividends will accrue daily and will compound quarterly on the Amalco
Non-voting Exchangeable Shares. Each Amalco Non-voting Exchangeable Share is
exchangeable at certain times into US$0.86 of PSINet Common Stock valued at
the ten day weighted average market price of PSINet Common Stock at the time
of exchange plus a cash payment equal to all accrued and unpaid dividends. Up
to 33 1/3% of the aggregate number of Amalco Non-voting Exchangeable Shares
issued may be exchanged at the holder's option on April 1, 1998. Up to 66 2/3%
of the aggregate number of Amalco Non-voting Exchangeable Shares issued (less
any shares exchanged on April 1, 1998) may be exchanged at the holder's option
on July 1, 1998. Any Amalco Non-voting Exchangeable Shares which remain
outstanding on January 1, 1999 may be exchanged, at the holders' option, on or
after that date. The shares will be automatically exchanged into shares of
PSINet Common Stock in certain circumstances.
The agreement also includes the immediate credit facility of $5,000,000
working capital from PSINet Limited to the Company. The transaction is
expected to be completed by January 31, 1998. The offer is subject to certain
closing conditions including government and regulatory approvals. The offer is
also conditional upon a satisfactory arrangement with Bell, regarding the
Network Provisioning Agreement.
The Company expects the purchase by PSINet to be completed by January 31,
1998. If this sale is not completed the Company will be obligated to repay to
PSINet any amounts borrowed however, the Company currently does not have any
other available sources of financing.
These consolidated financial statements have been prepared on a going
concern basis in accordance with generally accepted accounting principles. The
going concern basis of presentation assumes the Company will continue its
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. These consolidated
financial statements do not give effect to the adjustments to the carrying
value of assets and liabilities and to the reported revenues and expenses, and
the balance sheet classifications used that would be necessary should the
Company be unable to find new sources of financing to operate in the ordinary
course of business.
20. UNITED STATES ACCOUNTING PRINCIPLES:
This financial statement note has been prepared because the consolidated
financial statements of the Company will be included in a proxy statement to
be issued to the shareholders of PSINet Inc.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which in
the case of the Company differ in the following material respects from those
generally accepted in the United States (U.S. GAAP).
F-39
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(a) Statements of operations:
If U.S. GAAP were employed, the net loss and loss per share would be
adjusted as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net loss under Canadian GAAP........................... $20,438 $53,754
Adjustments:
Compensation element of: stock options issued to
employees and; contingent consideration paid to
acquire companies and businesses.................... 10,727 2,062
Customer lists and goodwill amortization and write-
off................................................. 97 (67)
------- -------
Net loss under U.S. GAAP............................... $31,262 $55,749
======= =======
Net loss per share under U.S. GAAP..................... $ (2.59) $ (2.51)
======= =======
(b) Balance sheets:
The cumulative effect of the adjustments on the consolidated assets,
liabilities and shareholders' equity is as follows:
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Total assets under Canadian GAAP....................... $55,480 $39,420
Adjustments:
Restricted cash...................................... 455 --
Customer lists and goodwill.......................... 686 --
------- -------
Total assets under U.S. GAAP........................... $56,621 $39,420
======= =======
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Total shareholders' equity under Canadian GAAP......... $39,262 $11,072
Adjustments:
Issue of common shares and stock options to acquire
companies and businesses............................ 11,965 12,819
Selling, general and administration expenses......... (10,727) (12,789)
Customer lists and goodwill amortization and write-
off................................................. (97) (30)
------- -------
Total shareholders' equity under U.S. GAAP............. $40,403 $11,072
======= =======
</TABLE>
F-40
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED MAY 31, 1996 AND 1997
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(c) Statements of changes in financial position:
Under U.S. GAAP, financing and investing activities not involving a receipt
or outlay of cash are excluded from the consolidated statements of changes in
financial position. Accordingly, the following investing and financing
activities would not be presented in the consolidated statement of changes in
financial position for the years ended May 31, 1997 and 1996 but would be
shown supplementally:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Financing activities under Canadian GAAP............. $ 62,622 $ 29,514
Adjustments:
Common shares and warrants issued and contributed
surplus established on acquisition of companies
and businesses.................................... (9,531) (1,844)
Additional capital lease obligations on acquisition
of property and equipment......................... (4,757) (5,566)
Increase in bank indebtedness...................... -- 3,500
-------- --------
Financing activities under U.S. GAAP................. $ 48,334 $ 25,604
======== ========
Investing activities under Canadian GAAP............. $(28,079) $(11,123)
Adjustments:
Acquisition of companies and businesses through the
issue of shares and warrants...................... 9,531 1,844
Property and equipment purchases financed through
capital leases.................................... 4,757 5,566
-------- --------
Investing activities under U.S. GAAP................. $(13,791) $ (3,713)
======== ========
</TABLE>
21. SALE OF BUSINESS (UNAUDITED)
On December 24, 1997, the Company and PSINet Inc. ("PSINet"), a United
States Internet service provider, announced an amendment to the terms of their
November 10, 1998 announcement whereby PSINet planned to acquire the Company
and to merge it with its privately held Canadian subsidiary, PSINet Limited.
The new terms provide that PSINet will offer Cdn $.75 cash for each of the
outstanding common shares of iSTAR by way of a take-over bid to be mailed to
shareholders of the Company on or before January 7, 1998. Subsequently, PSINet
extended the expiry of the offer and between January 30, 1998 and February 12,
1998, PSINet acquired approximately 23,900,000 (or 81.4%) of the outstanding
common shares of iSTAR.
F-41
<PAGE>
iSTAR internet inc.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended February 28, 1997 and eight months ended January 31, 1998
================================================================================
ISTAR INTERNET INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 28, JANUARY 31,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and marketable securities....................... $ 14,857 $ 3,616
Accounts receivable.................................. 8,254 8,408
Inventory............................................ 802 266
Prepaid expenses and other........................... 2,103 2,299
-------- --------
26,016 14,589
Property and equipment................................. 10,983 12,196
Goodwill............................................... 15,439 --
-------- --------
$ 52,438 $ 26,785
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank indebtedness.................................... $ -- $ 8,999
Accounts payable and accrued liabilities............. 12,885 18,427
Deferred revenue..................................... 1,363 1,851
Current portion of capital lease obligations......... 1,692 4,336
-------- --------
15,940 33,613
Capital lease obligations.............................. 767 1,026
Deferred leasehold inducements......................... 817 608
-------- --------
Total liabilities...................................... 17,524 35,247
-------- --------
Shareholders' (deficit) equity:
Share capital........................................ 81,663 91,675
Share purchase warrants.............................. 16
Contributed surplus.................................. 2,871 2,871
Deficit.............................................. (21,278) (75,033)
Current period loss.................................. (28,342) (27,991)
-------- --------
34,914 (8,462)
-------- --------
$ 52,438 $ 26,785
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-42
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
EIGHT
NINE MONTHS MONTHS
ENDED ENDED
FEBRUARY 28, JANUARY 31,
1997 1998
------------ -----------
<S> <C> <C>
Sales................................................. $ 23,950 $ 27,460
Cost of sales......................................... 22,441 22,875
-------- ---------
Gross profit.......................................... 1,509 4,585
Selling, general and administration expenses.......... 25,010 24,757
-------- ---------
Operating loss before under noted items............... (23,501) (20,172)
Depreciation and amortization......................... 4,831 6,116
Net interest expense.................................. 23 1,703
Income tax (recovery)................................. (13) --
-------- ---------
Net loss.............................................. (28,342) (27,991)
Deficit, beginning of period.......................... (21,278) (75,033)
-------- ---------
Deficit, end of period................................ $(49,620) $(103,024)
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-43
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS EIGHT MONTHS
ENDED ENDED
FEBRUARY 28, JANUARY 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss............................................ $(28,342) $(27,991)
Adjustments:
Depreciation and amortization..................... 4,831 6,116
Non-cash operating working capital................ 1,028 3,748
-------- --------
Net cash used in operating activities............. (22,483) (18,127)
-------- --------
Cash flows from investing activities
Purchase of property and equipment................ (2,033) (1,969)
Acquisition of companies and businesses........... (83) --
-------- --------
Net cash used in investing activities............. (2,116) (1,969)
-------- --------
Cash flows from financing activities
Common shares and special warrants issued......... 23,994 8,458
Capital lease obligation.......................... (1,271) (2,318)
-------- --------
Net cash provided by financing activities......... 22,723 6,140
-------- --------
Net decrease in cash and cash equivalents........... (1,876) (13,956)
Cash and cash equivalents (net of bank
indebtedness), beginning of period................. 16,733 8,573
-------- --------
Cash and cash equivalents, end of period............ $ 14,857 $ (5,383)
======== ========
Cash and cash equivalents, end of period comprised
of:
Cash and cash equivalents......................... $ 14,857 $ 3,616
Bank indebtedness................................. -- (8,999)
-------- --------
$ 14,857 $ (5,383)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-44
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED FEBRUARY 28, 1997 AND EIGHT MONTHS ENDED JANUARY 31, 1998
(ALL TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
1. BACKGROUND AND BASIS OF PRESENTATION:
iSTAR internet inc. (the "Company") provides advanced Internet services for
businesses, institutions, and individuals. The Company provides customers with
a range of networking expertise and Web-based products and services including
business solutions with high-speed connection to the Internet through a
national backbone network.
These financial statements for the nine months ended February 28, 1997 and
the eight months ended January 31, 1998 and the related footnote information
are unaudited and have been prepared on a basis substantially consistent with
the audited financial statements of iSTAR internet inc. (the "Company") as of
May 31, 1997 previously filed with the Securities and Exchange Commission in a
proxy statement dated December 19, 1997 filed by PSINet Inc. These financial
statements should be read in conjunction with the audited financial statements
and the related notes to financial statements of the Company as of May 31,
1997. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
financial position of the Company at February 28, 1997 and January 31, 1998
and the results of its operations and the changes in its financial position
for the nine months ended February 28, 1997 and the eight months ended January
31, 1998.
2. SUBSEQUENT EVENT--SALE OF BUSINESS:
In late October 1997 the Company entered into discussions with PSINet Inc.
(PSINet) regarding the potential sale of the Company. On November 10, 1997,
PSINet, a United States Internet service provider, announced that it planned
to acquire the Company and to merge it with its privately held Canadian
subsidiary, PSINet Limited.
On December 24, 1997, the Company and PSINet announced an amendment to the
terms of their November 10, 1997 announcement whereby PSINet planned to
acquire the Company and to merge it with its privately held Canadian
subsidiary, PSINet Limited. Between February and May 1998, PSINet completed
its acquisition of all of the outstanding capital shares of the Company. No
adjustments to the carrying amounts of the Company's assets and liabilities
have been reflected in the accompanying unaudited consolidated financial
statements as of January 31, 1998, for the purchase of the Company by PSINet.
3. UNITED STATES ACCOUNTING PRINCIPLES:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which in
the case of the Company differ in the following material respects from those
generally accepted in the United States (U.S. GAAP).
F-45
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
(a) Consolidated statements of operations and deficit:
If U.S. GAAP were employed, the net loss would be adjusted as follows:
<TABLE>
<CAPTION>
NINE MONTHS EIGHT MONTHS
ENDED ENDED
FEBRUARY 28, JANUARY 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss under Canadian GAAP.............................. $(28,342) $(27,991)
Adjustments:
Compensation element of stock options issued to
employees and contingent consideration paid to acquire
companies and businesses............................... 2,062 --
Customer lists and goodwill amortization and write-off.. (67) --
-------- --------
Net loss under U.S. GAAP.................................. $(30,337) $(27,991)
======== ========
</TABLE>
(b) Consolidated balance sheets:
The cumulative effect of the adjustments on the consolidated total assets
and shareholders' (deficit) equity are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, JANUARY 31,
1997 1998
------------ -----------
<S> <C> <C>
Total assets under Canadian GAAP................. $52,438 $26,785
Total assets under U.S. GAAP..................... $52,438 $26,785
======= =======
</TABLE>
The cumulative effect of the adjustments on the consolidated assets and
shareholders' (deficit) equity is as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, JANUARY 31,
1997 1998
------------ -----------
<S> <C> <C>
Total shareholders' (deficit) equity under
Canadian GAAP................................. $34,914 $(8,462)
Adjustments:
Issue of stock options and common shares to
acquire companies and businesses............ 12,819 --
Selling, general and administration
expenses.................................... (12,789) --
Customer lists and goodwill amortization and
write-off................................... (30) --
------- -------
Total shareholders' (deficit) equity under U.S.
GAAP.......................................... $34,914 $(8,462)
======= =======
</TABLE>
(c) Consolidated statements of changes in financial position:
<TABLE>
<CAPTION>
NINE MONTHS EIGHT MONTHS
ENDED ENDED
FEBRUARY 28, JANUARY 31,
1997 1998
------------ ------------
<S> <C> <C>
Financing activities under Canadian GAAP...... $22,723 $ 6,140
Adjustment:
Increase in loans payable................... -- 5,499
------- -------
Financing activities under U.S. GAAP.......... $22,723 $11,639
======= =======
</TABLE>
Under U.S. GAAP, cash and cash equivalents does not include bank
indebtedness which is reflected as a financing activity.
F-46
<PAGE>
TOKYO INTERNET CORPORATION
FINANCIAL STATEMENTS
For the Years Ended March 31, 1996, 1997 and 1998
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
September 30, 1998
To the Board of Directors
of Tokyo Internet Corporation
We have audited the accompanying balance sheets of Tokyo Internet
Corporation (the "Company") as of March 31, 1996, 1997 and 1998 and the
related statements of operations and undisposed deficit for the years then
ended, all expressed in Japanese yen. 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 audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March
31, 1996, 1997 and 1998 and the results of its operations for the years then
ended, in conformity with accounting principles generally accepted in Japan
applied on a consistent basis.
Accounting principles generally accepted in Japan vary in certain important
respects from accounting principles generally accepted in the United States.
The application of the latter would have affected the determination of the net
loss expressed in Yen for each of the two years in the period ended March 31,
1998 and the determination of shareholders' equity and financial position also
expressed in Yen at March 31, 1997 and 1998 to the extent summarized in Note 4
to the financial statements.
/s/ Price Waterhouse, Tokyo
F-47
<PAGE>
TOKYO INTERNET CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------
1996 1997 1998
------------ ------------ --------------
(IN THOUSANDS OF YEN)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash on hand and in banks......... (Yen) 78,462 (Yen) 72,339 (Yen) 136,605
Accounts receivable--trade........ 138,899 492,681 893,692
Accounts receivable--other........ -- -- 19,565
Merchandise....................... 1,080 5,128 --
Advance payment................... -- 35,440 28,358
Prepaid expenses.................. 9,676 10,712 11,333
Other current assets.............. 6,984 3,608 1,566
Bad debt reserve.................. (9,180) (25,411) (154,607)
------------ ------------ --------------
Total current assets............. 225,921 594,497 936,512
------------ ------------ --------------
Fixed assets:
Tangible fixed assets--net
Building and facilities........... 13,984 33,954 44,202
Machinery......................... -- 27,251 27,385
------------ ------------ --------------
Total tangible fixed assets--
net............................. 13,984 61,205 71,587
------------ ------------ --------------
Intangible fixed assets:
Telephone rights.................. 60,235 122,396 133,225
Software assets................... -- 17,868 36,003
Goodwill.......................... -- 59,051 44,288
------------ ------------ --------------
Total intangible fixed assets.... 60,235 199,315 213,516
------------ ------------ --------------
Investments & other assets:
Investment securities............. -- -- 25,000
Lease deposits.................... 16,599 40,112 41,185
Long-term prepaid expenses........ 18,598 53,515 7,109
------------ ------------ --------------
Total investments & other
assets.......................... 35,197 93,627 73,294
------------ ------------ --------------
Total fixed assets............... 109,416 354,147 358,397
------------ ------------ --------------
Deferred assets:
Stock issue expenses.............. 1,232 616 2,436
Business commencement expenses.... 30,091 20,060 10,030
Organization expenses............. 804 536 268
------------ ------------ --------------
Total deferred assets............ 32,127 21,212 12,734
------------ ------------ --------------
Total assets..................... (Yen)367,464 (Yen)969,856 (Yen)1,307,643
============ ============ ==============
LIABILITIES
Current liabilities:
Short-term borrowings............. (Yen) -- (Yen)869,000 (Yen) 800,000
Accounts payable--other........... 116,378 176,135 219,265
Income tax payable................ 483 816 3,239
Consumption tax payable........... -- 51,728 93,750
Accrued expenses.................. 17,812 44,331 23,646
Advance received.................. 2,440 8,229 5,567
Deposit received.................. 8,930 17,274 6,565
------------ ------------ --------------
Total current liabilities........ 146,043 1,167,513 1,152,032
------------ ------------ --------------
Non-current liabilities:
Guarantee deposit received........ 1,296 8,363 1,296
Accrued severance indemnities..... 75 249 676
------------ ------------ --------------
Total non-current liabilities.... 1,371 8,612 1,972
------------ ------------ --------------
Total liabilities................ 147,414 1,176,125 1,154,004
------------ ------------ --------------
SHAREHOLDERS' EQUITY
Capital stock...................... 480,000 730,000 1,204,500
------------ ------------ --------------
Deficit:
Undisposed deficit................ (259,950) (936,269) (1,050,861)
[Net loss for the year included in
the line above].................. [208,084] [676,319] [114,592]
------------ ------------ --------------
Total shareholders' equity
(deficit)....................... 220,050 (206,269) 153,639
------------ ------------ --------------
Total liabilities and
shareholders' equity............ (Yen)367,464 (Yen)969,856 (Yen)1,307,643
============ ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
TOKYO INTERNET CORPORATION
STATEMENTS OF OPERATIONS AND UNDISPOSED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------
1996 1997 1998
------------ -------------- --------------
(IN THOUSANDS OF YEN)
<S> <C> <C> <C>
Ordinary income and expenses:
Operating income and expenses--
Operating income:
Net sales.................... (Yen)774,059 (Yen)3,173,672 (Yen)5,348,391
Operating expenses:
Cost of sales................ 506,579 2,551,528 4,033,904
Selling, general and
administrative expenses..... 465,427 1,291,929 1,291,251
------------ -------------- --------------
972,006 3,843,457 5,325,155
------------ -------------- --------------
Operating (profit) loss.... 197,947 669,785 (23,236)
------------ -------------- --------------
Non-operating income and
expenses--
Non-operating income:
Interest income and
dividends................... 308 121 389
Other........................ 1,492 11,267 22,084
------------ -------------- --------------
1,800 11,388 22,473
------------ -------------- --------------
Non-operating expenses:
Interest expense............. 349 5,988 7,905
Amortization of deferred
assets...................... 10,914 10,914 12,132
Other........................ 140 188 9,848
------------ -------------- --------------
11,403 17,090 29,885
------------ -------------- --------------
Ordinary (profit) loss..... 207,550 675,487 (15,824)
------------ -------------- --------------
Special gain and loss--
Provision for bad debts: -- -- 127,176
------------ -------------- --------------
Loss before income taxes..... 207,550 675,487 111,352
Corporate and inhabitant
taxes....................... 534 832 3,240
------------ -------------- --------------
Net loss for the year........ 208,084 676,319 114,592
Accumulated deficit brought
forward..................... 51,866 259,950 936,269
------------ -------------- --------------
Undisposed deficit......... (Yen)259,950 (Yen) 936,269 (Yen)1,050,861
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS
The balance sheets and the statements of operations and undisposed deficit
are prepared in conformity with accounting principles generally accepted in
Japan.
