As filed with the Securities and Exchange Commission on March 25, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PSINet Inc.
(Exact name of registrant as specified in its charter)
New York 16-1353600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 Huntmar Park Drive, Herndon, Virginia 20170
(703) 904-4100
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
David N. Kunkel, Esq.
Senior Vice President, General Counsel and Secretary
PSINet Inc.
510 Huntmar Park Drive, Herndon, Virginia 20170
Telephone No.: (703) 904-4100/Facsimile No.: (703) 904-9527
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies To:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue, New York, New York 10022
Attention: Richard F. Langan, Jr. Esq.
Telephone No.: (212) 940-3140/Facsimile No.: (212) 940-3111
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
<S> <C> <C> <C> <C>
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Aggregate Offering Registration Fee
Per Share (1) Price (1)
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Common Stock, $.01 par 3,000,000 shares(2) $9.84375 $29,531,250.00 $8,711.72
value
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to the provisions of Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the reported high and low sales prices on The
Nasdaq Stock Market on March 20, 1998.
(2) Includes a like number of preferred share purchase rights (the
"Rights"). Since no separate consideration is paid for the Rights, the
registration fee is included in the fee for the Common Stock.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 25, 1998
********************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
*******************************************************************************
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PSINet Inc.
3,000,000 Shares of Common Stock
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This Prospectus pertains to the offer and sale of up to 3,000,000
shares of Common Stock (the"Common Stock"), par value $.01 per share, of PSINet
Inc., (the"Company" or "PSINet"), from time to time, by certain of the Company's
stockholders named herein (each, a "Selling Stockholder" and collectively the
"Selling Stockholders"). See "Selling Stockholders." Any or all of the Common
Stock being registered hereby may be sold from time to time to purchasers
directly by the Selling Stockholders. Alternatively, the Selling Stockholders
may from time to time offer the Common Stock through underwriters, dealers or
agents who may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of Common Stock for whom they may act as agent. To the extent required, the
names of the Selling Stockholders, the number of shares of Common Stock to be
sold, purchase price, public offering price, the name of any agent, dealer or
underwriter and any applicable commission or discount or other items
constituting compensation or indemnification arrangements with respect to a
particular offering will be set forth in an accompanying Prospectus Supplement.
The Company will receive no proceeds from the sale by the Selling Stockholders
of the Common Stock offered hereby.
The shares of Common Stock to which this Prospectus relates may be
issued to the Selling Stockholders from time to time upon conversion of Series B
8% Convertible Preferred Stock issued in the Private Placement (as defined
herein). See "Plan of Distribution." All Registration Expenses (as defined
herein) incurred in connection with the registration of the Common Stock to
which this Prospectus relates will be borne by the Company. The Company has
agreed to indemnify the Selling Stockholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"), or to contribute to payments which the Selling Stockholders
may be required to make in respect thereof. See "Plan of Distribution."
The shares offered hereby may, without limitation, be sold by the
Selling Stockholders, their pledges, donees and successors-in-interest directly
or through agents, underwriters or dealers as designated from time to time or
through a combination of methods. See "Plan of Distribution."
The Company will not receive any proceeds from this offering. No
underwriting is being utilized in connection with this registration of Common
Stock and, accordingly, the shares of Common Stock are being offered without
underwriting discounts. The expenses of this registration will be paid by the
Company. Normal brokerage commissions, discounts and fees will be payable by the
Selling Stockholders.
For a discussion of certain matters which should be considered
by prospective investors, see "Risk Factors" commencing on page 4.
The Common Stock is traded on The Nasdaq Stock Market under
the symbol "PSIX." On March 24, 1998, the last sale price for the Common Stock
as reported on The Nasdaq Stock Market was $10 11/16 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is March , 1998.
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<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make representations other than those contained in this
Prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Selling
Stockholders. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that the
information herein is correct as of any time subsequent to its date. This
Prospectus does not constitute an offer of solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer of solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
RISK FACTORS...........................................................4
THE COMPANY...........................................................13
USE OF PROCEEDS.......................................................13
SELLING STOCKHOLDERS..................................................14
PLAN OF DISTRIBUTION..................................................15
LEGAL MATTERS.........................................................16
EXPERTS...............................................................16
AVAILABLE INFORMATION.................................................16
DOCUMENTS INCORPORATED BY REFERENCE...................................17
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, INCLUDING DOCUMENTS INCORPORATED BY REFERENCE, MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUCH FORWARD-LOOKING
STATEMENTS MAY INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE
ACTUAL RESULTS AND PERFORMANCE OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM
FUTURE RESULTS OR PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS.
CAUTIONARY STATEMENTS REGARDING THE RISKS, UNCERTAINTIES AND OTHER FACTORS
ASSOCIATED WITH SUCH FORWARD-LOOKING STATEMENTS ARE DISCUSSED UNDER "RISK
FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE
URGED TO CAREFULLY CONSIDER SUCH FACTORS.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENT ATTRIBUTABLE TO THE
COMPANY ARE EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
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RISK FACTORS
Prospective investors should carefully consider the risk factors set
forth below, as well as the other information contained in this Prospectus, in
evaluating an investment in the securities offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus. Unless the
context otherwise requires, "PSINet" and the "Company" refer to PSINet Inc. and
its subsidiaries.
