<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 15, 1998
------------------
PSINet Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 0-25812 16-1353600
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
510 Huntmar Park Drive, Herndon, Virginia 20170
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 904-4100
--------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
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Item 5. Other Events.
------------
PSINet Inc. (the "Company") is filing by this Report on Form 8-K
certain financial statements and pro forma financial information relating to
certain businesses recently acquired by the Company. Each of the businesses
acquired or considered probable of acquisition are insignificant under Rule
1-02(w), with the exception of iSTAR internet inc. for which audited historical
financial statements and pro forma information were previously filed on Form
8-K.
The following businesses have been acquired on the dates indicated or
are considered probable of acquisition by the Company:
Name of Company Location Date of Closing
- --------------- -------- ---------------
Serveur Telematique Internet S.A. France October 1997
(doing business as "Calvacom")
Internet Prolink S.A. ("Iprolink") Switzerland January 1998
iSTAR internet inc. ("iSTAR") Canada February 1998
ioNET, Inc. ("ioNET") /(1)/ U.S.A. June 1998
LinkAge Online Limited ("LinkAge") /(1)/ Hong Kong June 1998
INTERACTIVE NETWORX GmbH
("INX") /(1)/ Germany June 1998
Interlog Internet Services Inc. ("Interlog") Canada July 1998
Rimnet Corporation ("Rimnet") /(1)/ Japan August 1998
Inet, Inc. ("Inet") Korea Probable
(1) In accordance with S-X Rule 3-05(b)(2)(i), financial statements for a
substantial majority of individually insignificant acquired businesses have
been provided.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
A. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ISTAR INTERNET INC.
- -------------------
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of January 31, 1998 and February 28, 1997
(Unaudited)..................................................................... 7
Consolidated Statements of Operations and Deficit for the eight months
ended January 31, 1998 and nine months ended February 28, 1997 (Unaudited)...... 8
Consolidated Statements of Changes in Financial Position for the eight months
ended January 31, 1998 and nine months ended February 28, 1997 (Unaudited)....... 9
Notes to Consolidated Financial Statements (Unaudited)...........................10
RIMNET CORPORATION
- ------------------
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants................................................14
Balance Sheet as of August 31, 1997..............................................15
Statement of Income for the year ended August 31, 1997...........................17
Notes to the Financial Statements................................................18
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet as of March 31, 1998 (Unaudited)...................................23
Statements of Income for the seven months ended March 31, 1997 and 1998
(Unaudited)......................................................................25
Notes to Financial Statements (Unaudited)........................................26
IONET, INC.
- -----------
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.........................................29
Balance Sheets as of December 31, 1996 and 1997..................................30
Statements of Operations for the years ended December 31, 1996 and 1997..........31
Statements of Changes in Stockholders' Equity for the years ended December 31,
1996 and 1997....................................................................32
Statements of Cash Flows for the years ended December 31, 1996 and 1997..........33
</TABLE>
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<TABLE>
<S> <C>
Notes to Financial Statements....................................................34
UNAUDITED CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1997 and
June 30, 1998 (Unaudited).......................................................42
Condensed Statements of Operations for the six months ended
June 30, 1997 and 1998 (Unaudited)..............................................43
Condensed Statements of Changes in Stockholders' Equity for the year ended
December 31, 1997 and the six months ended June 30, 1998 (Unaudited)............44
Condensed Statements of Cash Flows for the six months ended
June 30, 1997 and 1998 (Unaudited)..............................................45
Notes to Condensed Financial Statements (Unaudited)..............................46
LINKAGE ONLINE LIMITED
- ----------------------
AUDITED FINANCIAL STATEMENTS
Report of the Auditors...........................................................48
Balance Sheet as of December 31, 1997............................................49
Profit and Loss Account for the year ended December 31, 1997.....................50
Cash Flow Statement for the year ended December 31, 1997.........................51
Notes to Financial Statements....................................................52
INTERACTIVE NETWORX GMBH
- ------------------------
AUDITED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 (audited) and December 31, 1996
(unaudited).....................................................................62
Income Statements for the years ended December 31, 1997 (audited) and
December 31, 1996 (unaudited)...................................................63
Notes to Financial Statements....................................................64
Auditors' Opinion................................................................69
</TABLE>
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<TABLE>
<S> <C>
B. PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997............................................71
Unaudited Pro Forma Consolidated Statement of Operations
for the six months ended June 30, 1998..........................................72
Notes to Unaudited Pro Forma Consolidated Statements of Operations...............73
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1998...............76
Notes to Unaudited Pro Forma Consolidated Balance Sheet..........................77
C. EXHIBITS
The following is a list of all Exhibits filed as part of this Current Report on
Form 8-K:
23.1 Consent of Arthur Andersen LLP.............................................80
23.2 Consent of Ernst & Young...................................................81
23.3 Consent of Price Waterhouse GmbH...........................................82
23.4 Consent of Chuo Audit Corporation..........................................83
</TABLE>
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iSTAR internet inc.
Unaudited Consolidated Financial Statements
Eight months ended January 31, 1998 and nine months ended February 28, 1997
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iSTAR internet inc.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
(Unaudited) January 31, February 28,
1998 1997
---- ----
ASSETS
Current assets:
Cash and marketable securities $ 3,616 $ 14,857
Accounts receivable 8,408 8,254
Inventory 266 802
Prepaid expenses and other 2,299 2,103
-------- --------
14,589 26,016
Property and equipment 12,196 10,983
Goodwill - 15,439
-------- --------
$ 26,785 $ 52,438
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank indebtedness $ 8,999 $ -
Accounts payable and accrued liabilities 18,427 12,885
Deferred revenue 1,851 1,363
Current portion of capital lease obligations 4,336 1,692
-------- --------
33,613 15,940
Capital lease obligations 1,026 767
Deferred leasehold inducements 608 817
-------- --------
Total liabilities 35,247 17,524
-------- --------
Shareholders' (deficit) equity:
Share capital 91,675 81,663
Share purchase warrants 16
Contributed surplus 2,871 2,871
Deficit (75,033) (21,278)
Current period loss (27,991) (28,342)
-------- --------
(8,462) 34,914
-------- --------
$ 26,785 $ 52,438
======== ========
See accompanying notes to unaudited consolidated financial statements.
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iSTAR internet inc.
Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars)
(Unaudited)
Eight months Nine months
ended ended
January 31, February 28,
1998 1997
---- ----
Sales....................................... $ 27,460 $ 23,950
Cost of sales............................... 22,875 22,441
--------- --------
Gross profit................................ 4,585 1,509
Selling, general and administration expenses 24,757 25,010
--------- --------
Operating loss before under noted items..... (20,172) (23,501)
Depreciation and amortization............... 6,116 4,831
Net interest expense 1,703 23
Income tax (recovery) - (13)
--------- --------
Net loss.................................... (27,991) (28,342)
Deficit, beginning of period................ (75,033) (21,278)
--------- --------
Deficit, end of period...................... $(103,024) $(49,620)
========= ========
See accompanying notes to unaudited consolidated financial statements.
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iSTAR internet inc.
Consolidated Statements of Changes in Financial Position
(In thousands of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Eight months Nine months
ended ended
January 31, February 28,
1998 1997
---- ----
<S> <C> <C>
Net loss $(27,991) $(28,342)
Adjustments:
Depreciation and amortization 6,116 4,831
Non-cash operating working capital 3,748 1,028
-------- --------
Net cash used in operating activities (18,127) (22,483)
-------- --------
Cash flows from investing activities
Purchase of property and equipment (1,969) (2,033)
Acquisition of companies and businesses - (83)
-------- --------
Net cash used in investing activities (1,969) (2,116)
-------- --------
Cash flows from financing activities
Common shares and special warrants issued 8,458 23,994
Capital lease obligation (2,318) (1,271)
-------- --------
Net cash provided by financing activities 6,140 22,723
-------- --------
Net decrease in cash and cash equivalents (13,956) (1,876)
Cash and cash equivalents (net of bank indebtedness),
beginning of period 8,573 16,733
-------- --------
Cash and cash equivalents, end of period $ (5,383) $ 14,857
======== ========
Cash and cash equivalents, end of period comprised
of:
Cash and cash equivalents $ 3,616 $ 14,857
Bank indebtedness (8,999) -
-------- --------
$ (5,383) $ 14,857
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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iSTAR internet inc.
Notes to Consolidated Financial Statements
(Unaudited)
Eight months ended January 31, 1998 and nine months ended February 28, 1997
(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 eight months ended January 31, 1998 and
nine months ended February 28, 1997 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 by PSINet Inc in a proxy statement dated December 19,
1997. 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
January 31, 1998 and February 28, 1997 and the results of its operations
and the changes in its financial position for the eight months ended
January 31, 1998 and nine months ended February 28, 1997.
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, and the Company
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, the 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.
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iSTAR internet inc.
Notes to Consolidated Financial Statements
Eight months ended January 31, 1998 and nine months ended February 28, 1997
(All tabular amounts in thousands of Canadian dollars)
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).
(a) Consolidated statements of operations and deficit:
If U.S. GAAP were employed, the net loss would be adjusted as follows:
<TABLE>
<CAPTION>
Eight months Nine months
ended ended
January 31, February 28,
1998 1997
---- ----
<S> <C> <C>
Net loss under Canadian GAAP $(27,991) $(28,342)
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 $(27,991) $(30,337)
======== ========
</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>
January 31, February 28,
1998 1997
---- ----
<S> <C> <C>
Total assets under Canadian GAAP $26,785 $52,438
Total assets under U.S. GAAP $26,785 $52,438
======= =======
</TABLE>
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iSTAR internet inc.
Notes to Consolidated Financial Statements
Eight months ended January 31, 1998 and nine months ended February 28, 1997
(All tabular amounts in thousands of Canadian dollars)
3. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(b) Consolidated balance sheets (continued):
The cumulative effect of the adjustments on the consolidated assets and
shareholders' (deficit) equity is as follows:
<TABLE>
<CAPTION>
January 31, February 28,
1998 1997
---- ----
<S> <C> <C>
Total shareholders' (deficit) equity under Canadian GAAP...... $(8,462) $ 34,914
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......... $(8,462) $ 34,914
======= ========
</TABLE>
<TABLE>
(c) Consolidated statements of changes in financial position: Eight months Nine months
ended ended
January 31, February 28,
1998 1997
---- ----
<S> <C> <C>
Financing activities under Canadian GAAP.................... $ 6,140 $ 22,723
Adjustment:
Increase in loans payable................................. 5,499 --
------- --------
Financing activities under U.S. GAAP......................... $11,639 $ 22,723
======= ========
</TABLE>
Under U.S. GAAP, cash and cash equivalents does not include bank
indebtedness which is reflected as a financing activity.
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RIMNET CORPORATION
------------------
AUDITED FINANCIAL STATEMENTS
----------------------------
YEAR ENDED AUGUST 31, 1997
--------------------------
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Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors of
RIMNET CORPORATION
We have audited the accompanying balance sheet of RIMNET CORPORATION (the
"Company") as of August 31, 1997 and the related statement of income for the
year 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 audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides 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 August 31,
1997 and the results of its operations for the year then ended, in conformity
with accounting principles generally accepted in Japan applied on a consistent
basis.