1. SIGNIFICANT ACCOUNTING POLICIES:
(1) The valuation basis and valuation method of inventories--
Merchandise is stated at cost determined by the first-in first-out method.
(2) The method of depreciation--
Tangible fixed assets are depreciated based on the declining-balance method
in accordance with the Japanese corporate tax regulations.
Intangible fixed assets are amortized based on the straight-line method in
accordance with the Japanese corporate tax regulations.
Deferred assets are amortized based on the straight-line method in
accordance with the Japanese Commercial Code.
(3) The basis for recognition of provisions--
In order to provide for expected future losses, bad debt reserve is provided
for the expected uncollectable amount of individual receivable balances plus
the maximum deductible amount allowed under the Japanese corporate tax
regulations.
Accrued severance indemnities are provided for the maximum deductible amount
allowed under the Japanese corporate tax regulations in order to provide for
expected future retirement benefit payments.
(4) Matters related to restriction of dividends--
The excess prescribed in Paragraph 4, Clause 1, Article 290 of the
Commercial Code amounts to (Yen)10,030 thousand--1998, ((Yen)30,090 thousand--
1996, (Yen)20,060 thousand--1997).
2. NOTES TO THE BALANCE SHEETS:
Accumulated depreciation of tangible fixed assets is (Yen)2,803 thousand,
(Yen)10,943 thousand and (Yen)32,558 thousand as of March 31, 1996, 1997 and
1998, respectively.
(1) Balances with the Company's majority shareholder--
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -----------
(IN THOUSANDS OF YEN)
<S> <C> <C> <C>
Accounts receivable--trade.................. (Yen)34 (Yen)911 (Yen)28,685
Other current assets........................ 62 -- 167
Lease deposits.............................. 50 50 50
Short-term borrowings....................... -- 869,000 800,000
Accounts payable--other..................... 11,376 24,271 17,203
</TABLE>
(2) Net loss per share--
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(IN YEN)
<S> <C> <C>
(Yen)29,936.57 (Yen)60,077.02 (Yen)951.31
</TABLE>
F-50
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. NOTES TO THE STATEMENTS OF OPERATIONS AND UNDISPOSED DEFICIT:
Transactions with the Company's majority shareholder--
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
(IN THOUSANDS OF YEN)
<S> <C> <C> <C>
Sales................................. (Yen)2,834 (Yen)1,543 (Yen)27,985
Purchases............................. 71,698 10,762 1,909
Transactions other than operating
activities (interest expense)........ -- 12,817 19,755
</TABLE>
4. SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN JAPAN AND THE UNITED STATES:
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in Japan ("Japanese GAAP"), which in
the case of the Company differ in the following material respects from those
generally accepted in the United States ("U.S. GAAP"). The principal
differences applicable to the financial statements and their effects on net
loss, assets, liabilities and shareholders' equity are summarized below.
(1) Statement of cash flows--
Under Japanese GAAP, a statement of cash flows is not required as part of
the basic financial statements.
Under U.S. GAAP, a statement of cash flows is required as part of the basic
financial statements, and cash and cash equivalents include highly liquid
investments that generally have original maturities at the time of purchase of
three months or less.
(2) Valuation of inventories--
Under Japanese GAAP, inventories can be stated at cost, the policy followed
by the Company, or at the lower of cost or market.
U.S. GAAP requires all inventories to be valued at the lower of cost or
market.
(3) Valuation of securities--
Under Japanese GAAP, investments in marketable securities, as well as non-
marketable securities, can be stated at cost. The Company's non-marketable
security is stated at cost. However, when significant impairment of value has
been deemed permanent, cost is appropriately reduced.
Under U.S. GAAP, investments in debt securities and equity securities that
have readily determinable fair values, except for investments accounted for
using the equity method, are to be classified in three categories and
accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Unrealized holdings gains and losses are
not reported in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary.
(b) Debt and marketable equity securities that are acquired and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings.
F-51
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
(4) Deferred assets--
The Company has deferred stock issue expenses, business commencement
expenses and organization expenses which are amortized over five years as
permitted under Japanese GAAP.
Under U.S. GAAP, startup costs such as business commencement expenses and
organization expenses are to be expensed as incurred under the circumstances
that future gross profit sufficient to absorb these startup costs is not
anticipated. Stock issue costs are to be netted against the stock issuance
proceeds.
(5) Accounting for income taxes
Under Japanese GAAP, income taxes are principally provided for based on
taxable income for the period, determined in accordance with applicable tax
laws. Deferred tax accounting may be applied only in consolidated financial
statements; however, it is not mandatory and has not been adopted by the
Company.
U.S. GAAP requires that deferred income taxes be recognized for temporary
differences between the tax basis of the assets or liabilities and the
reported amount in the financial statements and for tax loss carry-forwards
which are permitted to be carried forward to offset taxable income over the
next five years under Japanese Income Tax Law. A valuation allowance is
provided for the deferred tax assets if it is more likely than not that these
assets will not be realized.
(6) Capital leases--
Under Japanese GAAP, for finance leases where ownership is not deemed to be
transferred from lessor to lessee, the lessee may choose not to capitalize the
leased asset and may account for the lease in a manner similar to operating
leases. The Company's policy is to account for such leases in a manner similar
to operating leases.
U.S. GAAP requires leases which transfer essentially all the risks and
rewards of ownership in the leased assets from the lessor to lessee to be
capitalized.
(7) Accrued compensated absences--
Under Japanese GAAP, accrued compensated absences are normally not
recognized for future absences due to the fact that such accruals do not meet
the conditions for provisions. The Company does not recognize such accrued
compensated absences.
U.S. GAAP requires that accrued compensated absences be recognized as earned
by employees.
(8) Accrued severance indemnities--
The Company maintains a severance indemnity plan which provides for payments
to certain employees upon termination of employment. This defined benefit plan
is not funded. The Company has recorded a liability, as allowed under Japanese
GAAP, equal to 40% of the amount which would be paid if all eligible employees
terminated their employment on the balance sheet date.
U.S. GAAP requires pension costs to be actuarially computed and charged to
expense as stipulated by Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions." Due to the small number of employees and
short average service period of employees, the Company's liability for
severance indemnities under U.S. GAAP would not be significantly different
from the amount recorded under Japanese GAAP.
F-52
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) Accounting for business combinations--
At the time of its November 1996 business combination with Secom Internet
K.K., both the Company and Secom Internet K.K. were controlled by Secom
Corporation. The Company has accounted for this business combination under
purchase accounting, which is allowed by Japanese GAAP.
Under U.S. GAAP, such a transfer of ownership among companies under common
control is accounted for at historical cost in a manner similar to that in
pooling of interests accounting.
If U.S. GAAP as indicated above were employed by the Company, the net loss,
loss per share, assets, liabilities and shareholders' equity would be adjusted
as follows:
(a) Statement of operations:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS OF YEN)
<S> <C> <C>
Net loss under Japanese GAAP.................. (Yen) 676,319 (Yen) 114,592
Adjustments:
Deferred assets.............................. (10,914) (12,132)
Leases capitalized as assets................. 2,947 873
Deferred tax assets.......................... (364,670) (57,440)
Valuation allowance for deferred tax
assets...................................... 364,670 57,440
Accrued compensated absences................. 636 (70)
Accounting for business combinations......... (21,887) (14,763)
-------------- --------------
Net loss under U.S. GAAP................... (Yen) 647,101 (Yen) 88,500
============== ==============
<CAPTION>
(IN YEN)
<S> <C> <C>
Net loss per share under U.S. GAAP............ (Yen)57,484.32 (Yen) 4,220.31
============== ==============
(b) Balance sheet:
<CAPTION>
AS OF AS OF
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS OF YEN)
<S> <C> <C>
Total assets under Japanese GAAP.............. (Yen) 969,856 (Yen)1,307,643
Adjustments:
Deferred assets.............................. (21,212) (12,734)
Deferred tax assets.......................... 507,263 449,823
Valuation allowance for deferred tax
assets...................................... (507,263) (449,823)
Goodwill..................................... (59,051) (44,288)
Tangible fixed assets--net................... 780,184 969,711
Unrealized loss on marketable securities..... -- (13,285)
-------------- --------------
Total assets under U.S. GAAP............... (Yen)1,669,777 (Yen)2,207,047
============== ==============
Total shareholders' equity (deficit) under
Japanese GAAP................................ (Yen) (206,269) (Yen) 153,639
Adjustments:
Deferred assets.............................. (21,212) (12,734)
Goodwill..................................... (59,051) (44,288)
Tangible fixed assets--net................... (4,806) (5,679)
Deferred tax assets.......................... 507,263 449,823
Valuation allowance for deferred tax
assets...................................... (507,263) (449,823)
Accrued compensated absences................. (1,114) (1,044)
Unrealized loss on marketable securities..... -- (13,285)
-------------- --------------
Total shareholders' equity (deficit) under
U.S. GAAP................................. (Yen) (292,452) (Yen) 76,609
============== ==============
</TABLE>
F-53
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) Statements of cash flows under U.S. GAAP--
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1997 1998
------------- ------------
(IN THOUSANDS OF YEN)
<S> <C> <C>
Cash flow from operating activities:
Net loss under U.S. GAAP........................ (Yen)(647,101) (Yen)(88,500)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization................. 176,315 336,869
Loss on disposal of intangible assets......... -- 15,097
Provision for bad debts....................... 16,175 129,196
Increase in accounts receivable............... (343,280) (401,011)
(Increase) decrease in inventories............ (4,048) 5,128
Decrease (increase) in prepaid expenses and
other current assets......................... 25,430 (11,062)
Increase in accounts payable--other........... 59,757 43,130
Increase in other current liabilities......... 88,700 10,319
Decrease in non-current liabilities........... (7,554) (6,640)
------------- ------------
Net cash provided by (used for) operating
activities................................. (635,606) 32,526
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment.............. (55,409) (32,005)
Purchase of investment securities............... -- (25,000)
Cash arising from acquisition of Secom Internet
K.K............................................ 118,985 --
Purchase of telephone rights.................... (61,841) --
Capitalized software development costs.......... (52,559) --
Increase in lease deposits...................... (23,513) --
Other........................................... -- 1,272
------------- ------------
Net cash used for investing activities...... (74,337) (55,733)
------------- ------------
Cash flows from financing activities:
Proceeds from short-term borrowings............. 869,000 181,000
Repayment of short-term borrowings.............. -- (250,000)
Principal payments under capital lease
obligations.................................... (165,180) (314,373)
Issuance of common stock........................ -- 470,846
------------- ------------
Net cash provided by financing activities... 703,820 87,473
------------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... (6,123) 64,266
Cash and cash equivalents at beginning of period.. 78,462 72,339
------------- ------------
Cash and cash equivalents at end of period........ (Yen) 72,339 (Yen)136,605
============= ============
Supplemental schedule of non-cash investing and
financing activities
Increase in lease assets and obligations under
capital lease arrangements....................... (Yen) 504,773 (Yen)672,181
============= ============
</TABLE>
F-54
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(11) Statements of changes in shareholders' equity (deficit) under U.S. GAAP--
<TABLE>
<CAPTION>
CAPITAL STOCK UNREALIZED TOTAL
-------------------------- LOSS ON SHAREHOLDERS'
OUTSTANDING UNDISPOSED MARKETABLE EQUITY
SHARES VALUE DEFICIT SECURITIES (DEFICIT)
----------- -------------- --------------- ------------ -------------
(IN THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C>
Balance, March 31,
1996................... 9,600 (Yen) 478,152 (Yen) (292,565) (Yen) -- (Yen)185,587
------ -------------- --------------- ------------ ------------
Issuance of common
stock for acquisition
of Secom Internet
K.K.................. 5,000 169,062 -- -- 169,062
Net loss.............. -- -- (647,101) -- (647,101)
------ -------------- --------------- ------------ ------------
Balance, March 31,
1997................... 14,600 647,214 (939,666) -- (292,452)
------ -------------- --------------- ------------ ------------
Issuance of common
stock................ 9,490 470,846 -- -- 470,846
Unrealized loss on
marketable
securities........... (13,285) (13,285)
Net loss.............. -- -- (88,500) -- (88,500)
------ -------------- --------------- ------------ ------------
Balance, March 31,
1998................... 24,090 (Yen)1,118,060 (Yen)(1,028,166) (Yen)(13,285) (Yen) 76,609
====== ============== =============== ============ ============
</TABLE>
F-55
<PAGE>
ANNEX A
Letter of Transmittal
PSINET INC.
Offer To Exchange Its
New 11 1/2 % Senior Notes Due 2008, Series B
Which Have Been Registered Under The Securities Act of 1933
For Any And All Of Its Outstanding
11 1/2 % Senior Notes Due 2008, Series A
Pursuant To The Prospectus
Dated __________, 199_
- --------------------------------------------------------------------------------
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________,
199_, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
WILMINGTON TRUST COMPANY, as Exchange Agent
<TABLE>
<CAPTION>
<S> <C> <C>
By Registered or Certified Mail By Hand:
or Overnight Courier:
Wilmington Trust Company Wilmington Trust Company
Attn: Kristin Long Attn: Corporate Trust Operations
Corporate Trust Operations c/o Harris Trust Co. of New York as
1100 North Market Street Agent
Rodney Square North 88 Pine Street, 19th Floor
Wilmington, DE 19890-0001 Wall Street Plaza
New York, New York 10005
By Facsimile:
(For Eligible Institutions Only)
Wilmington Trust Company
(302) 651-1079
Confirm by telephone:
(302) 651-1562
Kristin Long
</TABLE>
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of this Letter of Transmittal via facsimile to a
number other than as set forth above does not constitute a valid delivery.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
A-1
<PAGE>
This Letter of Transmittal is to be completed by holders of Initial Notes
(as defined below) either if Initial Notes are to be forwarded herewith or if
tenders of Initial Notes are to be made by book-entry transfer to an account
maintained by the Exchange Agent (as defined below) at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in "The Exchange Offer--
Procedures for Tendering Initial Notes" in the Prospectus and an "Agent's
Message" (as defined below) is not delivered. Tenders by book-entry transfer
may also be made by delivering an Agent's Message in lieu of this Letter.
Holders of Initial Notes whose certificates (the "Certificates") for such
Initial Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Initial
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Initial Notes" in the Prospectus. See
Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
Ladies and Gentlemen:
The undersigned hereby tenders to PSINet Inc., a New York corporation (the
"Company"), the aggregate principal amount of the Company's outstanding 11 1/2 %
Senior Notes due 2008, Series A (the "Initial Notes") described in Box 1 below,
in exchange for a like aggregate principal amount of the Company's new 11 1/2 %
Senior Notes due 2008, Series B (the "Exchange Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms and subject to the conditions set forth in the Prospectus dated
__________, 199_ (as the same may be amended or supplemented from time to time,
the "Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Initial Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Initial Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Wilmington Trust Company as Exchange Agent (the "Exchange Agent") as its agent
and attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer) with respect to
the tendered Initial Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Certificates for Initial Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of
the Exchange Notes to be issued in exchange for such Initial Notes, (ii) present
Certificates for such Initial Notes for transfer, and to transfer the Initial
Notes on the books of the Company, and (iii) receive for the account of the
Company all benefits and otherwise exercise all rights of beneficial ownership
of such Initial Notes, all in accordance with the terms and conditions of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, sell, assign and transfer the
Initial Notes tendered hereby and that, when the same are accepted for exchange,
the Company will acquire good, marketable and unencumbered title thereto, free
and clear of all liens, restrictions, charges and encumbrances, and that the
Initial Notes tendered hereby are not subject to any adverse claims or proxies.
The undersigned will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
complete the exchange, assignment and transfer of the Initial Notes tendered
hereby, and the undersigned
A-2
<PAGE>
will comply with its obligations under the Registration Rights Agreements. The
undersigned has read and agrees to all of the terms of the Exchange Offer.
The name(s) and address(es) of the registered holder(s) of the Initial
Notes tendered hereby should be printed in Box 1 below, if they are not already
set forth therein, as they appear on the Certificates representing such Initial
Notes. The Certificate number(s) and the aggregate principal amount of Initial
Notes that the undersigned wishes to tender should also be indicated in Box 1
below.
If any tendered Initial Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Initial Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Initial Notes will be returned (or, in the case of Initial Notes
tendered by book-entry transfer, such Initial Notes will be credited to an
account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Initial Notes pursuant to any
one of the procedures described under "The Exchange Offer--Procedures for
Tendering Initial Notes" in the Prospectus and in the instructions hereto will,
upon the Company's acceptance for exchange of such tendered Initial Notes,
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived by the
Company, in whole or in part, in the reasonable discretion of the Company), as
more particularly set forth in the Prospectus, the Company may not be required
to exchange any of the Initial Notes tendered hereby and, in such event, the
Initial Notes not exchanged will be returned to the undersigned at the address
shown in Box 1.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Initial Notes, that such Exchange Notes be credited to the
account indicated below maintained at DTC. If applicable, substitute
Certificates representing Initial Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Initial Notes, will be credited to the account indicated below
maintained at DTC. Similarly, unless otherwise indicated herein in the box
entitled "Special Delivery Instructions" below (Box 8), the undersigned hereby
directs that the Exchange Notes be delivered to the undersigned at the address
shown below the undersigned's signature.
THE EXCHANGE OFFER IS NOT BEING MADE TO ANY BROKER-DEALER WHO PURCHASED
INITIAL NOTES DIRECTLY FROM THE COMPANY FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT OR ANY PERSON THAT IS AN "AFFILIATE" OF THE COMPANY WITHIN
THE MEANING OF RULE 405 UNDER THE SECURITIES ACT. THE UNDERSIGNED UNDERSTANDS
AND AGREES THAT THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED INITIAL
NOTES FROM ANY TENDERING HOLDER IF THE COMPANY DETERMINES, IN ITS REASONABLE
DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE
SECURITIES LAWS.
By tendering Initial Notes and executing this Letter of Transmittal, the
undersigned hereby represents and agrees that (i) the undersigned is not an
"affiliate" of the Company (within the meaning of Rule 405 under the Securities
Act), (ii) any Exchange Notes to be received by the undersigned are being
acquired in the ordinary course of its business, (iii) the undersigned has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of Exchange Notes
A-3
<PAGE>
to be received in the Exchange Offer, and (iv) if the undersigned is not a
broker-dealer, the undersigned is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such Exchange
Notes. By tendering Initial Notes pursuant to the Exchange Offer and executing
this Letter of Transmittal, a holder of Initial Notes that is a broker-dealer
additionally represents and agrees, consistent with certain interpretive letters
issued by the staff of the Division of Corporation Finance of the Securities and
Exchange Commission to third parties described under "The Exchange Offer--
Registration Rights" in the Prospectus, that such Initial Notes were acquired by
such broker-dealer for its own account as a result of market-making activities
or other trading activities (such a broker-dealer tendering Initial Notes is
herein referred to as a "Participating Broker-Dealer") and it will deliver the
Prospectus (as amended or supplemented from time to time) meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes (provided that, by so acknowledging and by delivering a
Prospectus, such Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act).