Operating Deficit; Continuing Losses; Potential Fluctuations in Operating
Results; iSTAR Operating Losses
The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract and retain qualified
persons, and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company has experienced
revenue growth on an annual basis with revenue increasing from $38.7 million in
1995 to $84.4 million in 1996 to $121.9 million in 1997, it has incurred losses
and experienced negative earnings before interest, taxes, depreciation and
amortization ("EBITDA") during each of such periods. The Company has incurred
net losses of $45.6 million, $55.1 million and $53.2 million and has incurred
negative EBITDA of $21.2 million, $28.0 million and $27.9 million for each of
the years ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, the Company had a retained deficit of $162.6 million. In its Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, the Company reported
that it would achieve positive EBITDA sometime during the second quarter of 1997
and would be profitable by the first quarter of 1998 or prior thereto. The
Company did achieve breakeven EBITDA in certain months of the second and third
quarters of 1997, but as a result of several factors that arose subsequent to
the date of the Company's filing of its Form 10-K for fiscal 1996, the Company
was unable to meet certain of its prior objectives. Principal among these
factors adversely affecting the Company's operating performance were delivery
delays for Primary Rate Interface ("PRI") telecommunications facilities required
to meet customer demand, accelerated investment by the Company in its overseas
operations in order to respond to rapidly developing markets, and lower than
expected growth during the third quarter of 1997 in the demand for its domestic
Internet services. The Company expects to focus in the near term on continuing
to increase its corporate customer base and expanding its Carrier and Internet
Service Provider ("ISP") Services business unit strategy which will require it
to continue to incur expenses for marketing, network infrastructure, personnel
and the development of new products and services. Such continued expenses may
adversely impact cash flow and operating performance. The Company also plans to
continue to enhance its network and the administrative and operational
infrastructure necessary to support its Internet access service domestically and
internationally.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside the Company's control, including, among others, general
economic conditions, specific economic conditions in the Internet access
industry, user demand for Internet services, capital expenditures and other
costs relating to the expansion of operations and the Company network, the
introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes and new product introductions by the Company and its competitors
and delays in obtaining sufficient supplies of sole or limited source equipment
and telecom facilities (i.e., PRIs). As a strategic response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions that could have a material adverse
effect on the Company's business, results of operations and cash flow.
In February 1998, the Company acquired iSTAR internet inc. ("iSTAR"),
one of the leading Canadian providers of Internet services and solutions. Prior
to its acquisition by the Company, iSTAR incurred a net loss of $39.1 million
and had negative EBITDA of $20.7 million for the twelve months ended November
30, 1997. While the Company believes that after eliminating redundant network
architecture and administrative functions and taking
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other actions to integrate the operations of iSTAR it will be able to
realize significant cost savings on its Canadian operations beginning in 1998,
there can be no assurance that the Company's integration of the operations of
iSTAR will be accomplished successfully. The inability of the Company to improve
the operating performance of iSTAR's business or to successfully integrate the
operations of iSTAR could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition
The market for Internet access and related services is highly
competitive. The industry has relatively insignificant barriers to entry and
numerous entities competing for the same customers. The Company expects that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of the Internet access market has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers, and on-line service providers. The Company
believes that the primary competitive factors for the provision of Internet
services are quality of service, reliability, price, technical expertise, ease
of use, variety of value-added services, quality and availability of customer
support, experience of the supplier, geographic coverage and name recognition.
The Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and related services at competitive
prices.
As a result of industry competition, the Company has encountered and
expects to continue to encounter pricing pressure, which in turn could result in
reductions in the average selling price of the Company's services. For example,
certain of the Company's competitors which are telecommunications companies,
including AT&T Corporation and MCI Communications Corp., may be able to provide
customers with reduced or free communications costs in connection with their
Internet access services or offer Internet access as a standard component of
their overall service package, thereby increasing price pressure on the Company.
The Company has in the past reduced prices on certain of its Internet access
options and may continue to do so in the future. There can be no assurance that
the Company will be able to offset the effects of any such price reductions with
an increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. The Company is not able presently to
predict the impact which future growth in the Internet access and on-line
services businesses will have upon competition in the industry. Increased price
or other competition could result in erosion of the Company's market share and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
As the Company continues to expand its operations outside the United
States, it will encounter new competitors and competitive environments. In some
cases, the Company will be forced to compete with and buy services from
government owned or subsidized telecommunications providers, some of which may
enjoy a monopoly on telecommunications services essential to the Company's
business. There can be no assurance that the Company will be able to purchase
such services at a reasonable price or at all. In addition to the risks
associated with the Company's previously described competitors, foreign
competitors may possess a better understanding of their local markets and better
working relationships with local infrastructure providers and others. There can
be no assurance that the Company can obtain similar levels of local knowledge,
and failure to obtain that knowledge could place the Company at a significant
competitive disadvantage.
Risks Associated with Strategic Alliance With IXC
The Company is subject to a variety of risks relating to its
transactions with IXC Internet Services, Inc. ("IXC") and the acquisition,
operation and maintenance of the bandwidth corresponding to the indefeasible
rights of use ("PSINet IRUs"). Such risks include, among other things, the
following: (i) the risk that, if the difference between $240 million and the
fair market value of 10,229,789 shares of the Common Stock of the Company issued
to IXC in exchange for the PSINet IRUs (representing approximately 20% of the
issued and outstanding Common Stock of the Company after giving effect to such
issuance and having an aggregate market value of $78,641,503 based on the
Closing market price per share of the Company's Common Stock as reported by The
Nasdaq Stock
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<PAGE>
Market on February 25, 1998 of $7.6875) (the "IXC Initial Shares")
as of the Determination Date or the Acceleration Date (as defined), as
applicable, is significant, satisfaction of the Contingent Payment Obligation
(as defined) by the Company through the issuance of additional shares of common
stock or, at the sole option of the Company, by a payment of cash, or a
combination of stock and cash, could result in significant dilution to the
Company's other shareholders and in IXC owning a significant, or even a
controlling, portion of the outstanding common stock, and/or could necessitate a
significant cash outlay by the Company, which in any such event could have a
material adverse effect on the Company and its shareholders; (ii) the risk that
financial, legal, technical and/or other matters may adversely affect IXC's
ability to perform the operation, maintenance and other services under the IRU
and Stock Purchase Agreement, dated as of July 22,1997, between the Company and
IXC, as amended (the "IRU Purchase Agreement") with respect to the bandwidth
corresponding to the PSINet IRUs, which may adversely affect the Company's use
of such bandwidth; (iii) the risk that, in the event of a material default by
IXC under the IRU Purchase Agreement at such time as IXC is in bankruptcy, the
Company's use of the bandwidth corresponding to the PSINet IRUs may be
materially adversely affected or curtailed; (iv) the risk that the Company will
not have access to sufficient additional capital and/or financing on
satisfactory terms to enable it to make the necessary capital expenditures to
take full advantage of the PSINet IRUs; (v) the risk that IXC may not continue
to have the necessary financial resources to enable it to complete, or may
otherwise elect not to complete, its contemplated buildout of its fiber optic
telecommunications system or that such buildout may be delayed or otherwise
adversely affected by presently unforeseeable legal, technical and/or other
factors; (vi) the risk that, in the event of a change of control or change in
management of IXC, IXC's successor or new management, as the case may be, may
not share IXC's commitment to the buildout of its fiber optic telecommunications
system or may not otherwise allocate the necessary human, financial, technical
and other resources to satisfactorily meet its obligations to the Company under
the IRU Purchase Agreement that would adversely affect the Company's use of the
bandwidth corresponding to the PSINet IRUs; (vii) the risk that IXC, as the
Company's largest shareholder and through its chairman's seat on the Company's
Board of Directors, could subject the Company to certain conflicts of interest
or could influence the Company's management in a manner that could adversely
affect the Company's business or control of the Company; and (viii) the risk
that future sales by IXC of substantial numbers of shares of common stock could
adversely affect the market price of the common stock and make it more difficult
for the Company to raise funds through equity offerings and to effect
acquisitions of businesses or assets in consideration for issuances of its
common stock. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with its
strategic alliance with IXC.