/s/ Chuo Audit Corporation
Independent Certified Public Accountants
August 25, 1998
(September 7, 1998 as to Note 4)
Tokyo, Japan
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RIMNET CORPORATION
------------------
BALANCE SHEET - ASSETS
----------------------
AS OF AUGUST 31, 1997
---------------------
<TABLE>
<CAPTION>
(In thousands of yen)
Assets
------
<S> <C>
Current assets:
Cash on hand and in banks (Yen) 277,684
Accounts receivable - trade 468,040
Merchandise 26,268
Supplies 2,666
Advance payment 10,769
Prepaid expenses 18,765
Other current assets 411
Bad debt reserve (56,021)
--------------
Total current assets 748,583
--------------
Long-term assets:
Tangible fixed assets - net -
Buildings and facilities 62,043
Structures 613
Automobiles 718
Machinery and equipment 555,731
Construction in progress 36,849
--------------
Total tangible fixed assets - net 655,957
--------------
Intangible fixed assets -
Telephone rights 44,062
-------
Investments & other assets -
Investment securities 32,167
Investment in capital 100
Long-term prepaid expenses 108,045
Lease deposits 59,758
Long-term bank deposits 12,800
Insurance premiums 1,342
--------------
Total investments & other assets 214,214
--------------
Total long-term assets 914,234
--------------
Total assets (Yen)1,662,817
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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RIMNET CORPORATION
------------------
BALANCE SHEET - LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------
AS OF AUGUST 31, 1997
---------------------
<TABLE>
<CAPTION>
(In thousands of yen)
<S> <C>
Liabilities
-----------
Current liabilities:
Accounts payable - trade (Yen) 72,996
Short-term borrowings 350,000
Current portion -
Long-term borrowings 380,225
Accounts payable - other 159,415
Income tax payables 28,723
Enterprise tax payables 7,554
Consumption tax payables 34,574
Accrued expenses 35,053
Advance received 2,344
Deposits received 14,800
--------------
Total current liabilities 1,085,688
--------------
Non- current liabilities:
Long- term borrowings 316,193
Long-term accounts payable 1,258
--------------
317,451
--------------
Total liabilities 1,403,140
--------------
Shareholders' equity
--------------------
Capital stock 217,800
Legal reserve:
Capital reserve 6,600
Retained earnings:
Reserve for software development 3,865
Reserve for special depreciation 79,186
Undisposed deficit (47,774)
[Net income for the year] [2,963]
--------------
Total shareholders' equity 259,677
--------------
Total liabilities and shareholders' equity (Yen)1,662,817
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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RIMNET CORPORATION
------------------
STATEMENT OF INCOME
-------------------
FOR THE YEAR ENDED AUGUST 31, 1997
----------------------------------
<TABLE>
<CAPTION>
<S> <C>
(In thousands of yen)
Ordinary income and expenses:
Operating income and expenses -
Operating income:
Net sales (Yen)2,173,510
Operating Expenses:
Cost of sales 1,314,258
Selling, general and administrative expenses 800,927
--------------
2,115,185
--------------
Operating profit 58,324
--------------
Non-operating income and expenses -
Non-operating income:
Interest income and dividends 272
Other 727
--------------
1,000
--------------
Non-operating expenses -
Interest expenses 21,846
Other 2,002
--------------
23,848
--------------
Ordinary profit 35,476
--------------
Extraordinary items:
Extraordinary loss -
Loss on disposal of fixed assets 812
Condolence payment to director 3,000
--------------
3,812
--------------
Income before taxes 31,663
Corporate tax and inhabitant tax (28,700)
--------------
Net income for the year 2,963
Accumulated deficit brought forward (50,737)
--------------
Undisposed deficit (Yen) (47,774)
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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RIMNET CORPORATION
------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
AUGUST 31, 1997
---------------
The balance sheet and the statement of income are prepared in accordance with
the Japanese Commercial Code and the regulations regarding the balance sheet,
the statement of income, the business report and the supplementary schedules of
a joint-stock company (Regulation of Ministry of Justice No. 31).
1. The figures in the statements are indicated in thousands of yen. Yen
amounts of less than one thousand have been omitted without rounding;
accordingly, rounding differences may occur.
2. Significant accounting policies
-------------------------------
(1) The valuation basis and valuation methods of securities:
-------------------------------------------------------
Marketable securities:
---------------------
Marketable securities are stated at the lower of cost or market, cost being
determined by the moving average method.
Non- marketable securities:
---------------------------
Non- marketable securities are stated at cost determined by the moving
average method.
(2) The valuation basis and valuation methods of inventories:
--------------------------------------------------------
Merchandise and supplies are stated at cost determined by the periodic
average method.
(3) The method of depreciation:
--------------------------
Tangible fixed assets are depreciated based on the declining balance method
in accordance with Japanese corporate tax regulations.
Long-term prepaid expenses are amortized based on the straight-line method
under Japanese corporate tax regulations.
(4) The basis for recognition of provisions:
---------------------------------------
Bad debt reserve is provided for the expected uncollectible amount in
individual receivable balances, which include the amount estimated by using
past experience as to write-off of receivables from defaulting members, in
addition to the maximum deductible amount allowed under the Japanese
corporate tax regulations in order to provide for expected future losses.
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(5) The accounting method for leases:
--------------------------------
Finance leases, other than the leases for which the title of the leased
assets is deemed to be transferred to a lessee, are accounted for in a
manner similar to operating leases.
(6) Accounting procedure for consumption tax:
----------------------------------------
Accounting for consumption tax is made on the basis of excluding the
consumption tax (i.e., all transactions are recorded net of consumption
tax).
3. Notes to the balance sheet
--------------------------
(1) Accumulated depreciation of tangible fixed assets is (Yen)363,233 thousand.
(2) Material fixed assets under lease agreements
In addition to fixed assets on the balance sheet, certain computers,
peripherals and other office equipment, are under lease contracts.
(3) Fixed assets whose titles are suspended
Tangible fixed assets on the balance sheet include certain communication
devices for 'RIMNET' etc., the titles of which are held by a seller until
settlement of the entire payable because of the terms of installment
purchase contracts. The balance of payables of (Yen)7,823 thousand is
included on accounts payable (other) and long-term accounts payable in the
balance sheet.
(4) Major foreign currency assets and liabilities
Investment securities (Yen)17,167 thousand (U.S. $150 thousand)
Accounts payable - trade (Yen)22,210 thousand (U.S. $189 thousand)
Accounts payable - other (Yen)2,198 thousand (U.S. $18 thousand)
(5) Assets pledged as collateral
Bank deposit (Yen)30,668 thousand
Lease deposit (Yen)40,294 thousand
Machinery and equipment (Yen)100,202 thousand
(6) Earning per share (Yen)680.30
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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"). Such
principles vary in certain respects from those generally accepted in the United
States ("U.S. GAAP"). The principal differences applicable to the financial
statements are summarized below. This discussion is intended only as a
descriptive summary and does not include a complete analysis or listing of all
possible differences. Further, no attempt has been made to identify future
differences between Japanese GAAP and U.S. GAAP as a result of prescribed
changes in accounting standards. Regulatory bodies that promulgate Japanese
GAAP and U.S. GAAP have significant projects ongoing that could affect future
comparisons such as this one. Finally, no attempt has been made to identify all
future differences between Japanese GAAP and U.S. GAAP that may affect the
financial statements as a result of transactions or events that may occur in the
future.
(1) Statement of cash flows
Under Japanese GAAP, the statement of cash flows is not required as part of
the basic financial statements.
Under U.S. GAAP, the 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 marketable
securities are stated at the lower of cost or market and the Company's non-
marketable securities are 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.
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(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) 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.
(5) Leases capitalized as assets
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
lease expense 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.
(6) 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 for
future absences.
(7) Classification on statement of income
Under U.S. GAAP, certain items presented in the Statement of Income as
extraordinary items would be classified as operating items.
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RIMNET CORPORATION
------------------
UNAUDITED FINANCIAL STATEMENTS
------------------------------
SEVEN MONTHS ENDED MARCH 31, 1998
---------------------------------
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RIMNET CORPORATION
------------------
BALANCE SHEET - ASSETS
----------------------
AS OF MARCH 31, 1998
--------------------
(UNAUDITED)
-----------
(In thousands of yen)
Assets
------
Current assets:
Cash on hand and in banks (Yen) 191,290
Accounts receivable - trade 401,735
Merchandise 16,112
Supplies 3,069
Short-term loan receivable 10,000
Prepaid expenses 11,336
Other current assets 94
Bad debt reserve (29,800)
--------------
Total current assets 603,839
--------------
Long-term assets:
Tangible fixed assets - net -
Buildings and facilities 57,300
Structures 535
Automobiles 333
Machinery and equipment 462,145
Construction in progress 26,182
--------------
Total tangible fixed assets - net 546,498
--------------
Intangible fixed assets -
Telephone rights 44,404
--------------
Investments & other assets -
Investment securities 32,167
Investment in capital 100
Long-term prepaid expenses 104,790
Lease deposits 59,758
Long-term bank deposits 15,950
Insurance premiums 2,424
--------------
Total investments & other assets 215,191
--------------
Total long-term assets 806,094
--------------
Total assets (Yen)1,409,933
==============
The accompanying notes are an integral part of these unaudited financials
statements.
23 of 83
<PAGE>
RIMNET CORPORATION
------------------
BALANCE SHEET - LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------
AS OF MARCH 31, 1998
--------------------
(UNAUDITED)
-----------
(In thousands of yen)
Liabilities
-----------
Current liabilities:
Accounts payable - trade (Yen) 26,889
Short-term borrowings 371,895
Current portion -
Long-term borrowings 364,243
Accounts payable - other 105,729
Income tax payables 12,166
Enterprise tax payables 4,491
Consumption tax payables 18,017
Accrued expenses 43,603
Advance received 729
Deposits received 7,754
Other current liabilities 1,000
---------------
Total current liabilities 956,520
---------------
Non- current liabilities:
Long- term borrowings 219,203
Long-term accounts payable 157
---------------
Total non-current liabilities 219,360
---------------
Total liabilities 1,175,880
---------------
Shareholders' equity
--------------------
Capital stock 217,800
Legal reserve:
Capital reserve 6,600
Retained earnings:
Reserve for software development 3,865
Reserve for special depreciation 67,234
Undisposed deficit (61,446)
[Net loss for the period] [25,624]
---------------
Total shareholders' equity 234,053
---------------
Total liabilities and shareholders' equity (Yen) 1,409,933
===============
The accompanying notes are an integral part of these unaudited financial
statements.
24 of 83
<PAGE>
RIMNET CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands of yen)
For seven month period ended,
March 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Ordinary income and expenses:
Operating income and expenses -
Operating income:
Net sales (Yen)1,141,135 (Yen)1,267,649
Operating Expenses:
Cost of sales 685,913 835,085
Selling, general and administrative expenses 466,825 417,241
-------------- --------------
1,152,738 1,252,327
-------------- --------------
Operating (loss) profit (11,603) 15,322
-------------- --------------
Non-operating income and expenses -
Non-operating income -
Interest income and dividends 144 184
Other 548 0
-------------- --------------
692 184
Non-operating expenses -
Interest expenses 12,836 13,228
Other 2,281 840
-------------- --------------
15,118 14,069
-------------- --------------
Ordinary (loss) profit (26,029) 1,437
-------------- --------------
Extraordinary items:
Extraordinary gain -
Gain on sales of fixed assets 7,949 -
Prior year adjustment 29 -
-------------- --------------
7,979 -
Extraordinary loss -
Bad debt loss - 14,161
Condolence payment to director 3,000 -
Loss on disposal of fixed assets 812 -
3,812 14,161
-------------- --------------
Loss before taxes (21,862) (12,724)
Corporate tax and inhabitant tax (300) (12,900)
-------------- --------------
Net loss for the period (22,162) (25,624)
Accumulated deficit brought forward (50,737) (35,821)
=============== ==============
Undisposed deficit (Yen) (72,899) (Yen) (61,446)
=============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
25 of 83
<PAGE>
RIMNET CORPORATION
------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(unaudited)
MARCH 31, 1998
--------------
The balance sheet and the statements of income are prepared in accordance with
the Japanese Commercial Code and the regulations regarding the balance sheet,
the statement of income, the business report and the supplementary schedules of
a joint-stock company (Regulation of Ministry of Justice No. 31).
1. The figures in the statements are indicated in thousands of yen. Yen
amounts of less than one thousand have been omitted without rounding;
accordingly, rounding differences may result.
2. Significant accounting policies
-------------------------------
(1) The valuation basis and valuation methods of securities:
-------------------------------------------------------
Marketable securities:
---------------------
Marketable securities are stated at the lower of cost or market, cost being
determined by the moving average method.
Non- marketable securities:
--------------------------
Non- marketable securities are stated at cost determined by the moving
average method.
(2) The valuation basis and valuation methods of inventories:
--------------------------------------------------------
Merchandise and supplies are stated at cost determined by the periodic
average method.
(3) The method of depreciation:
--------------------------
Tangible fixed assets are depreciated based on the declining balance method
in accordance with Japanese corporate tax regulations.
Long-term prepaid expenses are amortized based on the straight-line method
under Japanese corporate tax regulations.