The Company has agreed that, subject to the provisions of the Registration
Rights Agreements, the Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Initial Notes, where such
Initial Notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making activities or other trading activities, for
a period ending one year after the Expiration Date or, if earlier, when all such
Exchange Notes have been disposed of by such Participating Broker-Dealer. In
that regard, each Participating Broker-Dealer, by tendering such Initial Notes
and executing this Letter of Transmittal, agrees to notify the Company prior to
using the Prospectus in connection with the sale or transfer of Exchange Notes
and acknowledges and agrees that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in the Prospectus untrue in any material
respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading or of the occurrence of
certain other events specified in the Registration Rights Agreements, such
Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to
the Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to the Participating Broker-Dealer or the Company has
given notice that the sale of the Exchange Notes may be resumed, as the case may
be.
EACH PARTICIPATING BROKER-DEALER SHOULD CHECK THE BOX HEREIN UNDER THE
CAPTION "PARTICIPATING BROKER-DEALER" (BOX 5 HEREOF) IN ORDER TO RECEIVE
ADDITIONAL COPIES OF THE PROSPECTUS, AND ANY AMENDMENTS AND SUPPLEMENTS THERETO,
FOR USE IN CONNECTION WITH RESALES OF THE EXCHANGE NOTES, AS WELL AS ANY NOTICES
FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS
INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING
BROKER-DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR
THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. IF NO
PARTICIPATING BROKER-DEALERS CHECK SUCH BOX, OR IF ALL PARTICIPATING BROKER-
DEALERS WHO HAVE CHECKED SUCH BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE
EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL
NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION
STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY HOLDERS WITH ANY
NOTICES TO SUSPEND OR RESUME USE OF THE PROSPECTUS.
Each Exchange Note will bear interest from the most recent date on which
interest has been paid or duly provided for on the Initial Note surrendered in
exchange for such Exchange Note or, if no such interest
A-4
<PAGE>
has been paid or duly provided for on such Initial Note, from November 3, 1998.
Holders of Initial Notes whose Initial Notes are accepted for exchange will not
receive accrued interest on such Initial Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Initial Notes prior to the original issue date of the Exchange Notes or,
if no such interest has been paid or duly provided for, will not receive any
accrued interest on such Initial Notes, and will be deemed to have waived the
right to receive any interest on such Initial Notes accrued from and after such
Interest Payment Date or, if no such interest has been paid or duly provided
for, from and after November 3, 1998.
The undersigned understands that the delivery and surrender of the Initial
Notes is not effective, and the risk of loss of the Initial Notes does not pass
to the Exchange Agent, until receipt by the Exchange Agent of this Letter of
Transmittal, or a manually signed facsimile hereof, properly completed and duly
executed, with any required signature guarantees, together with all accompanying
evidences of authority and any other required documents in form satisfactory to
the Company. All questions as to form of all documents and the validity
(including time of receipt) and acceptance of tenders and withdrawals of Initial
Notes will be determined by the Company, in its sole discretion, which
determination shall be final and binding.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights as set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS INCLUDED HEREWITH.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF INITIAL NOTES
BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE
MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION.
Your bank or broker can assist you in completing this form. The
instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent, whose address and telephone number appear on
the front cover of this Letter of Transmittal. See Instruction 8 below.
A-5
<PAGE>
All Tendering Holders Complete This Box 1:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF INITIAL NOTES TENDERED
(see instructions 3 and 4 below)
- ------------------------------------------------------------------------------------------------------------------------
If Blank, Please Print Certificate Number(s) of Aggregate Principal Amount Aggregate Principal Amount
Name(s) And Address(es) Initial Notes Represented By Certificates* of Initial Notes Being
Of Registered Holder(s), Tendered**
Exactly As Name(s)
Appear(s) On Initial Note
Certificate(s)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders (see below).
** The minimum permitted tender is $1,000 in principal amount. All
tenders must be in integral multiples of $1,000 in principal amount. The
aggregate principal amount of all Initial Notes Certificates identified in this
Box 1, or delivered to the Exchange Agent herewith, shall be deemed tendered
unless a lesser number is specified in this column. See Instruction 4.
- --------------------------------------------------------------------------------
BOX 2
BOOK-ENTRY TRANSFER
(See Instruction 1 Below)
[_] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution ______________________________________________
DTC Account Number__________________________________________________________
Transaction Code Number_____________________________________________________
- --------------------------------------------------------------------------------
Holders of Initial Notes may tender Initial Notes by book-entry transfer by
crediting the Initial Notes to the Exchange Agent's account at the DTC in
accordance with the DTC's Automated Tender Offer Program ("ATOP") and by
complying with applicable ATOP procedures with respect to the Exchange
A-6
<PAGE>
Offer. DTC participants that are accepting the Exchange Offer should transmit
their acceptance to DTC, which will edit and verify the acceptance and execute a
book-entry delivery to the Exchange Agent's account at DTC. DTC will then send a
computer-generated message (an "Agent's Message") to the Exchange Agent for its
acceptance in which the holder of the Initial Notes acknowledges and agrees to
be bound by the terms of, and makes the representations and warranties contained
in, this Letter of Transmittal, the DTC participant confirms on behalf of itself
and the beneficial owners of such Initial Notes all provisions of this Letter of
Transmittal (including any representations and warranties) applicable to it and
such beneficial owner as fully as if it had completed the information required
herein and executed and transmitted this Letter of Transmittal to the Exchange
Agent. Delivery of the Agent's Message by DTC will satisfy the terms of the
Exchange Offer as to execution and delivery of a Letter of Transmittal by the
participant identified in the Agent's Message. DTC participants may also accept
the Exchange Offer by submitting a Notice of Guaranteed Delivery through ATOP.
A-7
<PAGE>
- --------------------------------------------------------------------------------
BOX 3
NOTICE OF GUARANTEED DELIVERY
(See Instruction 1 Below)
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)_________________________________________________
Window Ticket Number (if any)________________________________________________
Date of Execution of Notice of Guaranteed Delivery___________________________
Name of Institution which Guaranteed Delivery________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution________________________________________________
DTC Account Number___________________________________________________________
Transaction Code Number______________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX 4
RETURN OF NON-EXCHANGED INITIAL NOTES
TENDERED BY BOOK-ENTRY TRANSFER
(See Instructions 4 and 6 Below)
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED INITIAL
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
- --------------------------------------------------------------------------------
A-8
<PAGE>
- --------------------------------------------------------------------------------
BOX 5
PARTICIPATING BROKER-DEALER
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF THE
PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO, AS WELL AS
ANY NOTICES FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY
TENDERING ITS INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH
PARTICIPATING BROKER-DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY
THE COMPANY OR THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES.
(IF NO PARTICIPATING BROKER-DEALERS CHECK THIS BOX, OR IF ALL PARTICIPATING
BROKER-DEALERS WHO HAVE CHECKED THIS BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE
EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL
NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION
STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY NOTICES TO ANY
HOLDERS TO SUSPEND OR RESUME USE OF THE PROSPECTUS).
PROVIDE THE NAME OF THE INDIVIDUAL WHO SHOULD RECEIVE, ON BEHALF OF THE HOLDER,
ADDITIONAL COPIES OF THE PROSPECTUS, AND AMENDMENTS AND SUPPLEMENTS THERETO, AND
ANY NOTICES TO SUSPEND AND RESUME USE OF THE PROSPECTUS.
Name:___________________________________________________________
Address:________________________________________________________
Telephone No.: _________________________________________________
Facsimile No.: _________________________________________________
- --------------------------------------------------------------------------------
A-9
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
BOX 6
TENDERING HOLDER SIGNATURE
(See Instructions 1 and 5)
In Addition, Complete Substitute Form W-9
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
X___________________________________________________ Signature Guarantee
(If required by Instruction 5)
X___________________________________________________
(Signature of registered holder(s) or Authorized
Signatory(ies)) Authorized Signature
Note: The above lines must be signed by the registered
holder(s) of Initial Notes as their name(s) appear(s) X___________________________________________________
on the Initial Notes or by person(s) authorized to
become registered holder(s) (evidence of which Name:_______________________________________________
authorization must be transmitted with this Letter of (please print)
Transmittal). If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer, or Title:______________________________________________
other person acting in a fiduciary or representative
capacity, such person must set forth his or her full Name of Firm:_______________________________________
title below. See Instruction 5. (Must be an Eligible Institution
as defined in Instruction 1)
Name(s): ___________________________________________
Address:____________________________________________
___________________________________________ ____________________________________________
___________________________________________ ____________________________________________
(include Zip Code)
Capacity:___________________________________________
___________________________________________
Area Code and Telephone Number:
Street Address:_____________________________________
____________________________________________
___________________________________________
(include Zip Code)
Dated: ___________________________________________
Area Code and Telephone Number:
___________________________________________
Tax Identification or Social Security Number:
___________________________________________
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
A-10
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- ---------------------------------------------------------
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5 and 6 Below) (See Instructions 1, 5 and 6 Below)
<S> <C>
To be completed ONLY if Certificates for the Initial To be completed ONLY if Certificates for the Initial
Notes not exchanged and/or Certificates for the Notes not exchanged and/or Certificates for the
Exchange Notes are to be issued in the name of Exchange Notes are to be sent to someone other than the
someone other than the registered holder of the registered holder of the Initial Notes whose name(s)
Initial Notes whose name(s) appear(s) above. appear(s) above, or to such registered holder(s) at an
address other than that shown above.
Name: __________________________________________ Name: ___________________________________________
(Please Print) (Please Print)
Address: _______________________________________ Address: __________________________________________
_______________________________________ __________________________________________
(Include Zip Code) (Include Zip Code)
_________________________________________________ ___________________________________________________
(Tax Identification or Social Security Number) (Tax Identification or Social Security Number)
- ------------------------------------------------- ---------------------------------------------------
</TABLE>
A-11
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
BOX 9
- -----------------------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: WILMINGTON TRUST COMPANY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE Name (if joint names, list first and circle the name of the person or entity whose number you
enter in Part 1 below. See instructions if your name has changed)
-------------------------------------------------------------------------------------------------
Form W-9 Address
-------------------------------------------------------------------------------------------------
City, State and Zip Code
-------------------------------------------------------------------------------------------------
Department of the Treasury List account number(s) here (optional)
Internal Revenue Service
-------------------------------------------------------------------------------------------------
Part 1 -- PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER Social Security Number or
("TIN") IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING TIN
BELOW.
-------------------------------------------------------------------------------------------------
Part 2 -- Check the box if you are NOT subject to backup withholding under the provisions of
section 3406(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that
you are subject to backup withholding as a result of failure to report all interest or dividends
or (2) the Internal Revenue Service has notified you that you are no longer subject to backup
withholding.
Not subject to withholding [_]
- -----------------------------------------------------------------------------------------------------------------------------------
Payor's Request for TIN CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE Part 3 --
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT, AND COMPLETE.
Signature: ___________________________ Date: ___________ Awaiting TIN [_]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W - 9" FOR ADDITIONAL DETAILS.
A-12
<PAGE>
- --------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the Exchange Notes shall be retained
until I provide a taxpayer identification number to the Exchange Agent and that,
if I do not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the Internal Revenue Service as backup
withholding and 31% of all reportable payments made to me thereafter will be
withheld and remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature:_____________________________________________________________________
Date:__________________________________________________________________________
- --------------------------------------------------------------------------------
A-13
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Initial Notes directly to the Company.
Your Initial Note Certificates, together with your signed and completed Letter
of Transmittal and any required supporting documents, should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. THE METHOD OF
DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed by holders of Initial Notes
(which term, for purposes of the Exchange Offer, includes any participant in DTC
whose name appears on a security position listing as the holder of such Initial
Notes) if either (a) Certificates for such Initial Notes are to be forwarded
herewith or (b) tenders are to be made pursuant to the procedures for tender by
book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering
Initial Notes" in the Prospectus, and an Agent's Message is not delivered.
Tenders by book-entry transfer may also be made by delivering an Agent's Message
in lieu of this Letter. The term "Agent's Message" means a message, transmitted
by DTC to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgement from
the tendering Participant, which acknowledgement states that such Participant
has received and agrees to be bound by, and makes the representations and
warranties contained in, this Letter of Transmittal and that the Company may
enforce this Letter of Transmittal against such Participant. Certificates
representing the tendered Initial Notes, or timely confirmation of a book-entry
transfer of such Initial Notes into the Exchange Agent's account at DTC, as well
as a properly completed and duly executed copy of this Letter of Transmittal, or
a facsimile hereof (or, in the case of a book-entry transfer, an Agent's
Message), a substitute Form W-9, and any other documents required by this Letter
of Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date, or
the tendering holder must comply with the guaranteed delivery procedures set
forth below. Initial Notes may be tendered in whole or in part in the principal
amount of $1,000 and integral multiples of $1,000.
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who cannot deliver their Initial Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Initial Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Initial Notes" in the Prospectus
and by completing Box 3 hereof. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution (as defined below); (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
Exchange Agent on or prior to the Expiration Date; and (iii) the Certificates
(or a book-entry confirmation (as defined in the Prospectus)) representing all
tendered Initial Notes of such holder, in proper form for transfer,
A-14
<PAGE>
together with a Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees (or, in the case of a
book-entry transfer, an Agent's Message) and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent within three
New York Stock Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering Initial Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Initial Notes to
be properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchange Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC whose
name appears on a security position listing as the owner of the Initial Notes)
of Initial Notes tendered herewith, unless such holder(s) has (have) completed
either the box entitled "Special Exchange Instructions" (Box 7) or the box
entitled "Special Delivery Instructions" (Box 8) above; or
(ii) such Initial Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
in Box 6 on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Initial Notes"
is inadequate, the Certificate number(s) and/or the principal amount of Initial
Notes and any other required information should be listed on a separate, signed
schedule and attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Initial Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Initial Notes
evidenced by any Certificate submitted are to be tendered, fill in the principal
amount of Initial Notes which are to be tendered in Box 1 under the column
"Aggregate Principal Amount of Initial Notes Being Tendered." In such case, new
Certificate(s) for the remainder of the Initial Notes that were evidenced by the
Initial Notes Certificate(s) will be sent to the holder of the Initial Notes,
promptly after the Expiration Date. All Initial Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
A-15
<PAGE>
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective, a written or facsimile transmission of such notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth above on or prior to the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Initial Notes to be
withdrawn (the "Depositor"), (ii) identify the Initial Notes to be withdrawn
(including the Certificate number(s) and principal amount of such Initial Notes,
or, in the case of Initial Notes transferred by book-entry transfer, the name
and number of the account at DTC to be credited), (iii) be signed by the Initial
Holder in the same manner as the original signature on the Letter of Transmittal
by which such Initial Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee register the transfer of such Initial Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Initial Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time or receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. If Initial Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in the Prospectus under "The
Exchange Offer--Procedures for Tendering Initial Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Initial Notes, in which case a notice of withdrawal will
be effective if delivered to the Exchange Agent by written or facsimile
transmission. Initial Notes properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer. Withdrawals of tenders of Initial
Notes may not be rescinded, but such Initial Notes may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures for
Tendering Initial Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Initial Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Initial Notes tendered hereby, the signature(s) must correspond with the name(s)
as written on the face of the Certificate(s) without alteration, addition or any
change whatsoever.
If any of the Initial Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Initial Notes are registered in different names on several
Certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit proper evidence satisfactory to the Company, in its sole discretion, of
such persons' authority to so act.
A-16
<PAGE>
When this Letter of Transmittal is signed by the registered owner(s) of the
Initial Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless Exchange Notes are to be issued in
the name of a person other than the registered holder(s). However, if Exchange
Notes are to be issued in the name of a person other than the registered
holder(s), signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Initial Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Initial Notes may require in accordance
with the restrictions on transfer applicable to the Initial Notes. Signatures on
such Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Exchange Notes are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Notes are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed (Boxes 7 and 8). Certificates for Initial Notes not
exchanged will be returned by mail or, if tendered by book-entry transfer, by
crediting the account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Initial Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer--Conditions" or any conditions or
irregularity in any tender of Initial Notes of any particular holder whether or
not similar conditions or irregularities are waived in the case of other
holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Initial Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form
A-17
<PAGE>
W-9 (Box 9 of this Letter of Transmittal), and to certify, under penalty of
perjury, that such number is correct and that he or she is not subject to backup
withholding. If the Exchange Agent is not provided with the correct TIN, the
Internal Revenue Service (the "IRS") may subject the holder or other payee to a
$50 penalty. In addition, payments to such holders or other payees with respect
to Initial Notes exchanged pursuant to the Exchange Offer, or with respect to
Exchange Notes following the Exchange Offer, may be subject to 31% backup
withholding.
Part 3 of the Substitute Form W-9 (Box 9) may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If Part 3 is checked, the holder or other payee
must also complete the Certificate of Awaiting Taxpayer Identification Number
following Substitute Form W-9 in order to avoid backup withholding.
Notwithstanding that Part 3 is checked and the Certificate of Awaiting Taxpayer
Identification Number is completed, the Exchange Agent will withhold 31% of all
payments made prior to the time a properly certified TIN is provided to the
Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Initial Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Initial Notes. If the Initial Notes are registered in
more than one name or are not in the name of the actual owner, consult the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which number to report.
If the tendering holder is a nonresident alien or foreign entity not
subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. A copy of the Form W-8 may be obtained
from the Exchange Agent. Please consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Initial Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been completed.
11. SECURITY TRANSFER TAXES
Holders who tender their Initial Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Initial Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Initial Notes in connection
with the Exchange Offer, then the amount of any such tax (whether imposed on the
registered holder or any other persons) is payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such taxes will be
billed directly to such tendering holder.
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<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
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<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF
11 1/2 % SENIOR NOTES DUE 2008, SERIES A
OF
PSINET INC.
The undersigned hereby acknowledges receipt of the Prospectus dated
__________, 199_ (the "Prospectus") of PSINet Inc., a New York corporation (the
"Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of its 11 1/2 % Senior Notes due
2008, Series B (the "Exchange Notes") for each $1,000 in principal amount of its
outstanding 11 1/2 % Senior Notes due 2008, Series A (the "Initial Notes").
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the Initial Notes held by
you for the account of the undersigned.
The aggregate face amount of the Initial Notes held by you for the account
of the undersigned is (fill in amount):
$____________________________ of the 11 1/2 % Senior Notes due 2008,
Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[_] To TENDER the following Initial Notes held by you for the account of
the undersigned (insert principal amount of Initial Notes to be
tendered*, if any):
$____________________________ of the 11 1/2 % Senior Notes due 2008,
Series A.
* The minimum permitted tender is $1,000 in principal amount of
Initial Notes. All other tenders must be in integral multiples
of $1,000 of principal amount.