If the fair market value of the IXC Initial Shares (based on a 20
trading day volume-weighted average share price) is less than $240 million at
the earlier of one year following delivery and acceptance of the total amount of
bandwidth corresponding to the PSINet IRUs or February 25, 2002 (the
"Determination Date"), the Company will be obligated to provide IXC with
additional shares of its common stock, or at the sole option of the Company,
cash or a combination thereof equal to the shortfall (the "Contingent Payment
Obligation"). The Company has the right to accelerate the Contingent Payment
Obligation to any date (the "Acceleration Date") prior to the Determination
Date.
Risks Associated With Management of Growth and Expansion
The Company had 400 points-of-presence ("POPs") as of March 1, 1998 and
plans to continue to expand the capacity of existing POPs as customer-driven
demand dictates. The Company's rapid growth has placed, and in the future may
continue to place, a strain on the Company's administrative, operational and
financial resources and has increased demands on its systems and controls. The
Company anticipates that its Carrier and ISP Services business unit, as well as
other business growth, may require continued enhancements to and expansion of
its network. Competition for qualified personnel in the Internet services
industry is intense and there are a limited number of persons with the requisite
knowledge of and experience in such industry. The process of locating, training
and successfully integrating qualified personnel into the Company's operations
is often lengthy and expensive. There can be no assurance that the Company will
be successful in attracting, integrating and retaining such personnel. In
addition, there can be no assurance that the Company's existing operating and
financial control systems and infrastructure will be adequate to maintain and
effectively monitor future growth. The inability to continue to upgrade the
networking systems or the operating and financial control systems, the inability
to recruit and hire necessary personnel, the inability to successfully integrate
new personnel into the Company's operations, the
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inability to manage its growth effectively or the emergence of unexpected
expansion difficulties could adversely affect the Company's business, results of
operations and financial condition.
Need for Additional Capital to Finance Growth and Capital Requirements
The Company expects to continue to enhance its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. The Company expects
to incur capital expenditures through the end of the year 2000 of up to $95
million. In addition, the Company expects to incur on an annual basis
approximately $1.15 million in operation and maintenance fees with respect to
the PSINet IRUs per each 1,000 equivalent route miles of OC-48 bandwidth
accepted under the IRU Purchase Agreement. Other planned capital expenditures
expected to be incurred by the Company over the next four years include up to
$35 million in connection with the Company's anticipated buildout of its
pan-European Internet network. The Company is also obligated, under the terms of
one of its Carrier and ISP Services agreements, to provide the ISP customer with
a rental facility of up to $5.0 million for telecommunications equipment owned
or leased by the Company and deployed in the customer's network ($1.4 million
drawn at December 31, 1997). In addition, the Company may be obligated pursuant
to the Contingent Payment Obligation under the IRU Purchase Agreement to provide
IXC with additional shares of common stock and/or cash, at the Company's sole
option, in an amount equal to the difference between $240 million and the then
fair market value of the IXC Initial Shares on the earlier of one year following
delivery and acceptance of the total bandwidth corresponding to the PSINet IRUs
or February 25, 2002.
The Company believes it will have a reasonable degree of flexibility to
adjust the amount and timing of its capital expenditures in response to the
Company's then existing financing capabilities, market conditions, competition
and other factors. The Company believes that working capital generated from the
use of bandwidth corresponding to the PSINet IRUs, together with other working
capital from operations, from existing credit facilities, from capital lease
financings, and from proceeds of future equity or debt financings (which the
Company presently expects to be able to obtain when needed), will be sufficient
to meet the presently anticipated working capital and capital expenditure
requirements of its operations.
The Company may seek to raise additional funds in order to take
advantage of unanticipated opportunities, more rapid international expansion or
acquisitions of complementary businesses, or to develop new products or
otherwise respond to changing business conditions or unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise such
funds on favorable terms. In the event that the Company is unable to obtain such
additional funds on acceptable terms, the Company may determine not to enter
into various expansion opportunities.
Risks Associated with International Expansion
A component of the Company's strategy is its planned expansion into
international markets. There can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it to operate, to hire
and train employees or to market, sell and deliver high quality services in
these markets. In addition to the uncertainty as to the Company's ability to
expand its international presence, there are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles, problems in
collecting accounts receivable, political instability, expropriation,
nationalization, war, insurrection and other political risks, fluctuations in
currency exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences, which could
adversely impact the success of the Company's international operations. The
Company may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct its foreign operations
successfully. There can be no assurance that such factors will not have an
adverse effect on the Company's future international operations and,
consequently, on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that laws or administrative
practice relating to taxation, foreign exchange or other matters of countries
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within which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated With Acquisitions and Strategic Alliances
As part of its business strategy, the Company expects to continue to
seek to develop strategic alliances both domestically and internationally and/or
to acquire assets and businesses principally relating to or complementary to its
current operations. Any such future strategic alliances or acquisitions would be
accompanied by the risks commonly encountered in strategic alliances with or
acquisitions of companies. Such risks include, among other things, the
difficulty of integrating the operations and personnel of the companies, the
potential disruption of the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the Company by
the successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered in connection with such strategic alliances or acquisitions.