(4) The basis for recognition of provisions:
---------------------------------------
Bad debt reserve is provided for the expected uncollectible amount in
individual receivable balances, which include the amount estimated by using
the past experience as to write-off of receivables from defaulting members,
in addition to the maximum deductible amount allowed under the Japanese
corporate tax regulations in order to provide for expected future losses.
(5) The accounting method for leases:
--------------------------------
Finance leases, other than the leases for which the title of the leased
assets is deemed to be transferred to a lessee, are accounted for in a
similar manner to operating leases.
26 of 83
<PAGE>
(6) Accounting procedure for consumption tax:
----------------------------------------
Accounting for consumption tax is made on the basis of excluding the
consumption tax (i.e., all transactions are recorded net of consumption
tax).
3. Notes to the balance sheet
--------------------------
(1) Accumulated depreciation of tangible fixed assets is (Yen)473,836 Thousand
(2) Material fixed assets under lease agreements
In addition to fixed assets on the balance sheet, certain computers,
peripherals and other office equipment, are under lease contracts.
(3) Fixed assets whose titles are suspended
Tangible fixed assets on the balance sheet include certain communication
devices for 'RIMNET' etc., the titles of which are held by a seller until
settlement of the entire payable because of the terms of installment
purchase contracts. The balance of payables of (Yen)10,589 thousand is
included in accounts payable (other) and long-term accounts payable on the
balance sheet.
(4) Major foreign currency assets and liabilities
Investment securities (Yen)17,167 thousand (U.S. $150 thousand)
Accounts payable - trade (Yen)11,342 thousand (U.S. $ 85 thousand)
Accounts payable - other (Yen)5,644 thousand (U.S. $42 thousand)
(5) Assets pledged as collateral
Bank deposits (Yen)30,718 thousand
Lease deposits (Yen)40,294 thousand
Machinery and equipment (Yen)79,620 thousand
(6) Loss per share (Yen)5,882.61
27 of 83
<PAGE>
ioNET, Inc.
Audited Financial Statements
Years ended December 31, 1997 and 1996
28 of 83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ioNET, Inc.:
We have audited the accompanying balance sheets of ioNET, Inc. (an Oklahoma
corporation), as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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 generally accepted auditing
standards. 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 ioNET, Inc. as of December 31,
1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
May 29, 1998
29 of 83
<PAGE>
ioNET, Inc.
-----------
BALANCE SHEETS
--------------
DECEMBER 31, 1996 AND 1997
--------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ --------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 551,497 $ 165,718
Receivables-
Accounts receivable, net of allowance for doubtful accounts of
$2,195 in 1996 and $0 in 1997 468,484 788,255
Officer 35,870 38,022
Other 18,077 15,129
Inventory 259,750 62,536
Prepaid expenses and other 30,834 74,101
---------- -----------
Total current assets 1,364,512 1,143,761
PROPERTY AND EQUIPMENT, net 2,044,912 2,382,823
---------- -----------
Total assets $ 3,409,424 $ 3,526,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 876,591 $ 1,014,469
Accrued liabilities 58,828 113,175
Notes payable - stockholders - 45,369
Current portion of long-term debt 458,746 128,313
Current portion of capitalized lease obligations 184,382 297,178
Current portion of deferred revenue 591,620 691,015
Other 39,082 -
---------- -----------
Total current liabilities 2,209,249 2,289,519
LONG-TERM DEBT, net of current portion 544,739 865,896
CAPITALIZED LEASE OBLIGATIONS, net of current portion 642,877 731,185
DEFERRED REVENUE, net of current portion 294,413 195,891
---------- -----------
Total liabilities 3,691,278 4,082,491
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 6)
STOCKHOLDERS' DEFICIT:
Common stock - $0.01 par value; 4,000,000 shares authorized; 2,554 2,556
255,400 and 255,600 shares issued and outstanding at December
31, 1996 and 1997, respectively
Preferred stock - $0.01 par value; 1,000,000 shares authorized; - -
no shares issued or outstanding
Additional paid-in capital 564,863 567,361
Accumulated deficit (849,271) (1,125,824)
---------- -----------
Total stockholders' deficit (281,854) (555,907)
---------- -----------
Total liabilities and stockholders' deficit $ 3,409,424 $ 3,526,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30 of 83
<PAGE>
ioNET, Inc.
-----------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
REVENUES:
Hardware and software sales $4,321,083 $5,225,832
Internet services-
Consumer 1,900,055 3,257,967
Corporate 480,446 847,747
Engineering services 142,898 221,825
Other 66,533 118,711
---------- ----------
Total revenues 6,911,015 9,672,082
---------- ----------
COST OF GOODS SOLD:
Hardware and software 3,361,460 4,367,094
Internet services 1,126,773 1,454,164
---------- ----------
Total cost of goods sold 4,488,233 5,821,258
---------- ----------
GROSS PROFIT 2,422,782 3,850,824
---------- ----------
OPERATING AND ADMINISTRATIVE EXPENSES:
Salaries and benefits 1,740,193 2,259,145
General and administrative 783,957 1,101,099
Advertising 376,198 237,630
Depreciation and amortization 187,571 453,594
Bad debts 21,068 9,777
---------- ----------
Total operating and administrative expenses 3,108,987 4,061,245
---------- ----------
LOSS FROM OPERATIONS (686,205) (210,421)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (127,745) (187,067)
Other income 205,480 120,935
---------- ----------
Total other income (expense) 77,735 (66,132)
---------- ----------
NET LOSS $ (608,470) $ (276,553)
========== ==========
BASIC NET LOSS PER SHARE $ (2.42) $ (1.08)
========== ==========
DILUTED NET LOSS PER SHARE $ (2.42) $ (1.08)
========== ==========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE
251,733 255,477
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31 of 83
<PAGE>
ioNET, Inc.
-----------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 205,800 $2,058 $111,359 $ (240,801) $(127,384)
Common stock issued 49,600 496 453,504 - 454,000
Net loss - - - (608,470) (608,470)
------- ------ -------- ----------- ---------
BALANCE, December 31, 1996 255,400 2,554 564,863 (849,271) (281,854)
Common stock issued 200 2 2,498 - 2,500
Net loss - - - (276,553) (276,553)
------- ------ -------- ----------- ---------
BALANCE, December 31, 1997 255,600 $2,556 $567,361 $(1,125,824) $(555,907)
======= ====== ======== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32 of 83
<PAGE>
ioNET, Inc.
-----------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(608,470) $(276,553)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 187,571 453,594
Gain on sales of assets (35,147) -
Changes in assets and liabilities-
Receivables 1,266 (318,975)
Inventory (38,106) 197,214
Prepaid expenses and other (24,701) (43,267)
Accounts payable (19,502) 137,878
Accrued liabilities (22,398) 54,347
Other 39,082 (39,082)
Deferred revenue 358,940 873
--------- ---------
Net cash (used in) provided by operating activities (161,465) 166,029
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (826,492) (736,143)
Purchase of dial-up customers - (33,859)
Proceeds from sales of property and equipment 79,050 -
Proceeds from sale leaseback transaction 661,845 327,115
--------- ---------
Net cash used in investing activities (85,597) (442,887)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - stockholders - 45,369
Proceeds from issuance of long-term debt 690,713 175,000
Repayment of long-term debt (337,656) (184,276)
Repayment of capitalized lease obligations (25,564) (145,014)
Proceeds from sale of common stock 451,000 -
--------- ---------
Net cash provided by (used in) financing activities 778,493 (108,921)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 531,431 (385,779)
CASH AND CASH EQUIVALENTS, beginning of year 20,066 551,497
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 551,497 $ 165,718
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 119,888 $ 194,923
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33 of 83
<PAGE>
ioNET, Inc.
-----------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996 AND 1997
--------------------------
1. ORGANIZATION:
-------------
ioNET, Inc. commenced operations in July 1983 and subsequently was incorporated
as an Oklahoma corporation in March 1986 under the name Johnson Computer &
Supply Company ("Johnson Computer"). Effective October 31, 1996, Johnson
Computer merged with an affiliated Oklahoma corporation, Internet Oklahoma
Services, Inc. ("Internet Oklahoma"), the name of the corporation was changed to
ioNET, Inc. ("ioNET" or "the Company") and Internet Oklahoma was dissolved.
ioNET maintains its principal office in Oklahoma City, Oklahoma. The Company
is an Internet Service Provider and a systems integrator of computer systems,
services, and supplies in Arizona, Kansas, Missouri and Oklahoma. The Company
also sells computer products and services and is an authorized reseller for
several hardware companies.
Merger of Johnson Computer and Internet Oklahoma
- ------------------------------------------------
On October 31, 1996, Johnson Computer acquired all of the common stock of
Internet Oklahoma in exchange for 235,100 shares of Johnson Computer's common
stock. The transaction was considered a reorganization of interests under
common control under which the accounting treatment of the merger is similar to
a pooling-of-interests. Prior to the merger, Johnson Computer's fiscal year end
was January 31 while Internet Oklahoma's fiscal year end was October 31.
Concurrent with the merger, the Company changed its year-end to December 31.
Accordingly, the 1996 financial statements include the results of Johnson
Computer and Internet Oklahoma.
Concurrent with the merger, the number of shares and par value of the Company's
authorized stock changed. All share and per share data is stated to reflect the
common stock revisions.
The companies' accounting policies prior to the merger were not significantly
different. The effects of all intercompany transactions prior to the merger
have been eliminated.
Continuing Operations
- ---------------------
At December 31, 1996 and 1997, the Company had current liabilities in excess of
current assets, reported a net stockholders' deficit of $281,854 and $555,907,
respectively, and had a net loss of $608,470 and $276,553, respectively, for the
years then ended. The Company's operations are subject to certain risks and
uncertainties including, among others, actual and potential competition by
entities with greater financial resources, experience and market presence than
the Company, risks associated with consolidation in the industry, risks
associated with acquisitions and international expansion, the need to manage
growth and expansion, certain technology and regulatory risks, and dependence
upon sole and limited source suppliers.
During 1998, ioNET management plans to continue its growth in its core market
and products. Specifically, the Company plans to target systems integration
sales toward higher margin
34 of 83
<PAGE>
products and services and expanding its wholesale internet services while
focusing on reducing the cost of sales for internet access services. Management
believes that sufficient cash flows will be available from operations and
current bank financing to meet the Company's obligations during 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
---------------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For purposes of financial reporting, the Company considers all cash and
marketable securities with an original maturity of three months or less to be
cash and cash equivalents.
Inventory
- ---------
Inventory is stated at the lower of cost (first-in, first-out) or market, and
consists primarily of computer hardware and supplies for resale.
Property and Equipment
- ----------------------
Property and equipment is recorded at cost. Depreciation, including
depreciation of assets acquired under capital lease agreements, is computed on a
straight-line basis. Property and equipment at December 31, 1996 and 1997,
consisted of the following:
35 of 83
<PAGE>
<TABLE>
<CAPTION>
Estimated
Useful Lives
(in Years) 1996 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Network and computer equipment 5 $2,006,254 $2,686,759
Airplane 25 258,531 270,568
Furniture and office equipment 5 30,287 40,552
Software 3 47,692 78,396
Leasehold improvements and other 5 17,847 19,273
---------- ----------
Property and equipment, at cost 2,360,611 3,095,548
Less- Accumulated depreciation (315,699) (712,725)
---------- ----------
Property and equipment, net $2,044,912 $2,382,823
========== ==========
</TABLE>
Revenue Recognition
- -------------------
Internet services revenues consist primarily of monthly service fees, equipment
sales and installation charges. Service fees consist of fixed monthly amounts
and/or hourly amounts based on usage and are recognized as the service is
provided. Payments received in advance of providing services are deferred until
the period in which such services are provided. Equipment sales and
installation charges are recognized when installation is completed.
Hardware and software sales consist primarily of the resale of computer hardware
and of packaged third-party software. The Company recognizes revenue on
computer hardware and software sales at the time of delivery. Engineering
services revenue is deferred and recognized as the service is provided.
Cost of Goods Sold
- ------------------
Internet services cost of revenues consists primarily of network
telecommunication costs. Hardware and software cost of goods sold consists of
the cost of equipment and of packaged third-party software costs and other
products sold.
Advertising
- -----------
The Company expenses all advertising and customer acquisition costs in the
period incurred.