[_] NOT to TENDER any Initial Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Initial Notes held by you
for the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
Beneficial Owner (as defined in the Letter of Transmittal), including but not
limited to representations to the effect that (i) the undersigned's principal
residence is in the state of (fill in state)___________________________________,
(ii) the undersigned is acquiring the Exchange Notes in the ordinary course of
business of the undersigned, (iii) the undersigned is not participating, does
not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution (within the meaning of the Securities
Act) of the Exchange Notes, (iv) except as otherwise disclosed in writing
herewith, the undersigned acknowledges that any person participating in the
Exchange Offer with the intention or for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale of the
Exchange Notes acquired by such person and cannot rely on the position of the
Staff of the Securities and Exchange Commission set forth in the no-action
letters that are discussed in the section of the Prospectus entitled "The
Exchange Offer --Resale of the Exchange Notes"; (b) to make such agreements,
representations and warranties on behalf of the undersigned, as set forth in the
Letter of Transmittal; and (c) to take such other action as may be necessary
under the Prospectus or the Letter of Transmittal to effect the valid tender of
such Initial Notes.
SIGN HERE
Name of Beneficial Owner(s):___________________________________________________
Signature(s):__________________________________________________________________
Name(s) (please print):________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
Telephone Number:______________________________________________________________
Taxpayer Identification or Social Security Number:_____________________________
Date:__________________________________________________________________________
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<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their social
security number. Refer to the following chart to determine the appropriate
number:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY OR EMPLOYER
IDENTIFICATION NUMBER OF:
- ----------------------------------------------------------------------------------------------------------
<S> <C>
1. Individual The individual
2. Two or more individuals The actual owner of the account or, if combined
(joint account) funds, the first individual on the account (1)
3. Custodian account of a minor (Uniform Gift to The minor(2)
Minors Act)
4. a. Revocable savings trust (grantor is also trustee) The grantor-trustee(1)
b. So-called trust account that is not a legal or
valid trust under State law The actual owner(1)
5. Sole proprietorship
6. A valid trust, estate or pension trust The owner(3)
7. Corporate Legal entity(4)
8. Association, club, religious, charitable, The corporation
educational or other tax exempt organization The organization
9. Partnership
10. A broker or registered nominee The partnership
11. Account with the Department of Agriculture The broker or nominee
The public entity
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you must
nonetheless complete the form and provide your TIN in order to establish that
you are exempt. Check the box in Part 3 of the form, sign and date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) the United States
or any of its agencies or instrumentalities; (4) a state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) a foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) an international
organization or any of its agencies or instrumentalities; (7) a foreign central
bank of issue; (8) a dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.; (9) a real estate investment trust; (10)
an entity or person registered at all times during the tax year under the
Investment
A-21
<PAGE>
Company Act of 1940; (11) a common trust fund operated by a bank under section
584(a); and (12) a financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form SS-
4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not payees are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividend
and certain other payments to a payee who does not furnish a taxpayer
identification number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail
to include any portion of an includable payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
A-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Sections 721 through 725 of the Business Corporation Law of the State
of New York (the "BCL"), the Registrant has broad powers to indemnify its
directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provision of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action as adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors of an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of the
BCL permits the purchase of insurance to indemnify a corporation or its officers
and directors to the extent permitted.
As permitted by Section 721 of the BCL, the Registrant's By-laws provide
that the Registrant shall indemnify its officers and directors, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that no director of the Registrant shall be held personally liable to the
Registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that (1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or (2) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled, or (3) his acts violated section 719 of the BCL. The Registrant has
entered into Indemnity Agreements with its directors and certain key officers
pursuant to which the Registrant generally is obligated to indemnify its
directors and such officers to the full extent permitted by the BCL as described
above. The Company also has purchased directors' and officers' liability
insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as part of this
Registration Statement.
3.1 Certificate of Incorporation, as amended.
3.2 Certificate of Amendment of Certificate of Incorporation dated
April 25, 1995.
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 5, 1995.
3.4 Certificate of Amendment of Certificate of Incorporation,
dated November 11, 1995.
II-1
<PAGE>
3.5 Certificate of Amendment of Certificate of Incorporation dated
May 18, 1996.
3.6 Certificate of Amendment of Certificate of Incorporation dated
as of November 6, 1997.
3.7 Certificate of Amendment of Certificate of Incorporation dated
February 5, 1998.
3.8 Amended and Restated By-laws of the Company.
4.1 Form of 10% Senior Notes due 2005.
4.2 Indenture dated as of April 13, 1998 between the Company and
Wilmington Trust Company, as trustee.
4.3 Form of 11 1/2 Senior Notes due 2008, Series A.
4.4 Indenture dated as of November 3, 1998 between the Company and
Wilmington Trust Company, as trustee.
4.5 Fist Supplemental Indenture dated as of November 12, 1998
between the Company and Wilmington Trust Company, as trustee.
4.6 Form of 11 1/2% Senior Notes due 2008, Series A, as amended.
4.7 Form of 11 1/2% Senior Notes due 2008, Series B.
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP.
7 Opinion of Nixon, Hargrave, Devans & Doyle LLP regarding tax
matters (contained in Exhibit 5).
10.1 Lease Agreement dated July 1, 1990 between the Company and
Rensselaer Polytechnic 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 8, 1995 between the Company and
Rensselaer Polytechnic Institute.
10.3 Amendment to Lease Agreement dated July 1, 1995 between the
Company and Rensselaer Polytechnic Institute.
10.4 Lease Agreement dated as of April 30, 1993 by and between
Vingarden Limited Partnership and the Company.
10.5 Lease Agreement dated April 1995 by and between Brit Limited
Partnership.
10.6 Sublease dated September 20, 1995 by and between The Medical
Sciences Research Institute and the Company and Lease
Agreement dated October 6, 1993 by and between Vingarden
Associates Limited Partnership and The Medical Sciences
Research Institute.
II-2
<PAGE>
10.7 Lease Agreement dated October 31, 1995 between Oakfern
Properties Limited and the Company.
10.8 Amendment to Deed of 460 Spring Park Technology Center dated
as of June 12, 1997 between JBG/Spring Park Limited
Partnership and the Company.
10.9 Sublease Agreement dated as of June 2, 1997 between Lucas
Industries, Inc. and the Company and Office Lease Agreement
between 3B Limited Partnership and Lucas Industries Inc. dated
as of September 12, 1989.
10.10 Sublease Agreement dated January 22, 1998 between the Company
and Unisys Corporation, as amended.
10.11 Lease Agreement dated February 20, 1998 between the Company
and CarrAmerica Realty Corporation.
10.12 Lease Agreement dated October 1994 between the Company and
Cascade Communications, Inc.
10.13 Master Lease Agreement dated July 19, 1994 between the Company
and Technology Credit Corporation.
10.14 Lease Agreement dated as of July 9, 1993 between Applied
Telecommunications Technologies, Inc. and the Company.
10.15 Lease Agreement dated as of February 10, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.16 Lease Agreement dated as of March 14, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.17 Lease Agreement dated as of June 9, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.18 Lease Agreement dated as of September 21, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.19 Master Equipment Lease Agreement dated as of June 23, 1995
between the Company and Forsythe/McArthur Associates, Inc.
("FMA").
10.20 Master Lease Line Commitment Agreement dated as of June 23,
1995 between the Company and FMA.
10.21 Amendment Agreement dated as of August 1, 1995 between the
Company and Technology Credit Corporation.
10.22 Master Equipment Lease Agreement No. 620-0004602-000 dated
November 1995 between the Company and Siemens Credit
Corporation.
10.23 Amendment to Master Lease Agreement No. 1753 dated January 26,
1996 between the Company and Technology Credit Corporation.
10.24 Master Equipment Lease Agreement dated December 15, 1995
between the Company and Financing for Science International,
Inc.
II-3
<PAGE>
10.25 Security Agreement dated as of March 20, 1996 between the
Company and USL Capital Corporation.
10.26 Master Software/Equipment Lease Agreement dated as of
September 20, 1996 between the Company and LPI Software
Funding Group, Inc.
10.27 Master Lease Agreement dated as of January 27, 1997 between
Cascade Communications Corp. and the Company.
10.28 Master Equipment/Software Rental Agreement dated as of
September 11, 1997 between PSINet and Earthlink Network, Inc.
and Change Order Amendment Master Equipment dated as of
September 22, 1997.
10.29 Equipment lease dated as of June 30, 1997 between Royal Bank
of Canada and PSINet Limited.
10.30 Master Lease Agreement dated as of October 10, 1997 between
Cisco Systems Capital Corporation and the Company.
10.31 Master Lease Agreement No. A212 dated as of October 30, 1997
between 3Com Credit Corporation and the Company, as amended.
10.32 Master Lease of Personal Property No. 3402, dated December 12,
1997 between the Company and Charter Financial, Inc., as
amended.
*10.33 Executive Stock Option Plan of the Company.
*10.34 Executive Stock Incentive Plan of the Company, as amended.
*10.35 Directors Stock Incentive Plan of the Company, as amended.
*10.36 Strategic Stock Incentive Plan of the Company.
*10.37 1996 Performance Bonus Plan of the Company.
*10.38 InterCon Systems Corporation 1992 Incentive Stock Plan.
*10.39 InterCon Systems Corporation 1994 Stock Option Plan.
*10.40 Software Ventures Corporation 1994 Stock Option Plan.
*10.41 Employment Agreement dated June 21, 1995 between the Company
and David N. Kunkel.
*10.42 Employment Agreement dated February 9, 1996 between the
Company and Mary-Ann Carolan.
*10.43 Employment Agreement dated February 13, 1996 between the
Company and Mitchell Levinn.
*10.44 Employment Agreement dated April 3, 1996 between the Company
and Harold S. Wills.
*10.45 Employment Agreement dated October 1, 1996 between the Company
and Edward D. Postal.
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<PAGE>
*10.46 Employment Agreement dated October 9, 1996 between the Company
and Richard R. Frizalone.
*10.47 Employment Agreement dated February 12, 1997 between the
Company and David L. Hudson.
*10.48 Employment Agreement dated July 1, 1997 between the Company
and Michael Malesardi.
*10.49 Employment Agreement dated August 2, 1997 between the Company
and Anthony Aveta.
*10.50 Employment Agreement dated August 4, 1997 between the Company
and Harry Hobbs.
*10.51 Employment Agreement dated January 8, 1998 between the Company
and William Cripe.
*10.52 Employment Agreement dated January 18, 1998 between the
Company and Kathleen B. Horne.
*10.53 Employment Agreement dated February 16, 1998 between the
Company and John Muleta.
10.54 Form of Indemnification Agreement.
10.55 Registration Rights Agreement dated as of June 16, 1995 among
the Company and Stockholders of InterCon Systems Corporation.
10.56 Registration Rights Agreement dated as of July 11, 1995 among
the Company and Stockholders of Software Ventures Corporation.
10.57 Registration Rights Agreement made as of September 19, 1996 by
and between the Company and The Chatterjee Management Company.
10.58 Registration Rights Agreement dated as of November 11, 1997
between the Company and the purchasers of Series B 8%
Convertible Preferred Stock.
10.59 Registration Rights Agreement dated as of February 25, 1998
between the Company and IXC Internet Services, Inc.
10.60 Credit Agreement dated September 29, 1998 among the Company,
the Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication
Agent, and The Bank of New York, as Documentation Agent.
10.61 Guarantee Agreement dated September 29, 1998 among each of the
subsidiaries of the Company party thereto and The Chase
Manhattan Bank.
10.62 Pledge Agreement dated September 29, 1998 among the Company,
each subsidiary of the Company party thereto and The Chase
Manhattan Bank.
10.63 Security Agreement dated September 29, 1998 among the Company,
each subsidiary of the Company party thereto and The Chase
Manhattan Bank.
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<PAGE>
10.64 First Amendment dated as of October 27, 1998 to the Credit
Agreement, dated as of September 29, 1998, among the Company,
the Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication
Agent, and The Bank of New York, as
Documentation Agent.
10.65 Warrant to purchase up to 25,000 shares of the Series B
Preferred of the Company, at an exercise price of $1.60 per
share, registered in the name of William H. Baumer.
10.66 Warrant to purchase up to 25,000 shares of the Series B
Preferred of the Company, at an exercise price of $1.60 per
share, registered in the name of William H. Baumer.
10.67 Joint Venture Agreement dated as of September 19, 1996 between
the Company and Chatterjee Management Company.
10.68 Stock Acquisition Agreement, 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.
10.69 Asset Purchase Agreement dated as of June 28, 1996 between the
Company and MindSpring Enterprises, Inc.
10.70 Amendment No. 1 to Asset Purchase Agreement and Network
Services Agreement entered into as of June 28, 1996 by and
between the Company and MindSpring Enterprises, Inc.
10.71 Amendment No. 2 to Asset Purchase Agreement entered into as of
September 1, 1996 by and between the Company and MindSpring
Enterprises, Inc.
10.72 Amendment No. 3 to Asset Purchase Agreement and Amendment No.
1 to Convertible Note entered into as of January 24, 1997 by
and between the Company and MindSpring Enterprises, Inc.
10.73 Amendment No. 2 to Network Services Agreement entered into as
of January 1, 1997 by and between the Company and MindSpring
Enterprises, Inc.
10.74 IRU and Stock Purchase Agreement dated as of July 22, 1997
between IXC Internet Services, Inc. and the Company.
10.75 First Amendment to IRU and Stock Purchase Agreement dated as
of July 22, 1997 between IXC Internet Services, Inc. and the
Company.
10.76 Second Amendment to IRU and Stock Purchase Agreement dated as
of July 22, 1997 between IXC Internet Services, Inc. and the
Company.
10.77 Joint Marketing and Services Agreement dated as of July 22,
1997 between IXC Internet Services Inc. and the Company.
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<PAGE>
10.78 Stock Purchase Agreement dated as of November 11, 1997 between
the Company and the Purchasers of Series B 8% Convertible
Preferred Stock.
10.79 Agreement dated as of November 10, 1997 between iSTAR internet
inc. and the Company.
10.80 Pre-Acquisition Agreement between the Company and iSTAR
internet inc., dated December 23, 1997.
10.81 Security Agreement and Assignment dated as of February 25,
1998 between the Company and IXC Internet Services, Inc.
10.82 Collocation and Interconnection Agreement between the Company
and IXC Internet Services, Inc.
10.83 Escrow Agreement, dated as of April 13, 1998, among Wilmington
Trust Company (as escrow agent and trustee) and the Company.
10.84 Registration Rights Agreement dated as of April 13, 1998 among
the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Chase Securities Inc.
10.85 First Amendment to Sublease dated as of March 23, 1998 between
Unisys Corporation and the Company.
10.86 Share Purchase Agreement dated as of October 1, 1998 among
PSINet Japan Inc., a subsidiary of the Company, Tokyo Internet
Corporation and Secom Co., Ltd.
10.87 Registration Rights Agreement dated as of November 3, 1998
among the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, Chase Securities, Inc. and Morgan Stanley & Co.
Incorporated.
*10.88 Employment Agreement dated June 17, 1998 between the Company
and William A. Opet.
*10.89 Employment Agreement dated July 2, 1998 between the Company
and Robert D. Leahy.
*10.90 Employment Agreement dated September 1, 1998 between the
Company and Chi H. Kwan.
*10.91 Employment Agreement dated September 8, 1998 between the
Company and James A. Haid.
*10.92 Employment Agreement dated September 30, 1998 between the
Company and Sandy L. Blaisdell.
*10.93 Employment Agreement dated October 12, 1998 between the
Company and Geoffrey E. Axton.
*10.94 Employment Agreement dated October 14, 1998 between the
Company and Edward Arnold Davis.
II-7
<PAGE>
10.95 Registration Rights Agreement, dated as of November 13, 1998,
among the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, Chase Securities Inc. and Morgan Stanley & Co.
Incorporated.
10.96 Second Amendment dated as of November 9, 1998, to the Credit
Agreement, dated as of September 29, 1998, among the Company,
the Lenders party thereto, the Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication
Agent, and The Bank of New York, as Documentation Agent.
*10.97 Amendment to Employment Agreement dated October 1, 1998
between the Company and Harry Hobbs.
*10.98 Employment Agreement dated November 2, 1998 between the
Company and David J. Kramer.
*10.99 Employment Agreement dated November 6, 1998 between the
Company and John Walpuck.
*10.100 Employment Agreement dated November 12, 1998 between the
Company and Lawrence Winkler.
10.101 Master Lease Agreement between the Company and Technology
Credit Corporation No. 1788 dated June 20, 1998.
10.102 Master Lease Agreement between the Company and Technology
Credit Corporation No. 1789 dated June 20, 1998.
10.103 Master Loan and Security Agreement No. 3963 between the
Company and Charter Financial Inc. dated September 28, 1998.
11.1 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1997.
11.2 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1996.
11.3 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1995.
11.4 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares Used in Calculation for the Nine Months Ended
September 30, 1998.
12 Statements re Computation of Ratios.
21 Subsidiaries of the Company.
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of KPMG LLP.
23.4 Consent of Price Waterhouse.
23.5 Consent of Arthur Anderson LLP.
23.6 Consent of Chuo Audit Corporation.
II-8
<PAGE>
23.7 Consent of Ernst & Young.
23.8. Consent of Price Waterhouse GmbH.
24 Power of Attorney.
25 Statement of Eligibility on Form T-1 of Wilmington Trust
Company.
99.1 Form of Notice of Guaranteed Delivery.
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(a)(3).
FINANCIAL STATEMENTS AND SCHEDULE:
Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
II-Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 1997.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that:
(a) The undersigned hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities and Exchange Act
of 1934; and, where interim financial information required to be presented by
Article 3 of regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim information.
(b) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt
II-9
<PAGE>
means. This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding to
the request.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Herndon, Commonwealth of Virginia on December 3, 1998.
PSINET INC.