In addition, if the Company were to proceed with one or more
significant acquisitions in which the consideration consists of cash, such as
the Company's recently completed transaction with iSTAR, a substantial portion
of the Company's available cash could be used to consummate such acquisitions.
If the Company were to consummate one or more significant acquisitions or
strategic alliances in which the consideration consists of stock, such as the
Company's recently completed transaction with IXC, shareholders of the Company
could suffer a significant dilution of their ownership interests in the Company.
Many of the businesses that might become attractive acquisition candidates for
the Company may have significant goodwill and intangible assets, and acquisition
of these businesses, if accounted for as a purchase, would typically result in
increases in the Company's amortization expenses and the length of time over
which they are reported. In connection with acquisitions, the Company could
incur substantial expenses, including the expenses of integrating the business
of the acquired company or the strategic alliance with the Company's business.
Such expenses, in addition to the financial impact of such acquisitions, could
have a material adverse effect on the Company's business, financial condition
and results of operations and could cause substantial fluctuations in the
Company's quarterly and yearly operating results.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the
continued contributions of its senior management team and technical, marketing
and sales personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified employees and
personnel in the internetworking industry is intense and there are a limited
number of persons with knowledge of and experience in the Internet Services
industry. The Company's success also will depend on its ability to attract and
retain qualified management, marketing, technical and sales executives and
personnel. The process of locating such personnel with the combination of skills
and attributes required to carry out the Company's strategies is often lengthy.
The loss of the services of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company's results of operations, product development efforts and ability to
expand its network infrastructure. There can be no assurance that the Company
will be successful in attracting and retaining such executives and personnel.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks of Technology Trends and Evolving Industry Standards
The Company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. The market for Internet access and
related services is relatively new and characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new product and service introductions. The Company's future success will depend,
in part, on its ability to effectively use leading
-8-
<PAGE>
technologies, to continue to develop its technical expertise, to enhance
its current services, to develop new products and services that meet changing
customer needs, and to influence and respond to emerging industry standards and
other technological changes on a timely and cost-effective basis. There can be
no assurance that the Company will be successful in effectively using new
technologies, developing new services or enhancing its existing services on a
timely basis or that such new technologies or enhancements will achieve market
acceptance. The Company believes that its ability to compete successfully is
also dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. There can
be no assurance that the Company will be able to effectively address the
compatibility and interoperability issues raised by technological changes or new
industry standards. In addition, there can be no assurance that services or
technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.
In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may impact the growth of Internet use, especially
in the business market targeted by the Company. Despite growing interest in the
many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Published reports have also indicated that capacity
constraints caused by growth in the use of the Internet may, unless resolved,
impede further development of the Internet to the extent that users experience
delays, transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
enterprises that have historically relied upon alternative means of commerce and
communications, generally requires the understanding and acceptance of a new way
of conducting business and exchanging information. In particular, enterprises
that have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new strategy that may make their existing personnel and infrastructure
obsolete. The failure of the market for business-related Internet solutions to
continue to develop would adversely impact the Company's business, financial
condition and results of operation.
Potential Liability for Information Disseminated through Network; Regulatory
Matters
The law relating to liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. A number of lawsuits
have sought to impose such liability for defamatory speech and infringement of
copyrighted materials. In one case, a federal district court held that an online
service provider could be found liable for defamatory matter provided through
its service, on the ground that the service provider exercised active editorial
control over postings to its service. Other courts have held that online service
providers and ISPs may, under certain circumstances, be subject to damages for
copying or distributing copyrighted materials. Certain provisions of the
Communications Decency Act, which imposed criminal penalties for using an
interactive computer service for transmitting obscene or indecent
communications, have been found unconstitutional by the U.S. Supreme Court. New
legislative attempts to curtail obscene or indecent communications are likely.
The imposition upon ISPs or web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company carries errors and omissions insurance with a basic policy
limitation of $2.0 million, subject to deductibles, exclusions and
self-insurance retention amounts. Such coverage may not be adequate or available
to compensate the Company for all liability that may be imposed. The imposition
of liability in excess of, or the unavailability of, such coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
-9-
<PAGE>
Although the Company's Internet operations are not currently subject to
direct regulation by the Federal Communications Commission (the "FCC") or any
other governmental agency (other than regulations applicable to businesses
generally), due to the increasingly widespread use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, user pricing, privacy, libel,
intellectual property protection and infringement, and technology export and
other controls. The FCC is currently reviewing its regulatory position on the
usage of the basic network and communications facilities by ISPs. Changes in the
regulatory structure and environment affecting the Internet access market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies ("RBOCs") or other telecommunications companies, could
have an adverse effect on the Company's business. Although the FCC has decided
not to allow local telephone companies to impose per-minute access charges on
ISPs, the impact of this decision on the availability of telephone service is
the subject of a congressionally-mandated report. In addition, some telephone
companies are seeking relief through state regulatory agencies. Such rules, if
adopted, are likely to have a greater impact on consumer-oriented Internet
access providers than on business-oriented ISPs such as the Company.
Nonetheless, the imposition of access charges would affect the Company's costs
of serving dial-up customers and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is undergoing
a process of development in other countries. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services, including the Company.
The Company's wholly-owned subsidiary, PSINet Telecom Limited, has
received a license from the FCC to provide global facilities-based
telecommunications services, subjecting it to regulation as a non-dominant
international common carrier. Further, the Company is also considering the
financial, regulatory and operational implications of becoming or acquiring a
competitive local exchange carrier ("CLEC") in certain selected cities. As a
result, it is also possible that the Company could become subject to further
regulation by the FCC and/or another regulatory agency, including state and
local entities, as a provider of domestic basic telecommunications services,
particularly competitive local exchange services.
The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent that they involve
the provision, origination or termination of jurisdictionally interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications. In
addition, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.
Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. The
Company believes that, in the current regulatory environment, the FCC is
unlikely to do so. International non-dominant carriers must maintain tariffs on
file with the FCC. Regulation of CLECs occurs on both a state and federal level,
to the extent CLECs provide interstate exchange access service. Regulatory
regimes vary from state-to state, however, competing local exchange carriers are
non-dominant and are likely to be subject to a relaxed form of regulation.