Stock-Based Compensation
- -------------------------
The Company accounts for stock options using the intrinsic value based method of
accounting. Pro forma disclosures, as if the fair value based method of
accounting had been applied, have not been presented since such disclosures
would not result in material differences from the intrinsic value method.
36 of 83
<PAGE>
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. Common stock equivalent shares are calculated using the treasury
stock method. All stock options 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.
Recent Pronouncements
- ---------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for the fiscal years
beginning after December 15, 1997. The Statement establishes standards for
reporting and displaying comprehensive income, as defined, and its components.
The Company plans to adopt the Statement's disclosure requirements in 1998.
Also in 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.
3. LONG-TERM DEBT:
---------------
In August 1993, the Company entered into a note agreement with a bank to
purchase an airplane. The note requires monthly principal and interest payments
through maturity in August 2001, and bears a variable rate of interest (7.9% at
December 31, 1996 and 1997). The note balance was $124,248 and $101,278 at
December 31, 1996 and 1997, respectively.
In January 1996 and May 1996, the Company entered into note agreements with a
financial institution to purchase machinery and equipment. The notes required
monthly principal and interest payments through maturity in January 2000 and May
2000. The balance on these note agreements was $598,921 at December 31, 1996.
In October 1997, these notes were refinanced into a single note. The new note
requires monthly principal and interest payments through maturity in September
2001 and bears interest at prime plus 1.5% (10% at December 31, 1997). The
balance outstanding under this note agreement was $465,439 at December 31, 1997.
In 1996, the Company entered into a $500,000 line of credit debt agreement with
a financial institution. The debt agreement had a variable rate of interest
(9.50% at December 31, 1996) and required monthly interest payments with
principal due at maturity in February 1997. The debt agreement was renewed
subsequent to December 31, 1996, with a new maturity of April 1998. In December
1997, the above-discussed line of credit was renewed with an increase in the
principal amount to $750,000. The line of credit requires interest payments
through maturity in April 1999 and bears interest at prime plus 1% (9.5% at
December 31, 1997). The line of credit is presented in the accompanying balance
sheets as current portion of long-term debt at
37 of 83
<PAGE>
December 31, 1996 and as long-term debt at December 31, 1997. The balance under
this debt agreement was $280,316.
The note agreement discussed in the preceding paragraph requires compliance with
several financial covenants including minimum current ratio, minimum tangible
net worth, debt to worth ratio and cash flow coverage, among others. At
December 31, 1997, the Company was in violation with the financial covenants in
the note agreement. However, on May 29, 1998, the Company received a term note
commitment (the "commitment") from a financial institution to refinance the debt
which was in default at December 31, 1997. The commitment allows for a
principal amount not to exceed $431,000. The commitment requires monthly
principal and interest payments over a 42-month amortization period and bears
interest at prime plus 1%. The commitment contains a financial covenant which
requires the Company to maintain a debt service coverage ratio of 1.20 to 1.0 as
defined in the commitment. In the opinion of management, the Company will be
able to maintain compliance with the financial covenant contained in the
commitment.
Aggregate future principal payments on long-term debt as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998 $128,313
1999 566,715
2000 152,601
2001 146,580
--------
Total $994,209
========
</TABLE>
4. CAPITAL LEASE AGREEMENTS:
-------------------------
In May 1996, the Company leased approximately $191,000 of telephone equipment.
This transaction qualified for treatment as a financing lease and the property
and related lease liability have been included in the accompanying balance
sheets and excluded from the statements of cash flows as this is a noncash
transaction.
During 1996 and 1997, the Company sold approximately $662,000 and $442,000,
respectively, of network equipment in sales-leaseback transactions. The
transactions were accounted for as financing leases and, accordingly, the
property and related lease liability have been included in the accompanying
balance sheets. Additionally, as a result of these transactions, the Company
recognized deferred revenue of approximately $392,000 and $102,000, in 1996 and
1997, respectively, which has been included in the accompanying balance sheets
and is being amortized to income over the four-year term of the leases. The
leases also require the Company to maintain a minimum usage level on the network
equipment or pay for the unutilized usage up to the minimum requirement. It is
management's belief that this requirement will be met for the entire life of the
lease.
The net carrying value of all capitalized lease assets at December 31, 1996 and
1997, was approximately $827,260 and $963,745, respectively, net of accumulated
amortization of approximately $25,560 and $140,464, respectively.
Future required payments, net of imputed interest of approximately $197,000,
under capital lease obligations at December 31, 1997, were as follows:
38 of 83
<PAGE>
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998 $ 297,178
1999 314,799
2000 297,638
2001 118,748
----------
Total $1,028,363
==========
</TABLE>
5. STOCKHOLDERS' EQUITY:
---------------------
Common Stock Issuances
- ----------------------
During 1996, Internet Oklahoma issued 49,600 shares of common stock prior to the
merger with Johnson Computer for $454,000 through a combination of cash payments
totaling $451,000 and as payment for services provided by unrelated parties of
$3,000. Specifically, 45,600 shares were issued for $8.75 per share; 2,500
shares were issued for $10.00 per share; and 1,500 were issued for $20.00 per
share. These shares, along with 185,500 shares issued prior to 1996, were
exchanged one-for-one for ioNET stock as described in Note 1. At January 1,
1996, Johnson Computer had 20,300 shares of common stock issued and outstanding.
During 1997, 200 shares of stock were issued to an individual in exchange for
services performed.
Stock Option Plan
- -----------------
In 1996, the Company adopted a Stock Option Plan (the "Plan") to grant stock
options (up to 12,700 shares of common stock) to officers and employees of
ioNET. Under the Plan provisions, the options shall be issued at not less than
fair market value, as defined in the Plan, vest in three equal amounts over the
last three years of a five-year period beginning at the grant date, and expire
not longer than ten years from grant date. In January 1997, the Company issued
8,200 stock options at an exercise price of $35 per share. In the opinion of
management, the price per share at the date of grant approximated the fair
market value of the stock. No compensation expense related to this transaction
was recorded. As of December 31, 1996 and 1997, no options under the plan were
exercisable. Subsequent to December 31, 1997, the Company issued an additional
1,525 and 440 stock options in January and March 1998, respectively. The stock
options issued in 1998 were issued at an exercise price of $35 per share.
Additionally, contingent upon execution of the purchase agreement discussed in
Note 8, the Company will reduce the grant price on 2,000 of the stock options
issued in January 1997 to $10 per share. All compensation expense related to
this reduction in grant price will be recorded as compensation expense in 1998.
6. OPERATING LEASES:
-----------------
At December 31, 1997, the Company was committed to future lease payments under
two operating leases with an initial or remaining noncancellable lease term in
excess of one year. Subsequent to December 31, 1997, one lease was cancelled
through mutual agreement with the lessor and one lease was renegotiated.
As a result of these renegotiated lease terms, the new lease required treatment
as a financing lease. Accordingly, the Company recorded property and a related
lease liability of approximately $171,000 in January 1998. The lease will
require payments of approximately $79,000 in 1998 and $92,000 in 1999, net of
imputed interest.
39 of 83
<PAGE>
7. INCOME TAXES:
-------------
The provisions for income taxes for the years ended December 31, 1996 and 1997,
differ from amounts computed at the statutory rate as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Income tax benefit at statutory $(206,880)
rate (34%) $(94,028)
State income taxes, net of Federal (24,339) (11,062)
income tax benefit
Other permanent differences 2,659 3,975
Impairment of deferred tax assets 228,560 101,115
--------- --------
$ - $ -
========= ========
</TABLE>
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses $ 374,672 $ 603,678
Gross deferred tax liabilities:
Depreciation and other (158,788) (286,679)
--------- ---------
Net deferred tax asset 215,884 316,999
Valuation allowance (215,884) (316,999)
--------- ---------
$ - $ -
========= =========
</TABLE>
The Company has established a valuation allowance for net deferred tax assets of
its operations since realization of these benefits cannot be reasonably assured.
These net operating loss carryforwards expire at specific future dates beginning
in 2010. While the need for the valuation allowance is subject to periodic
review, if the allowance is reduced, the tax benefits of the carryforwards will
be recorded in future operations as a reduction of the Company's income tax
expense.
No cash was paid for income taxes in 1996 or 1997.
8. SUBSEQUENT EVENT:
-----------------
On May 7, 1998, the Company entered into a non-binding letter of intent to sell
all of the outstanding shares of its common stock. Upon consummation of the
sale, the Company will become a wholly owned subsidiary of the acquiror. The
sale is expected to occur on or around June 18, 1998.
40 OF 83
<PAGE>
ioNET, inc.
-----------
UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------------------------------------
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
41 of 83
<PAGE>
ioNET, Inc.
-----------
CONDENSED BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
------ 1997 1998
----------- ----------
CURRENT ASSETS: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 165,718 $ 177,646
Receivables-
Accounts receivable 788,255 513,271
Officer 38,022 -
Other 15,129 4,831
Inventory 62,536 46,086
Prepaid expenses and other 74,101 38,347
----------- -----------
Total current assets 1,143,761 780,181
PROPERTY AND EQUIPMENT, net 2,382,823 2,428,224
----------- -----------
Total assets $ 3,526,584 $ 3,208,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,014,469 $ 676,213
Accrued liabilities 113,175 172,484
Notes payable - stockholders 45,369 -
Current portion of long-term debt 128,313 128,998
Current portion of capitalized lease obligations 297,178 492,050
Current portion of deferred revenue 691,015 838,743
---------- -----------
Total current liabilities 2,289,519 2,308,488
LONG-TERM DEBT, net of current portion 865,896 1,232,735
CAPITALIZED LEASE OBLIGATIONS, net of current portion 731,185 673,126
DEFERRED REVENUE, net of current portion 195,891 188,192
----------- -----------
Total liabilities 4,082,491 4,402,541
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; 4,000,000 shares 2,556 2,556
authorized; 255,600 shares issued and outstanding at
December 31, 1997 and June 30, 1998
Preferred stock - $0.01 par value; 1,000,000 shares - -
authorized; no shares issued or outstanding
Additional paid-in capital 567,361 567,361
Accumulated deficit (1,125,824) (1,764,053)
----------- -----------
Total stockholders' deficit (555,907) (1,194,136)
----------- -----------
Total liabilities and stockholders' deficit $ 3,526,584 $ 3,208,405
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42 of 83
<PAGE>
ioNET, Inc.
-----------
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1997 1998
-------------- ---------------
<S> <C> <C>
REVENUE $4,554,920 $4,390,458
---------- ----------
OPERATING COSTS AND EXPENSES:
Data communications and operations 3,241,687 2,782,576
Sales and marketing 540,990 665,993
General and administrative 825,562 1,192,807
Depreciation and amortization 209,230 277,101
---------- ----------
Total operating costs and expenses 4,817,469 4,918,477
---------- ----------
Loss from operations (262,549) (528,019)
OTHER INCOME (EXPENSE):
Interest expense (83,306) (111,792)
Interest income 6,037 3,206
Other income (expense) 48,588 (1,624)
---------- ----------
Total other income (expense) (28,681) (110,210)
---------- ----------
Loss before taxes (291,230) (638,229)
---------- ----------
INCOME TAX EXPENSE (BENEFIT) - -
NET LOSS $ (291,230) $ (638,229)
========== ==========
BASIC LOSS PER SHARE $(1.17) $(2.50)
========== ==========
DILUTED LOSS PER SHARE $(1.17) $(2.50)
========== ==========
SHARES USED IN COMPUTING BASIC AND DILUTED LOSS
PER SHARE 247,963 255,418
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
43 of 83
<PAGE>
ioNET, Inc.
-----------
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------
(Unaudited)
For The Year Ended December 31, 1997
and for the Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ---------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 255,400 $2,554 $564,863 $ (849,271) $ (281,854)
Common stock issued 200 2 2,498 - 2,500
Net loss - - - (276,553) (276,553)
------- ------ -------- ----------- -----------
BALANCE, December 31, 1997 255,600 2,556 567,361 (1,125,824) (555,907)
Net loss - - - (638,229) (638,229)
------- ------ -------- ----------- -----------
BALANCE, June 30, 1998 255,600 $2,556 $567,361 $(1,764,053) $(1,194,136)
======= ====== ======== =========== ===========
(unaudited)
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
44 of 83
<PAGE>
ioNET, Inc.