By: /s/ WILLIAM L. SCHRADER
------------------------
William L. Schrader, Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints David N. Kunkel, Edward D. Postal, Michael
J. Malesardi and Kathleen B. Horne, and each or any of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective documents in connection therewith),
with the Securities and Exchange Commission, granting unto each said attorney
- -in-fact and agent full power and authority to do and perform each and every act
and thing requisite and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ WILLIAM L. SCHRADER Chairman, Chief Executive Officer and December 3, 1998
----------------------- Director (Principal Executive Officer)
William L. Schrader
/S/ HAROLD S. WILLS President, Chief Operating Officer December 3, 1998
------------------- and Director
Harold S. Wills
/S/ DAVID N. KUNKEL Executive Vice President, General December 3, 1998
------------------- Counsel and Director
David N. Kunkel
/S/ EDWARD D. POSTAL Senior Vice President and Chief December 3, 1998
-------------------- Financial Officer (Principal
Edward D. Postal Financial Officer)
/S/ MICHAEL J. MALESARDI Vice President and Controller December 3, 1998
------------------------ (Principal Accounting Officer)
Michael J. Malesardi
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ WILLIAM H. BAUMER Director December 3, 1998
---------------------
William H. Baumer
/s/ RALPH J. SWETT Director December 3, 1998
------------------
Ralph J. Swett
/s/ IAN P. SHARP Director December 3, 1998
----------------
Ian P. Sharp
</TABLE>
<PAGE>
SCHEDULE II-VALUATION ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
-------------------------------------
BALANCE AT CHARGED TO BALANCES BALANCE AT
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 doubtful accounts and returns.. $ 127 $724 $ 252 $ (228) $ 875
Deferred tax valuation allowance.............. 2,439 8,936 - - 11,375
Year ended December 31, 1996
Allowances for doubtful accounts and returns.. 875 3,130 - (2,096) 1,909
Deferred tax valuation allowance.............. 11,375 20,948 - - 32,323
Year ended December 31, 1997
Allowances for doubtful accounts and returns.. 1,909 5,424 16 (5,248) 2,101
Deferred tax valuation allowance.............. 32,323 18,756 - - 51,079
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended Incorporated by reference from 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 Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated April 25, 1995 the Company's 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 Certificate of Incorporated by reference from Exhibit 3.2 to
Incorporation Dated May 5, 1995 the June 1995 10-Q
3.4 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation Dated November 11, 1995 the Company's 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 Certificate of Incorporated by reference from Exhibit 3 to the
Incorporation, dated May 18, 1996 Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 located under
Securities Exchange Commission File No. 0-25812
("June 1996 10-Q")
3.6 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated as of November 6, 1997 the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 located
under the Securities and Exchange Commission
File No. 0-25812 ("September 1997 10-Q")
3.7 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.7 to
Incorporation dated February 5, 1998 the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 located
under Securities Exchange Commission File No.
0-25812 ("1997 Form 10-K")
3.8 Amended and Restated By-laws of the Company Incorporated by reference from Exhibit 3.5 to
the September 1995 10-Q
4.1 Form of 10% Senior Notes due 2005, Series B Incorporated by reference from Exhibit 4.1 to
the Company's Current Report on Form 8-K dated
April 22, 1998 located under Securities
Exchange Commission File No. 0-25812 ("April
22, 1998 8-K")
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
4.2 Indenture dated as of April 13, 1998 between Incorporated by reference from Exhibit 4.2 to
the Company and Wilmington Trust Company the April 22, 1998 8-K
4.3 Form of 11 1/2% Senior Notes due 2008, Series A Incorporated by reference from Exhibit 4.2 to
the Company's Current Report on Form 8-K dated
November 3, 1998 located under Securities
Exchange Commission File No. 0-25812 ("November
10, 1998 8-K")
4.4 Indenture dated as of November 3, 1998 Incorporated by reference from Exhibit 4.1 to
between the Company and Wilmington Trust the November 10, 1998 8-K
Company
4.5 First Supplemental Indenture dated as of Incorporated by reference from Exhibit 4.1 to
November 12, 1998 between the Company and the Company's Quarterly Report on Form 10-Q for
Wilmington Trust Company, as trustee the quarter ended September 30, 1998 located
under Securities Exchange Commission File No.
0-25812 ("September 1998 10-Q")
4.6 Form of 11 1/2% Senior Notes due 2008, Series Incorporated by reference from Exhibit 4.2 to
A, as amended the September 1998 10-Q
4.7 Form of 11 1/2% Senior Notes due 2008, Series B Filed herewith
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP. Filed herewith
7 Opinion of Nixon, Hargrave, Devans & Doyle LLP Set forth in Exhibit 5 filed herewith
regarding tax matters
10.1 Lease Agreement dated July 1, 1990 between the Incorporated by reference from Exhibit 10.1 to
Company and Rensselaer Polytechnic Institute, the May 1995 Registration Statement
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 8, 1995 between Incorporated by reference from Exhibit 10.2 to
the Company and Rensselaer Polytechnic Institute the May 1995 Registration Statement
10.3 Amendment to Lease Agreement dated July 1, 1995 Incorporated by reference from Exhibit 10.2A to
between the Company and Rensselaer Polytechnic the Company's Registration Statement on Form
Institute S-1 declared effective on December 14, 1995
located under Securities and Exchange Commission
File No. 33-99610 ("December 1995 Registration
Statement")
10.4 Lease Agreement dated as of April 30, 1993 by Incorporated by reference from Exhibit 10.3 to
and between Vingarden Limited Partnership and the May 1995 Registration Statement
the Company
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.5 Lease Agreement dated April 1995 by and between Incorporated by reference from by Exhibit 10.3A
Brit Limited Partnership and the Company to the December 1995 Registration Statement
10.6 Sublease dated September 20, 1995 by and between Incorporated by reference from Exhibit 10.3B to
The Medical Sciences Research Institute and the the December 1995 Registration Statement
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, 1995 between Incorporated by reference from Exhibit 10.4A to
Oakfern Properties Limited and the Company the December 1995 Registration Statement
10.8 Amendment to Deed of 460 Spring Park Technology Incorporated by reference from Exhibit 10.1 to
Center dated as of June 12, 1997 between JBG/ the September 1997 Form 10-Q
Spring Park Limited Partnership and the Company
10.9 Sublease Agreement dated as of June 2, 1997 Incorporated by reference from Exhibit 10.2 to
between Lucas Industries, Inc. and the Company the September 1997 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 22, 1998 Incorporated by reference from Exhibit 10.9 to
between the Company and Unisys Corporation, as the 1997 Form 10-K
amended
10.11 Lease Agreement dated February 20, 1998 between Incorporated by reference from Exhibit 10.11 to
the Company and CarrAmerica Realty Corporation the 1997 Form 10-K
10.12 Lease Agreement dated October 1994 between the Incorporated by reference from Exhibit 10.4 to
Company and Cascade Communications, Inc. the May 1995 Registration Statement
10.13 Master Lease Agreement dated July 19, 1994 Incorporated by reference from Exhibit 10.5 to
between the Company and Technology Credit the May 1995 Registration Statement
Corporation
10.14 Lease Agreement dated as of July 9, 1993 between Incorporated by reference from Exhibit 10.6 to
Applied Telecommunications Technologies, Inc. the May 1995 Registration Statement
and the Company
10.15 Lease Agreement dated as of February 10, 1994 Incorporated by reference from Exhibit 10.7F to
between Applied Telecommunications Technologies, the December 1995 Registration Statement
Inc. and the Company
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.16 Lease Agreement dated as of March 14, 1994 Incorporated by reference from Exhibit 10.7G to
between Applied Telecommunications Technologies, the December 1995 Registration Statement
Inc. and the Company
10.17 Lease Agreement dated as of June 9, 1994 between Incorporated by reference from Exhibit 10.7H to
Applied Telecommunications Technologies, Inc. the December 1995 Registration Statement
and the Company
10.18 Lease Agreement dated as of September 21, 1994 Incorporated by reference from Exhibit 10.7 to
between Applied Telecommunications Technologies, the May 1995 Registration Statement
Inc. and the Company
10.19 Master Equipment Lease Agreement dated as of Incorporated by reference from Exhibit 10.1 to
June 23, 1995 between the Company and the September 1995 10-Q
Forsythe/McArthur Associates, Inc. ("FMA")
10.20 Master Lease Line Commitment Agreement dated as Incorporated by reference from Exhibit 10.2 to
of June 23, 1995 between the Company and FMA the September 1995 10-Q
10.21 Amendment Agreement dated as of August 1, 1995 Incorporated by reference from Exhibit 10.8 to
between the Company and Technology Credit the September 1995 10-Q
Corporation
10.22 Master Equipment Lease Agreement No. Incorporated by reference from Exhibit 10.44A
620-0004602-000 dated November 1995 between the to the December 1995 Registration Statement
Company and Siemens Credit Corporation
10.23 Amendment to Master Lease Agreement No. 1753 Incorporated by reference from Exhibit 10.77 to
dated January 26, 1996 between the Company and the Company's Annual Report on Form 10-K for
Technology Credit Corporation the fiscal year ended December 31, 1995 located
under the Securities Exchange Commission File
No. 0-25812 ("1995 Form 10-K")
10.24 Master Equipment Lease Agreement dated December Incorporated by reference from Exhibit 10.78 to
15, 1995 between the Company and Financing for the 1995 Form 10-K
Science International, Inc.
10.25 Security Agreement dated as of March 20, 1996 Incorporated by reference from Exhibit 10.79 to
between the Company and USL Capital Corporation the 1995 Form 10-K
10.26 Master Software/Equipment Lease Agreement dated Incorporated by reference from Exhibit 10.4 to
as of September 20, 1996 between the Company and the Company's Quarterly Report on Form 10-Q for
LPI Software Funding Group, Inc. the quarter ended September 30, 1996 located
under Securities Exchange Commission File No.
0-25812 ("September 1996 10-Q")
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.27 Master Lease Agreement dated as of January 27, Incorporated by reference from Exhibit 10.77 to
1997 between Cascade Communications Corp. the Company's Annual Report on Form 10-K for
and the Company the fiscal year ended December 31, 1996 located
under Securities and Exchange Commission File
No. O-25812 ("1996 Form 10-K")
10.28 Master Equipment/Software Rental Agreement dated Incorporated by reference from Exhibit 10.3 to
as of September 11, 1997 between PSINet and the September 1997 10-Q
Earthlink Network, Inc. and Change Order
Amendment Master Equipment dated as of September
22, 1997
10.29 Equipment lease dated as of June 30, 1997 Incorporated by reference from Exhibit 10.4 to
between Royal Bank of Canada and PSINet Limited the September 1997 10-Q
10.30 Master Lease Agreement dated as of October Incorporated by reference from Exhibit 10.4 to
10, 1997 between Cisco Systems Capital the September 1997 Form 10-Q
Corporation and the Company
10.31 Master Lease Agreement No. A212 between 3Com Incorporated by reference from dated as of
Credit Corporation and the Company, as amended October 30, 1997 Exhibit 10.31 to the 1997 Form
10-K
10.32 Master Lease of Personal Property No. 3402, Incorporated by reference from Exhibit 10.32 to
dated December 12, 1997 between the Company and the 1997 Form 10-K
Charter Financial, Inc., as amended
10.33* Executive Stock Option Plan of the Company Incorporated by reference from Exhibit 10.10 to
the May 1995 Registration Statement
10.34* Executive Stock Incentive Plan of the Company, Incorporated by reference from Exhibit 10.12 to
as amended the December 1995 Registration Statement
10.35* Directors Stock Incentive Plan of the Company, Incorporated by reference from Exhibit 10.13 to
as amended the December 1995 Registration Statement
10.36* Strategic Stock Incentive Plan of the Company Incorporated by reference from Exhibit 10 to
the June 1995 10-Q
10.37* 1996 Performance Bonus Plan of the Company Incorporated by reference from Exhibit 10.25 to
the 1996 Form 10- K
10.38* InterCon Systems Corporation 1992 Incentive Incorporated by reference from Exhibit 99.1 to
Stock Plan 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")
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.39* InterCon Systems Corporation 1994 Stock Option Incorporated by reference from Exhibit 99.2 to
Plan the S-8 No. 16
10.40* Software Ventures Corporation 1994 Stock Option Incorporated by reference from Exhibit 99 to
Plan 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 21, 1995 between Incorporated by reference from Exhibit 10.26 to
the Company and David N. Kunkel the December 1995 Registration Statement
10.42* Employment Agreement dated February 9, 1996 Incorporated by reference from Exhibit 10.42 to
between the Company and Mary-Ann Carolan the 1995 Form 10-K
10.43* Employment Agreement dated February 13, 1996 Incorporated by reference from Exhibit 10.19 to
between the Company and Mitchell Levinn the 1995 10-K
10.44* Employment Agreement dated April 3, 1996 between Incorporated by reference from Exhibit 10.2 to
the Company and Harold S. Wills the June 1996 10-Q.
10.45* Employment Agreement dated October 1, 1996 between Incorporated by reference from Exhibit 10.2 to
the Company and Edward D. Postal the September 1996 10-Q
10.46* Employment Agreement dated October 9, 1996 Incorporated by reference from Exhibit 10.3 to
between the Company and Richard R. Frizalone the September 1996 10-Q
10.47* Employment Agreement dated February 12, 1997 Incorporated by reference from Exhibit 10.78 to
between the Company and David L. Hudson the 1996 Form 10-K
10.48* Employment Agreement dated July 1, 1997 between Incorporated by reference from Exhibit 10.5 to
the Company and Michael Malesardi the September 1997 10-Q
10.49* Employment Agreement dated August 2, 1997 Incorporated by reference from Exhibit 10.6 to
between the Company and Anthony Aveta the September 1997 10-Q
10.50* Employment Agreement dated August 4, 1997 Incorporated by reference from Exhibit 10.7 to
between the Company and Harry Hobbs the September 1997 10-Q
10.51* Employment Agreement dated January 8, 1998 Incorporated by reference from Exhibit 10.52 to
between the Company and William Cripe the 1997 Form 10-K
10.52* Employment Agreement dated January 18, 1998 Incorporated by reference from Exhibit 10.53 to
between the Company and Kathleen B. Horne the 1997 Form 10-K
10.53* Employment Agreement dated February 16, 1998 Incorporated by reference from Exhibit 10.54 to
between the Company and John Muleta the 1997 Form 10-K
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.54 Form of Indemnification Agreement Incorporated by reference from Exhibit 10.21 to
the May 1995 Registration Statement
10.55 Registration Rights Agreement dated as of June Incorporated by reference from Exhibit 10.39
16, 1995 among the Company and Stockholders of to the December 1995 Registration Statement
InterCon Systems Corporation
10.56 Registration Rights Agreement dated as of July Incorporated by reference from Exhibit 10.40
11, 1995 among the Company and Stockholders of to the December 1995 Registration Statement
Software Ventures Corporation
10.57 Registration Rights Agreement made as of Incorporated by reference from Exhibit 10.1 to
September 19, 1996 by and between the Company the September 1996 10-Q
and The Chatterjee Management Company
10.58 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.10 to
November 11, 1997 between the Company and the the September 1997 10-Q
purchasers of Series B 8% Convertible Preferred
Stock
10.59 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.62 to
February 25, 1998 between the Company and IXC the 1997 Form 10-K
Internet Services, Inc.
10.60 Credit Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.2 to
the Company, the Lenders party thereto, The the Company's Current Report on Form 8-K dated
Chase Manhattan Bank, as Administrative Agent, October 16, 1998 located under the Securities
Fleet National Bank, as Syndication Agent, and Exchange Commission File No. 0-25812 ("October
The Bank of New York as Documentation Agent 16, 1998 8-K")
10.61 Guarantee Agreement dated September 29, 1998 Incorporated by reference from Exhibit 2.3 to
among each of the subsidiaries of the Company the October 16, 1998 8-K
party thereto and The Chase Manhattan Bank
10.62 Pledge Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.4 to
the Company, each subsidiary of the Company the October 16, 1998 8-K
party thereto and The Chase Manhattan Bank
10.63 Security Agreement dated September 29, 1998 Incorporated by reference from Exhibit 2.5 to
among the Company, each subsidiary of the the October 16, 1998 8-K
Company party thereto and The Chase Manhattan
Bank
10.64 First Amendment dated as of October 27, 1998 to Incorporated by reference from Exhibit 10.2 to
the Credit Agreement dated as of September 29, the November 10, 1998 8-K
1998, among the Company, the Lenders party
thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and the Bank of New York, as
Documentation Agent
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.65 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.39 to
Series B Preferred of the Company, at an the May 1995 Registration Statement
exercise price of $1.60 per share, registered in
the name of William H. Baumer
10.66 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.40 to
Series B Preferred of the Company, at an the May 1995 Registration Statement
exercise price of $1.60 per share, registered in
the name of William H. Baumer
10.67 Joint Venture Agreement dated as of September Incorporated by reference from Exhibit 2 to
19, 1996 between the Company and Chatterjee Amendment No. 1 to the Company's Quarterly
Management Company Report on Form 10-Q for the quarter ended
September 30, 1996 located under Securities
Exchange Commission File No. 0-25812
("September 1996 10-Q/A1")
10.68 Stock Acquisition Agreement, dated as of Incorporated by reference from Exhibit 2 to the
February 1, 1997, between Ascend Communications, Company's Current Report on Form 8-K dated
Inc., a Delaware corporation, and the Company, a February 14, 1997 located under Securities
New York corporation, with respect to all Exchange Commission File No. 0-25812
outstanding capital stock of InterCon Systems
Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company
10.69 Asset Purchase Agreement dated as of June 28, Incorporated by reference from Exhibit 2 to the
1996 between the Company and MindSpring June 1996 10-Q
Enterprises, Inc.
10.70 Amendment No. 1 to Asset Purchase Agreement and Incorporated by reference from Exhibit 2 to the
Network Services Agreement entered into as of September 1996 10-Q
June 28, 1996 by and between the Company and
MindSpring Enterprises, Inc.
10.71 Amendment No. 2 to Asset Purchase Agreement Incorporated by reference from Exhibit 10.8 to
entered into as of September 1, 1996 by and the September 1996 10-Q
between the Company and MindSpring Enterprises,
Inc.
10.72 Amendment No. 3 to Asset Purchase Agreement and Incorporated by reference from Exhibit 10.74 to
Amendment No. 1 to Convertible Note entered the 1996 Form 10-K
into as of January 24, 1997 by and between the
Company and MindSpring Enterprises, Inc.
10.73 Amendment No. 2 to Network Services Agreement Incorporated by reference from Exhibit 10.75 to
entered in as of January 1, 1997 by and between the 1996 Form 10-K
the Company and MindSpring Enterprises, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.74 IRU and Stock Purchase Agreement dated as of Incorporated by reference from Exhibit 2.1 to
July 22, 1997 between IXC Internet Services, Amendment No. 2 to the Company's Quarterly
Inc. and the Company Report on Form 10-Q for the quarter ended June
30, 1997 located under Securities Exchange
Commission File No. 0-25812 ("June 1997
10-Q/A2")
10.75 First Amendment to IRU and Stock Purchase Incorporated by reference from Exhibit A to the
Agreement dated as of July 22, 1997 between IXC Company's Proxy Statement on Schedule 14A dated
Internet Services, Inc. and the Company December 19, 1997 located under Securities
Exchange Commission File No. 0-25812
("December 1997 Proxy Statement")
10.76 Second Amendment to IRU and Stock Purchase Incorporated by reference from Exhibit A to the
Agreement dated as of July 22, 1997 between IXC December 1997 Proxy Statement
Internet Services, Inc. and the Company
10.77 Joint Marketing and Services Agreement dated as Incorporated by reference from Exhibit 10.1 to
of July 22, 1997 between IXC Internet Services the June 1997 10-Q/A1
Inc. and the Company
10.78 Stock Purchase Agreement dated as of November Incorporated by reference from Exhibit 10.9 to
11, 1997 between the Company and the Purchasers the September 1997 10-Q
of Series B 8% Convertible Preferred Stock
10.79 Agreement dated as of November 10, 1997 between Incorporated by reference from Exhibit 2 to the
iSTAR internet inc. and the Company September 1997 10-Q
10.80 Pre-Acquisition Agreement between the Company Incorporated by reference from Exhibit 10.1 to
and iSTAR internet inc., dated December 23, 1997 the Company's Current Report on Form 8-K dated
January 7, 1998 located under Securities Exchange
Commission File No. 0-25812 ("January 7, 1998 8-K")
10.81 Security Agreement and Assignment dated as of Incorporated by reference from Exhibit 10.95 to
February 25, 1998 between the Company and IXC the 1997 Form 10-K
Internet Services, Inc.