Nevertheless, there are numerous state and federal proceedings that may impose
regulatory burdens on CLECs. The Company cannot predict the impact, if any, that
future regulation or regulatory changes may have on the Company.
Risks Associated with Financing Arrangements
Certain of the Company's financing arrangements are secured by
substantially all of the Company's assets and stock of certain subsidiaries of
the Company. These financing arrangements require that the Company satisfy
certain financial covenants and currently prohibit the payment of dividends and
the repurchase of capital stock of the Company without, in each case, the
lender's consent. The Company's secured lenders would be entitled to foreclose
upon those assets in the event of a default under the financing arrangements and
to be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to the holders of the Company's
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<PAGE>
capital stock in the event that the Company is liquidated. In addition, the
collateral security arrangements under the Company's existing financing
arrangements may adversely affect the Company's ability to obtain additional
borrowings.
Risk of System Failure or Shutdown
The success of the Company is dependent upon its ability to deliver
reliable, high-speed access to the Internet. The Company's network, as is the
case with other networks providing similar service, is vulnerable to damage or
cessation of operations from fire, earthquakes, severe storms, power loss,
telecommunications failures and similar events, particularly if such events
occur within a high traffic location of the network. The Company is also
dependent upon the ability and willingness of its telecommunications providers
to deliver reliable, high-speed telecommunications service through their
networks. While the Company's network has been designed with redundant circuits
among POPs to allow traffic rerouting, lab and field testing is performed before
integrating new and emerging technology into the network, and the Company
engages in capacity planning, there can be no assurance that the Company will
not experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network. The Company carries property, POP
equipment and business interruption insurance with basic policy limitations of
$4.0 million, $5.0 million and $5.0 million, respectively, subject to
deductibles, exclusions and self-insurance retention amounts. Such coverage may
not be adequate or available to compensate the Company for all losses that may
occur. In addition, the Company generally attempts to limit its liability to
customers arising out of network failures through contractual provisions
disclaiming all such liability and, in respect of certain services, limiting
liability to a usage credit based upon the amount of time that the system was
not operational. There can be no assurance that such limitations will be
enforceable. In any event, significant or prolonged system failures or shutdowns
could damage the reputation of the Company and result in the loss of customers.
Network Security Risks; Risks Associated with Providing Security Services
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its routers, its infrastructure
is potentially vulnerable to computer viruses, break-ins and similar disruptive
problems caused by its customers or other Internet users. Computer viruses,
break-ins or other problems caused by third parties could lead to interruptions,
delays or cessation in service to the Company's customers. Furthermore, such
inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company's customers, which may deter potential customers and
adversely affect existing customer relationships. Security problems represent an
ongoing threat to public and private data networks. Attacks upon the security of
Internet sites and infrastructure continue to be reported to organizations such
as the CERT Coordination Center at Carnegie Mellon University, which facilitates
responses of the Internet community to computer security events. Addressing
problems caused by computer viruses, break-ins or other problems caused by third
parties could have a material adverse effect on the Company.
The security services offered by the Company for use in connection with
its customers' networks also cannot assure complete protection from computer
viruses, break-ins and other disruptive problems. Although the Company attempts
to limit contractually its liability in such instances, the occurrence of such
problems may result in claims against or liability on the part of the Company.
Such claims, regardless of their ultimate outcome, could result in costly
litigation and could have a material adverse effect on the Company's business or
reputation or on its ability to attract and retain customers for its products.
Moreover, until more consumer reliance is placed on security technologies
available, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet service industry and the Company's
customer base and revenues.
Dependence on Suppliers
The Company has few long-term contracts with its suppliers. The Company
is dependent on third party suppliers for its leased-line connections, or
bandwidth. Certain of these suppliers are or may become competitors of the
Company, and such suppliers are not subject to any contractual restrictions upon
their ability to compete with the
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<PAGE>
Company. To the extent that these suppliers change their pricing
structures, the Company may be adversely affected. Following the recent
consummation of its transaction with IXC, the Company anticipates that its
dependence upon certain of these suppliers will be decreased as it accepts
delivery of OC-48 bandwidth under the IRU Purchase Agreement. Nevertheless,
until the IXC fiber optic telecommunications system is completed (and IXC is not
obligated under the IRU Purchase Agreement to extend its buildout of the IXC
system beyond approximately 6,640 unique route miles of OC-48 bandwidth) and, in
certain geographic regions, even after such completion, the Company will
continue to be dependent upon such suppliers in certain geographic regions.
Moreover, any failure or delay of IXC to deliver bandwidth under the IRU
Purchase Agreement or to provide operations, maintenance and other services with
respect to such bandwidth in a timely or adequate fashion could adversely affect
the Company. The Company is also dependent on certain third party suppliers of
hardware components. Although the Company attempts to maintain a minimum of two
vendors for each required product, certain components used by the Company in
providing its networking services are currently acquired or available from only
one source.
The Company has from time to time experienced delays in the receipt of
certain hardware components and telecommunications facilities, including, most
recently, delays in delivery of PRI telecommunications facilities (which connect
dial-up customers to the Company's network). A failure by a supplier to deliver
quality products on a timely basis, or the inability to develop alternative
sources if and as required, could result in delays which could materially
adversely affect the Company. The Company's remedies against suppliers who fail
to deliver products on a timely basis are limited by contractual liability
limitations contained in supply agreements and purchase orders and, in many
cases, by practical considerations relating to the Company's desire to maintain
good relationships with the suppliers. As the Company's suppliers revise and
upgrade their equipment technology, the Company may encounter difficulties in
integrating the new technology into the Company's network.
Certain of the vendors from whom the Company purchases
telecommunications bandwidth, including the RBOCs and other local exchange
carriers ("LECs"), currently are subject to tariff controls and other price
constraints which in the future may be changed. In addition, newly enacted
legislation will produce changes in the market for telecommunications services.
These changes may affect the prices charged by the RBOCs and other LECs to the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the Company is subject
to the effects of other potential regulatory actions which, if taken, could
increase the cost of the Company's telecommunications bandwidth through, for
example, the imposition of access charges.