-----------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 189,933 $ (71,135)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (422,779) (190,745)
Purchase of dial-up customers (32,243) -
Proceeds from sale leaseback transactions 227,588 -
--------- ---------
Net cash used in investing activities (227,434) (190,745)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 963,983
Repayment of long-term debt (103,647) (565,351)
Repayment of capitalized leases (118,243) (124,823)
--------- ---------
Net cash (used in) provided by financing activities (221,890) 273,809
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259,391) 11,929
CASH AND CASH EQUIVALENTS, beginning of period 551,497 165,718
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 292,106 $ 177,647
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 84,414 $ 80,237
========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital asset and lease obligation additions $ 246,827 $ 230,528
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
45 of 83
<PAGE>
ioNET, Inc.
-----------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(Unaudited)
Six Months Ended June 30, 1998
------------------------------
1. BASIS OF PRESENTATION:
----------------------
The unaudited condensed financial statements include all normal adjustments
which, in the opinion of management, are necessary to present fairly the
condensed financial position at June 30, 1998, and the results of operations and
cash flows for the six months ended June 30, 1998 and 1997. These interim
financial statements are prepared on a basis consistent with the December 31,
1997 audited financial statements with the exception of compensation expense,
which is allocated between data communications, sales and marketing, and general
and administrative expenses in the interim condensed financial statements
whereas such compensation expense is included in operating and administrative
expenses in the financial statements for the years ended December 31, 1997 and
1996. These unaudited condensed financial statements should be read in
conjunction with the December 31, 1997 audited financial statements and related
notes.
2. SUBSEQUENT EVENT:
-----------------
On June 19, 1998, all of the outstanding stock of ioNET was purchased by PSINet
Inc. Prior to the commencement of this purchase, ioNET purchased all of the
outstanding stock options back from the individuals to which the stock options
were issued. Accordingly, compensation expense of approximately $500,000 was
recorded in the unaudited condensed financial statements for the six months
ended June 30, 1998. No adjustments to the carrying amounts of ioNET's assets
and liabilities have been reflected in the accompanying unaudited condensed
financial statements as of June 30, 1998, for the purchase of ioNET by PSINet
Inc.
46 of 83
<PAGE>
LINKAGE ONLINE LIMITED
Audited Financial Statements
Year Ended December 31, 1997
47 of 83
<PAGE>
REPORT OF THE AUDITORS
To the members
LinkAge Online Limited
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying balance sheet of LinkAge Online Limited ( the
"Company") as of December 31, 1997, and the related statements of income,
accumulated losses, and cash flows for the year then ended. 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 audit in accordance with generally accepted auditing standards
in Hong Kong and in the United States. 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 statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of LinkAge
Online Limited as of December 31, 1997, and the results of its operations and
cash flows for the year then ended, in conformity with accounting principles
generally accepted in Hong Kong which differ in certain respects from those
followed in the United States (see note 17 to the financial statements).
/s/ Ernst & Young
Hong Kong
June 22, 1998, except for note 17, as to which the date is September 7, 1998.
48 of 83
<PAGE>
LINKAGE ONLINE LIMITED
BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
Notes HK$ US$
<S> <C> <C> <C>
FIXED ASSETS 8 6,222,628 797,773
INTERESTS IN UNCONSOLIDATED SUBSIDIARIES 9 5,579,936 715,377
CURRENT ASSETS
Cash and bank balances 1,104,641 141,621
Accounts receivable 4,097,610 525,335
Inventories 304,780 39,074
Prepayments, deposits and other receivables 1,350,510 173,142
Due from a related company 10 1,862,033 238,722
----------- -----------
8,719,574 1,117,894
----------- -----------
CURRENT LIABILITIES
Bank overdraft 11 1,106,572 141,868
Other loan 11 295,273 37,856
Accounts payable and accrued liabilities 11,756,667 1,507,265
Receipt in advance 267,604 34,308
Current portion of finance lease payables 12 1,870,490 239,806
Due to a director 13 2,060,947 264,224
----------- -----------
17,357,553 2,225,327
----------- -----------
NET CURRENT LIABILITIES (8,637,979) (1,107,433)
----------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES 3,164,585 405,717
LONG TERM PORTION OF FINANCE LEASE
PAYABLES 12 876,102 112,321
----------- -----------
2,288,483 293,396
=========== ===========
SHAREHOLDERS' EQUITY
Share capital 14 6,422,000 823,333
Share premium 14 7,845,200 1,005,796
Accumulated losses (11,978,717) (1,535,733)
----------- -----------
2,288,483 293,396
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
49 of 83
<PAGE>
LINKAGE ONLINE LIMITED
PROFIT AND LOSS ACCOUNT
Year ended December 31, 1997
<TABLE>
<CAPTION>
Notes HK$ $US$
<S> <C> <C> <C>
TURNOVER 4 34,127,312 4,375,296
========== =========
LOSS BEFORE TAXATION 5 6,246,557 800,841
Taxation 7 - -
---------- ---------
LOSS FOR THE YEAR 6,246,557 800,841
Accumulated losses at beginning of year 5,732,160 734,892
---------- ---------
ACCUMULATED LOSSES AT END OF YEAR 11,978,717 1,535,733
========== =========
</TABLE>
See accompanying notes to the financial statements.
50 of 83
<PAGE>
LINKAGE ONLINE LIMITED
CASH FLOW STATEMENT
Year ended December 31, 1997
<TABLE>
<CAPTION>
Notes HK $US$
<S> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES 15(a) (826,005) (105,898)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 28,852 3,699
Interest paid (109,846) (14,083)
Interest element on finance lease payments (186,881) (23,959)
---------- ---------
Net cash outflow from returns on investments and
servicing of finance (267,875) (34,343)
---------- ---------
INVESTING ACTIVITIES
Purchases of fixed assets (594,821) (76,259)
Investment in subsidiaries (4,286,000) (549,487)
---------- ---------
Net cash outflow from investing activities (4,880,821) (625,746)
---------- ---------
NET CASH OUTFLOW BEFORE FINANCING ACTIVITIES (5,974,701) (765,987)
FINANCING ACTIVITIES 15(b)
Issue of ordinary shares 5,619,200 720,410
Capital element of finance lease payments (1,294,343) (165,941)
Repayment of other loan (4,727) (606)
---------- ---------
Net cash inflow from financing activities 4,320,130 553,863
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (1,654,571) (212,124)
Cash and cash equivalents at beginning of year 1,652,640 211,877
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR (1,931) (247)
========== =========
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash and bank balances 1,104,641 141,621
Bank overdraft (1,106,572) (141,868)
---------- ---------
(1,931) (247)
============ ==========
</TABLE>
See accompanying notes to the financial statements.
51 of 83
<PAGE>
LINKAGE ONLINE LIMITED
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
---------------------
The financial statements are prepared on the assumption that the Company
will continue to operate as a going concern. Such assumption is based on
an undertaking received from the ultimate holding company to provide
continuous financial support.
The Company prepares its statutory financial statements in accordance with
accounting principles generally accepted in Hong Kong and in Hong Kong
dollars ("HK$"). For the convenience of the readers, these financial
statements as of and for the year ended December 31, 1997 are translated
into US dollars ("US$") and presented in US$ at the rate of US$1.00 =
HK$7.80, the approximate exchange rate at December 31, 1997. No
representation is made that the Hong Kong dollar amounts shown could have
been or could be converted into US dollars at that or any other rate.
Basis of consolidation
----------------------
Consolidated financial statements have not been prepared as the directors
are of the opinion that the consolidation would involve expenses or delay
out of proportion to the value to members of the Company. Such basis of
presentation is permissible under the Companies Ordinance.
Subsidiaries
------------
A subsidiary is a company in which the Company, directly or indirectly,
controls more than half of its voting power or issued share capital or
controls the composition of its board of directors. Interests in
subsidiaries are stated at cost unless, in the opinion of the directors,
there have been permanent diminutions in value, when they are written down
to values determined by the directors.
Fixed assets and depreciation
-----------------------------
Fixed assets are stated at cost less accumulated depreciation. The cost of
an asset comprises its purchase price and any directly attributable costs
of bringing the asset to its working condition and location for its
intended use. Expenditure incurred after the fixed assets have been put
into operation, such as repairs and maintenance, is normally charged to the
profit and loss account in the period in which it is incurred. In
situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be
obtained from the use of the fixed asset, the expenditure is capitalized as
an additional cost of the fixed asset.
The gain or loss on disposal or retirement of a fixed asset recognized in
the profit and loss account is the difference between the sales proceeds
and the carrying amount of the relevant asset.
52 OF 83
<PAGE>
Depreciation is calculated on the reducing balance basis to write off the
cost of each asset over its estimated useful life. The principal annual
rates used for this purpose are as follows:
Computer and network 20%
Office equipment 20%
Furniture and fixtures 20%
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.
Related company
---------------
A related company is a company in which a director has a direct or indirect
interest, either as a shareholder or director of that company, and is in a
position to exercise significant influence over the related company.
Inventories
-----------
Inventories represent trading merchandise and are stated at the lower of
cost and net realizable value. Cost is determined on the first-in, first-
out basis. Net realizable value is based on estimated selling prices less
further costs expected to be incurred to disposal.
Leased assets
-------------
Leases that transfer substantially all the rewards and risks of ownership
of assets to the Company, other than legal title, are accounted for as
finance leases. At the inception of a finance lease, the cost of the asset
is capitalised at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element, to
reflect the purchase and financing. Assets held under capitalised finance
leases are included in fixed assets and are depreciated over the shorter of
the lease terms and the estimated useful lives of the assets. The finance
costs of such leases are charged to the profit and loss account so as to
produce a constant periodic rate of charge over the lease terms.
Leases where substantially all the rewards and risks of ownership of assets
remain with the leasing company are accounted for as operating leases.
Rentals applicable to such operating leases are charged to the profit and
loss account on the straight-line basis over the lease terms.
Revenue
-------
Revenue is recognized when it is probable that the economic benefits will
flow to the Company and when the revenue can be measured reliably, on the
following bases:
(a) on rendering of services, when the services are provided;
(b) on the sales of goods, when the significant risks and rewards of
ownership have been transferred to the buyer; and
(c) interest, on a time proportion basis, taking into account the
principal outstanding and the effective interest rate applicable.
53 of 83
<PAGE>
Deferred taxation
-----------------
Deferred taxation is provided, using the liability method, on all
significant timing differences to the extent it is probable that the
liability will crystallize in the foreseeable future. A deferred tax asset
is not recognised unless its realisation is assured beyond reasonable
doubt.
Foreign currencies
------------------
Foreign currency transactions are recorded at the applicable rates of
exchange ruling at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
at the applicable rates of exchange ruling at that date. Exchange
differences are dealt with in the profit and loss account.
2. CORPORATE AFFILIATION
The Company is a subsidiary of Annette Resources Limited, a company
incorporated in the British Virgin Islands, which is considered by the
directors to be the Company's ultimate holding company.
3. RELATED PARTY TRANSACTIONS
In addition to transactions with Annette Resources Limited and its
subsidiaries as set out in note 2, the Company had transactions with
MagicTel Limited of which Mr. Man Chin, a director of the Company, is a
director as set out below.
HK$
Sales of goods 2,205,245
Reimbursement of expenses 178,113
4. TURNOVER
Turnover represents the invoiced value of services rendered and goods sold,
net of discounts and returns.
5. LOSS BEFORE TAXATION
Loss before taxation is arrived at after charging/(crediting):
HK$
Auditors' remuneration 62,000
Depreciation:
Owned fixed assets 608,535
Leased fixed assets 947,121
Interest on bank loan and other loan 109,846
Interest on obligations under finance leases 186,881
Operating lease rentals:
Land and buildings 687,960
Equipment 7,372,324
Bad debt written off 136,351
Interest income (28,852)
---------
6,246,557
=========
54 of 83
<PAGE>
<TABLE>
6. DIRECTORS' REMUNERATION
HK$
<S> <C>
Fees -
Other emoluments 400,000
-------
400,000
=======
</TABLE>
7. TAXATION
No provision for Hong Kong profits tax has been made as the Company had no
assessable profits for the year.