10.82 Collocation and Interconnection Agreement Incorporated by reference from Exhibit 10.96 to
between the Company and IXC Internet Services, the 1997 Form 10-K
Inc.
10.83 Escrow Agreement, dated as of April 13, 1998, Incorporated by reference from Exhibit 10.2 to
among Wilmington Trust Company (as escrow agent the April 22, 1998 8-K
and trustee) and the Company.
10.84 Registration Rights Agreement dated as of April Incorporated by reference from Exhibit 10.1 to
13, 1998 among the Company and Donaldson, Lufkin the April 22, 1998 8-K
& Jenrette Securities Corporation, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and
Chase Securities, Inc.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.85 First Amendment to Sublease dated as of March Incorporated by reference from Exhibit 10.99 to
23, 1998 between Unisys Corporation and the the Company's Registration Statement on Form
Company S-4 declared effective on May 7, 1998 located
under the Securities and Exchange Commission
File No. 333-51491 ("May 1998 Registration Statement")
10.86 Share Purchase Agreement dated as of October 1, Incorporated by reference from Exhibit 2.1 to
1998, among PSINet Japan Inc., a subsidiary of the October 16, 1998 8-K
the Company, Tokyo Internet Corporation and
Secom Co., Ltd.
10.87 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.1 to
November 3, 1998 among the Company and the November 10, 1998 8-K
Donaldson, Lufkin and Jenrette Securities
Corporation, Chase Securities, Inc. and Morgan
Stanley & Co. Incorporated
10.88* Employment Agreement dated June 17, 1998 between Incorporated by reference from Exhibit 10.1 to the Company's
the Company and William A. Opet Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 located under Securities Exchange Commission File No.
0-25812 ("June 1998 10-Q")
10.89* Employment Agreement dated July 2, 1998 between Incorporated by reference from Exhibit 10.2 to
the Company and Robert D. Leahy the June 1998 10-Q
10.90* Employment Agreement dated September 1, 1998 Incorporated by reference from Exhibit 10.8 to
between the Company and Chi H. Kwan the September 1998 10-Q
10.91* Employment Agreement dated September 8, 1998 Incorporated by reference from Exhibit 10.5 to
between the Company and James A. Haid the September 1998 10-Q
10.92* Employment Agreement dated September 30, 1998 Incorporated by reference from Exhibit 10.3 to
between the Company and Sandy L. Blaisdell the September 1998 10-Q
10.93* Employment Agreement dated October 12, 1998 Incorporated by reference from Exhibit 10.2 to
between the Company and Geoffrey E. Axton the September 1998 10-Q
10.94* Employment Agreement dated October 14, 1998 Incorporated by reference from Exhibit 10.4 to
between the Company and Edward Arnold Davis the September 1998 10-Q
10.95 Registration Rights Agreement, dated as of Incorporated by reference from Exhibit 4.3 to
November 13, 1998, among the Company and the September 1998 10-Q
Donaldson Lufkin & Jenrette Securities
Corporation, Chase Securities Inc. and Morgan
Stanley & Co. Incorporated
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
10.96 Second Amendment dated as of November 9, 1998, Incorporated by reference from Exhibit 10.1 to
to the Credit Agreement, dated as of September the September 1998 10-Q
29, 1998, among the Company, the Lenders party
thereto, the Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and The Bank of New York, as
Documentation Agent
10.97* Amendment to Employment Agreement dated October Incorporated by reference from Exhibit 10.6 to
1, 1998 between the Company and Harry Hobbs the September 1998 10-Q
10.98* Employment Agreement dated November 2, 1998 Incorporated by reference from Exhibit 10.7 to
between the Company and David J. Kramer the September 1998 10-Q
10.99* Employment Agreement dated November 6, 1998 Incorporated by reference from Exhibit 10.9 to
between the Company and John Walpuck the September 1998 10-Q
10.100* Employment Agreement dated November 12, 1998 Incorporated by reference from Exhibit 10.10 to
between the Company and Lawrence Winkler the September 1998 10-Q
10.101 Master Lease Agreement between the Company and Incorporated by reference from Exhibit 10.11 to
Technology Credit Corporation No. 1788 dated the September 1998 10-Q
June 20, 1998
10.102 Master Lease Agreement between the Company and Incorporated by reference from Exhibit 10.12 to
Technology Credit Corporation No. 1789 dated the September 1998 10-Q
June 20, 1998
10.103 Master Loan and Security Agreement No. 3963 Incorporated by reference from Exhibit 10.13 to
between the Company and Charter Financial Inc. the September 1998 10-Q
dated September 28, 1998
11.1 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.1 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1997
11.2 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.2 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1996
11.3 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.3 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1995
11.4 Calculation of Basic and Diluted Loss per Share Incorporated by reference from Exhibit 11.2 to
and Weighted Average Shares Used in Calculation the September 1998 10-Q
for the Nine Months Ended September 30, 1998
12 Statements re Computation of Ratios Filed herewith
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
<S> <C> <C>
21 Subsidiaries of the Company Filed herewith
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP Set forth in Exhibit 5 filed hereunder
23.2 Consent of PricewaterhouseCoopers LLP Filed herewith
23.3 Consent of KPMG LLP Filed herewith
23.4 Consent of Price Waterhouse Filed herewith
23.5 Consent of Arthur Andersen LLP Filed herewith
23.6 Consent of Chuo Audit Corporation Filed herewith
23.7 Consent of Ernst & Young Filed herewith
23.8 Consent of Price Waterhouse GmbH Filed herewith
24 Power of Attorney Included in Signature Pages to the Registration
Statement
25 Statement of Eligibility on Form T-1 of Filed herewith
Wilmington Trust Company
99.1 Form of Notice of Guaranteed Delivery Filed herewith
</TABLE>
______________________
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(a)(3).
-12-
<PAGE>
EXHIBIT 4.7
SERIES B GLOBAL NOTE
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF
CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS
OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 3.06 AND 3.07 OF THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
<PAGE>
PSINET INC.
__________________
11 1/2% SENIOR NOTE DUE 2008, SERIES B
CUSIP NO. 74437CAD3
No. __________ $_______________________
PSINET INC., a New York corporation (herein called the "Company," which
term includes any successor Person under the Indenture hereinafter referred to),
for value received, hereby promises to pay to _____________ or registered
assigns, the principal sum of _______________ United States dollars on November
1, 2008, at the office or agency of the Company referred to below, and to pay
interest thereon from November 3, 1998, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semiannually on May 1
and November 1 in each year, commencing May 1, 1999 at the rate of 11 1/2% per
annum, in United States dollars, until the principal hereof is paid or duly
provided for; provided that to the extent interest has not been paid or duly
provided for with respect to the Series A Note exchanged for this Series B Note,
interest on this Series B Note shall accrue from the most recent Interest
Payment Date to which interest on the Series A Note which was exchanged for this
Series B Note has been paid or duly provided for. Interest shall be computed on
the basis of a 360-day year comprised of twelve 30-day months.
This Series B Note was issued pursuant to the Exchange Offer pursuant to
which the 11 1/2% Senior Notes due 2008, Series A (herein called the "Series A
Notes") in like principal amount were exchanged for the Series B Notes. The
Series B Notes rank pari passu in right of payment with the Series A Notes.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in the Indenture hereinafter referred
to, be paid to the Person in whose name this Note (or any Predecessor Notes) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the April 15 or October 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the interest rate borne by the Series B Notes, to the
extent lawful, shall forthwith cease to be payable to the Holder on such Regular
Record Date, and may either be paid to the Person in whose name this Note (or
any Predecessor Notes) is registered at the close of business on a Special
Record Date for the payment of such defaulted interest to be fixed by the
Trustee, notice whereof shall be given to Holders of Notes not less than 10 days
prior to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest on, this Note,
and exchange or transfer of the Note, will be made at the office or agency of
the Company in the City of New York maintained for such purpose (which initially
will be the Trustee c/o Harris Trust Company of New York, 77 Water
-2-
<PAGE>
Street, New York, NY 10005), or at such other office or agency as may be
maintained for such purpose, or, at the option of the Company, payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear on the Note Register, and provided, that
payment by wire transfer of immediately available funds will be required with
respect to principal of and interest on all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Note shall not be entitled to any benefit under the Indenture, or
be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and its
corporate seal to be affixed or reproduced hereon.
PSINET INC.
By:_______________________
Title:____________________
[SEAL]
Attest:
______________________
Authorized Officer
-3-
<PAGE>
(Back of Note)
PSINET INC.
11 1/2% Senior Note due 2008, Series B
This Note is one of a duly authorized issue of Notes of the Company
designated as its 11 1/2% Senior Notes due 2008, Series B (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $350,000,000, issued under, entitled to
the benefits of and subject to the terms of an indenture (herein called the
"Indenture") dated as of November 3, 1998, as amended, between the Company and
Wilmington Trust Company, as trustee (herein called the "Trustee," which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, any Guarantors, the Trustee and the Holders of the
Notes, and of the terms upon which the Notes are, and are to be, authenticated
and delivered.
The Indenture contains provisions for defeasance at any time of (a) the
entire Indebtedness on the Notes and (b) certain restrictive covenants and
related Defaults and Events of Default, in each case upon compliance with
certain conditions set forth therein.
The Notes are subject to redemption at any time on or after November 1,
2003, at the option of the Company, in whole or in part, on not less than 30 nor
more than 60 days' prior notice, in amounts of $1,000 or an integral multiple
thereof, at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning November 1
of the years indicated below:
Redemption
Year Price
---- ----------
2003 105.750%
2004 103.833%
2005 101.917%
2006 100.000%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
In addition, at any time on or prior to November 1, 2001, the Company may,
at its option, use the net proceeds of one or more Public Equity Offerings or
the sale of Capital Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or in a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Notes originally issued under the Indenture at a redemption price
equal to 111.5% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Redemption Date; provided that at least
65% aggregate principal amount of Notes remains outstanding immediately after
the occurrence of such redemption. In order to effect the foregoing redemption,
the Company must mail a notice of redemption no later than 45 days after
the closing of the related Public Equity Offering or to a Strategic Investor and
must
-4-
<PAGE>
consummate such redemption within 60 days of the closing of the Public Equity
Offering or sale to a Strategic Investor.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, subject to the terms of the
Indenture, each Holder may require the Company to purchase such Holder's Notes
in whole or in part in integral multiples of $1,000, at a purchase price in cash
in an amount equal to 101% of the principal amount thereof, plus accrued and
unpaid interest if any, to the date of purchase, pursuant to Change of Control
Offer and in accordance with the procedures set forth in the Indenture.
Under certain circumstances, in the event the Net Cash Proceeds received by
the Company from any Asset Sale, which proceeds are not used to repay any Pari
Passu Indebtedness of the Company or any Subsidiary (including the repurchase of
Notes) or which will be invested in Telecommunications Assets, exceeds a
specified amount, the Company will be required to apply such proceeds to
purchase Notes and certain Indebtedness ranking pari passu in right of payment
to the Notes.
In the case of any redemption of Notes in accordance with the Indenture,
interest installments whose Stated Maturity is on or prior to the Redemption
Date will be payable to the Holders of such Notes of record as of the close of
business on the relevant Regular Record Date or Special Record Date referred to
on the face hereof. Notes (or portions thereof) for whose redemption and
payment provision is made in accordance with the Indenture shall cease to bear
interest from and after the Redemption Date.
In the event of redemption of this Note in accordance with the Indenture in
part only, a new Note or Notes for the unredeemed portion hereof shall be issued
in the name of the Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal amount
of all the Notes may be declared due and payable in the manner and with the
effect provided in the Indenture.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders and certain amendments
which required the consent of all of the Holders) as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and any Guarantors and the rights of the Holders under the Indenture and
the Notes and any Guarantees at any time by the Company and the Trustee with the
consent of the Holders of at least a majority in aggregate principal amount of
the Notes at the time Outstanding. The Indenture also contains provisions
permitting the Holders of at least a majority in aggregate principal amount of
the Notes (100% of the Holders in certain circumstances) at the time
Outstanding, on behalf of the Holders of all the Notes, to waive compliance by
the Company and any Guarantors with certain provisions of the Indenture and the
Notes and any Guarantees and certain past Defaults under the Indenture and the
Notes and any Guarantees and their consequences. Any such consent or waiver by
or on behalf of the Holder of this Note shall be conclusive and binding upon
such Holder and upon all future Holders of this Note and of any Note issued upon
the registration of transfer hereof or in exchange herefor or in lieu hereof
whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, any Guarantor
or any other obligor on the Notes (in the event such Guarantor or such other
obligor is obligated to make payments in respect of the Notes), which is
absolute and unconditional, to pay the principal of, and premium, if any, and
interest on, this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
-5-
<PAGE>
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in the Borough of Manhattan, The City of New York, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Note Registrar duly executed by, the Holder hereof or its
attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount will be
issued to the designated transferee or transferees.
Certificated securities shall be transferred to all beneficial holders in
exchange for their beneficial interests in the Series B Global Notes if (x) the
Depositary notifies the Company that it is unwilling or unable to continue as
depository for such Global Note and a successor depository is not appointed by
the Company within 90 days or (y) there shall have occurred and be continuing an
Event of Default and the Note Registrar has received a request from the
Depositary. Upon any such issuance, the Trustee is required to register such
certificated Series B Notes in the name of, and cause the same to be delivered
to, such Person or Persons (or the nominee of any thereof).
Series B Notes in certificated form are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof.
As provided in the Indenture and subject to certain limitations therein set
forth, the Series B Notes are exchangeable for a like aggregate principal amount
of Notes of a differing authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor
or the Trustee may treat the Person in whose name this Note is registered as the
owner hereof for all purposes, whether or not this Note is overdue, and neither
the Company, any Guarantor, the Trustee nor any such agent shall be affected by
notice to the contrary.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
All terms used in this Note which are defined in the Indenture and not
otherwise defined herein shall have the meanings assigned to them in the
Indenture.
[Seal] By:___________________________
Title:________________________
Attest:
____________________________
Authorized Officer
-6-
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11 1/2% Senior Notes due 2008, Series B referred to in
the within-mentioned Indenture.
WILMINGTON TRUST COMPANY
as Trustee
By: ________________________________
Authorized Signer
Dated:
-7-
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to Section
10.12 or Section 10.14, as applicable, of the Indenture, check the Box: [ ].
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.12 or Section 10.14 as applicable, of the Indenture,
state the amount (in original principal amount):
$ _______________.
Date: ___________________ Your Signature: _____________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: __________________________________
-8-
<PAGE>
FORM OF TRANSFEREE CERTIFICATE
I or we assign and transfer this Note to:
Please insert social security or other identifying number of assignee
_____________________________________________________________________
Print or type name, address and zip code of assignee
_____________________________________________________________________
and irrevocably appoint _______________________________________________________
[Agent], to transfer this Note on the books of the Company. The Agent may
substitute another to act for him.
Dated __________________________
Signed _________________________
(Sign exactly as name appears on the other side of this Note) [Signature
must be guaranteed by an eligible Guarantor Institution (banks, stock brokers,
savings and loan associations and credit unions) with membership in an approved
guarantee medallion program pursuant to Securities and Exchange Commission Rule
17 Ad-15]
-9-
<PAGE>
EXHIBIT 5
NIXON, HARGRAVE, DEVANS & DOYLE LLP
437 Madison Avenue
New York, New York 10022
December 3, 1998
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Ladies and Gentlemen:
We have acted as counsel to PSINet Inc., a New York corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-4 (the "Registration Statement") to be filed by the Company on or about
December 3, 1998 with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the offer
by the Company of $350,000,000 aggregate principal amount of the Company's new
11 1/2 % Senior Notes Due 2008, Series B (the "Exchange Notes"), to be issued
under the Indenture dated as of November 3, 1998, as amended (the "Indenture"),
by and between the Company and Wilmington Trust Company, as trustee (the
"Trustee"), in exchange for a like principal amount of the Company's outstanding
11 1/2 % Senior Notes Due 2008, Series A (the "Initial Notes" and, together with
the Exchange Notes, the "Notes"), as contemplated by the Registration Rights
Agreement dated as of November 3, 1998 and the Registration Rights Agreement
dated as of November 13, 1998 (collectively, the "Registration Rights
Agreements") by and among the Company and Donaldson, Lufkin & Jenrette
Securities Corporation, Chase Securities Inc. and Morgan Stanley & Co.
Incorporated.
In connection with the foregoing, we have examined the Registration
Statement and the preliminary prospectus contained in the Registration Statement
(the "Preliminary Prospectus"), the Indenture, the Registration Rights
Agreements and the form of Exchange Notes set forth in the Indenture and the
form of Statement of Eligibility and Qualification on Form T-1 of the Trustee
filed as an exhibit to the Registration Statement. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, certificates and other documents and have made such
investigations of law as we have deemed necessary or appropriate as a basis for
the opinions expressed below.
As to questions of fact material to our opinions expressed herein, we have,
when relevant facts were not independently established, relied upon certificates
of, and information received from, the Company, the Trustee and/or
representatives of the Company and/or the Trustee. We have made no independent
investigation of the facts stated in such certificates or as to any
information received from the Company, the Trustee and/or representatives of the
Company
<PAGE>
PSINet Inc.
December 3, 1998
Page 2
and/or the Trustee and do not opine as to the accuracy of such factual matters.
We also have relied, without investigation, upon certificates and other
documents from, and conversations with, public officials.
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity to the originals of any document or other
instrument submitted to us as a copy, the genuineness of all signatures on such
originals or copies, and the legal capacity of natural persons who executed any
such document or instrument at the time of execution thereof. We assume also
that the Exchange Notes have been or will be duly and validly authenticated.
Additionally, we have assumed, but not independently verified, that the factual
matters set forth in the statements made in the Registration Statement,
including, without limitation, those matters set forth and statements made in
the Prospectus under the caption "Certain Federal Income Tax Considerations",
are true and correct and we have relied upon such factual matters and statements
in rendering the opinion expressed herein.
Members of our firm involved in the preparation of this opinion are
licensed to practice law in the State of New York and we do not purport to be
experts on, or to express any opinion herein concerning, the laws of any other
jurisdiction other than the law of the State of New York and the federal law of
the United States of America.
Based upon and subject to the foregoing and the other qualifications and
limitations contained herein, we are of the opinion that:
1. After (a) the Commission shall have entered an appropriate order
declaring effective the Registration Statement, as amended, and (b) the Exchange
Notes have, if required, been duly qualified or registered, as the case may be,
for sale under applicable state securities laws, and duly issued, executed,
authenticated and delivered by each of the Company and the Trustee upon
consummation of the Exchange Offer against receipt of the Initial Notes
surrendered in exchange therefor in accordance with the terms of the Exchange
Offer and the Indenture, the Exchange Notes will be valid and binding
obligations of, and enforceable against, the Company in accordance with their
terms, except as limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, liquidation and other similar laws relating to or
affecting creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law), including, without limitation, principles of commercial
reasonableness and materiality and an implied covenant of good faith and fair
dealing.