Dependence on Technology; Proprietary Rights
The Company's success and ability to compete is dependent in part upon
its technology and proprietary rights, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights. The Company relies on a combination of copyright, trademark and trade
secret laws and contractual restrictions to establish and protect its
technology. Nevertheless, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently, and there can be
no assurance that such measures are adequate to protect the Company's
proprietary technology. In addition, the Company's products may be licensed or
otherwise utilized in foreign countries where laws may not protect the Company's
proprietary rights to the same extent as do laws in the United States. It is the
Company's policy to require employees and consultants and, when obtainable,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company. There can be no assurance that the steps taken
by the Company will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. The
Company is also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights. While the Company does not believe that it has infringed the proprietary
rights of other parties, there can be no assurance that third parties will not
assert infringement claims in the future with respect to the Company's current
or future products or that any such claims will not require the Company to enter
into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
-12-
<PAGE>
Year 2000
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that its
computer systems are currently Year 2000 compliant. However, many of the
Company's customers maintain their Internet connections on UNIX-based servers,
which may be impacted by Year 2000 complications. The failure of the Company's
customers to ensure that their servers are Year 2000 compliant could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Potential Volatility of Stock Price
The market price and trading volume of the Company's Common Stock has
been and may continue to be highly volatile. Factors such as variations in the
Company's revenue, earnings and cash flow and announcements of new service
offerings, technological innovations, strategic alliances and/or acquisitions
involving competitors of the Company or price reductions by the Company, its
competitors or providers of alternative services could cause the market price of
the Common Stock to fluctuate substantially. In addition, the stock markets
recently have experienced significant price and volume fluctuations that
particularly have affected technology-based companies and resulted in changes in
the market prices of the stock of many companies that have not been directly
related to the operating performance of those companies. Such broad market
fluctuations have adversely affected and may continue to adversely affect the
market price of the Common Stock.
THE COMPANY
The Company is a leading global facilities-based provider of Internet
access services and related products to businesses. The Company provides
dedicated and dial-up Internet connectivity in 90 of the 100 largest
metropolitan statistical areas in the U.S. and in nine of the 20 largest
international telecommunications markets. The Company also offers Internet
Protocol ("IP")-based value-added services and products to businesses, including
corporate intranets, Web hosting and collocation, remote user access,
multi-currency electronic commerce and security services, that enable businesses
to maximize utilization of their corporate networks and the Internet.
Additionally, the Company provides network backbone services to other
telecommunications carriers and ISPs to further exploit its network capacity.
The Company was incorporated in New York in 1988. The mailing address
of the Company's principal executive offices is 510 Huntmar Park Drive, Herndon,
Virginia 20170. Its telephone number at that address is (703) 904-4100 and its
Internet address for shareholder information is [email protected].
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Common Stock being offered hereby for the account of the Selling Stockholders.
-13-
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by the Selling Stockholders as of March 1,
1998, and the number of shares of Common Stock being offered by this Prospectus
assuming the sale of all shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares Shares Beneficially Owned
Prior to Offering(1)(2) Being Offered After Offering
--------------------------- ------------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
Beneficial Owner Number Percent Number Percent
Brown Simpson Strategic 22,000 * 22,000 -- --
Growth Fund, L.P.
Brown Simpson Strategic 3,000 * 3,000 -- --
Growth Fund, Ltd.
KA Investments LDC 475,000 * 475,000 -- --
Lehman Brothers Inc. 1,000,000 1.93 1,000,000 -- --
SBC Warburg Dillon Read Inc. 1,500,000 2.86 1,500,000 -- --
</TABLE>
- ---------------------------
* Less than one percent.
(1) Except to the extent otherwise provided herein, the persons named in the
table have sole voting and dispositive power with respect to the shares of
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
(2) Includes shares of Common Stock issuable upon conversion of the Company's
Series B 8% Convertible Preferred Stock assuming conversion at the formula
price in effect on March 24, 1998 (which price will fluctuate from time to
time based on changes in the market price of the Common Stock and
provisions in the formula for determining the conversion price). The Series
B 8% Convertible Preferred Stock was issued by the Company to such Selling
Stockholders in November 1997 in a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended. Does not include
any Common Stock issuable upon conversion of Series B 8% Convertible
Preferred Stock that may be issued as dividends on Series B 8% Convertible
Preferred Stock.
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<PAGE>
PLAN OF DISTRIBUTION
Any or all of the Common Stock being registered hereby may be sold from
time to time to purchasers directly by any Selling Stockholder, its pledges,
donees and successors-in-interest. Alternatively, any Selling Stockholder may
from time to time offer the Common Stock through underwriters, dealers or agents
who may receive compensation in the form of underwriting discounts, concessions
or commissions from such Selling Stockholder and/or the purchasers of Common
Stock for whom they may act as agent. Any such Selling Stockholder, and any such
underwriters, dealers or agents that participate in the distribution of Common
Stock, may be deemed to be underwriters, and any profit on the sale of the
Common Stock by them and any profit on the resale of such Common Stock purchased
by them may be deemed to be underwriting discounts, commissions or concessions
received by them may be deemed to be underwriting discounts and commissions
under the Securities Act. Any such shares of Common Stock may, without
limitation, be so offered or sold in the open market, on The Nasdaq Stock
Market, in privately negotiated transactions, in an underwritten offering, or a
combination of such methods, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. To the
extent required, the names of the Selling Stockholders, the number of shares of
Common Stock to be sold, purchase price, public offering price, the name of any
agent, dealer or underwriter and any applicable commission or discount or other
items constituting compensation or indemnification arrangements with respect to
a particular offering will be set forth in an accompanying Prospectus
Supplement. The Company will receive no proceeds from the sale by any Selling
Stockholder of the Common Stock offered hereby. The Selling Stockholders may
also sell the Common Stock being registered hereby in accordance with Rule 144
of the Commission, rather than pursuant to this Prospectus.