No provision for deferred taxation has been made as there were no
significant timing differences for the year. The components of the
Company's unprovided deferred tax asset calculated at 16% on the cumulative
timing differences are analyzed as follows:
<TABLE>
<CAPTION>
HK$
<S> <C>
Tax loss carried forward 2,600,000
Accelerated depreciation allowances (543,000)
---------
2,057,000
=========
</TABLE>
8. FIXED ASSETS
<TABLE>
<CAPTION>
Computer and Office Furniture and
network equipment fixtures Total
HK $HK $HK $HK$
<S> <C> <C> <C> <C>
Cost:
At beginning of year 4,874,882 90,737 682,437 5,648,056
Additions 3,329,079 113,266 188,498 3,630,843
--------- -------- -------- ----------
At December 31, 1997 8,203,961 204,003 870,935 9,278,899
--------- -------- -------- ----------
Accumulated depreciation:
At beginning of year 1,318,592 30,583 151,440 1,500,615
Provided during the year 1,377,073 34,684 143,899 1,555,656
--------- -------- -------- ----------
At December 31, 1997 2,695,665 65,267 295,339 3,056,271
--------- -------- -------- ----------
Net book value:
At December 31, 1997 5,508,296 138,736 575,596 6,222,628
========= ======== ======== ==========
</TABLE>
The net book value of assets held under finance leases included in the
total amount of fixed assets at December 31, 1997 amounted to HK$3,788,483.
The depreciation charge for the year in respect of such assets amounted to
HK$947,121.
55 of 83
<PAGE>
9. INTERESTS IN UNCONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
HK$
<S> <C>
Unlisted shares, at cost 4,286,000
Due from a subsidiary 1,293,936
----------
5,579,936
==========
</TABLE>
Particulars of the subsidiaries are as follows:
<TABLE>
<CAPTION>
Nominal value Equity interest
of issued directly
Place of share capital attributable Principal
Name incorporation HK$ to the Company activities
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA Internet Hong Kong 2 100% Provision of
Limited internet services
and sales of
computer
equipment
LinkAge Webmedia Hong Kong 1,000 100% Dormant
Limited
</TABLE>
The amount due from a subsidiary is unsecured, interest-free and has no
fixed terms of repayment.
The loss for the year of the subsidiaries attributable to the Company not
dealt with in the financial statements of the Company and the retained
post-acquisition losses of the subsidiaries attributable to the Company
amounted to HK$700 at the balance sheet date.
10. DUE FROM A RELATED COMPANY
Particulars of the amount due from a related company disclosed pursuant to
Section 161B of the Companies Ordinance are as follows:
Maximum
outstanding
December 31, 1997 during the year
HK$ HK$
MagicTel Limited 1,862,033 1,862,033
MagicTel Limited is a company of which Mr. Man Chin, a director of the
Company, is a director. The amount due from a related company is
unsecured, interest-free and has been fully repaid in March 1998.
Subsequent to the balance sheet date, on March 18, 1998, Mr. Man Chin
resigned as a director of MagicTel Limited.
11. BANKING FACILITIES
The Company's bank overdraft facilities are secured by a property owned by
a director.
Other loan is secured by joint and several guarantees of Messrs. Man Chin
and Lam Kin Hing, Kenneth, directors of the Company, to the extent of
HK$300,000.
56 of 83
<PAGE>
12. FINANCE LEASE PAYABLES
There were commitments under finance leases at the balance sheet
date as set out below:
<TABLE>
<CAPTION>
HK$
<S> <C>
Amount payable:
Within one year 2,069,003
In the second to fifth years, inclusive 1,016,743
----------
Total minimum lease payments 3,085,746
Future finance charges (339,154)
----------
Total net finance lease payables 2,746,592
Portion classified as current liabilities (1,870,490)
----------
Long term portion of finance lease payables 876,102
==========
</TABLE>
Certain finance lease facilities are secured by personal guarantee of Mr.
Man Chin, director of the Company, and accounts receivable of the Company.
13. DUE TO A DIRECTOR
The amount due to a director is unsecured, interest-free and has no fixed
terms of repayment.
14. SHARE CAPITAL
HK$
Authorized:
15,000,000 ordinary shares of HK$1 each 15,000,000
==========
Issued and fully paid:
6,422,000 ordinary shares of HK$1 each 6,422,000
=========
Pursuant to a shareholder resolution passed on December 30, 1997, the
authorised share capital of the Company was increased from 6,000,000
ordinary shares to 15,000,000 ordinary shares of HK$1 each. On the same
day, 472,000 ordinary shares were issued at a premium of HK$0.1 per
ordinary share for an aggregate consideration of HK$519,200 and 425,000
ordinary shares were issued at a premium of HK$11 per ordinary share for an
aggregate consideration of HK$5,100,000. The total consideration of
HK$5,619,200 was satisfied by cash to provide additional working capital.
All the issues of these ordinary shares rank pari passu with the existing
share capital of the Company.
On August 22, 1995, the Company adopted a share option scheme under which
the board of directors may grant options to subscribe for shares in the
Company to any eligible employees. The subscription price is determined by
the directors. The maximum number of shares in respect of which options may
be granted under the scheme may not exceed 10% of the issued share capital
of the Company. The scheme will remain in force for a period of ten years
from the date of its adoption. On the same day, the Company granted options
to certain employees of the Company (at nil cash consideration) for the
right to subscribe for a total of 440,000 ordinary shares at a price of
HK$1.1 per share. No options have been exercised under the scheme since the
commencement date.
57 OF 83
<PAGE>
Pursuant to a shareholder resolution passed on December 30, 1997, such
share option scheme was revoked and all the issued share options were
cancelled.
15. NOTES TO THE CASH FLOW STATEMENT
(a) Reconciliation of loss before taxation to net cash outflow
from operating activities:
<TABLE>
<CAPTION>
HK$
<S> <C>
Loss before taxation (6,246,557)
Interest received (28,852)
Interest paid 296,727
Depreciation 1,555,656
Increase in amount due from a subsidiary (1,293,936)
Increase in accounts receivable (602,702)
Increase in inventories (238,091)
Increase in prepayments, deposits and other receivables (961,565)
Decrease in amounts due from shareholders 1,735,000
Decrease in amount due from a director 209,556
Increase in amount due from a related company (1,862,033)
Increase in accounts payable and accrued liabilities 7,087,479
Decrease in receipt in advance (476,687)
----------
Net cash outflow from operating activities (826,005)
===========
</TABLE>
(b) Analysis of changes in financing during the year:
<TABLE>
<CAPTION>
Share capital
(including Advance from Finance lease Other
premium) a director obligations loan
HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Balance at January 1, 1997 8,648,000 1,851,391 1,004,913 300,000
Issue of ordinary shares 5,619,200 - - -
Cash inflows from financing - 209,556 - -
Inception of finance lease contracts - - 3,036,022 -
Cash outflows from financing - - (1,294,343) (4,727)
----------- --------- ----------- --------
Balance at December 31, 1997 14,267,200 2,060,947 2,746,592 295,273
=========== ========= =========== ========
</TABLE>
(c) Major non-cash transaction
The Company entered into finance lease arrangements in respect of
assets with a total capital value at the inception of the leases of
HK$3,036,022.
58 of 83
<PAGE>
16. COMMITMENTS
<TABLE>
<CAPTION>
HK$
<S> <C>
Commitments payable in the following year under operating
leases in respect of:
Land and buildings expiring:
Within one year 149,798
In the second to fifth years, inclusive 904,176
---------
1,053,974
---------
Other equipment expiring:
Within one year 4,294,028
In the second to fifth years, inclusive -
---------
4,294,028
---------
Total commitments 5,348,002
=========
</TABLE>
17. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")
The audited financial statements of the Company are prepared and presented
in accordance with HK GAAP, which differ in certain significant respects
from accounting principles generally accepted in U.S. GAAP. The significant
differences between HK GAAP and U.S. GAAP relevant to the Company's
financial statements are followings:
(a) Deferred taxation
Timing differences arise from the recognition for tax purposes of
certain items of income and expense in a different accounting period
from that in which they are recognized in the accounts. Under HK GAAP,
the tax effect of timing differences, computed under the liability
method, is recognized in the accounts to the extent it is probable a
liability or an asset will crystallise in the foreseeable future.
Under U.S. GAAP, full provision should be made for all deferred taxes
as they arise, except that a valuation allowance is provided on
deferred tax assets to the extent that it is considered more likely
than not that the deferred tax assets will not be realized.
(b) Share options to employees
Under HK GAAP, no effect is given to the issuance of share options
to employees.
Under U.S. GAAP, share options granted may include a compensation
element to option holders that is measured at the date of granting the
option if the exercise price is less than the fair value of the shares
at that date. Any compensation resulting from the granting of share
options is charged to the profit and loss account over the vesting
period. The corresponding entry is to increase the additional paid in
capital in the respective years of the vesting period.
59 OF 83
<PAGE>
No effect is given in the accompanying financial statements to the
cancellation of the previously granted 440,000 options or to the
issuance of shares to employees and directors on December 30, 1997 at
premium of HK$0.1.
Under US GAAP, the previously recognized compensation expense on
options for shares that were sold on December 30, 1997 to the same
employee would be reversed and credited to compensation expense on
the date the option was canceled and the difference between the fair
value of the shares issued to the employees and directors, and the
amount paid would be accounted for as compensation expense on the
date of sale.
(c) Compensated absence
Under HK GAAP, no effect is given to the accrual of compensated
absence.
Under U.S. GAAP, compensated absence arises when an employer expects
to pay an employee for illness, holiday, vacation or other reasons. A
liability for the estimated probable future payments must be accrued
if certain conditions, as described under Statement of Financial
Accounting Standards No. 43, "Accounting for Compensated Absences" are
met.
(d) Acquisition of subsidiaries
Under US GAAP, the acquisition by the Company of AAA would be
accounted for as a combination of companies under common control
in a manner similar to a pooling of interests and accordingly, the
historical basis would be used to record the assets and liabilities of
AAA as of December 31, 1997.
(e) Statements of cash flows
The Company has adopted the Hong Kong Statements of Standard
Accounting Practice No. 15, "Cash Flow Statements" ("SSAP 15"). Its
objectives and principles are similar to those set out in the U.S.
Statement of Financial Accounting Standards No. 95, "Statement of Cash
Flows" ("SFAS 95"). The principal difference between the standards
relates to classifications. Under SSAP 15, the Company presents its
cash flows for (a) operating activities; (b) returns on investments
and servicing of finance; (c) taxation; (d) investing activities; and
(e) financing activities. SFAS 95 requires only three categories of
cash flow activity: (a) operating; (b) investing; and (c) financing.
Cash flows from returns on investments and the servicing of finance
would be included as operating activities under SFAS 95.
Under HK GAAP, bank overdrafts are included in cash and cash
equivalents in the cash flows statement. Under U.S. GAAP, bank
overdrafts are not considered a cash equivalents and are included in
financing activities.
18. APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the board of directors on June
22, 1998.