2. The opinions referred to as the opinions of counsel in the Preliminary
Prospectus under the caption "Certain Federal Income Tax Considerations", are
our opinions, insofar as they are statements of United States federal income tax
law or conclusions with respect to United States federal income tax law. Our
opinions are based upon existing United States federal income tax law and
present interpretations thereof. We can give no assurance that such opinions
will continue to be our opinions if existing United States federal income tax
laws, or the interpretations thereof, are changed or modified hereafter.
<PAGE>
PSINet Inc.
December 3,1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
captions "Certain Federal Income Tax Considerations" and "Legal Matters" in the
Preliminary Prospectus.
We wish to advise you that certain attorneys with Nixon, Hargrave, Devans &
Doyle LLP own certain shares of the Company's Common Stock and that we represent
the Trustee from time to time on certain matters.
Very truly yours,
/s/ Nixon, Hargrave, Devans & Doyle LLP
<PAGE>
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1997
------------------------------------
Pro Forma,
As
--
1993 1994 1995 1996 Actual Pro Forma Adjusted
---- ---- ---- ---- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income taxes $(2,159) $(5,342) $(53,160) $(55,256) $(46,078) $(192,116) $(233,087)
Equity in loss of affiliate 35 204 807
Interest expense 311 731 1,964 5,025 5,362 80,618 121,589
Interest portion of rental expense 136 230 692 1,200 1,359 2,783 2,783
------- ------- -------- -------- -------- --------- ---------
Earnings/(loss) $(1,712) $(4,346) $(50,300) $(48,224) $(39,357) $(108,715) $(108,715)
======= ======= ======== ======== ======== ========= =========
Interest expense 311 731 1,964 5,025 5,362 80,618 121,589
Interest portion of rental expense 136 230 692 1,200 1,359 2,783 2,783
------- ------- -------- -------- -------- --------- ---------
Fixed charges $ 447 $ 961 $ 2,656 $ 6,225 $ 6,721 $ 83,401 $ 124,372
======= ======= ======== ======== ======== ========= =========
Ratio of earnings to fixed charges - - - - - - -
------- ------- -------- -------- -------- --------- ---------
Deficiency of earnings to cover
fixed charges $ 2,159 $ 5,307 $ 52,956 $ 54,449 $ 46,078 $ 192,116 $ 233,087
======= ======= ======== ======== ======== ========= =========
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------
Pro Forma,
As
--
1997 1998 Pro Forma Adjusted
---- ---- --------- --------
<S> <C> <C> <C> <C>
Loss before income taxes $(31,741) $(130,006) $(181,918) $(212,646)
Equity in loss of affiliate
Interest expense 4162 38,193 64,285 95,013
Interest portion of rental expense 1,016 1,828 2,574 2,574
-------- --------- --------- ---------
Earnings/(loss) $(26,563) $ (89,985) $(115,059) $(115,059)
======== ========= ========= =========
Interest expense 4,162 38,193 64,285 95,013
Interest portion of rental expense 1,016 1,828 2,574 2,574
-------- --------- --------- ---------
Fixed charges $ 5,178 $ 40,021 $ 66,859 $ 97,587
======== ========= ========= =========
Ratio of earnings to fixed charges - - - -
-------- --------- --------- ---------
Deficiency of earnings to cover
fixed charges $ 31,741 $ 130,006 $ 181,918 $ 212,646
======== ========= ========= =========
</TABLE>
<PAGE>
EXHIBIT 21
DOMESTIC SUBSIDIARIES
---------------------
1. PSINet Pipeline New York, Inc. (100% owned by PSINet Inc.)
2. PSINet North America Holdings Inc. (100% owned by PSINet Inc.)
3. PSINet Asia Holdings Inc. (100% owned by PSINet Inc.)
4. Telecom Licensing Inc. (100% owned by PSINetworks Company)
5. PSIWeb Inc. (100% owned by PSINet Inc.)
6. PSINet Security Services Inc (100% owned by PSINet Inc.)
7. PSINet Europe Inc.
8. PSINetworks Company (100% owned by PSINet Inc.)
9. IoNet, Inc. (100% by PSINet Inc.)
10. IoCOM, Inc., (100% owned by IoNet, Inc.)
11. PSINet Telecom Limited
12. Telecom Licensing of Virginia, Inc
FOREIGN SUBSIDIARIES
--------------------
1. PSINet Japan Inc. (100% owned by PSINet Inc.)
2. PSINet Limited (100% owned by PSINet Inc.)
3. PSINet UK Limited (100% owned by PSINet Inc.)
4. EUnet GB Limited (owned by PSINet UK Limited)
5. PSIWeb Europe Limited (owned by PSIWeb Inc.)
6. PSINet Telecom UK Limited (owned by PSINetworks Company)
7. PSINet Europe B.V. (100% owned by PSINet Inc.)
8. PSINet Europe Limited (owned by PSINet Europe B.V.)
9. PSINet Netherlands B.V (owned by PSINet Europe B.V.)
10. PSINet Belgium S.P.R.L (owned by PSINet Europe B.V.)
11. PSINet Germany GmbH (owned by PSINet Europe B.V.)
12. PSINet (Europe) SARL (owned by PSINet Europe B.V.)
13. PSINet SARL (owned by PSINet Europe B.V.)
14. PSINet France S.A. (owned by PSINet Europe B.V.)
15. PSINet Switzerland S.A. (owned by PSINet Europe B.V)
16. Internet Prolink S.A (owned by PSINet Switzerland S.A.)
17. iSTAR internet inc (100% owned by PSINet Inc.)
18. Jefferson Capital Partners Incorporated (owned by iSTAR internet inc.)
19. PSINet Jersey Limited (owned by EUnet GB Limited)
20. INTERACTIVE NETWORK Gesellschaft zur Entwicklung und Vermarktung
interaktiver Online- und Netzwerkdienste mbH (owned by PSINet Germany GmbH)
21. LinkAge Online Limited (owned by PSINet Asia Holdings Inc.)
22. AAA Internet Limited (owned by LinkAge Online Limited)
23. LinkAge Web Media Limited (owned by LinkAge Online Limited)
24. Societe de Communication Informatiques Internationales S.A. (owned by
PSINet France S.A.)
25. PSIWeb Sarl (owned by PSINet Europe B.V. and PSINet Netherlands B.V.)
26. PSINet Euro Telecomm Sarl (owned by PSINet Europe B.V. and PSINet
Netherlands B.V.)
27. Interlog Internet Services Inc. (owned by PSINet Limited)
28. PSINet Italy S.r.l
29. RIMNET Corporation (owned by PSINet Japan Inc. and by PSINet Asia
Holdings Inc.)
30. RIMNET USA Corp. (owned by RIMNET Corporation) -- a NY sub of RIMNET
Corporation
31. TWICS Co., Ltd. (owned by PSINet Japan Inc.)
32. PSINet Limited
33. Hong Kong Internet & Gateway Services Limited (owned by LinkAge Online
Limited & PSINet Asia Holdings Inc.)
34. PSINet Germany Holding GmbH
35. Inet, Inc. (owned by PSINet Asia Holdings Inc.)
36. Tokyo Internet Corporation (owned by PSINet Japan Inc.)
37. The Unix Group B.V. (owned by PSINet Europe B.V.)
38. Unix Support Nederland B.V. (owned by The Unix Group B.V.)
39. Internet Exchange Europe B.V (owned by The Unix Group B.V.)
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of PSINet Inc. of our report dated February
6, 1998, except as to paragraphs 1, 2 and 6 of Note 11, which are as of February
25, 1998, relating to the consolidated financial statements of PSINet Inc.,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for each of the three years in the
period ended December 31, 1997 listed under Item 21 of this Registration
Statement when such schedule is read in conjunction with the consolidated
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial and Operating
Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Financial and Operating Data."
/s/ PricewaterhouseCoopers LLP
Washington, D.C.
December 3, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated July 10, 1997, except for
notes 12, 18, 19 and 20 which are as at December 5, 1997, relating to the
consolidated financial statements of iSTAR internet inc. as of May 31, 1997 and
1996 and for each of the two years in the period ended May 31, 1997. We also
consent to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG LLP
Chartered Accountants
Ottawa, Canada
December 3, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of PSINet Inc. of our report dated September
30, 1998 relating to the financial statements of Tokyo Internet Corporation
which appears in such Prospectus. We also consent to the references to us under
the heading "Experts."
/s/ Price Waterhouse
Tokyo, Japan
December 2, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated May 29, 1998, with
respect to the financial statements of ioNET, Inc. contained in the Current
Report on Form 8-K of PSINet, Inc. filed on September 15, 1998 and to all
references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
December 3, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PSINet Inc. on Form S-4 of our report dated August 25, 1998 (September 7, 1998
as to Note 4), on our audit of the financial statements of RIMNET CORPORATION as
of August 31, 1997 and for the year then ended, which report is included in the
Current Report on Form 8-K of PSINet Inc.
/s/ Chuo Audit Corporation
Tokyo, Japan
November 27, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in this registration statement of PSINet Inc. on Form
S-4 for the registration of $350,000,000 11 1/2% Senior Notes due 2008, of our
report dated June 22, 1998, except for Note 17 as to which the date is September
7, 1998, with respect to the financial statements of Linkage Online Limited
included in the Current Report (Form 8-K) of PSINet Inc. filed with the
Securities and Exchange Commission on September 15, 1998.
/s/ ERNST & YOUNG
Hong Kong
December 3, 1998
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of PSINet Inc. of
our auditors' opinion dated September 4, 1998, with respect to the financial
statements as of and for the period ended December 31, 1997 of INTERACTIVE
NETWORX Gesellschaft zur Entwicklung und Vermarktung interaktiver Online- und
Netzwerk Dienste mbH, Berlin, contained in the Current Report on Form 8-K of
PSINet Inc. filed with the Securities and Exchange Commission on September 15,
1998.
Price Waterhouse GmbH
Wirtschaftspruefungsgesellschaft
/s/ A. Slotta /s/ P.G/ Stern
Wirtschaftspruefer Wirtschaftspruefer
Berlin, Germany
December 2, 1998
<PAGE>
EXHIBIT 25
Registration No.
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) ____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
PSINET INC.
(Exact name of obligor as specified in its charter)
New York 16-1353600
(State of incorporation) (I.R.S. employer identification no.)
510 Huntmar Park Drive
Herndon, Virginia 20170
(Address of principal executive offices) (Zip Code)
11-1/2% Senior Notes Due 2008, Series B
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is Subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each affiliation:
Based upon an examination of the books and records of the trustee and upon
information furnished by the obligor, the obligor is not an affiliate of
the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of Eligibility and
Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes the
certificate of authority of Wilmington Trust Company to commence
business and the authorization of Wilmington Trust Company to exercise
corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b) of
Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 2nd day
of December, 1998.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Patricia A. Evans By: /s/ Emmett R. Harmon
---------------------------- ------------------------------------
Assistant Secretary Name: Emmett R. Harmon
Title: Vice President
2
<PAGE>
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
<PAGE>
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the General
Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware
Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which
company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed in the
Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act
of Incorporation of which company has been from time to time amended and changed
by merger agreements pursuant to the corporation law for state banks and trust
companies of the State of Delaware, does hereby alter and amend its Charter or
Act of Incorporation so that the same as so altered and amended shall in its
entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of Delaware is
at Rodney Square North, in the City of Wilmington, County of New Castle;
the name of its resident agent is WILMINGTON TRUST COMPANY whose address is
Rodney Square North, in said City. In addition to such principal office,
the said corporation maintains and operates branch offices in the City of
Newark, New Castle County, Delaware, the Town of Newport, New Castle
County, Delaware, at Claymont, New Castle County, Delaware, at Greenville,
New Castle County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New Castle
County, Delaware, and such other branch offices or places of business as
may be authorized from time to time by the agency or agencies of the
government of the State of Delaware empowered to confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation are
to do any or all of the things herein mentioned as fully and to the same
extent as natural persons might or could do and in any part of the world,
viz.:
(1) To sue and be sued, complain and defend in any Court of law or
equity and to make and use a common seal, and alter the seal at
pleasure, to hold, purchase, convey, mortgage or otherwise deal in
real and personal estate and property, and to appoint such officers
and agents as the business of the Corporation shall require, to make
by-laws not inconsistent with the Constitution or laws of the United
States or of this State, to discount bills, notes or other evidences
of debt, to receive deposits of money, or securities for money, to buy
gold and silver bullion
<PAGE>
and foreign coins, to buy and sell bills of exchange, and generally to
use, exercise and enjoy all the powers, rights, privileges and
franchises incident to a corporation which are proper or necessary for
the transaction of the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real
or personal, against any claim or claims, adverse to his interest
therein, and to prepare and give certificates of title for any lands
or premises in the State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description,
and to carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and
kind, from executors, administrators, guardians, public officers,
courts, receivers, assignees, trustees, and from all fiduciaries, and
from all other persons and individuals, and from all corporations
whether state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting
the stock, bonds or other obligations of any corporation, association,
state or municipality, and may receive and manage any sinking fund
therefor on such terms as may be agreed upon between the two parties,
and in like manner may act as Treasurer of any corporation or
municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body politic,
corporation, association or person, either alone or in conjunction
with any other person or persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract
or agreement, and the fidelity of persons holding places of
responsibility or trust; to become surety for any person, or persons,
for the faithful performance of any trust, office, duty, contract or
agreement, either by itself or in conjunction with any other person,
or persons, corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment, suit, order,
or decree to be entered in any court of record within the State of
Delaware or elsewhere, or which may now or hereafter be required by
any law, judge, officer or court in the State of Delaware or
elsewhere.
2
<PAGE>
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity in the receiving, holding, managing, and disposing of any and
all estates and property, real, personal or mixed, and to be appointed
as such trustee, trustee in bankruptcy, receiver, assignee, assignee
in bankruptcy, executor, administrator, guardian or bailee by any
persons, corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so appointed
by any person, corporation, court, officer or authority such trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity, it shall not be required to give bond with surety, but its
capital stock shall be taken and held as security for the performance
of the duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise of
any of its powers hereby given, or for the performance of any of the
duties which it may undertake or be called upon to perform, or for the
assumption of any responsibility the said Corporation may be entitled
to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages, debentures,
shares of capital stock, and other securities, obligations, contracts
and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the
Government of the United States, or of any state, territory, colony,
or possession thereof, or of any foreign government or country; to
receive, collect, receipt for, and dispose of interest, dividends and
income upon and from any of the bonds, mortgages, debentures, notes,
shares of capital stock, securities, obligations, contracts, evidences
of indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures, notes,
shares of capital stock, securities, obligations, contracts, evidences
of indebtedness and other property, any and all the rights, powers and
privileges of individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of the
Corporation upon such securities and in such manner as it may think
fit and proper, and from time to time to vary or realize such
investments; to issue bonds and secure the same by pledges or deeds of
trust or mortgages of or upon the whole or any part of the property
held or owned by the Corporation, and to sell and pledge such bonds,
as and when the Board of Directors shall determine, and in the
promotion of its said corporate business of investment and to the
extent authorized by law, to lease, purchase, hold, sell, assign,
transfer, pledge, mortgage and convey real and personal property of
any name and nature and any estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by the
laws of the State of Delaware, it is hereby expressly provided that the said
Corporation shall also have the following powers:
3
<PAGE>
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of the
world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation, and to pay for the same in
cash, stock of this Corporation, bonds or otherwise; to hold or in any
manner to dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any part of
any business so acquired, and to exercise all the powers necessary or
convenient in and about the conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of
property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every
kind with any person, firm, association or corporation, and, without
limit as to amount, to draw, make, accept, endorse, discount, execute
and issue promissory notes, drafts, bills of exchange, warrants,
bonds, debentures, and other negotiable or transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as
natural persons might or could do, to purchase or otherwise acquire,
to hold, own, to mortgage, sell, convey or otherwise dispose of, real
and personal property, of every class and description, in any State,
District, Territory or Colony of the United States, and in any foreign
country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where
otherwise expressed in said paragraph) be nowise limited or restricted
by reference to or inference from the terms of any other clause of
this or any other paragraph in this charter, but that the objects,
purposes and powers specified in each of the clauses of this paragraph
shall be regarded as independent objects, purposes and powers.
FOURTH: - (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-one million (41,000,000)
shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be alike in every particular,
except that there may be different dates from which dividends, if any,
4
<PAGE>
thereon shall be cumulative, if made cumulative. The voting powers and the
preferences and relative, participating, optional and other special rights
of each such series, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any
time outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article FOURTH, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the issuance of any shares of a particular
series of Preferred Stock, the voting powers and the designations,
preferences and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series, including, but
without limiting the generality of the foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may
be increased (except where otherwise provided by the Board of
Directors) or decreased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series shall be
paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or
series of the same or other class of stock and whether such dividends
shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares of
any other class or classes or of any series of the same or any other
class or classes of stock of the Corporation and the terms and
conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be subject to
redemption, and the redemption price or prices and the time or times
at which, and the terms and conditions on which, Preferred Stock of
such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such
series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-
up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase account,
if any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the
foregoing include the right, voting as a series or by itself or
together with other series of Preferred Stock or all series of
Preferred Stock as a class, to elect one or more directors of the
Corporation if there shall have been a default in the payment of
dividends on any one or more series of Preferred Stock or under such
circumstances and on such conditions as the Board of Directors may
determine.
5
<PAGE>
(c) (1) After the requirements with respect to preferential dividends on
the Preferred Stock (fixed in accordance with the provisions of section (b)
of this Article FOURTH), if any, shall have been met and after the
Corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as sinking funds or redemption or
purchase accounts (fixed in accordance with the provisions of section (b)
of this Article FOURTH), and subject further to any conditions which may be
fixed in accordance with the provisions of section (b) of this Article
FOURTH, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this
Article FOURTH), to be distributed to the holders of Preferred Stock
in the event of voluntary or involuntary liquidation, distribution or
sale of assets, dissolution or winding-up, of the Corporation, the
holders of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of
whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of Common Stock held by them
respectively.