In connection with distributions of the Common Stock, any Selling
Stockholder may enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of Common Stock in the course of
hedging the positions they assume with such Selling Stockholder. Any Selling
Stockholder also may sell the Common Stock short and deliver the Common Stock to
close out such short positions. Any Selling Stockholder also may enter into
option or other transactions with broker-dealers that involve the delivery of
the Common Stock to the broker-dealers, which may then resell or otherwise
transfer such Common Stock in block trades or otherwise. Any Selling Stockholder
also may loan or pledge the Common Stock to a broker-dealer and the
broker-dealer may sell the Common Stock so loaned or upon a default may sell or
otherwise transfer the pledged Common Stock as a principal hereunder.
All Registration Expenses incurred in connection with the registration
of the Common Stock to which this Prospectus relates will be borne by the
Company. As and when the Company is required to update this Prospectus, it may
incur additional expenses in excess of this estimated amount. "Registration
Expenses" means all fees and expenses incident to the registration of the Common
Stock to which this Prospectus relates, including fees and expenses of counsel
to the Company and the Selling Stockholders (limited, in the case of counsel to
the Selling Stockholders, to $10,000) but excluding, in the case of an
underwritten offering, all fees and disbursements of any underwriters (including
discounts and commissions), their counsel and accountants and all registration
and filing fees.
The shares of Common Stock covered by this Prospectus are issuable upon
conversion of 600,000 Series B 8% Convertible Preferred Stock issued by the
Company in a private placement in November 1997 (the "Private Placement").
The Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including certain liabilities under the Securities Act, or
to contribute to payments which the Selling Stockholders may be required to make
in respect thereof.
Under applicable rules and regulations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), each Selling Stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing
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<PAGE>
of purchases and sales of the Securities by the Selling Stockholders. All of the
foregoing may affect the marketability of the Securities.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock
offered hereby will be passed upon for the Company by Nixon, Hargrave, Devans &
Doyle LLP (a partnership including professional corporations), 437 Madison
Avenue, New York, New York 10022. Certain partners of Nixon, Hargrave, Devans &
Doyle LLP own shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company incorporated in
this Prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 1997 have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of iSTAR internet inc. as of May
31, 1997 and 1996, and for each of the two years in the period ended May 31,
1997 incorporated in this Prospectus by reference to the Company's Current
Report on Form 8-K dated January 7, 1998 have been audited by KPMG, Chartered
Accountants, as stated in their report, which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at its offices at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at Seven World Trade Center, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained by
mail from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
obtained electronically through the SEC's Electronic Data Gathering, Analysis
and Retrieval system at the SEC's Web site (http://www.sec.gov). The Company's
Common Stock is listed on The Nasdaq Stock Market and copies of such reports and
other information can also be inspected at the offices of The Nasdaq Stock
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the SEC a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder, with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto, as
permitted by the rules and regulations of the SEC. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof, which may be inspected
and copied at the public reference facilities of the SEC referred to above.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the full text of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
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<PAGE>
The Company furnishes stockholders with annual reports containing
audited financial statements and with proxy material for its annual meetings
complying with the proxy requirements of the Exchange Act.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents which have been filed by the Company with the
SEC are hereby incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, which contains audited
consolidated balance sheets of the Company and subsidiaries as
of December 31, 1997 and 1996, and related consolidated
statements of operations, of changes in shareholders' equity
and of cash flows for the years ended December 31, 1997, 1996
and 1995.
2. Part II, Item 2 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,1997, as
amended.
3. The Company's Current Reports on Form 8-K dated
July 31, 1997 (solely insofar as it relates to the Company's
Shareholder Rights Agreement dated May 8, 1996, as amended),
August 20, 1997, January 7, 1998, January 22, 1998, February
12, 1998, and March 10, 1998.
4. The Company's Registration Statement on Form 8-A
dated April 7, 1995, as amended (registration no. 0-25812).
5. The Company's Registration Statement on Form 8-A
dated June 4, 1996, as amended (registration no. 0-25812).
All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
filing of a post-effective amendment which indicates that all securities offered
hereby have been sold or which deregisters all securities then remaining unsold,
shall be deemed to be incorporated by reference in and to be a part of this
Prospectus from the date of filing of such reports and documents.
Any statement contained herein or in a document which is incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement in any subsequently filed
document that is also deemed to be incorporated by reference herein modifies or
supersedes such prior statement.
This Prospectus incorporates documents by reference which are not
presented or delivered herewith. These documents are available upon written or
oral request from the Company, without charge, to each person to whom a copy of
this Prospectus has been delivered, other than exhibits to those documents.
Exhibits are available for a reasonable fee. Requests should be directed to the
Office of the Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia
20170 (telephone (703) 904-4100).
-17-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table itemizes the expenses estimated to be incurred by
the Company in connection with the offering of the Common Stock being
registered. All the amounts shown are estimates except the SEC registration fee.
Item Amount
Registration Fee -
SEC ....................................................$ 8,711.72
Legal Fees and Expenses .................................40,000.00
Accounting Fees and Expenses .............................5,000.00
Miscellaneous ............................................5,000.00
---------
TOTAL...................................................$58,711.72
==========
Item 15. Indemnification of Directors and Officers
Under Sections 721 through 725 of the Business Corporation Law of the
State of New York (the "BCL"), the Registrant has broad powers to indemnify its
directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provision of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action os adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors of an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of the
BCL permits the purchase of insurance to indemnify a corporation or its officers
and directors to the extent permitted.
As permitted by Section 721 of the BCL, the Registrant's By-laws
provide that the Registrant shall indemnify its officers and directors, as such,
to the fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the Registrant's Certificate of Incorporation
provides that no director of the Registrant shall be held personally liable to
the Registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that (1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or (2) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled, or (3) his acts violated section 719 of the BCL.
The Registrant has entered into Indemnity Agreements with its directors
and certain key officers pursuant to which the Registrant generally is obligated
to indemnify its directors and such officers to the full extent permitted by the
BCL as described above. The Company also has purchased directors' and officers'
liability insurance.
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<PAGE>
Item 16. Exhibits
(a) Exhibits:
5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP, as to
validity of securities being registered.
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP (included
as part of Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG, Chartered Accountants.
24.1 Power of attorney (included on signature page).
Item 17. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
-19-
<PAGE>
The Registrant hereby further undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the Prospectus, to deliver, or cause to be
delivered to each person to whom the Prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
Prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Herndon, Commonwealth of Virginia on March 25,
1998.