60 of 83
<PAGE>
INTERACTIVE NETWORX
GESELLSCHAFT ZUR ENTWICKLUNG UND
VERMARKTUNG INTERAKTIVER ONLINE-
UND NETZWERK DIENSTE MBH
BERLIN
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
61 of 83
<PAGE>
INTERACTIVE NETWORX
--------------------
GESELLSCHAFT ZUR ENTWICKLUNG UND
--------------------------------
VERMARKTUNG INTERAKTIVER ONLINE-
--------------------------------
UND NETZWERK DIENSTE MBH BERLIN
-------------------------------
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
-------------------- ----------------- -------------------- -----------------
DM DM DM DM DM DM
--------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS LIABILITIES AND
SHAREHOLDERS' EQUITY
Fixed assets Shareholders' equity
Intangible assets 70,563 31,690 Subscribed capital 150,000 150,000
Tangible assets 1,669,883 1,007,428 Other revenue reserves 162,270 162,270
Financial assets 3,000 1,743,446 0 Net income for the year
--------- per balance sheet 230,011 542,281 0
-------
Current assets
Inventories 22,293 66,730
Receivables and other
assets 1,509,437 1,290,117
Cash-in-hand and at
banks 20,724 1,552,454 695
----------
Accruals 452,188 234,527
Prepaid expenses 291,859 116,567 Liabilities 2,593,290 1,968,430
--------- --------- --------- ---------
3,587,760 2,515,228 3,587,760 2,515,228
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
62 of 83
<PAGE>
INTERACTIVE NETWORX
-------------------
GESELLSCHAFT ZUR ENTWICKLUNG UND
--------------------------------
VERMARKTUNG INTERAKTIVER ONLINE-
--------------------------------
UND NETZWERK DIENSTE MBH BERLIN
-------------------------------
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
DM DM
----------- -----------
(unaudited)
-----------
<S> <C> <C>
Sales 9,415,318 5,123,745
Other operating income 29,448 13,450
Cost of materials and purchased services (3,875,975) (2,217,193)
---------- ----------
Gross profit 5,568,791 2,920,002
Wages and salaries (2,040,978) (1,066,363)
Social security contributions (248,904) (96,946)
Depreciation (746,811) (343,332)
Other operating expenses (2,116,855) (1,021,338)
---------- ----------
Operating profit 415,245 392,023
Other interest and similar income 493 96
Interest and similar expenses (75,022) (13,645)
---------- ----------
Income on ordinary activities 340,716 378,474
Taxes on income (107,865) (214,527)
Other taxes (2,838) (633)
---------- ----------
Net income for the year 230,011 163,314
Accumulated deficit beginning of the year - (1,044)
Transfer to other revenue reserves - (162,270)
---------- ----------
Net income for the year per balance sheet 230,011 -
========== ==========
</TABLE>
See accompanying notes to the financial statements
63 of 83
<PAGE>
INTERACTIVE NETWORX
-------------------
GESELLSCHAFT ZUR ENTWICKLUNG UND
--------------------------------
VERMARKTUNG INTERAKTIVER ONLINE-
--------------------------------
UND NETZWERK DIENSTE MBH BERLIN
-------------------------------
NOTES TO FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997
1. Accounting and valuation methods
--------------------------------
Balance sheet, income statement and the notes to the financial statements
are prepared in accordance with accounting standards generally accepted in
Germany and the simplification rules for small companies.
Intangible fixed assets are accounted for at acquisition costs less
scheduled amortization based on the straight-line method applying a normal
useful operating life of three years.
Tangible fixed assets are stated at acquisition costs less normal
depreciation over useful lives. Depreciation is charged on a straight-line
basis. Normal useful operating lives vary from three to ten years. An
exception to this is leasehold improvements on third party land which are
depreciated over the useful life of the building of 25 years. The
simplification rules for tax purposes are taken advantage of in that the
full annual depreciation rate under regulation 44 (2) EStR (Income Tax
Regulation) is applied to additions in the first half of the financial year
and half the annual rate to additions in the second half of the financial
year, and that low-value fixed assets, as defined under paragraph 6 (2)
EStG (Income Taxes Act), are written off fully in the year of acquisition.
Receivables and other assets are stated at their nominal values less
appropriate allowances for bad debt.
We have provided adequate amounts for uncertain liabilities in accordance
with reasonable business judgment.
Liabilities are stated at their repayment amounts.
2. Explanation to summarized balance sheet items.
---------------------------------------------
The analysis and movements in the fixed assets summarized in the balance
sheet of the company for 1997 are presented in the fixed assets movement
schedule.
64 of 83
<PAGE>
INTERACTIVE NETWORX
-------------------
GESELLSCHAFT ZUR ENTWICKLUNG UND
--------------------------------
VERMARKTUNG INTERAKTIVER ONLINE-
--------------------------------
UND NETZWERK DIENSTE MBH BERLIN
-------------------------------
FIXED ASSETS MOVEMENTS SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Historical Cumulative
acquisition cost acquisition cost depreciation Net book value Depreciation
January 1, 1997 Additions Disposals Dec. 31, 1997 Dec. 31, 1997 Dec. 31, 1997 for the year
--------------- --------- --------- ---------------- ------------- -------------- ------------
DM DM DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C> <C>
Intangible assets 39,499 59,401 - 98,900 28,337 70,563 20,529
--------- --------- --------- ---------------- ------------- -------------- ------------
Tangible assets
EDP equipment 1,191,050 1,016,787 - 2,207,837 937,517 1,270,320 631,739
Office furniture 157,769 210,857 - 368,626 72,613 296,013 36,999
Fitting and fixtures - 103,895 - 103,895 346 103,549 346
Low-value assets up
to DM 800 1 57,197 57,197 1 - 1 57,198
--------- --------- --------- ---------------- ------------- -------------- ------------
1,348,820 1,388,736 57,197 2,680,359 1,010,476 1,669,883 726,282
--------- --------- --------- ---------------- ------------- -------------- ------------
Financial assets - 3,000 - 3,000 - 3,000 -
--------- --------- --------- ---------------- ------------- -------------- ------------
1,388,319 1,451,137 57,197 2,782,259 1,038,813 1,743,446 746,811
========= ========= ========= ================ ============= ============== ============
</TABLE>
65 of 83
<PAGE>
<TABLE>
<S> <C>
Receivables and other assets comprise:
DM
Trade receivables 1,464,800
Other assets 44,637
-------------
1,509,437
=============
The accruals disclosed include: DM
Tax accruals 257,189
Other accruals 195,000
-------------
452,189
=============
The liabilities consist of: DM
Trade payables 1,308,038
Liabilities to banks 928,718
Other liabilities 356,534
-------------
2,593,290
=============
</TABLE>
Liabilities to banks in the amount of DM 397,161 are collateralized by a
chattel mortgage on hardware of DM 343,000.
The amount of liabilities with a term of up to one year is DM 2,294,113.
3. Liabilities to shareholders
---------------------------
Liabilities to shareholders include DM 34,768 for salaries outstanding from
December 1997, bonus payments for 1996 (DM 33,406) and DM 25,104 for bonus
payments for 1997. Liabilities to shareholders are included in other
liabilities.
4. Summary of principal differences between generally accepted accounting
----------------------------------------------------------------------
principles in Germany and the United States with respect to the Company.
-----------------------------------------------------------------------
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in Germany ("German GAAP"). Such
principles vary in certain respects from those generally accepted in the
United States ("U.S. GAAP"). The principal differences applicable to these
financial statements are summarized below. This discussion is intended only
as a descriptive summary and does not include a complete analysis or
listing of all possible differences. Further, no attempt has been made to
identify future differences between German GAAP and U.S. GAAP as a result
of prescribed changes in accounting standards. Regulatory bodies that
promulgate German GAAP and U.S. GAAP have significant projects ongoing that
could affect future comparisons such as this one. Finally, no attempt has
been made to identify all future differences between German GAAP and U.S.
GAAP that may affect the financial statements as a result of transactions
or events that may occur in the future.
66 of 83
<PAGE>
1. Statement of cash flows
Under German GAAP, the statement of cash flows is not required as part of the
basic financial statements.
Under U.S. GAAP, the statement of cash flows is required as part of the basic
financial statements, and cash and cash equivalents include highly liquid
investments that have original maturities at the time of purchase of three
months or less.
2. Leases capitalized as assets
Under German GAAP, criteria for leases to be classified as capital leases differ
from U.S. GAAP. The Company's policy is to enter into leases that classify as
operating leases under German GAAP.
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.
3. Cost of computer software
Under German GAAP, costs of computer software that has been developed by the
Company have to be charged to expense when incurred.
U.S. GAAP requires certain computer software costs to be capitalized and
amortized over the remaining estimated useful life.
4. Accounting for income taxes
Under German GAAP, income taxes are principally provided for based on taxable
income for the period, determined in accordance with applicable tax laws.
However, it is not mandatory and has not been adopted by the Company to
recognize deferred taxes assets in these financial statements.
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.
67 of 83
<PAGE>
5. General managers
----------------
General managers with sole power of representation are:
Mr. Robert Rothe and
Mr. Jorn Lubkoll
Berlin, May 15, 1998
Robert Rothe Jorn Lubkoll
General Manager General Manager
68 of 83
<PAGE>
Based on our audit of the financial statements as of and for the year ended
December 31, 1997, which in all material respects complies with an audit
according to auditing standards generally accepted in the USA, we have issued
the following auditors' opinion:
AUDITORS' OPINION
The accounting and the annual financial statements as of and for the year
ended December 31, 1997, which we have audited in accordance with
professional standards, comply with the German legal provisions. With due
regard to the accounting principles generally accepted in Germany these
annual financial statements give a true and fair view of the company's
assets, liabilities, financial position and results from operations.
Price Waterhouse GmbH
Wirtschaftspruefungsgesellschaft
Berlin, Germany
September 4, 1998
/s/ A. Slotta /s/ F.K. Gothe
Wirtschaftspruefer Wirtschaftspruefer
69 of 83
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet at June 30, 1998
presents, on a pro forma basis, the Company's consolidated financial position
assuming the acquisitions of Rimnet, Inet and Interlog had been consummated on
June 30, 1998. The following Unaudited Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1997 and the six months ended June
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 the acquisitions of iSTAR,
ioNET, LinkAge, INX, Rimnet, Iprolink, Inet, Interlog and Calvacom had been
consummated on January 1, 1997 and the issuances by the Company of both
10,229,789 shares of common stock to IXC Internet Services, Inc. ("IXC") and
$600,000,000 10% Senior Notes due 2005 (the "10% Senior Notes") had occurred on
January 1, 1997.
Each of the acquisitions has been accounted for as purchase business
combinations 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 Pro Forma Financial Information does not reflect any expense of
intangible assets attributable to the value of in-process research and
development associated with the acquisitions of Rimnet, Inet and Interlog. The
Company has undertaken a study to determine the allocation of the total purchase
price of Rimnet, Inet and Interlog to the various assets acquired, including in-
process research and development, and the liabilities assumed. To the extent
that a portion of the purchase price is allocated to in-process research and
development, a charge, which may be material, would be recognized in the period
in which the acquisitions occur.
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 as filed with the Securities
and Exchange Commission (the "Commission") on Form 10-K and the other financial
statements and notes thereto, included elsewhere in this Form 8-K.
70 OF 83
<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>
iSTAR OTHER PRO
PSINET INC.(1) internet inc.(2) ACQUISITIONS(3) ADJUSTMENTS(4) FORMA(5)
-------------- ---------------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue....................................... $121,902 $ 29,338 $60,072 - $ 211,312
Operating cost and expenses:
Data communications and
operations.............................. 94,363 31,561 38,621 164,545
Sales and marketing........................ 25,831 8,406 7,149 41,386
General and administrative................. 22,947 9,082 14,294 46,323
Depreciation and amortization.............. 28,347 5,799 3,387 $ 13,457 (2a) 50,990
Intangible asset write-down................ - 12,570 - 12,570
-------- -------- ------- --------- ---------
Total operating costs and expenses... 171,488 67,418 63,451 13,457 315,814
-------- -------- ------- --------- ---------
Loss from operations.......................... (49,586) (38,080) (3,379) (13,457) (104,502)
Interest expense.............................. (5,362) (1,016) (1,742) (62,750)(2b) (70,870)
Interest income............................... 3,059 8 143 3,210
Other income (expense)........................ 110 - (3,798) (3,688)
Gain on sale of subsidiary.................... 5,701 - - 5,701
-------- -------- ------- --------- ---------
Loss before taxes............................. (46,078) (39,088) (8,776) (76,207) (170,149)
Income tax benefit (expense).................. 476 - (541) (65)
-------- -------- ------- --------- ---------
Net loss...................................... (45,602) (39,088) (9,317) (76,207) (170,214)
Return to preferred shareholders.............. (411) - - (411)
-------- -------- ------- --------- ---------
Net loss available to common shareholders..... $(46,013) $(39,088) $(9,317) $(76,207) $(170,625)
======== ======== ======= ========= =========
Basic and diluted loss per share.............. $ (1.14) $ (3.38)
======== =========
Shares used in computing basic and
diluted loss per share (in thousands)........ 40,306 10,230 (2e) 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 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.
(3) 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.
(4) See Notes to Unaudited Pro Forma Consolidated Statements of Operations (Note
2--Pro Forma Adjustments).
(5) Reflects the results of operations of the Company, on a pro forma basis,
assuming (i) the acquisitions of iSTAR, CalvaCom, Iprolink, ioNET, LinkAge,
INX, Rimnet, Inet and Interlog had been consummated as of January 1, 1997,
(ii) the issuance by the Company of the 10% Senior Notes occurred on January
1, 1997 and (iii) the issuance by the Company of 10,229,789 shares of common
stock to IXC occurred on January 1, 1997.