(3) Except as may otherwise be required by law or by the provisions
of such resolution or resolutions as may be adopted by the Board of
Directors pursuant to section (b) of this Article FOURTH, each holder
of Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series
of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock of any
class or series or any additional shares of any class or series to be
issued by reason of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for stock
of the Corporation of any class or series, or carrying any right to
purchase stock of any class or series, but any such unissued stock,
additional authorized issue of shares of any class or series of stock or
securities convertible into or exchangeable for stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations
or associations, whether such holders or others, and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of its sole
discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and rights
of each other series of Preferred Stock shall, in each case, be as fixed
from time to time by the Board of Directors in the resolution or
resolutions adopted pursuant to authority granted in section (b) of this
Article FOURTH and the consent, by class or series vote or otherwise, of
the holders of such of the series of Preferred Stock as are from time to
time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock whether or not the powers,
preferences and rights of such other series shall be fixed by
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the Board of Directors as senior to, or on a parity with, the powers,
preferences and rights of such outstanding series, or any of them;
provided, however, that the Board of Directors may provide in the
resolution or resolutions as to any series of Preferred Stock adopted
pursuant to section (b) of this Article FOURTH that the consent of the
holders of a majority (or such greater proportion as shall be therein
fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors
of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred Stock
may, without a class or series vote, be increased or decreased from time to
time by the affirmative vote of the holders of a majority of the stock of
the Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more than
twenty-five as fixed from time to time by vote of a majority of the whole
Board, provided, however, that the number of directors shall not be reduced
so as to shorten the term of any director at the time in office, and
provided further, that the number of directors constituting the whole Board
shall be twenty-four until otherwise fixed by a majority of the whole
Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the
whole Board permits, with the term of office of one class expiring each
year. At the annual meeting of stockholders in 1982, directors of the first
class shall be elected to hold office for a term expiring at the next
succeeding annual meeting, directors of the second class shall be elected
to hold office for a term expiring at the second succeeding annual meeting
and directors of the third class shall be elected to hold office for a term
expiring at the third succeeding annual meeting. Any vacancies in the Board
of Directors for any reason, and any newly created directorships resulting
from any increase in the directors, may be filled by the Board of
Directors, acting by a majority of the directors then in office, although
less than a quorum, and any directors so chosen shall hold office until the
next annual election of directors. At such election, the stockholders shall
elect a successor to such director to hold office until the next election
of the class for which such director shall have been chosen and until his
successor shall be elected and qualified. No decrease in the number of
directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage
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may be specified by law, this Charter or Act of Incorporation or the By-
Laws of the Corporation), any director or the entire Board of Directors of
the Corporation may be removed at any time without cause, but only by the
affirmative vote of the holders of two-thirds or more of the outstanding
shares of capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as one class) cast
at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered
or mailed by first class United States mail, postage prepaid, to the
Secretary of the Corporation not less than 14 days nor more than 50 days
prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than
the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Notice of nominations which are
proposed by the Board of Directors shall be given by the Chairman on behalf
of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of such nominee
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with
the foregoing procedure, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants as
may be provided in the By-Laws as they may from time to time find necessary
or proper.
SEVENTH: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized under
the Act entitled "An Act Providing a General Corporation Law", approved
March 10, 1899, as from time to time amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which
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Committee, to the extent provided in said resolution, or in the By-Laws of
the Company, shall have and may exercise all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation,
and shall have power to authorize the seal of the Corporation to be affixed
to all papers which may require it.
ELEVENTH: - The private property of the stockholders shall not be liable
for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a
vote of the majority of the entire Board. The stockholders may make, alter
or repeal any By-Law whether or not adopted by them, provided however, that
any such additional By-Laws, alterations or repeal may be adopted only by
the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class).
FOURTEENTH: - Meetings of the Directors may be held outside of the State of
Delaware at such places as may be from time to time designated by the
Board, and the Directors may keep the books of the Company outside of the
State of Delaware at such places as may be from time to time designated by
them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this
Article FIFTEENTH:
(A) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (i) any Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder), which, after such merger or
consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value of $1,000,000 or
more, or
(C) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of related transactions) of any securities
of the Corporation or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
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(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this Article
FIFTEENTH shall mean any transaction which is referred to any one
or more of clauses (A) through (E) of paragraph 1 of the section
(a).
(b) The provisions of section (a) of this Article FIFTEENTH shall not
be applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by
law and any other provisions of the Charter or Act of Incorporation of
By-Laws if such business combination has been approved by a majority
of the whole Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary) who
or which as of the record date for the determination of stockholders
entitled to notice of and to vote on such business combination, or
immediately prior to the consummation of any such transaction:
(A) is the beneficial owner, directly or indirectly, of more than 10%
of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within two
years prior thereto was the beneficial owner, directly or indirectly,
of not less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within two
years prior thereto beneficially owned by any Interested Stockholder,
and such assignment or succession shall have occurred in the course of
a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
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(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii)
the right to vote pursuant to any agreement, arrangement or
understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any other
Voting Shares which may be issuable pursuant to any agreement, or upon
exercise of conversion rights, warrants or options or otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings given
those terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on December 31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as in effect in
December 31, 1981) is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Investment
Stockholder set forth in paragraph (2) of this section (c), the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article FIFTEENTH on the basis of
information known to them, (1) the number of Voting Shares
beneficially owned by any person (2) whether a person is an Affiliate
or Associate of another, (3) whether a person has an agreement,
arrangement or understanding with another as to the matters referred
to in paragraph (3) of section (c), or (4) whether the assets subject
to any business combination or the consideration received for the
issuance or transfer of securities by the Corporation, or any
Subsidiary has an aggregate fair market value of $1,000,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
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SIXTEENTH: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any
other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of at
least two-thirds of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) shall be required to amend,
alter or repeal any provision of Articles FIFTH, THIRTEENTH, FIFTEENTH or
SIXTEENTH of this Charter or Act of Incorporation.
SEVENTEENTH: (a) a Director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware General
Corporation Laws as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a Director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to the time of such repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON JANUARY 16, 1997
<PAGE>
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the third
Thursday in April each year at the principal office at the Company or at such
other date, time, or place as may be designated by resolution by the Board of
Directors.
Section 2. Special meetings of all stockholders may be called at any time
by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given by
mailing to each stockholder at least ten (10) days before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the Company
issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors shall
be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72) years
shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for three
years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed and
conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
<PAGE>
Section 6. Special meetings of the Board of Directors may be called at any
time by the Chairman of the Board of Directors or by the President, and shall be
called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of any
special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability to
act, or disqualification of any director, the Board of Directors, although less
than a quorum, shall have the right to elect the successor who shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its election
by the stockholders shall appoint an Executive Committee, a Trust Committee, an
Audit Committee and a Compensation Committee, and shall elect from its own
members a Chairman of the Board of Directors and a President who may be the same
person. The Board of Directors shall also elect at such meeting a Secretary and
a Treasurer, who may be the same person, may appoint at any time such other
committees and elect or appoint such other officers as it may deem advisable.
The Board of Directors may also elect at such meeting one or more Associate
Directors.
Section 11. The Board of Directors may at any time remove, with or without
cause, any member of any Committee appointed by it or any associate director or
officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
ARTICLE III
COMMITTEES
Section 1. Executive Committee
(A) The Executive Committee shall be composed of not more than
nine members who shall be selected by the Board of Directors from its own
members and who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
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(C) The Executive Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members, or at the call of the Chairman of the Executive
Committee or at the call of the Chairman of the Board of Directors. The majority
of its members shall be necessary to constitute a quorum for the transaction of
business. Special meetings of the Executive Committee may be held at any time
when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient severity
to prevent the conduct and management of the affairs and business of the Company
by its directors and officers as contemplated by these By-Laws any two available
members of the Executive Committee as constituted immediately prior to such
disaster shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Company in accordance with the
provisions of Article III of these By-Laws; and if less than three members of
the Trust Committee is constituted immediately prior to such disaster shall be
available for the transaction of its business, such Executive Committee shall
also be empowered to exercise all of the powers reserved to the Trust Committee
under Article III Section 2 hereof. In the event of the unavailability, at such
time, of a minimum of two members of such Executive Committee, any three
available directors shall constitute the Executive Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the foregoing provisions of this Section. This By-Law shall be subject to
implementation by Resolutions of the Board of Directors presently existing or
hereafter passed from time to time for that purpose, and any provisions of these
By-Laws (other than this Section) and any resolutions which are contrary to the
provisions of this Section or to the provisions of any such implementary
Resolutions shall be suspended during such a disaster period until it shall be
determined by any interim Executive Committee acting under this section that it
shall be to the advantage of the Company to resume the conduct and management of
its affairs and business under all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
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(C) The Trust Committee shall meet at the principal office of
the Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who
shall be selected by the Board of Directors from its own members, none of whom
shall be an officer of the Company, and shall hold office at the pleasure of the
Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division, review all reports of examination of
the Company made by any governmental agency or such independent auditor employed
for that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than five (5) members who shall be selected by the Board of Directors from its
own members who are not officers of the Company and who shall hold office during
the pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
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Section 5. Associate Directors
(A) Any person who has served as a director may be elected by
the Board of Directors as an associate director, to serve during the pleasure of
the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absence or disqualified member.
ARTICLE IV
OFFICERS
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the Board
-------------------------------
of Directors shall preside at all meetings of the Board of Directors at which
the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining to
the office of the President conferred or imposed upon him by statute or assigned
to him by the Board of Directors in the absence of the Chairman of the Board the
President shall have the powers and duties of the Chairman of the Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however denominated
by the Board of Directors, who may at any time perform all the duties of the
Chairman of the Board of Directors and/or the President and such other powers
and duties as may from time to time be
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assigned to them by the Board of Directors, the Executive Committee, the
Chairman of the Board or the President and by the officer in charge of the
department or division to which they are assigned.
Section 6. The Secretary shall attend to the giving of notice of meetings
of the stockholders and the Board of Directors, as well as the Committees
thereof, to the keeping of accurate minutes of all such meetings and to
recording the same in the minute books of the Company. In addition to the other
notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all assets
and liabilities of the Company. He shall be custodian of and responsible for
all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to all
Vice Presidents with such functional titles as shall be determined from time to
time by the Board of Directors, who shall ex officio hold the office Assistant
Secretary of this Company and who may perform such duties as may be prescribed
by the officer in charge of the department or division to whom they are
assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
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ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the President
or any Vice President, however denominated by the Board of Directors and
countersigned by the Secretary or Treasurer or an Assistant Secretary, and the
seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of
stock shall be issued only upon giving such security as may be satisfactory to
the Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix in
advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice President,
however denominated by the Board of Directors, shall have full power and
authority to enter into, make, sign, execute, acknowledge and/or deliver and the
Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all
7
<PAGE>
deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other than
salaried officers of the Company, shall be paid such reasonable honoraria or
fees for attending meetings of the Board of Directors as the Board of Directors
may from time to time determine. Directors and associate directors who serve as
members of committees, other than salaried employees of the Company, shall be
paid such reasonable honoraria or fees for services as members of committees as
the Board of Directors shall from time to time determine and directors and
associate directors may be employed by the Company for such special services as
the Board of Directors may from time to time determine and shall be paid for
such special services so performed reasonable compensation as may be determined
by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
-------- -------
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
8
<PAGE>
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant may file suit
to recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled to be paid the expense of prosecuting such claim. In any
such action the Corporation shall have the burden of proving that the claimant
was not entitled to the requested indemnification of payment of expenses under
applicable law.
(D) The rights conferred on any person by this Article X shall
not be exclusive of any other rights which such person may have or hereafter
acquire under any statute, provision of the Charter or Act of Incorporation,
these By-Laws, agreement, vote of stockholders or disinterested Directors or
otherwise.
(E) Any repeal or modification of the foregoing provisions of
this Article X shall not adversely affect any right or protection hereunder of
any person in respect of any act or omission occurring prior to the time of such
repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole or
in part, and any new By-Law or By-Laws adopted at any regular or special meeting
of the Board of Directors by a vote of the majority of all the members of the
Board of Directors then in office.
9
<PAGE>
EXHIBIT C
SECTION 321(b) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: December 2, 1998 By: /s/ Emmett R. Harmon
------------------------------------
Name: Emmett R. Harmon
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and
savings banks with state publication requirements. It has
not been approved by any state banking authorities. Refer to
your appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ---------------------------------------------- --------------
Name of Bank City
in the State of DELAWARE, at the close of business on September 30, 1998.
----------
<TABLE>
<CAPTION>
ASSETS
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins................ 180,755
Interest-bearing balances.......................................... 0
Held-to-maturity securities............................................. 148,529
Available-for-sale securities........................................... 1,216,482
Federal funds sold and securities purchased under
agreements to resell................................................... 203,500
Loans and lease financing receivables:
Loans and leases, net of unearned income......... 3,951,771
LESS: Allowance for loan and lease losses.......... 64,835
LESS: Allocated transfer risk reserve................... 0
Loans and leases, net of unearned income,
allowance, and reserve............................................ 3,886,936
Assets held in trading accounts......................................... 0
Premises and fixed assets (including capitalized leases)................ 137,819
Other real estate owned................................................. 1,849
Investments in unconsolidated subsidiaries and associated companies..... 997
Customers' liability to this bank on acceptances outstanding............ 0
Intangible assets....................................................... 3,105
Other assets............................................................ 82,400
Total assets............................................................ 5,862,370
</TABLE>
Continued on Next Page
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
Deposits:
<S> <C>
In domestic offices......................................................... 4,338,785
Noninterest-bearing................................ 792,528
Interest-bearing..................................3,546,257
Federal funds purchased and Securities sold under agreements to repurchase.. 249,670
Demand notes issued to the U.S. Treasury.................................... 74,347
Trading liabilities (from Schedule RC-D).................................... 0
Other borrowed money:....................................................... ///////
With original maturity of one year or less............................. 576,507
With original maturity of more than one year........................... 43,000
Bank's liability on acceptances executed and outstanding.................... 0
Subordinated notes and debentures........................................... 0
Other liabilities (from Schedule RC-G)...................................... 104,687
Total liabilities........................................................... 5,386,996
EQUITY CAPITAL
Perpetual preferred stock and related surplus............................... 0
Common Stock................................................................ 500
Surplus (exclude all surplus related to preferred stock).................... 62,118
Undivided profits and capital reserves...................................... 399,222
Net unrealized holding gains (losses) on available-for-sale securities...... 13,534
Total equity capital........................................................ 475,374
Total liabilities, limited-life preferred stock, and equity capital......... 5,862,370
</TABLE>
2
<PAGE>
EXHIBIT 99.1
NOTICE OF GUARANTEED DELIVERY
OF
11 1/2% SENIOR NOTES DUE 2008
OF
PSINet Inc.
This form, or one substantially equivalent hereto, must be used by any
Holder of 11 1/2% Senior Notes due 2008, Series A (the "Initial Notes") of
PSINet Inc., a New York corporation (-- "Company"), who wishes to tender
Initial Notes pursuant to the Company's Exchange Offer, as defined in the
prospectus dated _____________, 199_ ("Prospectus"), and (i) whose Initial
Notes are not immediately available or (ii) who cannot deliver such Initial
Notes or any other documents required by the Letter of Transmittal on or before
the Expiration Date (as defined in the Prospectus) or (iii) who cannot comply
with the book-entry transfer procedure on a timely basis. This form may be
delivered by facsimile transmission, mail or hand delivery to the Exchange
Agent. See "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus.
PSINet Inc.
Notice of Guaranteed Delivery
WILMINGTON TRUST COMPANY, as Exchange Agent
By Registered or Certified Mail or By Hand:
Overnight Courier:
Wilmington Trust Company Wilmington Trust Company
Attn: Kristin Long Attn: Corporate Trust Operations
Corporate Trust Operations c/o Harris Trust Co. of New York Agent
1100 North Market Street 88 Pine Street, 19th Floor
Rodney Square North Wall Street Plaza
Wilmington, DE 19890-0001 New York, New York 10005
By Facsimile:
(For Eligible Institutions Only)
Wilmington Trust Company
(302) 651-1079
Confirm by telephone:
(302) 651-1562
Kristin Long
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE>
-2-
Ladies and Gentlemen:
The undersigned hereby tenders to the Company upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Initial Notes specified below pursuant to the guaranteed delivery procedures set
forth under the caption "The Exchange Offer -- Guaranteed Delivery Procedures"
in the Prospectus. By so tendering, the undersigned does hereby make, at and as
of the date hereof, the representations and warranties of a tendering Holder of
Initial Notes set forth in the Letter of Transmittal. The undersigned hereby
tenders the Initial Notes listed below:
CERTIFICATE NUMBERS PRINCIPAL AMOUNT TENDERED
(IF AVAILABLE)
____________________________ ___________________________
____________________________ ___________________________
____________________________ ___________________________
All authority herein conferred or agreed to be conferred shall survive the
death, incapacity, or dissolution of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
If Initial Notes will be tendered by book-entry transfer:
Name of Tendering Institution:
_______________________________ _______________________________
The Depository Trust Company
Account No.:
_______________________________
Signature(s)
___________________________________ _______________________________
_______________________________
Name(s) (please print)
_______________________________
Street Address
_______________________________
City, State Zip Code
Date: _____________________ _______________________________
Area Code & Telephone No.
<PAGE>
-3-
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in a Recognized Signature Guarantee
Medallion Program, guarantees deposit with the Exchange Agent of the Letter of
Transmittal (or facsimile thereof), together with the Initial Notes tendered
hereby in proper form for transfer, or confirmation of the book-entry transfer
of such Initial Notes into the Exchange Agent's account at the Depository Trust
Company, pursuant to the procedure for book-entry transfer set forth in the
Prospectus, and any other required documents, all by 5:00 p.m., New York City
time, on the third New York Stock Exchange trading day following the Expiration
Date (as defined in the Prospectus).
________________________________ _____________________________
Name of Firm Authorized Signature
________________________________ _____________________________
Street Address Name (please print)
________________________________
City, State Zip Code
________________________________ Date: _______________________
Area Code & Telephone Number
DO NOT SEND CERTIFICATES FOR INITIAL NOTES WITH THIS FORM. ACTUAL SURRENDER OF
CERTIFICATES FOR INITIAL NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY,
A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL.
<PAGE>
-4-
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at one of its addresses set forth on the cover hereof prior to
the Expiration Date. The method of delivery of this Notice of Guaranteed
Delivery and all other required documents to the Exchange Agent is at the
election and risk of the Holder but, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
Instead of delivery by mail, it is recommended that holders use an overnight or
hand delivery service, properly insured. If such delivery is by mail, it is
recommended that the Holder use properly insured, registered mail with return
receipt requested. For a full description of the guaranteed delivery
procedures, see the Prospectus under the caption "The Exchange Offer --
Guaranteed Delivery Procedures." In all cases, sufficient time should be
allowed to assure timely delivery. No Notice of Guaranteed Delivery should be
sent to the Company.
2. SIGNATURE ON THIS NOTICE OF GUARANTEED DELIVERY; GUARANTEE OF
SIGNATURES. If this Notice of Guaranteed Delivery is signed by the registered
Holder(s) of the Initial Notes referred to herein, then the signature must
correspond with the name(s) as written on the face of the Initial Notes without
alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered Holder(s) of any Initial Notes listed, this Notice of Guaranteed
Delivery must be accompanied by a properly completed bond power signed as the
name of the registered Holder(s) appear(s) on the face of the Initial Notes
without alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and, unless waived by the Company, evidence satisfactory
to the Company of their authority so to act must be submitted with this Notice
of Guaranteed Delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to
the Exchange Offer or the procedure for consenting and tendering as well as
requests for assistance or for additional copies of the Prospectus, the Letter
of Transmittal and this Notice of Guaranteed Delivery, may be directed to the
Exchange Agent at the address set forth on the cover hereof or to your broker,
dealer, commercial bank or trust company.