PSINet Inc.
By: /s/ William L. Schrader
William L. Schrader, Chairman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David N. Kunkel, Edward D. Postal,
Michael J. Malesardi and Kathleen B. Horne, and each or any of them, his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective documents
in connection therewith), with the Securities and Exchange Commission, granting
unto each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or either of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
Chairman, President, March 25, 1998
/s/ William L. Schrader Chief Executive
William L. Schrader Officer and Director
(Principal Executive
Officer)
Executive Vice March 25, 1998
/s/ Harold S. Wills President, Chief
Harold S. Wills Operating Officer and
Director
Senior Vice March 25, 1998
/s/ David N. Kunkel President, General
David N. Kunkel Counsel, Secretary and
Director
Senior Vice President March 25, 1998
/s/ Edward D. Postal and Chief Financial
Edward D. Postal Officer (Principal
Financial Officer)
-21-
<PAGE>
Vice President and March 25, 1998
/s/ Michael J. Malesardi Controller (Principal
Michael J. Malesardi Accounting Officer)
Director March 25 1998
/s/ William H. Baumer
William H. Baumer
Director March 25, 1998
/s/ Ralph J. Swett
Ralph J. Swett
Director March 25, 1998
/s/ Ian P. Sharp
Ian P. Sharp
Director March 25, 1998
/s/ William A. Wilson
William A. Wilson
-22-
<PAGE>
EXHIBIT INDEX
Page Number
in Signed
Registration
Exhibit No. Description Statement
5.1 Opinion of Nixon, Hargrave, Devans &
Doyle LLP as to validity of securities being registered
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP
(included as part of Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
23.3 Consent of KPMG, Chartered
Accountants
24.1 Power of attorney (included on signature page)
-23-
Exhibit 5.1
NIXON, HARGRAVE, DEVANS & DOYLE LLP
437 Madison Avenue
New York, New York 10022
March 25, 1998
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Ladies and Gentlemen:
We have acted as counsel to PSINet Inc., a New York corporation (the
"Company"), in connection with preparation of a Registration Statement on Form
S-3 (the "Registration Statement") to be filed by the Company on or about March
25, 1998 with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), relating to the offer and
sale by certain selling stockholders named in the Registration Statement of up
to 3,000,000 shares of common stock of the Company, $.01 par value (the "Common
Stock"), issuable upon conversion of the 600,000 shares (the "Preferred Shares")
of Series B 8% Convertible Preferred Stock, $.01 par value, (the "Preferred
Stock"), originally issued and sold by the Company pursuant to a Convertible
Preferred Stock Purchase Agreement dated as of November 10, 1997 between the
Company and certain purchasers (the "Stock Purchase Agreement").
This opinion is being delivered to you in connection with the
Registration Statement.
In connection with the foreging, we have examined the Registration
Statement and the Preliminary Prospectus contained in the Registration Statement
(the "Preliminary Prospectus"). We also have examined originals or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, certificates and other documents and have made such investigations of
law as we have deemed necessary or appropriate as a basis for the opinions
expressed below.
As to questions of fact material to our opinions expressed herein, we
have, when relevant facts were not independently established, relied upon
certificates of, and information received from, the Company and/or
representatives of the Company. We have made no independent investigation of the
facts stated in such certificates or as to any information received from the
Company and/or representatives of the Company and do not opine as to the
accuracy of such factual matters. We also have relied, without investigation,
upon certificates and other documents from, and conversations with, public
officials.
<PAGE>
PSINet Inc.
March 25, 1998
Page 2
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity to the originals of any document or other
instrument submitted to us as a copy, the genuineness of all signatures on such
originals or copies, and the legal capacity of natural persons who executed any
such document or instrument at the time of execution thereof. For purposes of
this opinion, we have assumed that the conversion price of the Preferred Shares
will not be adjusted.
Members of our firm involved in the preparation of this opinion are
licensed to practice law in the State of New York and we do not purport to be
experts on, or to express any opinion herein concerning, the laws of any other
jurisdiction other than the laws of the State of New York.
Based upon and subject to the foregoing, and the other qualifications
and limitations contained herein, and after (a) the Commission shall have
entered an appropriate order declaring effective the above-referenced
Registration Statement, as amended, and (b) the shares of Common Stock have, if
required, been duly qualified or registered, as the case may be, for sale under
applicable state securities laws, we are of the opinion that the 3,000,000
shares of Common Stock to be offered pursuant to the Preliminary Prospectus, if
and when issued upon conversion of the Preferred Shares at a conversion price
not less than the par value per share of Common Stock in accordance with the
terms of the Preferred Shares and the Stock Purchase Agreement and in the manner
described in the Registration Statement, will be duly authorized and validly
issued and will be fully paid and non-assessable subject to Section 630 of the
Business Corporation Law of the State of New York.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters" in the Preliminary Prospectus.
We further consent to the filing of this opinion as an exhibit to
applications to the securities commissioners of the various states of the United
States, to the extent so required, in connection with the registration of the
shares of Common Stock.
This opinion is limited to the matters stated herein, and no opinion or
belief is implied or may be inferred beyond the matters expressly stated herein.
<PAGE>
PSINet Inc.
March 25, 1998
Page 2
We wish to advise you that Nixon, Hargrave, Devans & Doyle LLP and
certain attorneys with Nixon, Hargrave, Devans & Doyle LLP own certain shares of
the Company's Common Stock.
Very truly yours,
/s/ Nixon, Hargrave, Devans & Doyle LLP
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
February 6, 1998, except as to the first three paragraphs of Note 11, which are
as of February 25, 1998 appearing on page 45 of PSINet Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997. We also consent to the reference
to us under the heading "Experts."
/s/ PRICE WATERHOUSE LLP
Washington, D.C.
March 25, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the registration
statement on Form S-3 of PSINet Inc. of our report dated July 10, 1997, except
for notes 12, 18, 19 and 20 which are as at December 5, 1997, relating to the
financial statements of iSTAR internet inc. which appear in PSINet Inc.'s
current report on Form 8-K dated January 7, 1998 and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ KPMG
Chartered Accountants
Ottawa, Canada
March 25, 1998