See notes to Pro Forma Financial Information.
71 of 83
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
iSTAR OTHER PRO
PSINET INC. (1) internet inc. (2) ACQUISITIONS (3) ADJUSTMENTS (4) FORMA (5)
--------------- ----------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.................................... $ 98,182 $ 2,031 $27,308 $ 127,521
Operating cost and expenses:
Data communications and
operations........................... 78,609 4,038 20,859 103,506
Sales and marketing.................... 23,219 914 2,887 27,020
General and administrative............. 17,872 815 6,631 25,318
Depreciation and amortization.......... 22,354 487 1,651 $ 5,178(2c) 29,670
Charge for acquired in-process R&D..... 27,000 - - 27,000
-------- ------- ------- ------- ---------
Total operating costs and
expenses................................ 169,054 6,254 32,028 5,178 212,514
-------- ------- ------- ------- ---------
Loss from operations....................... (70,872) (4,223) (4,720) (5,178) (84,993)
Interest expense........................... (19,471) (169) (1,170) (16,858)(2d) (37,668)
Interest income............................ 6,644 - 47 6,691
Other income (expense)..................... 1,004 - (689) 315
-------- ------- ------- ------- ---------
Loss before taxes.......................... (82,695) (4,392) (6,532) (22,036) (115,655)
Income tax benefit (expense)............... (29) - (101) (130)
-------- ------- ------- ------- ---------
Net loss................................... (82,724) (4,392) (6,633) (22,036) (115,785)
Return to preferred shareholders........... (1,545) - - (1,545)
-------- ------- ------- ------- ---------
Net loss available to common
$(84,269) $(4,392) $(6,633) $(22,036)(2e) $(117,330)
shareholders............................. ======== ======= ======= ======== =========
Basic and diluted loss per share........... $ (1.76) $ (2.30)
======== =========
Shares used in computing basic and
diluted loss per share (in thousands).... 47,854 3,125 50,979
======== ======== =========
</TABLE>
(1) Reflects the unaudited consolidated results of operations of the Company for
the six months ended June 30, 1998.
(2) 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.
(3) 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
June 30, 1998, INX for the five months ended May 31, 1998, Rimnet for the
six months ended March 31, 1998, Inet for the six months ended June 30, 1998
and Interlog for the six months ended March 31, 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, and INX are included in the Company's unaudited results of
operations for the six months ended June 30, 1998 from their respective
dates of acquisition.
(4) See Notes to Unaudited Pro Forma Consolidated Statements of Operations (Note
2--Pro Forma Adjustments).
(5) Reflects the results of operations of the Company, on a pro forma basis,
assuming (i) the acquisitions of iSTAR, Iprolink, ioNET, LinkAge, INX,
Rimnet, Inet and Interlog had been consummated as of January 1, 1997, (ii)
the issuance by the Company of the Senior Notes as if consummated on January
1, 1997 and (iii) the issuance by the Company of 10,229,789 shares of common
stock to IXC as if consummated on January 1, 1997.
See notes to Pro Forma Financial Information.
72 of 83
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
SIX MONTHS ENDED JUNE 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 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 Company
has undertaken a study by an independent third party to determine the allocation
of the total purchase price of Rimnet, Inet and Interlog. For the purposes of
this pro forma information, the Company has attributed the excess of the
purchase price over the acquired net tangible assets for Rimnet, Inet and
Interlog of $69,100,000 to goodwill with a ten year useful life. To the extent
that a portion of the purchase price of Rimnet, Inet and Interlog 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 six months ended June 30, 1998 would be higher. To the extent
that a portion of the purchase price is allocated to in-process research and
development, a charge, which may be material, would be recognized in the period
in which the acquisitions occur 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 ($776,000) and amortization
($12,681,000) 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
10 years.
73 of 83
<PAGE>
NOTE 2--PRO FORMA ADJUSTMENTS (CONTINUED)
(b) Reflects the increase in interest expense ($60,000,000) from the
incurrence of the $600,000,000 10% Senior Notes and amortization of
deferred financing costs ($2,750,000).
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
(c) Reflects the increase in depreciation ($65,000) and amortization
($5,113,000) 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
10 years.
(d) Reflects the following (in thousands of U.S. dollars):
<TABLE>
<S> <C>
Interest expense on the 10% Senior Notes from January 1, 1998 -
April 10, 1998 (date of issuance of 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 SeniorNotes)................ 687
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)
-------
$16,858
=======
</TABLE>
(e) 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.
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 Internet Services, Inc.
occurred at 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.
74 of 83
<PAGE>
NOTE 4 - INTANGIBLE ASSET WRITE-DOWN (CONTINUED)
On an ongoing basis, iSTAR management reviewed the valuation of customer lists
and goodwill, taking into consideration any events and circumstances which might
have impaired value. As a result of a number of factors involving changes in the
Internet industry in Canada and the evolution of iSTAR from a provider of access
products to a provider of Internet business solutions, iSTAR management
determined that the value of its customer lists and goodwill was permanently
impaired. The value of the customer lists and goodwill included both the
management expertise and the value of the acquired consumer-oriented customer
lists. Since the dial subscriber market in Canada has become a commodity
business, most of the customers acquired from the predecessor Internet service
providers ("ISPs") left iSTAR for other ISPs and iSTAR management determined
that the value associated with the customer lists was permanently impaired and
could not be supported by future expected revenue streams from customers
acquired in the acquisitions. Additionally, most of the former owners and other
key management personnel, whose expertise was used in creating the acquired
companies, were no longer employed by iSTAR. All of these management departures
resulted from the reorganization by iSTAR as it shifted its focus away from the
consumer-oriented dial market in Canada to the corporate-oriented dedicated
access market. On an overall basis, the continuing net cash usage, net losses,
loss of management and increased competition in the Canadian marketplace for
consumer-oriented dial subscribers did not support the existence of the value of
the customer lists and goodwill from the purchased companies.
75 0F 83
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PSINET INC. (1) ACQUISITIONS (2) ADJUSTMENTS (3) PRO FORMA (4)
--------------- ---------------- --------------- -------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 124,535 $ 1,705 $(53,000) $ 73,240
Restricted cash and short-term
investments................................... 143,154 303 143,457
Short-term investments........................... 246,018 243 246,261
Accounts receivable, net......................... 20,839 4,684 25,523
Notes receivable................................. 1,779 69 1,848
Prepaid expenses................................. 4,127 93 4,220
Other current assets............................. 7,602 1,123 8,725
--------- -------- -------- ---------
Total current assets............. 548,054 8,220 (53,000) 503,274
Property and equipment, net...................... 171,526 10,842 182,368
Goodwill and other intangibles, net.............. 50,297 325 69,100 119,722
Other assets and deferred
charges.................................... 24,897 3,689 28,586
--------- -------- -------- ---------
Total assets..................................... $ 794,774 $ 23,076 $ 16,100 $ 833,950
========= ======== ======== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit.................................. $ 3,818 $ 5,884 $ 9,702
Current portion of long-term debt................ 46,667 6,556 53,223
Trade accounts payable........................... 43,579 669 44,248
Accrued payroll and related expenses............. 6,834 29 6,863
Other accounts payable and
accrued liabilities........................ 24,958 5,683 9,839 40,480
Deferred revenue................................. 6,695 1,116 7,811
--------- -------- -------- ---------
Total current liabilities.................. 132,551 19,937 9,839 162,327
Long-term debt................................... 659,559 9,381 668,940
Other liabilities................................ 3,772 19 3,791
--------- -------- -------- ---------
Total liabilities.......................... 795,882 29,337 9,839 835,058
--------- -------- -------- ---------
Shareholders' equity (deficit):
Preferred stock.................................. - -
Convertible preferred stock...................... 28,477 28,477
Common stock..................................... 513 7,140 (7,140) 513
Capital in excess of par value................... 398,083 63 (63) 398,083
Treasury stock................................... (2,005) - (2,005)
Retained deficit................................. (246,919) (15,368) 15,368 (246,919)
Accumulated other comprehensive
income....................................... 3,462 1,904 (1,904) 3,462
Bandwidth asset to be delivered
under IRU agreement........................ (182,719) - (182,719)
--------- -------- -------- ---------
Total shareholders' equity (deficit)............. (1,108) (6,261) 6,261 (1,108)
--------- -------- -------- ---------
Total liabilities and shareholders'
equity (deficit)........................... $ 794,774 $ 23,076 $ 16,100 $ 833,950
========= ======== ======== =========
</TABLE>
(1) Reflects the unaudited consolidated financial position of the Company as of
June 30, 1998.
(2) Reflects the unaudited financial position of Rimnet as of March 31, 1998,
Inet as of June 30, 1998 and Interlog as of March 31, 1998.
(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 acquisitions of Rimnet, Inet and Interlog had been
consummated on June 30, 1998.
See notes to Pro Forma Financial Information.
76 of 83
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 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 acquisitions of Rimnet, Inet and Interlog,
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 acquisitions of Rimnet, Inet and Interlog including (i) estimated
cash to be paid at closing, (ii) goodwill adjustment, (iii) estimated additional
consideration to be paid at a future date and acquisition costs and (iv) the
elimination of the equity accounts of the acquired companies.
The Company has undertaken a study by an independent third party to determine
the allocation of the total purchase price of Rimnet, Inet and Interlog. For
the purposes of this Pro Forma Financial Information, the Company has attributed
the excess of the purchase price over the acquired net tangible assets for
Rimnet, Inet and Interlog of $69,100,000 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, which may be material, would be
recognized in the period in which the acquisitions occur.
77 OF 83
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 15, 1998 PSINET INC.
By: /s/ Edward D. Postal
-------------------------------
Edward D. Postal
Senior Vice President and
Chief Financial Officer
78 OF 83
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Exhibit Name Location
- -------------- ------------ --------
23.1 Consent of Arthur Andersen LLP 80
23.2 Consent of Ernst & Young 81
23.3 Consent of Price Waterhouse GmbH 82
23.4 Consent of Chuo Audit Corporation 83
79 OF 83
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated May 29, 1998, on the financial statements of ioNET, Inc. included
in this Current Report on Form 8-K of PSINet Inc., into the previously filed
Registration Statements on Form S-8 (Nos. 33-98314, 33-98316, 33-98318, 33-
98320, 33-99464, 33-99466, 33-99470, 333-04008), the Registration Statement on
Form S-3 (No. 333-48663) and the Registration Statement on Form S-4 (No. 333-
51491) of PSINet Inc.
/s/ ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
September 14, 1998
80 of 83
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
PSINet Inc. on Form S-4 (no. 333-51491), Form S-3 (No. 333-48663) and Forms S-8
(Nos. 33-98314, 33-98316, 33-98318, 33-98320, 33-99464, 33-99466, 33-99470, 333-
04008) 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 LinkAge
Online Limited included in this Current Report on Form 8-K of PSINet Inc, filed
with the Securities and Exchange Commission.
/s/ ERNST & YOUNG
Hong Kong
September 14, 1998
81 of 83
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the Registration
Statements on Form S-8 (Nos. 33-98314, 33-98316, 33-98318, 33-98320, 33-99464,
33-99466, 33-99470, 333-04008), the Registration Statement on Form S-3 (No. 333-
48663) and the Registration Statement on Form S-4 (No. 333-51491) of PSINet Inc.
of our auditor's 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 Vermarktung interacktiver Online- und Netzwerk Dienste
mbH, Berlin, contained in the Current Report on Form 8-K of PSINet Inc.
Price Waterhouse GmbH
Wirtschaftspruefungsgesellschaft
/s/ A. Slotta
Wirtschaftspruefer
Berlin, Germany
September 14, 1998
82 of 83
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation of our report dated August 25, 1998 (September
7, 1998 as to Note 4), on our audit of the financial statements of RIMNET
CORPORATION included in this Current Report on Form 8-K of PSINet Inc., into the
previously filed Registration Statements on Form S-8 (Nos. 33-98314, 33-98316,
33-98318, 33-98320, 33-99464, 33-99466, 33-99470, 333-04008), the Registration
Statement on Form S-3 (No. 333-48663) and the Registration Statement on Form S-4
(No. 333-51491) of PSINet Inc.
/s/ Chuo Audit Corporation
Tokyo, Japan
September 14, 1998
83 of 83
